corporate and capital market laws
TRANSCRIPT
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CORPORATE AND CAPITAL MARKET LAWS
National Stock Exchange of India Limited 4th Floor, Jeevan Vihar Building, Parliament Street, New Delhi – 110 001
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Table of Contents
Unit 1
Chapter 1 Company Incorporation in India 3
Chapter 2 Prospectus, Issue and Allotments of Shares 35
Chapter 3 Share Capital and Debentures 66
Chapter 4 Management & Control, and Winding up of companies 84
Chapter 5 Genesis and Development of Regulatory framework 115
of Indian Capital Market
Chapter 6 The Securities Contracts (Regulation) Act, 1956 126
Unit 2
Chapter 7 The Securities and Exchange Board of India Act, 1992 158
Chapter 8 Depositories 176
Unit 3
Chapter 9 SEBI (Prohibition of Fraudulent and Unfair Trade Practices 219
Relating To Securities Market) Regulations, 2003 &
SEBI (Prohibition of Insider Trading) Regulations, 1992
Chapter 10 SEBI (Portfolio Managers) Regulations, 1993 240
Chapter 11 SEBI (Underwriters) Regulations, 1993 261
Unit 4
Chapter 12 SEBI (Ombudsman) Regulations, 2003 274
Chapter 13 Compliances of Listing Agreement 289
Chapter 14 SEBI (Disclosure and Investor Protection) Guidelines, 2000 311
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Chapter 1
Company Incorporation in India
INTRODUCTION
As you are aware, India is one of the fastest growing economies and most attracted
investment destination of the world. It is important for you to know different types of business
entities that are allowed in India to do business. The following types of business entities are
available for Indian resident doing business by Indian legal framework:
Proprietorship
Partnership firm
Limited Liability Partnership
Private Limited Company
Public Limited Company
In addition to the above legal entities, the following types of entities are available for
foreign investors/foreign companies doing business in India:
Wholly owned Subsidiary Company
Joint Venture Company
Liaison Office/Representative Office
Project Office
Branch Office
Other forms of business entities which are beyond the realms of this guide are
Co-operatives
Joint Hindu Family Business
Although we have various types of business entities as mentioned above, we will
focus the kind of companies that can be promoted and registered under the Companies Act
1956, for the rest of course.There are three basic types of companies‘ viz. Private Limited
Companies, Public Limited Companies, and Producer companies. You could classify the
companies from the point of incorporation and liability. Let us classify the companies from
the point of incorporation:
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A. Classification on the basis of Incorporation: There are three ways in which
companies may be incorporated.
1. Chartered Companies: A company formed, incorporated and legitimised by the
grant of a charter by the Crown is called a Chartered Company. It is regulated by
that Charter. The East India Company, British South Africa Company, and the
Chartered Bank are examples of Chartered Companies.
2. Statutory Companies: A company formed and incorporated byspecial Act of
Parliament or State Legislature. The provisions of the Companies Act, 1956 do
not apply to them. Examples of these types of companies are Reserve Bank of
India (RBI), Life Insurance Corporation of India (LIC), and so on.
3. Registered Companies: The companies that are incorporated under the
Companies Act, 1956 by getting themselves registered with Registrar of
Companies (ROC) fall under this category.
B. Classification on the basis of Liability: Under this category, there are three types of
companies:
1. Unlimited Companies: In this type of company is being related uncommon. The
membersare liable for the company's debts in proportion to their respective interests in
the company and their liability is unlimited. These types of companies may or may not
have share capital. It may be either a public company or private company.
2. Companies limited by guarantee:Usually non-profit organisation such as charities,
community projects, clubs, societies and other similar bodies that need legal personality
would prefer to incorporate under this category. A company that has the liability of its
members limited to such amount as the members may respectively undertake, by the
memorandum, to contribute to the assets of the company in the event of winding-up, is
known as a company limited by guarantee. The members of a guarantee company are,
in effect, placed in the position of guarantors of the company's debts up to the agreed
amount. It does not have a share capital or shareholders, but members who act as a
guarantor. Further, they do not distribute their profits to their members, but they either
retain them within the company or use them for some other purpose.
3. Companies limited by shares: A company that has the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by
them is termed as a company limited by shares. Companies limited by shares are by far
the most common and may be either public or private.
C. Other Forms of Companies: in addition to the above, there are six types of companies
namely, Associations not for profit having licence under Section 25 of the Act;
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Government Companies; Foreign Companies; Holding and Subsidiary Companies;
Investment Companies; and Producer Companies.
In India, incorporation of a company is governed by the Companies Act 1956. It is the
most important part of legislation that empowers the central government to regulate the
formation, financing, functioning and winding up of companies. This act is applies to the
companies that are registered under this act. However, it does not apply to Universities , co-
operative societies, unincorporated trading, and other societies. The incorporation
procedures are same all over India. This act lays down the set of rules for the establishment
of private or public limited company in India. Let us discuss the definition of private and
public limited companies according to the Companies Act 1956.
Definition
In this section, let us discuss the broad definition of different types of companies.
PRIVATE LIMITED COMPANY: U/s 3(1), a private company means a company, which has
a minimum paid-up capital of Rs.100,000 (rupees one lakh only) or such higher paid-up
capital as may be prescribed, and its articles:
a. Restricts the right to transfer its shares, if any;
b. Limits the number of its members to 50 not including—
i. persons who, are in the employment of the company; and
ii. persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to
be members after the employment ceased;
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of,
the company; and
d. Prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
PUBLIC COMPANY: U/S 3 (1) (iv), a public company means a company which-
a. Is not a private limited
b. Has a minimum of paid-up capital of Rs.5 lakh rupees or higher as it is prescribed
c. Private company which is a subsidiary of a company which is not a private company.
d. Should consist of not less than 7 members which is registered under the Act.
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e. Can invite the public to subscribe for any shares in, or debentures of, the company.
Moreover, the shares and debentures of a public limited company may be quoted on
a stock exchange.
LIMITED COMPANY: Section 2(23) defines 'Limited Company'. It means a company limited
by shares or by guarantee. In case of limited company, the liability of the members may be
limited to the nominal value of the shares held by them in the event of winding up of the
company. On the other hand, the liability of the members to the limited by guarantee may be
limited to the amount that they have guaranteed to contribute in the event of winding up of
the company.
Companies Limited by Shares: Under Section 12(2)(a), a company limited by shares is a
registered company. The members‘ liability is limited to the amount that is mentioned in the
Memorandum of Association. For example, the share price mentioned in the MoA is Rs.100.
Accordingly, no member of a company can be called upon to pay more than the face value.
However, if a member is paid fully, he/she has nothing more to pay. On the other hand, a
member is paid partly, the unpaid portion is payable at any time during the existence of the
company of a call being made, whether the company is a going concern or is being wound
up. This is the most common form of business entity in existence.
Companies Limited by Guarantee: As discussed above, usually no-profit organisations
are registered under this category.A special feature of this type of company is that the
liability of members to pay their guaranteed amounts arises only when the company has
gone into liquidation, not when it is a going concern.
UNLIMITED COMPANY:As per Section 12(2) (c) defines an unlimited company refers to a
company is not having any limit on the liability of its members. Therefore, the maximum
liability of the member of such a company might stretch up to the full extent of their assets to
meet the obligations of a company by contributing to their assets. However, the members of
an unlimited company are not liable directly to the creditors of the company, as in the case of
partners of a firm. Further, the liability of the members is only towards the company and in
the event of liquidation only, not during the existence. An unlimited company may or may not
have share capital. If it has a share capital, it has to be stated the numbers of members in
the articles of association and is to be registered u/s 27(1).Under Section 32, a company
registered as an unlimited company may subsequently convert itself as a limited company,
subject to the provision that any debts, liabilities, obligations or contracts incurred or entered
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into, by or on behalf of the unlimited company before such conversion are not affected by
such changed registration.
ASSOCIATION NOT FOR PROFIT: Under Section 13(1)(a), it is essential that the company
registered under the limited liability shall have the last words as ‗Limited‘. However, Section
25 permits the registration of associations not for profit with limited liability without being
required to use the word ‗Limited‘ or the words ‗Private Limited‘ after their names. This is of
great value to companies not engaged in business such as bodies pursuing charitable,
educational or other purposes of great utility. Typically, the licence for those companies shall
be granted by the Central Government. The Central Government may grant such a licence if:
1. it is intended to form a company for promoting commerce, art, science, religion,
charity or any other useful object; and
2. the company prohibits payment of any dividend to its members but intends to apply
its profits or other income in promotion of its objects.
The company is registered without paying any stamp duty on its Memorandum and Articles.
On registration, the Association enjoys all the privileges of a limited company, and is subject
to all its obligations, except, those in respect of which exemption by a special or general
order is granted by the Central Government. A licence may be granted by the Central
Government under Section 25 of the Act on such conditions and subject to such regulations
as it thinks fit and those conditions and regulations shall be binding on the body to which the
licence is granted. The Central Government may direct that such conditions and regulations
shall be inserted in the Memorandum, or in the Articles, or partly in the one and partly in the
other. This type of company cannot alter the provisions of its Memorandum with respect to
its objects except with the previous approval of the Central Government in writing.
GOVERNMENT COMPANIES: Section 617 defines a Government company as any
company in which not less than fifty one per cent of the paid-up share capital is held by the
Central Government, or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments. A subsidiary of a Government
company is also treated as a Government company.
The following are the exemptions to Government Companies from applicability of
Notified Sections/ Provisions of the Companies Act, 1956:
Section 620 of the Companies Act, 1956 empowers the Central Government to direct by
notification in the Official Gazette that any of the provisions of the Act shall not apply to
Government companies or apply only with such exceptions, modifications and adaptations,
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as may be specified in the notification. However, the provisions of Sections 618, 619 and
619A mandatorily apply to such companies.In exercise of its powers under the above
mentioned Section 620, the Central Government has issued notifications modifying the
operation of different provisions of the Companies Act to Government companies some of
which are as under:
1. Sections 17, 18, 19 and 186 shall apply to a Government company with the substitution
of the words ‗Central Government‖ for ―Court/CLB‖ wherever it occurs; and Section
166 shall apply with the substitution in the second proviso to Sub-section (1) of the words
‗Central Government‗ for the word ―Registrar, and in Sub-section (2) of Section 166
with the substitution of the words ―such other place as the Central Government may
approve in this behalf‖ for the words ―some other place within the city, town or village
in which the registered office of the company is situated".
2. Further Government companies are permitted to delete the word ‗Private‖ from their
name (Sections 21 and 23).
3. The Central Government has made various exemptions in the application of the
provisions of the Act to Government companies. Government companies have been
exempted from the following sections:
a. Sections 255, 256 and 257 of the Act pertaining to appointment and retirement of
directors in companies wholly owned by the Government.
b. Sections 198, 259, 268, 269, 309, 310, 311, 387 and 388 of the Act pertaining to
appointment of managing/whole-time directors and manager and their
remuneration.
c. Proviso to Sub-section (1) of Section 297 of the Act requiring the previous
approval of the Central Government in respect of contracts entered into by it with
any other Government company.
d. Section 187C requiring disclosure of beneficial interest in shares of a company.
e. Section 205A requiring transfer of unpaid dividend to a special dividend account
shall not apply to a Government company in which the entire paid-up share
capital is held by the Central Government or by any state Government or
Governments or by the Central Government or by any State Government or
Governments or by the Central Government and one or more State
Governments. This is in supersession of an earlier notification No. G.S.R. 231
dated the 31st January, 1978 [G.S.R. 580(E)].
f. Section 295 of the Act shall not apply to a Government company provided that
such company shall obtain the approval of the Ministry or Department of the
Central Government which is administratively in-charge of the company or, as the
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case may be, the State Government. This is in supersession of an earlier
notification No. S.O. 729 dated 24th May, 1978 [G.S.R. 581(E)].
g. Sections 43A*, 149(2A), 205B, 263 to 266, 307, 308, 316, 317 and 386 of the Act
shall not apply to a Government company in which the entire paid-up share
capital is held by the Central Government or by any State Government or
Governments or by the Central Government and one or more State Governments
[G.S.R. 577 (E)].
h. Sections 165, 187D*, 294 and Sub-sections (2) and (3) of Section 294AA of the
Act shall not apply to a Government company [G.S.R. 578(E)].
i. Section 108 of the Act shall not apply to a Government company [G.S.R. 579(E)].
j. It has further been notified that the following sections of the Companies Act, 1956
shall apply to Government companies with the modification that instead of Court
the application will be made to the Central Government.
i. Sections 100, 101, 102 and 103 of the Act regarding reduction of capital by a
company.
ii. Sections 391, 392 and 394 of the Act pertaining to amalgamation of companies.
b. Therefore, the legal status of a Government company is not affected because the
share capital of the company is contributed by the Central or State Government
and all its shares are held by the President of India or Governor of a State or
certain nominated offices of the Government.
When the Government engages itself in trading ventures, particularly as Government
companies under the company law, it does not do so as a State but it does as in essence as
a company. A Government company is not a department of the Government.
FOREIGN COMPANIES: A foreign company is a company which is incorporated in a
country outside India, under the law of that (other) country and has a place of business in
India. Sections 591 to 602 of the Act deal with such companies. Foreign companies are of
two classes namely:
1. Companies incorporated outside India, which have established a place of business in
India after April 1, 1956; and
2. Companies incorporated outside India, which established a place of business in India
before that date and continue to have an established place of business in India.
It is essential under section 592 of the Act that every foreign company which establishes a
place of business in India must file with the Registrar of Companies (ROC) at New Delhi and
also with the ROC of the respective state in which such place of business is suited. The
company should submit all the relevant documents such as MoA, registered address,
nationality and so on.The same requirements as regards accounts and their filing and as
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also the registration of the charges created in India are applicable to them, as to Indian
companies. No application form for shares or debentures can be issued in India without a
copy of the prospectus. Section 584 of the Companies Act, 1956 provides further that when
a foreign company, which has been carrying on business in India, ceases to carry on such
business in India, it may be wound up as an unregistered company under Sections 582 to
590 of the Act, even though the company has been dissolved or ceased to exist under the
laws of the country in which it was incorporated.
HOLDING AND SUBSIDIARY COMPANIES: „Holding‘ and ‗Subsidiary‘ companies are
relative terms. A company is a holding company of another if the other is its subsidiary.
According to Section 4 of the Companies Act, a company shall be deemed to be subsidiary
of another, if and only if:
(a) that other controls the composition of its Board of directors; or
(b) that other:
(i) where the first-mentioned company is an existing company in respect of
which the holders of preference shares issued before commencement of the
Companies (Amendment) Act 1960, have the same right in all respects as the
holders of equity shares, exercises or controls more than half of the total
voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than
half in the nominal value of its equity share capital, or
(c) the first mentioned company is a subsidiary of any company which is the other‗s
subsidiary.
To illustrate, company A Limited is a subsidiary of company B if, and only if:
1. company B (holding company) controls the composition of the Board of directors of
company A (subsidiary); or
2. company B (holding company) controls more than 50% voting power of company A
(subsidiary); or
3. Company B (holding company) holds more than half in the nominal value of equity
shares of company A (subsidiary); or
4. if company A (the subsidiary) is a subsidiary of company C which is subsidiary of
company B, then the company A is also a subsidiary of company B.
5. If Company D is the subsidiary of company A then D will be the subsidiary of
company C and also of company B.
INVESTMENT COMPANIES: The principal business of these types of companies consists in
acquiring, holding and dealing in shares and securities and thereby earning income by way
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of interest, dividend etc. In addition, they earn income not only through the acquisition and
holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at
higher prices and to sell with a view to buy later on at lower prices. If a company is engaged
in any other business to an appreciable extent, it will not be treated as an investment
company. The following two sets of legal opinions are quoted below as to the meaning of an
investment company:
According to one set of legal opinion, an "investment company" means company which
acquires and holds shares and securities with intent to earn income only from them by
holding them. On the other hand, another school of legal opinion holds that ―an Investment
Company means a company, which acquires shares and securities for earning income by
holding them as well as by dealing in such shares and other securities.According to Section
2(10A) of the Insurance Act, 1938, an investment company means a company whose
principal business is the acquisition of shares, stocks, debentures or other securities.
PRODUCER COMPANIES: Companies (Amendment) Act, 2002 had added a new Part IXA
to the main Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT.
According to the provisions as prescribed under Section 581A(l), a producer company is a
body corporate having objects or activities specified in Section 581B and which is registered
as such under the provisions of the Act. The membership of producer companies is open to
such people who themselves are the primary producers, which is an activity by which some
agricultural produce is produced by such primary producers.
Objects of Producer Companies:In terms of Section 581B (1) the objects of a producer
company registered under this Act may be all or any of the following matters:
A. Production, harvesting, procurement,
grading, pooling, handling, marketing, selling, export of primary produce of the
members or import of goods or services for their benefit.
B. Processing including preserving, drying,
distilling, brewing, venting, canning and packaging of the produce of its members.
C. Manufacturing, sale or supply of machinery,
equipment or consumables mainly to its members.
D. Providing education on the mutual assistance
principles to its members and others.
E. Rendering technical services, consultancy
services, training, research and development and all other activities for the promotion
of the interests of its members.
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F. Generation, transmission and distribution of
power, revitalisation of land and water resources, their use, conservation and
communications relatable to primary produce.
G. Insurance of producers or their primary
produce.
H. Promoting techniques of mutuality and
mutual assistance.
I. Welfare measures or facilities for the benefit
of the members as may be decided by the Board.
J. Any other activity, ancillary or incidental to
any of the activities referred to in clauses (a) to (i) above or other activities which may
promote the principles of mutuality and mutual assistance amongst the members in
any other manner.
K. financing of procurement, processing,
marketing or other activities specified in clauses (a) to (j) above, which include
extending of credit facilities or any other financial services to its members.
Further, under Section 581B(2) it has also been clarified that every producer company shall
deal primarily with the produce of its active members for carrying out any of its objects
specified above.
FINANCE COMPANIES: According to Rule 2(cc) of the Companies (Acceptance of
Deposits) Rules, 1975, a Financial Company‗ means a non-banking company which is a
financial institution within the meaning of clause (c) of Section 45-I of the Reserve Bank of
India Act, 1934 (2 of 1934). A Financial institution has been defined under Section 45-I of the
Reserve Bank of India Act, 1934 as follows:
Financial institution means any non-banking institution which carries on as its
business or part of its business any of the following activities:
(i) the financing, whether by way of making loans or advances or otherwise, or any
activity other than its own;
(ii) the acquisition of shares, stocks, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of the like nature;
(iii) the letting or delivery of any goods to a hirer under hire-purchase agreement as
defined in clause (c) of Section 2 of the Hire-Purchase Act, 1972;
(iv) the carrying on of any class of insurance business;
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(v) the managing or conducting or supervising as foreman, agent or in any other
capacity, of chits as defined in any law which is for the time being in force in any
state, or any business, which is similar thereto;
(vi) collecting for any purpose or under any scheme or arrangement by whatever name
called, monies in lump-sum or otherwise, by way of subscription or by sale of units,
or other instruments or in any other manner and awarding prizes, gifts, whether in
cash or in kind or disbursing monies in any other way to persons from whom monies
are collected or to any other person, but does not include any institution, which
carries on as its principal business:
a. agricultural operations; or
Industrial activity; or
b. the purchase or sale of any goods (other than securities) or the providing of
any services; or
c. the purchase, construction or sale of immovable property, so, however, that
no portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons;
Explanation: For the purposes of this clause, ―industrial activity means any activity
specified in sub-clauses (i) to (xviii) of clause (c) of Section 2 of the Industrial Development
Bank of India Act, 1964 (18 of 1964).
d. firm means a firm as defined in the Indian Partnership Act, 1932 (9 of 1932);
e. non-banking institution‖ means a company, corporation or co-operative
society;
f. non-banking financial company means—
i. a financial institution which is a company;
ii. a non-banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
iii. Such other non-banking institution or class of such institutions, as the
bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
A non-banking institution has been defined in clause (e) of the said section to mean a
company, corporation, co-operative society or firm. Thus, a financial company is a company
or corporation or co-operative society or firm which is a financial institution within the
meaning of clause (c) of Section 45-I of the Reserve Bank of India Act, 1934.
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PUBLIC FINANCIAL INSTITUTIONS: Section 4A (1) of the Companies Act, 1956 provides that
the following financial institutions shall be regarded, for the purposes of this Act, as a public
financial institution:-
(i) the Industrial Credit and Investment Corporation of India Limited, a company formed
and registered under the Indian Companies Act, 1913;
(ii) the Industrial Finance Corporation of India, established under section 3 of the
Industrial Finance Corporation Act, 1948;
(iii) the Industrial Development Bank of India, established under section 3 of the
Industrial Development Bank of India Act, 1964;
(iv) the Life Insurance Corporation of India, established under section 3 of the Life
Insurance Corporation Act, 1956;
(v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act,
1963;
(vi) the Infrastructure Development Finance Company Limited, a company formed and
registered under this Act.
Sub-section (2) of Section 4(A) of the Companies Act, 1956 empowers the Central
Government to specify any other institutions, as it may think fit, to be a public financial
institution by issuing a notification in the Official Gazette. However, no institution shall be so
specified unless:
(i) it has been established or constituted by or under any Central Act; or
(ii) not less than 51% of the paid-up share capital of such institution is held or controlled
by the Central Government.
Criteria for declaring an institution as Public Financial Institution: Earlier the Central
Government was declaring an institution as Public Financial Institution, if it meets any one of
clause (i) & (ii) of Sub-Section (2) of Section 4A of the Act. Now, Central Government has
framed the following criteria for declaring any financial institution as Public Financial
Institution under Section 4A of the companies Act, 1956 (MCA General Circular No. 34/2011
dated 02.06.2011):-
i. A company or corporation should be established under a special Act or the
Companies Act being Central Act;
ii. Main business of the company should be industrial/infrastructural financing;
iii. The Company must be in existence for at least 3 years and their financial statement
should show that their income from industrial/infrastructural financing exceeds 50%
of their income;
iv. The net worth of the company should be Rs.1000 Crore;
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v. Company is registered as Infrastructure Finance Company (IFC) with RBI or as an
Housing Finance Company (HFC) with National Housing Bank;
vi. In the case of CPSUs/SPSUs, No restrication shall apply with respect to financing
specific sector(s) and net-worth.
So far we have discussed the definition of different types of companies. Now let us
focus about Promoters.
PROMOTERS
Commencement of the business is possible only it receives the Certificate of
Incorporation. However, someone lays the ground work for the company before the
company gets incorporation. The person(s) who take the responsibility of starting the
company are called as Promoter (s).The Companies Act, 1956, does not define the word
'promoters' but the word promoter has been used in Sections 62, 69, 76, 478 and 519 of the
Companies Act, 1956. According to SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009, ―promoter includes:
(i) the person or persons who are in control of the issuer;
(ii) the person or persons who are instrumental in the formulation of a plan or
programme pursuant to which specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters:
In addition to the above, it is important you to know that
Provided that a director or officer of the issuer or a person, if acting as such
merely in his professional capacity, shall not be deemed as a promoter:
Provided further that a financial institution, scheduled bank, foreign
institutional investor and mutual fund shall not be deemed to be a promoter
merely by virtue of the fact that ten per cent. or more of the equity share
capital of the issuer is held by such person;
Provided further that such financial institution, scheduled bank and foreign
institutional investor shall be treated as promoter for the subsidiaries or
companies promoted by them or for the mutual fund sponsored by them;
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Position of a Promoter:it may be difficulty to describe about promoter, but his legal position
is very clear. A promoter is neither an agent of, nor a trustee for, the company, because it is
not in existence. However, when he acts with the company in mind, he/she stands in a
fiduciary position towards the company. Lord cairns have correctly stated the position of a
promoter in Erlanger v. new sombrero phosphate co. (39 LT 269) ―The promoters of a
company stand undoubtedly in a fiduciary position. They have in their hands the creation
and shaping of the company. They have the power of defining how, and when, and in what
shape and under what supervision, it shall start into existence and begin to act as a trading
corporation.‖Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899)
2 Ch. 392 that "promoters" stand in a fiduciary relation to the company they promote and to
those persons whom they induce to become shareholders in it".
There are no provisions regarding the duties of promoters in Companies Act.
However, Section 62, 63 and 542 only impose liabilities on promoters for untrue statement in
the prospectus and fraudulent trading. There are two fiduciary duties of a promoter, namely:
1. A promoter cannot make either directly or indirectly, any profit at the expense of the
company he promotes, without the knowledge and consent of the company and that
if he does so, in disregard of this rule, the company can compel him to account for it.
In relation to disclosure, it may be noted that part disclosure is worse than none. A
promoter is not forbidden to make profit but he is barred from making any secret
profit. He/she may make a profit out of promotion with the consent of the company in
the same way as an agent may retain a profit obtained through his/her agency with
his/her principal's consent.
2. A promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If a promoter contracts to sell his
own property to the company without making a full disclosure, the company may
either repudiate the sale or affirm the contract and recover the profit made out of it by
the promoter. Either way the dishonest promoter is deprived of his advantage.
In case, therefore, the promoter wishes to sell his own property to the company,
he/she should either disclose the fact:
(a) To an independent Board of directors; or
(b) In the articles of association of the company; or
(c) In the prospectus; or
(d) To the existing and intended shareholders directly.
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It is essential to know that promoter‘s duties cannot depend on a contract. While he/she
begins the promotional activities, company is not incorporated and hence cannot contract
with its promoters. The promoter's duties must be the same as that of a person acting on
his/her behalf of another individual without a contract of employment. If he/she does make
any misrepresentation in a prospectus he/she may be held guilty of fraud under Section 17
of the Indian Contract Act and would be held liable for damages under Section 19 of that Act.
Liabilities of Promoters
A promoter is subject to the following liabilities under the various provisions of the
Companies Act, 1956.
1. Section 56 and Schedule II of the Act lays down matters to be stated and reports to
be set out in the prospectus. The promoter(s) may be held liable for the non-
compliance of the provisions of this Section.
2. Under Section 62, a promoter is liable for any untrue statement in the prospectus to a
person who has subscribed for any shares or debentures on the faith of the
prospectus. Such a person may sue the promoter for compensation for any loss or
damage sustained by him/her. In the event of a false statement in the prospectus the
following consequences will follow:
a. the allotment of shares may be set aside;
b. the promoter may be sued for damages;
c. he/she may be sued for compensation for misrepresentation under Section
62(1)(c) of the Act;
d. he/she may be sued for damages by shareholders who have suffered by
reason of his/her non-compliance with the statutory requirements as to the
contents of the prospectus;
e. He/she may become liable to criminal proceedings.
3. By virtue of Section 203, of the Companies Act, 1956 the Court may suspend a
promoter from taking part in the management of a company for a period of 5 years if:
18
i. he is convicted of any offence in connection with the promotion, formation or
management of a company; or
ii. in liquidation it appears that he:
A. has been guilty of any offence for which he is punishable (whether he has
been convicted or not) under Section 542; or
B. While being an officer of the company, has otherwise been guilty of any
fraud or misfeasance in relation to the company or of any breach of his
duty to the company.
4. Under section 63, besides civil liability, the promoters are criminally liable for the
issue of prospectus containing untrue statements. This section imposes severe
penalty on promoters who make untrue and deceptive statements in prospectus with
a view to obtaining capital. The punishment prescribed, is imprisonment for a term
which may extend to two years or with fine which may extend to Rs. 50,000/- or with
both. A promoter can, however, escape the punishment if he proves:
that the statement was immaterial; or
that he had reasonable ground to believe, and did, up to the time of the issue
of prospectus, believe that statement was true.
5. Under section 478, a promoter may be liable to public examination like any other
director or officer of the company if the court so directs on a liquidator's report
alleging fraud in the promotion or formation of the company.
6. Under section 543, a company may proceed against a promoter on action for deceit
or breach of duty, where the promoter has misapplied or retained any property of the
company or is guilty of misfeasance or breach of trust in relation to the company.
Remuneration of Promoters
Promoters cannot claim remunerations from the company as a matter of right. Further,
he/she has no right to claim of promotional expenses for his/her services and preliminary
expenses unless there is a valid contract. But, a company before incorporation cannot enter
into a contract. After incorporation, he/she may be rewarded for his efforts that are in mercy
of the directors(Re English & Colonial Produce Co.). However the Articles of a company
generally contain a provision to this effect and authorise the directors to remunerate the
promoters.In practice, remunerations to a promoter for his services would be in any of the
following ways:
i. He/she may sell his/her own property to the company for cash or against fully paid
shares in the company at an over valuation after making full disclosure to a
disinterested Board of Directors or to the intended shareholders.
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ii. He/she may be given an option to buy further shares in the company at par.
iii. He/she may take commission on the shares sold.
iv. He/she may take a grant of some shares in the company.
v. He/she may be paid a lump-sum by the company.
vi. The articles may provide for a fixed sum to be paid to him. Such a provision has no
contractual effect and he cannot sue to enforce it, but if it is acted upon, the company
cannot recover its money.
Whatever be the nature of remuneration or benefit, it must be disclosed in the prospectus, if
paid, within 2 years preceding the date of the prospectus.
INCORPORATION OF COMPANIES
In order to incorporate a company, there are procedures that need to be followed
systematically. The following are the steps:
A. Deciding the types of company:Under the Companies Act, 1956 only three types
of companies can be registered, viz.
Public companies;
Private companies; and
Producer companies.
In this study, we shall concentrate only on the steps of incorporating Public and Private
limited companies.
Section 12 of the Act provides that any seven or more persons, or where the company to be
formed will be a private company, any two or more persons, associated for any lawful
purpose may, by subscribing their names to the Memorandum of Association and otherwise
complying with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability.
These companies may further be classified as follows:
(i) Companies limited by shares;
(ii) Companies limited by guarantee with or without share capital; and
(iii) Unlimited companies with or without share capital.
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B. Application for Availability of Name of company:
1. A company is identified by the name in order of preference with which it is to be
registered upto a maximum of six names. According to Section 13 of the Act, the
name of the company should be mentioned in the Memorandum of Association.
As discussed earlier, the name of a company must end with the word "Limited" in
the case of a public company and the words "private limited" in the case of a
private company. The name of a company must end with the ‗Limited‘ or ‗private
limited‘ for a company obtaining a licence from the Regional Director under
section 25 of the Act.
2. According to Section 20 of the Act a company cannot be registered with the
name that resembles the name of any other already registered company. In
addition, a company does not violate the provisions of Emblems and Names
(Prevention of Improper Use) Act, 1950. Before deciding the name of the
company, the promoter can avail the services of checking name availability on
the portal. (to decide the availability of names, the Ministry of Corporate Affairs
has issued Name Availability Guidelines, 2011 w.e.f. 24th July 2011)
3. The promoter will submit the application to the concerned Registrar of
Companies (ROC) in e-Form No. 1A according to the Companies (Central
Government's) General Rules and Forms (Amendment) Rules, 2011 vide Rule
4A. A fee of Rs. 1000 (w.e.f. 24.07.11) is to be paid along with e-Form 1A.
4. In case the proposed name is not available, the registrar may reject the same or
ask for resubmission of the application with new names or calls for further
information, ordinarily within three days of receipt of the application.
5. The applicant shall be given only upto two opportunities for re-submission of their
proposal against the fee paid in the first instance for name availability after the
original application is filed. After the name approval, the applicant can apply for
registration of the new company by filing the required forms (form 1, 18, and 32)
within 60 days from the date of name approval. The name allowed shall lapse
and no extension will be granted after expiry of sixty days from the date the name
is allowed.
C. Preparation of Memorandum and Articles of Association: This Memorandum of
Association is considered as the constitution of a company. It defines the area within
which the company can act. This document consists the objective of the company,
nature of business, liability, capital, location of registered office and so on. The other
important document is the Articles of Association which contains the rules and
regulations relating to the internal management of a company.
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D. Vetting of Memorandum and Articles, Printing, Stamping and Signing of the
same:The draft of the Memorandum and Articles should be prepared and typed
before printing the Memorandum and Articles of Association of a company and
submit the same to the Registrar of Companies for vetting the draft Memorandum
and Articles. Sometimes you may receive the changes from Registrar of Companies
which needs to be incorporated before going for the final printing. It is important to
note that there is no definite commitment from the Registrar in this regard vide
circular No. 128 (HCC) 64 date 27 th July 1964. The Memorandum and Articles have
to be stamped and the value of stamp differs from State to State as per respective
State Stamp laws. Further, section 15 stipulates that every Memorandum should be
signed by each subscriber who should add his address, description and occupation,
if any, in the presence of at least one witness who shall attest the signature and shall
likewise add his address, description and occupation, if any. Similarly, the Articles of
Association should also be signed separately by subscribers. The signatures of the
subscribers in the Articles of Association are also to be attested by a witness.
E. Power of Attorney: In order to carryout various formalities that are required for
incorporation of a company, the promoters may appoint an attorney empowering him
to carry out the instructions/requirements stipulated by the Registrar. To do so, it
requires execution of a Power of Attorney on a non-judicial stamp paper of a value
prescribed in the respective State Stamp Laws.
F. Additional documents required:As we discussed earlier, Form 1A application to
get approval for the name of the company to be registered. After that depending
upon the proposed company type, it required additional documents as given below:
i. Form 1 (Statutory Declaration): Section 33(2) requires that a declaration in e-Form
No. 1 of the Companies (Central Government's) General Rules and Forms
(Amendment) Rules, 2006 duly singed by an advocate of the Supreme Court or a
High Court, or an attorney or pleader entitled to appear before the High Court or a
Secretary or a Chartered Accountant practising in India who is engaged in the
formation of a company or by a person named in the Articles as a director or
manager, or secretary of a company, that all the requirements of the Companies Act,
1956 and the rules thereunder have been complied with in respect of registration and
matters precedent and incidental thereto to be filed with the Registrar. However, the
Registrar may accept such a declaration.It is important that the above declaration
should be on a non-judicial stamp paper of appropriate value with reference to the
State in which the office of the Registrar of Companies is situated.
ii. Form-18 (Registered Address): under section 146 requires that a declaration in e-
form about the location of the registered office of a company. This information should
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be submitted from the day on which it begins to carry on business or as from the 30th
day after the day of its incorporation whichever is earlier.
iii. Form 32 (Particulars of Directors): This form requires the details of a person who
acts as a director or manager or secretary as mentioned in Articles of Association.
This form is also to filled within 30 days of the registration of the company or
appointment of first director.
iv. Director‟s Identification Number (DIN): This concept has introduced by Ministry of
Corporate Affaris (MCA). This number is mandatory, unique, and life time
identification for all existing as well as prospective directors. This number is a
prerequisite for e-filing.As the number is required at the time of submitting e-form 32,
any individual who is a director or intends to be a director of a company shold apply
and obtained the same before commencing the procedure for incorporation of a
company.
v. Registration Fees: In addition to the above documents, the fee prescribed for
registration of company is required to be paid to the Registrar. The amount of
registration fees depends on the nominal capital of the company to be incorporated in
case of companies having share capital. The details have been prescribed in
Schedule X to the Act.
Certificate of Incorporation
If the Registrar of Companies is satisfied that all the aforesaid documents submitted
a company, he/she shall certify under his/her hand that the company is incorporated. From
the date of incorporation mentioned in the Certificate of Incorporation, members of the
company shall be a body corporate by the name contained in the Memorandum, capable
forthwith of exercising all the functions of an incorporated company and having perpetual
succession and a common seal, but with such liability on the part of the members to
contribute to assets of the company in the event of its being wound up as mentioned in the
Act (Section 34). From the date of incorporation, the company becomes a separate legal
entity notwithstanding the fact that there was only one governing director who also held a
majority of the shares of the company. The separate legal entity enabled a director who
representing the company, to enter into a contract of employment with himself in his
individual capacity. Two companies which are incorporated with the same set of
shareholders are nevertheless distinct and separate entities.
Let us discuss the contents of Memorandum and Articles of Association, because it helps to
understand the importance of the same.
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Memorandum of Association
This is one of the documents that have submitted with the RoC at the time of
incorporation of a company. Section 2(28) defines, ―the memorandum of association of a
company as originally framed or as altered from time to time in pursuance of any previous
company law or of this act.‖ It is a great challenge to understand about MoA by reading the
above definition. Let us discuss in detail, because it is an extremely important document in
relation to the affairs of the company.
This document sets out the constitution of the company and is therefore the foundation on
which the structure of the company is based. It contains the fundamental conditions upon
which alone the company is allowed to be incorporated. As discussed above, this is
essential document to get incorporation. This is evidenced in This is evidenced in Section 12
of the Act, which provides the mode of forming an incorporated company and states that in
the case of a public company, any seven or more persons, and in the case of a private
company, any two or more persons, associated for any lawful purpose, may by subscribing
their names to a memorandum and complying with the other requirements of this Act in
respect of registration, may form an incorporated company, with or without limited liability.
It is important that the company pursue the objects and exercise only such powers as are
conferred expressly in the documents. The purpose of the memorandum is to enable
shareholders, creditors and those who deal with the company to know the permitted range of
the company. Further, it defines as well as confines the powers of the company. Lord Cairns
in Ashbury Railway Carriage Co. V. Riche pointed out,‖ The memorandum is as it were, the
24
area beyond which the action of the company cannot go; inside that area the shareholders
may make such regulations for their own government as they think fit.‖
Purpose of memorandum: The purpose of the MoA is twofold.
1. The intending shareholders who contemplate the investment of his/her capital shall
know within what field it is to be put at risk.
2. Anyone who shall deal with the company shall know without reasonable doubt
whether the contractual relation into which he/she contemplates entering with the
company is one relating to a matter within its corporate objects.
Sections 12 to 23 of the Act prescribe the particulars to be mentioned in a MoA and other
requirements. It is considered as the constitution of the company in its relation to the
outside world. The company cannot depart from the provisions of the MoA. If it enters
into contract or engages in any trade or business which is beyond the powers conferred
on it by the MoA, such a contract or the act will be ultra vires the company and hence
void.
Form of Memorandum of Association
Section 14 of the Companies Act provides that the memorandum of association should be in
any one of the Forms specified in Tables B, C, D and E of Schedule I to the Companies Act,
1956. The table may be applicable in relation to the type of company proposed to be
incorporated. The table and its type of companies are given below:
Table Types of Companies
B Companies Limited by Shares
C companies limited by guarantee
D companies limited by guarantee, not having a share capital
E companies limited by guarantee and having a share capital
A company may either adopt any of the model Forms of the MoA mentioned above, as may
be applicable to it, or it may prepare it in any other Form. Nevertheless the same should be
as near thereto as the circumstances may admit.
Contents of Memorandum:
According to section 13, MoA of every company must contain the following clauses:
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1. The name of the company with ‗limited‘ as the last word of the name in the case of a
public limited company and with ‗private limited‘ as the last word in the case of a
private limited company.
2. The state in which the registered office of the company is to be situated.
3. The objects of the company are classified as stated below:
a. The main objects of the company to be pursued by the company on its
incorporation, objects incidental to the attainments of the main objects, and
b. Other objects not included above
4. In the case of companies with object not confined to one state, the states to whose
territories the objects extend.
5. The liability of members is limited if the company is limited by shares or by
guarantee.
6. In the case of a company having a share capital, the amount of share capital with
which the company proposes to be registered and its division into shares of a fixed
amount.
Note that an unlimited company need not include items 5 and 6 in its memorandum.In the
case of a company limited by guarantee, its MoA shall state that each member undertakes to
contribute to the assets of the company, in the event of its being winding up while he/she is a
member or within or year afterwards for the payment of the debts and liabilities of the
company as well. Every member to the MoA shall take at least one share and shall write
opposite to his/her name the number of shares taken by him/her.It is to be noted that section
9 of the Companies Act, 1956 shall override the provisions in the memorandum of a
company, if the latter contains anything contrary to the provisions in the Act.
A brief discussion of the various clauses is as follows:
Name clause: In order to maintain its separate entity, it needs to be registered with any
name it likes. However, no company shall be registered by a name which, in the opinion of
the central government, is undesirable. In particular, a name which is identical or which too
nearly resembles the name of an existing company. Note merely that a few words are
common may not be considered the name too identical and thus undesirable (section 20). It
must that every public company must end with the word ‗limited‘ after its name and every
private limited company must end with the word ‗private limited‘ after its name. However, the
use of the word ‗company‘ is not compulsory. Companies, whose liabilities are unlimited, are
prohibited from using the word ‗limited‘. The words ‗limited‘ may be dispensed with in the
name of charitable companies, but companies formed to promote art, science, religion etc,
which do not propose to pay dividend, but intend to apply all its profits towards the working
26
of the company, could be registered without the word ‗limited‘ under licenses granted by the
Central Government (Section 25)
In addition to the above, a company cannot adopt a name which violates the
provisions of the Emblems and Names Act, 1950. This act also prohibits the use of the name
and emblems of the united nation, and the world health organization, the official seal and
emblem of the central and the state governments, the Indian National Flag, the name and
pictorial representation of Mahatma Gandhi and the Prime Minister of India.If a limited
company makes a contract without using the word ‗limited‘, the directors who make the
contract on behalf of the company would be personally liable.
Every company is required to publish its name outside its registered office , and the
place where it carries on business, to have its name engraved on its seal and to have its
name on all business letters, bill heads, seal, notices and other official publications, as well
as in all negotiable instruments (section 147). Ministry of Company Affairs has clarified that
expression of its name in English only; in addition to the expression in the local language will
be a sufficient compliance with the requirements of the section.
Registered office clause:This clause states that name of the state in which the registered
office of the company is to be situated must be given in MoA. But the exect address of the
registered office is not required to be stated therein. This can be informed with the RoC
separately in e-Form 18 within 30 days of incorporation of the company. The clause is
important for two reasons.
It ascertains the domicile and nationality of a company. This domicile holds to it
throughout its existence.
It is the place where various registers relating to the company must be kept and to
which all communications and notices must be sent. A company need not to carry on
its business at its registered office.
Notice of situation of the registered office and every change therein must be submitted within
30 days from the date of incorporation of the company of after the date of change, as the
case may be.
Objects clause: The objects clause is the most important clause in MoA of a company. It
is not merely a record of what is contemplated by the subscribers, but it serves a two -told
purposes:
1. It gives an idea to the prospective shareholders for the purposes in which their
money will be utilized.
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2. It enables the persons who are dealing with the company to ascertain its powers.
In case of companies were existence before the commencement of the Companies Act,
1965, the objects of the company would be stated simply. But in case of companies are
registered after the amendment, the objects clause must divide their objects into two sub -
clauses, namely:
Main objects. This sub-clause has to state the main objects to be pursued by the
company on its incorporation and objects incidental or ancillary to the attainment of
the main objects.
Other objects: This sub-clause shall state other objects which are not included in
the above clause.
In the case of a non-trading company, whose objects are not confined to one state clause,
must be stated specifically the states to whose territories the objects extend. The
subscribers to MoA may choose and object or objects for their company. There are certain
restrictions which are given below:
1. The objects should not be against the policy of the constitution. For example, the
object should not be such as to encourage untouched ability which has been
abolished under our constitution.
2. The objects should not include anything which is illegal or against public policy. For
example, forming a company for dealing in lotteries or for trading with the alien
enemies.
3. The object must not be against the provisions of the companies act, as for example,
authorizing the company to purchase its own shares.
On its being registered, the company has power to do whatever is necessary to do for
attaining the objects stated in the memorandum, and to do whatever else is incidental to or
consequential upon the attainment of the main object. Therefore, It is clear that any act of
the company outside its stated, objects is ultra vires and therefore void and cannot be
ratified even by the whole body of shareholders.
Liability clause:This clause must state that the liability of the members of the company is
limited in the case of company limited by shares or guarantee. The members are liable only
to the amount of unpaid on the shares taken by them in the case of limited by shares. For
example, a face value of a share is Rs.100. The member has paid only Rs.50. The unpaid
amount is Rs.50. The member is liable to pay the unpaid amount of Rs.50 in the event of
28
liquidation of a company. In case the member paid fully, the member cannot be called upon
to pay anything. In a company limited by guarantee, the members are liable to the amount
undertaken to be contributed in the event of liquidation of a company. The member cannot
be called upon to pay anything before the company goes into liquidation. However, this
liability clause is omitted from MoA of unlimited companies.If a company carries on business
for more than six months, while the number of members is less than 7 in the case of public
company and less than 2 in case of a private company, each member is liable for all the
debts contracted by the company after the period of six months has elapsed.
Capital clause: The MoA of a company limited by shares must state the amount of the
capital with which company is registered. The registered amount of capital is known as
authorised capital or nominal capital. It clause also states the different kinds of shares and
the nominal value of each share. The authorised capital is determined having regard to the
present and future requirements of the capital with reference to its objects. A company
cannot issue shares more than the amount lays down in the limit. However, the authorised
capital could be altered as provided by Section 94 of the Companies Act, 1956. If a company
receives applications for shares beyond the shares mentioned in the MoA, the excess
number of shares should be returned. A company may wish to issue the shares to the
number of shares mentioned in the capital fully or partially, it is known as issued capital. Out
of issued capital, the total amount of actual shares subscribed by the subscribers is known
as subscribed capital. The amount of subscribed capital again may be fully paid or partially
paid by the subscribers is known as paid-up capital. According to Section 148 of the Act, if
the amount of the authorised capital, of the company is stated in any notice, advertisement,
official publication, business letter, bill head or letter paper, it shall also contain a statement
in an equally prominent position and in conspicuous characters of the amount of the capital
which has been subscribed and the amount paid-up.
Association Clause and Subscription: TheMoA concludes with the subscription clause in
which there is a declaration of association. The subscribers to the memorandum declare:
―We, the several persons whose names and addresses subscribed, are desirous of being
formed into a company in pursuance of this memorandum of association, and we
respectively agree to take the number of shares in the capital of the company se t opposite
our respective names. Then follow the names, address, occupations of the subscribers, and
the number of shares each subscriber has taken and his signatures attested by a witness.
The statutory requirements regarding subscription of memorandum are that:
29
(a) MoA must be signed by each subscriber in the presence of at least one witness who
must attest their signatures;
(b) each subscriber must take at least one share;
(c) each subscriber must write opposite his name the number of shares which he/she
agrees to hold (Section 13).
Let us discuss the ways in which we can alter the above discussed clauses.
Alteration of Memorandum of Association
The memorandum of association of a company may be altered in the following
respects:
1. By changing its name clause (Sections 21 to 24).
2. By altering it in regard to the State in which the registered office is to be
situated or its objects clause (Section 17).
3. By altering its share capital clause (Section 94).
4. By reorganising its share capital (Sections 391 to 396).
5. By reducing its capital (Section 100).
6. By making the liability of the directors‘ unlimited (Section 322).
For the purpose of amendment different clauses of the memorandum are broadly classified
into two parts, namely,
A. Part relating to conditions, and
B. Part relating to other provisions.
Under section 16(1) of the Companies Act 1956 lays down the procedures to be
followed while changing the conditions of memorandum. The provisions relating to the name
clause, registered office clause, the objects clause, limited liability clause, subscriber‗s share
clause as provided in Section 13 of the Companies Act, 1956 or any other specific provisions
contained in the Act are to be regarded as the conditions contained in the memorandum
[Section 16(2)]. For the alteration of those conditions in the memorandum of association, a
rigid procedure is to be followed and strict compliance of the procedure is demanded by law.
Failure to comply with the express provisions made under the Act for the purpose of
30
alteration of the conditions contained in the memorandum will be deemed as a nullity.Other
provisions which are found included in the memorandum including those relating to
appointment of a managing director or manager fall in the category of other provisions in the
memorandum [See Section 16(3)]. These may be generally altered in the same manner as
the articles of the company unless there are any specific directions as to the procedure to be
followed made in the Act. Thus, procedure to be followed as provided in the articles is
adhered to for this purpose.
Articles of Association (AoA)
Section 26 of the Companies Act, 1956 provides that a public company limited by
shares may at its option register its articles of association signed by the same subscribers as
to the memorandum, or alternatively it may adopt all or any of the regulations contained in
Table A of First Schedule of the Act. If articles are not registered, automatically Table A
applies, and if registered, Table A applies except in so far as it is excluded by the articles.
To avoid any confusion, normally every public company delivers its articles alongwith
the memorandum for registration. Further it will be specifically stated therein that
Table‗A‗ will not apply.
The articles of a private company must contain the four restrictions as contained in
Section 3(1)(iii).
The articles of association of an unlimited company should state the number o f
members with which the company is to be registered and if the company has a share
capital, the amount of share capital with which it is to be registered [Section 27(1)].
In the case of a company limited by guarantee the articles shall state the number o f
members with which it is to be registered [Section 27(2)].
A company limited by guarantee or a private company limited by shares or an
unlimited company must register their articles. The companies limited by guarantee
or unlimited company might adopt any of the appropriate regulations of Table C, D
and E respectively in Schedule I (Section 29).
31
Statutory Requirements: Section 30 requires that the articles must be printed, divided into
paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the
memorandum and duly witnessed and filed along with the memorandum. The articles must
not contain anything illegal or ultra vires the memorandum, nor should it be contrary to the
provisions of the Companies Act, 1956.
CONTENTS OF ARTICLES
The articles set out the rules and regulations framed by the company for its own
working. The articles should contain generally the following matters:
1. Exclusion wholly or in part of Table A.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialisation.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
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29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Provision regarding common seal.
33. Capitalisation of reserves.
Extra care must be exercised in the preparation of the AoAof a company. At the same time,
certain provisions of the Act are applicable to the company "notwithstanding anything to the
contrary in the articles". Therefore, the articles must contain provisions in respect of all
matters that are required to be contained therein, so as not to hamper the working of the
company later.
Provision in Articles As Regards Expulsion of a Member: Section 29 provides that
nothing in Section 29 shall be deemed to prevent a company from including any additional
matters in its Articles, in so far as they are not inconsistent with the provisions contained in
the Form in any of the Tables C, D and E, which might have been adopted by the company.
In the light of this provision, if there is a provision in the Articles empowering the Directors of
the company to expel any member of the company under any of the given conditions, then
such a provision shall be totally inconsistent with the provisions of Section 29 of the Act. But
the Stock exchanges, registered under the provisions of the Companies Act, can carry such
a provision in its Articles, because the Companies Act is a general law whereas the
Securities Contracts Regulation (SCR) Act is a special law. The regulation of stock
exchanges is done by SCR Act and SEBI Act and not by Companies Act. Hence, the Articles
of Stock Exchange may provide for additional matters as per SCR Act, which may not be
possible for inclusion in the Articles of a company as per the provisions of the Companies
Act.
Alteration of Articles of Association
A company has a statutory right to alter its AoA, but the power to alter is subject to the
provisions of the Act and to the conditions contained in the memorandum. Section 31
provides that subject to the provisions of the Act and the conditions contained in its
memorandum, a company may, by special resolution, alter its articles, and adds that any
alteration so made shall be as valid as if originally contained in the articles. However, no
alteration made in the articles which has the effect of converting a public company into
private company shall have effect unless such alteration has been approved by the Central
33
Government [Section 31(1)]. However, in spite of the power to alter its articles, a company
can exercise this power subject only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In the event
of conflict between the memorandum and the articles, it is the memorandum that will
prevail.
2. The alteration must not be inconsistent with any provisions of the Companies Act or
any other statute.
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
5. The alteration must not constitute a fraud on the minority by a majority. If the
alteration is not for the benefit of the company as a whole, but for majority of
shareholders, then the alteration would be bad. In other words, an alteration to the
articles must not discriminate between the majority shareholders and the minority
shareholders so as to give the former an advantage over the latter
6. An alteration of articles to effect a conversion of a public company into a private
company cannot be made without the approval of the Central Government [Section
31].
7. Articles cannot be altered so as to compel an existing member to take or subscribe
for more shares or in any way increase his liability to contribute to the share capital,
unless he gives his consent in writing (Section 38).
8. By effecting alteration in its articles, a company cannot defeat escape from its
contractual obligation with any person. The company will always be liable in such a
case.
9. The Articles of Association cannot be altered so as to have retrospective effects. The
articles only operate from the date of the amendment
10. The alteration must not be inconsistent with an order of the Court under Sections 397
or 398 and 404.
11. In the case of listed companies, earlier articles cannot be altered except with the
approval of Stock Exchange(s) concerned.
12. Amendment of Articles relating to Managing, Whole-time director and non-rotational
directors requires Central Government‗s approval. (Section 268)
Subject to the foregoing conditions, the Articles in a company can be altered and no clause
can be included in the Articles that it is not alterable. Persons who become members of a
company have no right to assume that the Articles will always remain in a particular form.
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Distinction between Memorandum and Articles of Association
The key distinction between the MoA and AoA are given below:
1. Memorandum of association is the charter of the company and defines the
fundamental conditions and objects for which the company is granted incorporation.
Articles of association are the rules and regulations framed to govern this internal
management of the company.
2. Clauses of the memorandum cannot be easily altered. They can only be altered in
accordance with the mode prescribed by the Act. In some of the cases, alteration
requires the permission of the Company Law Board or the Court. In the case of
articles of association, members have a right to alter the articles by a special
resolution. Generally there is no need to obtain the permission of the Court or the
Company Law Board for alteration of the articles.
3. Memorandum of association cannot include any clause contrary to the provisions of
the Companies Act. The articles of association are subsidiary both to the Companies
Act and the memorandum of association.
4. The memorandum generally defines the relation between the company and the
outsiders, while the articles regulate the relationship between the company and its
members and between the members inter se.
5. Acts done by a company beyond the scope of the memorandum are absolutely void
and ultra vires and cannot be ratified even by unanimous vote of all the shareholders.
But the acts of the directors beyond the articles can be ratified by the shareholders.
So far, we have discussed different types of company, its definitions, and procedures to be
followed in incorporation of a company, relevant documents to be submitted, and contents of
the documents as well. Now let us move on how to raise the funds and its related regulatory
framework in the next chapter.
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CHAPTER 2
PROSPECTUS, ISSUE AND ALLOTMENTS OF SHARES
After the receipt of certificate of incorporation, a public limited company is ready for
raising funds by issuing shares to the public in order to carry out the business activities, a
company will issue a document called prospectus. It is an invitation to the public to subscribe
to the share capital of the company i.e. document facilitate the collection of money for a
company. The prospectus describes the purpose of the company and the reason why the
capital is required. Under section 2(36) of the companies Act, 1956 defines ―any document
described or issued as a prospectus and include any notice, circular, advertisement or other
documents inviting deposits from the public or inviting offer from the public or inviting offers
from the public for the subscription or purchase of any shares in, or debentures of, a body
corporate‖.
Generally it is known as an offer document. It means ‗prospectus‘ in case of a public
limited company (as stated above) or an offer for sale and ‗letter of offer‘ in case of right
issue. As this is the basic document of a company, it is circulated among the public in printed
pamphlets. This is the only source for the investors to know about the company such as
objectives, plans, and soundness. Therefore, legislation has aimed at securing the fullest
disclosure of all materials and necessary particulars and laying the same before all the
prospective buyers of shares. The following are the important requirements for issuing the
prospectus:
Dating of Prospectus: According to Section 55, every prospectus must be dated.
This date is considered to the date of publication of prospectus, unless the contrary
proved.
Registration of Prospectus: It is absolutely mandatory for a company to submit the
copy of the prospectus to the Registrar for registration. This should be done on or
before the prospectus is published. However, the prospectus must not be issued
more than 90 days after the date on which a copy of it is submitted to the Registrar
for registration.
Approval of prospectus by various agencies: The prospectus has to beapproved
by various agencies before it is filed with the ROC of the respectiveState. The
various authorities who approve the prospectus are as follows:
a. All the lead managers to the issue.
b. Each of the stock exchanges where the shares of the company are listed and
where the shares/debentures are proposed to be listed.
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c. The lead financial institution underwriting the issue, if applicable.
The lead financial institution underwriting the issue, if applicable: The
prospectus is vetted by SEBI to ensure adequacy of disclosures provided by the
company. However, vettingby SEBI does not account to the approval of prospectus.
SEBI does not take anyresponsibility for the correctness of the statements made or
opinions expressed inthe prospectus by the company.
The Ministry of Corporate Affairs, vide its circular 10/8/87-CL V No. 7/91, dated 28-2-
1991 advised the ROCs to ensure that in respect of every prospectus of public issues which
comes up for filing with them the merchant bankers to the issue, whether as lead managers,
co-managers, advisers or consultants are only those authorised by SEBI. Each merchant
bankers has been given a code number. It was also decided that ROC shall not register a
prospectus where prior to registration of the prospectus, the ROC before whom the
prospectus is filed for registration is informed by SEBI that the contents of prospectus filed
are in contravention of any law or statutoryrules and regulations.
From the above discussion, it clear that the prospectus is an essential document.
The information statutorily needing disclosure is stated fully and precisely so that the public
who wish to invest about the present and future prospectus of the company. The purpose of
issuing the document is to protect the members of the public again their being misguided by
partial truths or falsehoods that the law casts a liability on various person connected with the
issue of the prospectus to compensate every person (who subscribes on the faith of
theprospectus) for any loss or damage he may have sustained because of the inclusion of
any untrue statements in the prospectus [Section 62].
Although the prospectus is an essential document to be issued for raising fund,
section 56 of the Companies Act 1956, the issue of a prospectus is not necessary in the
following situations:
1. Subsection 5 states when shares or debentures are offered to the existing holders of
shares or debentures
2. Subsection 5 tells when the issue relates to shares or debentures uniform in all
respects with shares or debentures previously issued and dealt in or quoted in a
recognised stock exchange
3. Subsection 3 conveys where a person is bonafide invited to enter into an
underwriting agreement and/or where shares are not offered to the public
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Before proceeding further about prospectus, it is essential that one should know
about the concept of capital, various sources of capital, meaning shares and its types, and
provisions for issue the same. Let us now the same.
Meaning of Capital
Capital has variety of meanings. Capital refers to money that is used to do business.
According to company law, the capital is the share capital of a company. It is classified as
given below:
1. Nominal, Authorised or Registered Capital:This is the amount mentionedin the
MoA of a company limited by shares as the capital of the company. It is the
maximum amount that a company is authorized to mobilise the required funds by
issuing shares. The company had paid the registration fee at the time of registration
on the basis of authorised capital. As and when the registration fee is increased, a
company will have to be paid to the Registrar in accordance with table in Schedule X
appended to the Companies Act, 1956. The capital is divided into shares of uniform
denominations. For example, Rs.10, 000, divided into 1000 equity shares with the
face value of Rs.10 each.
2. Issued Capital:a company may issue the capital fully or part of authorised capital. If
a company issues fully, authorised capital and issued capital would be same.
Otherwise, the part of the authorised or nominal capital is called issued capital. This
is computed at the face or nominal value. Considering the above example, a
company is issued of 600 equity shares. It means that the authorised capital is
Rs.10, 000 and issued capital is Rs.6000.
3. Subscribed Capital:It is that portion of the issued capital at face value which has
been subscribed by the subscribers of shares in the company. It is clear that the
entire issued capital may or may not be subscribed.
4. Called up Capital:It is that portion of the subscribed capital which has been called
up or demanded on the shares by the company. Assume thatRs. 6 has been called
up on each of 600 shares of a nominal value of Rs. 10, the called up capital is
Rs.3600.
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5. Uncalled Capital:It is the total amount not yet called up or demanded by the
company on the shares subscribed, which the shareholders are liable to pay as and
when called. For example, in the above case, uncalled capital is Rs. 2400.
6. Paid-up-Capital:It is the part of the total called up amount which is actually paid by
the shareholder. For example, if only Rs. 2,900 is actually paid by the shareholders
the paid-up capital is taken as Rs. 2900 only.
7. Unpaid Capital:It is the total of the called-up capital remaining unpaid i.e., Rs. 700
i.e. the difference between called up and paid-up capital.
8. Reserve Capital: It is that part of the uncalled capital of a company. The limited
company has decided by special resolution in terms of Section 99 of the Companies
Act, 1956, not to call except in the event and for the purpose of the company being
winding- up. For instance, in the above example, out of the Rs. 4 per share uncalled
capital, Rs. 2 per share may be resolved to be kept as reserve capital. (Reserve
capital should not be confused with capital reserve, which is created out of profits).
9. Preference and Equity Share Capital:Section 86 of the companies Act, 1956 as
amended by the Companies (Amendment) Act, 2000 permits a company limited by
shares to issueonly two kinds of shares Viz. preference shares and equity shares.
Equity share capital may be with similar rights or with different rights as to dividend,
voting or otherwise in accordance with the Companies (Issue of Share Capital wi th
Differential Voting Rights) Rules, 2001.
Section 85(1) of the companies Act, 1956 provides that a preference share or
preference share capital is that part of share capital that fulfils the following
requirements:
a. With regard to payment of fixed amount of dividend or fixed rate of dividend,
which may be either free of or subject to income tax
b. With regard to preferential right of the repayment of capital in the event of
liquidation of company. With regard to payment of dividend, preference
shares may be cumulative or non-cumulative.
According to section 85, equity shareholders are entitled to the residue of the
divisible profits, if any, after the preference shareholders have received their fixed rate of
dividend.
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Let us discuss the types of preference shares.
Types of Preference Shares:it may be of various types, namely 1. Participating or Non-participating:Participating preference shares are those shares
that are entitled to a fixed preferential dividend. In addition, it carries a right to participate
in the surplus profits along with equity shareholders, after paying dividend at a certain
rate has been paid to equity shareholders. For example, after 30% dividend has been
paid to equity shareholders, the preference shareholders may share the surplus p rofit
equally with equity shareholders. Moreover, there are any surplus left after paying to the
equity shares in the event of liquidation of a company, preference shares holders get
additional share in the surplus assets of the company. Unless expressly sated,
preference shareholders get only the fixed preferential dividend and nothing more. The
right to participate may be given either in the memorandum or articles or by virtue of
their terms of issue.
2. Cumulative and non-cumulative shares:Preference shares may be classified as
cumulative or non-cumulative on the basis of dividend payment. A holder of cumulative
preference shares has a right to claim fixed dividend of the past and the current year out
of profits. The preferential dividend keeps on accumulating until it is fully paid by the
company. On the other hand, the non-cumulative preference share gives right to its
holder to get the preference dividend on a fixed percentage out of the profits of each
year. If a company has not make profits, they get nothing, they cannot claim in
subsequent year as well. Preference shares are cumulative unless expressly stated to
be non-cumulative.
3. Redeemable and irredeemable Preference Shares: Subject to an authority in the
articles of association, a public limited company may issue redeemable preference
shares to be redeemed either at a fixed date or after a certain period of time during the
life of the company provided the company. However a company complied with the
following conditions lay down in section 80 of the Act.
a. the articles must have a provision for the issue of such shares;
b. they may be redeemed only out of profits available for dividend or out of the
proceeds of a fresh issue of shares made for the purpose of redemption;
c. if premium is payable on redemption, it must have been provided for out of
profits or out of company‗s securities premium account, before the shares are
redeemed;
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d. no such shares can be redeemed unless they are fully paid;
e. Where the shares are redeemed otherwise than out of the proceeds of the
fresh issue, a sum equal to the nominal amount of the shares redeemed shall
be transferred out of profits which would otherwise have been available for
dividend, to the ―Capital Redemption Reserve Account. This fund may also
be applied by the company in paying up unissued shares of the company to
be issued to the members of the company as fully paid shares.
Sweat Equity Shares
Sweat equity shares means equity shares that are issued by a company to its
employees or directors at a discount or for consideration, other than cash for providing
know-how or making available right in the nature of intellectual property rights or value
addition, whatever name they called.Section 79A of the Companies (Amendment) Act, 1999
permits to issue of such equity shares to employees or directors in recognition of their
contribution for providing know-how etc. as stated above. As the contribution made by
employees/directors results in increased profits to the company for a number of years, a
company provides sweat equity shares. It is considered as a new form of return. For the
purpose of issue of sweat equity shares, ‗company‗ means a company which is incorporated,
formed and registered under this Act and includes its subsidiary company incorporated
outside India. The intellectual property rights and value additions refers to -
the exclusive property rights that can be prevented from use by others without the
authorization of the owners and include patents for invention, industrial designs,
copyrights in literacy/scientific and so on matters, registered or pending trademarks
etc.
the increase in value of company‗s products etc. in economic termsthat is attributable
to the efforts of an employee or a director, in any manner.
Notwithstanding anything contained in Section 79, a company can issue sweat equity
shares, of a class of shares already issued, if the following conditions are satisfied:
(i) The issue has been authorised by a special resolution passed by the
company in the general meeting.
(ii) the following are clearly specified in the resolution:
(a) number of shares
(b) current market price
(c) consideration, if any
(d) Class or classes of directors or employees to whom such equity shares
are to be issued.
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(iii) as on the date of issue, atleast one year should have elapsed from the date
on which the company was entitled to commence business.
(iv) A company whose shares are listed on a recognized stock exchange issuing
sweat equity shares should comply with the regulations made in this behalf
by SEBI.
(v) A company whose shares are not so listed should issue sweat equity shares
in compliance with the rules made in this behalf.
Employee Stock Option Scheme (ESOP)
Section 2 (15A) of the Companies Act, 1956 defines ‗the option given to the whole-
time directors, officers or employees of a company, which gives such directors, officers or
employees the benefit or right to purchase or subscribe at a future date, the securities
offered by the company at a pre-determined price‘.
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 defines ‗a scheme under which the company grants option to its
employees and option means a right but not an obligation granted to an employee in
pursuance of ESOS to apply for shares of the company at a pre-determined price‘.
The following points are essential and to be followed while issue of ESOP:
1. The issue of ESOPs would besubject to approval by shareholders through a
special resolution. In addition, ESOP is more than 1 per cent, it is essentialfor
a company to have a specific disclosure and approval from the annual
general meeting.
2. A minimum period of one year between grant of options and its vesting has
been prescribed. After one year, the period during which the option can be
exercised are determined by the company.
The operation of the ESOP Scheme would have to be under the superintendence and
direction of a Compensation Committee of the Board of Directors. The composition of
Compensation Committee would be a majority of independent directors. If a company would
cover its subsidiary or a holding company, it needs the specific approval of the shareholders.
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Raising Capital
Assume that you are a finance manager of a company which was started privately by
promoters. Your management has decided to introduce a new product in the market which
needs to Rs.500 crores. The responsibility is given to you. You know that there are many
ways to raise funds viz. common stock, preferred stock, bonds, and bank borrowings. Bonds
and preferred stocks are fixed obligation to the business, whereas shares are the ownership
in the business that offer an unknown growth potential to the investors. In the first case,
investors get fixed benefits over the investment horizon. On the other hand, investor gets
benefits only if company makes profits.
As a private limited company, one can raise the funds from the promoters, friends
and relatives by private placement. Note that you cannot issue preference shares and
bonds. You know that it may not be sufficient for introducing the new product. Therefore, you
decide to invite the public to contribute towards the required capital. For raising capital from
the public by issuing shares, a company has to comply with the provisions of the Companies
Act, 1956, the Securities Contracts (Regulation)Act, 1956, SEBI (ICDR) Regulations 2009
the rules made thereunder and the guidelines and instructions issued by the concerned
government authorities, the stock exchanges etc. management of public issue involves
coordination of activities and cooperation of a number of agencies such as underwriters,
brokers, registrar to the issue, printers, financial institutions, auditors and other
government/statutory agencies. The entire process of public issue could be classified into
two: viz.
(i) Pre-issue activities and
(ii) Post issue activities.
All activities beginning with the planning of capital issue till the opening of the
subscription list are called pre-issue activities. All activities subsequent to the opening of the
subscription list are called post-issue activities.
Let us discuss the meaning of each term and then discuss the detailed procedures involved
in each of these issues.
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Public Issue refers to the company‘s shares that are sold to the public through stock
exchange. As per the Companies Act 1956, the allotment should be more than 50 persons.
The public issue are further classified into two categories namely Initial Public Offer (IPO)
and Follow on Public Offer (FPO).
Initial Public Offering (IPO) refers to the company‘s shares that are sold to the
general public through stock exchange for the first time. By doing this, a private
limited company become a public limited company. Note that all public limited
companies are not publically traded companies. A company can raise funds through
public; however, they may not prefer their company shares are to be traded in the
secondary market. Those companies are called unlisted companies. Conversely,
there are companies who prefers their shares to be traded in the secondary market
opts for listing. Listing is the process whereby shares are offered to the public,
become eligible for trading in the stock market. Those companies‘ shares are called
listed companies. Those companies‘ shares are available for buying and selling at
any point in time. Listing refers to the process whereby shares are offered to the
public through an IPO become eligible to be traded in the secondary market (BSE or
NSE). Generally there is a gap about 12 -15 days between the closing and listing
date of an IPO. (Note that SEBI is planning to reduce from 12 days to 6 days). There
are two methods to issue the IPOs:
Issues
Rights Private Placement Bonus
Qualified Institutions for lis ted companies
For un-lis ted companies
Follow on Public
Offer (IPO)
Initial Public Offer
(IPO)
Public
Preferential issues for lis ted companies
Offer for sale Fresh Issue
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a. fresh issue, and
b. An offer for sale: it refers to the process of offload/dilute the promoters
holding in the listed companies to the public for the first time.
For a moment assume that your company is a public limited company and listed in
the stock exchanges. After careful analysis, you have decided to mobilise funds
through equity. You can issue the securities to the public or offer for sale to the
public, through an offer document. It is known as Follow on Public offer. Note that a
company issues shares through an offer for sale is permitted only if your company
satisfy the listing or continuous listing obligations of the stock exchanges.
On the other hand, you are interested to issue the shares only to the existing shareholders
on a pro-rata basis as on a record date. It is known as Rights Issue. The right issue helps to
maintain the ownership stake of its existing shareholders as they have.
Suppose you are interested to invite the select set public instead of to the general public. It is
known as private placement. The allotment of shares should be less than 50 persons under
section 81, of the Companies Act 1956. It is neither rights issue nor a public issue. You are a
listed company and want to go for preferential allotment for a select set of people.
Buyers/investors may be an individual or institutions. Your company has to comply with the
requirements contained in Chapter VII of SEBI ( Issue of Capital and Disclosure
Requirements) Regulations 2009. If it is qualified institutions‘, the institution should be a
qualified buyer on the basis ofSEBI (Issue of Capital and Disclosure Requirements)
Regulations 2009. It is known as Qualified Institutional placement.
You have mobilised the required fund and launched the new product in the market. It gives
more profit to the company. The company has decided to give the dividend to the
shareholders. However they do not have adequate cash in their hands. They are permitted
to issue of shares equivalent to the dividend at predetermined price on pro-rate basis to the
existing shareholders on record date. Generally it is issued out of the general reserve or
share premium account. This issue is known as Bonus Issue.
Before proceeding further, let us now understand who are eligible to make an offer to the
public?
1. The company should have at least Rs.3 crores of net tangible assets for the past
preceding three years (each year consists of 12 months) from the year of issue. Of
which, the company should held less than 50 per cent of amount held in monetary
assets. If the company has more than 50 per cent held in monetary assets, they
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have to give the commitment to use those excess monetary assets in its
business/project.
2. The company has a track record of distributing dividend to their shareholders at least
three out of the immediately five years, excluding ex-ordinary items, as per the
section 205 of Companies Act 1956.
3. The company has a net worth of Rs. 1 cores of net worth
Issue of shares at a Premium or Discount
Issue at a Premium:A company may issue securities at a premium when it is able to sell
them at a price more than their nominal value. For example, the nominal value of a share is
Rs.100, but it is priced at Rs. 110. The difference of nominal value and issued value is called
as a share premium i.e. Rs. 10 per share. This is possible for a company irrespective of the
fact whether the securities are listed on Stock Exchange or not (Section 78). In this regard,
the Companies Act does not stipulate any conditions or restrictions regulating the issue of
securities by a company. However, the Companies Act imposessome conditions for
utilisation of the amount of premium amount collected on securities which is given bellow:
1. This amount cannot be treated as profit and should not distribute as dividend to
their shareholders. However, this amount can be used for specific purposes
mentioned in section 78(2).
2. It should be maintained as a separate account in the name of ‗Securities
Premium Account‘. The premium amount may be received in the form of cash or
in any kind.
3. The amount of premium is to be maintained with the same sanctity as the share
capital.
Typically share premium account must be disclosed in the annual balance sheet as a
separate item. In case the amount is deposed partially or wholly, it should indicate how it is
disposed of or exhausted. [See Schedule VI Part I]. Further, shareholder does not have any
preferential rights in the event of liquidation of a company. Section 78(2) of the Act indica tes
the way in which this fund could be utilised. It is given below:
a. Issuing fully paid bonus shares to members;
b. Writing off the balance of the preliminary expenses of the company;
c. Writing off commission paid or discount allowed, or the expenses incurred on
issue of shares or debentures of the company; and
d. For providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company.
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A company issues a share at premium which has to comply section 78 of the Act and
the rest of the procedures are the same as those for the procedure for issue of shares. A
private company and an unlisted company which is not making a public issue are at liberty to
issue capital at a premium as may be decided by the Board of directors.
Issue at discount:A company may issue shares at a price less than the nominal value of
shares. For example, the nominal value of a share is Rs.100, but it is priced at Rs. 90. The
difference of nominal value and issued value is called as a share discount i.e. Rs. 10 per
share. However, the Companies Act discourages issue of shares at a discount. Allotment of
shares at a discount without complying with the stringent requirements of the Act, it is
considered as ultra vires. Therefore, the person(s) who have been made on the register of
members are liable to pay the full value of their shares. Section 79 provides the guideline
when a company can issue shares at a discount by fulfilling the following conditions:
a. the shares must be of the class already issued;
b. at least one year must have elapsed since the company became entitled to
commence business;
c. the issue must be authorised by resolution of the general meeting of thecompany
specifying maximum rate of discount at which shares are to be issued;
d. the resolution must be confirmed by the Company Law Board.
e. the rate of discount cannot exceed 10 per cent or such higher percentage as is
permitted by the Company Law Board in special cases;
f. the shares must be issued within two months of the sanction by the Company Law
Board or within such extended time as the Company Law Board may allow; and
g. Every prospectus relating to the issue of shares must contain the particulars of the
discount allowed on the issue of the shares, or of so much of that discount as has not
been written off at the time of issue of the prospectus.
Note:
1. Provisions regarding issue of shares at a discount do not apply to debentures.
Debentures may be issued at a discount if the ultimate objective is not to convert
them into shares.
2. Issue of sweat equity shares to employees and directors at a discount under section
79A is outside the scope of this section. Sanction of the Company Law Board is not
required even if the issue is at a discount. However, if the discount is higher than 10
per cent in proper cases, the permission of the Company Law Board is mandatory.
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Note:
a. Issue of shares at premium should be stated in the balance sheet. On contrary, it is
no longer necessary to disclose the issue of shares at a discount in any balance
sheet.
b. Where shares are issued at a price lower than the market price but above nominal
value, such an issue is not an issue at a discount.
c. The fact that the market quotation for the shares is already below the par would not
justify issuing shares at a price less than the nominal value.
Types of Prospectus
The following are the types of prospectus:
Draft Prospectus:A company before making any public issue of shares or debentures shall
file a draft prospectus with SEBI, through an eligible merchant banker. The draft prospectus
should be submitted atleast 21 days prior to the filling of prospectus with the RoC. If any
changes are suggested by SEBI within the said 21 days, the issuing company or lead
merchant banker shall carryout such changes in the draft prospectus before submitting the
prospectus with RoC.
Draft letter of Offer: A listed company before making any rights issue for an amount
exceeding Rs.50 lakhs (including premium) shall file a draft letter of offer with SEBI.
Abridged Prospectus: Section 2(1) of the Companies (Amendment) Act, 2000 defines
―abridged prospectus means a memorandum containing such salient features of
aprospectus as may be prescribed.‖ An abridged form of prospectus was permitted along
with the application for shares and debentures instead of full prospectus (Amendment Act,
1988). However, the government has revised the format of abridged prospectus to provide
for greater disclosure of information to the prospective investors. The full disclosure of
information enables the investors to make an informed decision with regard to investment in
shares and debentures. This prospectus (in Form 2A) and the share application form have
the same printed number (section 56(3)). While submitting the application to the company or
its designated bankers, the investor may detach the prospectus and keep the same with for
their further reference. The objective of this provision is to reduce the cost of issue as the
detailed prospectus is a very bulky document. On the other hand, abridged prospectus is
limited pages and cost is very less while comparing the normal prospectus. Penalty for
failure to comply with section 56(3), a company should pay a fine of upto Rs.50,000.
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Circumstances where details are not required in the abridged prospectus:
(1) Where the offer is made in connection with a bonafide invitation to a person toenter
into an undertaking agreement with respect to the shares or debentures (Section
56(3)(a))
(2) Where the shares or debentures are not offered to the public (Section 56(3)(b))
(3) Where the offer is made only to the existing members or debenture holders of
thecompany. (Section 56(5)(a))
(4) Where the shares or debentures offered are in all respects uniform with shares
ordebentures already issued and quoted on a recognized stock exchange. (Section
56(5)(b))
(5) Where a prospectus is issued as a newspaper advertisement, it is not necessary
tospecify the contents of the memorandum, or the names etc., of the signatories
tothe memorandum or the number of shares subscribed for by them. (Section
56(3)(b))
A prospectus may contain a statement purporting to be made by an expert. Section
59(2) of the companies Act includes an engineer, a valuer, an accountant, and any other
person whose profession gives authority to a statement made by him.
Statement by Experts: An expert who would be liable by reason of having given his
consent under section 58 tothe issue of the prospectus containing a statement made by him
would not be liable if hecan prove.
a. An expert withdrew his/her consent to the issue of prospectus before the
delivery of a copy of the prospectus for registration. However, he/she has to
give in writing, or
b. An expert can withdrew his consent after delivery of prospectus but before
allotment. However he/she has to in writing and gave reasonable public
notice thereof and the reason as well, or
c. Section 62 (3) of the Companies Act states that he/she was competent to
make the statement if he/she had reasonable ground to believe and did up to
the time of allotment of the shares or debentures believe, that the statement
was true.
An expert is liable in relation to publication of prospectus if it contains untrue in the report
given by him/her. Let us understand the same.
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An expert is liable for any untrue in the prospectus, except,
a. he has given his written consent to the issue of the prospectus and has notwithdrawn
such consent before the delivery of the copy of the prospectus to theRegistrar for
Registration and
b. Unless a statement as to his consent and non-withdrawal of it appears in
theprospectus (Section 58).
Section 59(1) provides a penalty of fine up to Rs.50, 000/- for the companyand any other
person who is knowingly a party to the issue of a prospectus incontravention of these
provisions.
Shelf Prospectus: Section 60-A of the Companies (Amendment) Act, 2000 def ines ‗Shelf
Prospectus means a prospectus issued by any financial institution or bank for one or more
issues of the securities or class of securities specified in that prospectus‖.
1. Any public financial institution, public sector bank or scheduled bank whose main
object is financing shall file a shelf prospectus. ‗Financing‘ for this purpose means
making loans to, or subscribing in the capital of a private industrial enterprise
engaged in infrastructural financing or such other company as the Central
Government may notify in this behalf.
2. A company filing a shelf prospectus with the Registrar shall not be required to file
prospectus afresh at every stage of offer of securities by it within the period of validity
of such shelf prospectus, which is one year from the date of opening of the first issue
of securities.
3. A company filing a shelf-prospectus shall be required to file an information
memorandum on all material facts relating to new charges created, changes in the
financial position as have occurred between the first offer of securities, previous offer
of securities and succeeding offer of securities within such time as may be prescribed
by the Central Government prior to making of second or subsequent offer of
securities under the shelf prospectus. For this purpose of Section 60A(3), Rule 4CCA
of the Companies (Central Government's) General Rules and Forms, 1956
prescribes a period of three months. [Notification No. GSR 96(E) dt. 14.2.01].
4. An information memorandum shall be issued to the public along with shelf
prospectus filed at the stage of the first offer of securities and such prospectus shall
be valid for a period of one year from the date of opening of the first issue of
securities under that prospectus. Provided that where an update of information
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memorandum is filed every time an offer of securities is made, such memorandum
together with the shelf prospectus shall constitute the prospectus.
Note that the concept of shelf prospectus will save expenditure and time of the companies in
issuing a new prospectus every time they wish to issue securities to the public within a
period of one year.
Information Memorandum:Section 60B of the Companies Act, 1956 (the Companies
Amendment Act, 2000) provides the following regarding information memorandum:
1. A public company making an issue of securities may circulate information
memorandum to the public prior to filing of a prospectus.
2. A company inviting subscription by an information memorandum shall be bound tofile
a prospectus prior to the opening of the subscription lists and the offer as a red-
herringprospectus, at least three days before the opening of the offer.
3. The information memorandum and red-herring prospectus shall carry
sameobligations as are applicable in the case of a prospectus.
4. Any variation between the information memorandum and the red-herring
prospectusshall be highlighted as variations by the issuing company.
Explanation – For the purposes of Sub-sections (2), (3) and (4), ―red-
herringprospectus‘ means a prospectus which does not have complete particulars on
theprice of the securities offered and the quantum of securities offered.
5. Every variation as made and highlighted in accordance with sub-section (4)
aboveshall be individually intimated to the persons invited to subscribe to the issue
ofsecurities.
6. In the event of the issuing company or the underwriters to the issue have invited
orreceived advance subscription by way of cash or post-dated cheques or
stockinvest,the company or such underwriters or bankers to the issue shall not
encashsuch subscription moneys or post-dated cheques or stock invest before the
date ofopening of the issue, without having individually intimated the
prospectivesubscribers of the variation and without having offered an opportunity to
suchprospective subscribers to withdraw their application and cancel their post-
datedcheques or stock-invest or return of subscription paid.
7. The applicant or proposed subscriber shall exercise his right to withdraw from
theapplication on any intimation of variation within seven days from the date of
suchintimation and shall indicate such withdrawal in writing to the company and
theunderwriters.
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8. Any application for subscription which is acted upon by the company orunderwriters
or bankers to the issue without having given enough information ofany variations, or
the particulars of withdrawing of offer or opportunity for cancellingthe post -dated
cheques or stock invest or stop payments for such payments shallbe void and the
applicants shall be entitled to receive a refund, or return of its post-datedcheques or
stock-invest or subscription money or cancellation of itsapplication, as if the said
application had never been made and the applicants areentitled to receive back their
original application and interest at the rate of fifteenper cent from the date of
encashment till payment of realisation.
9. Upon the closing of the offer of securities, a final prospectus stating therein thetotal
capital raised whether by way, of debt or share capital and the closing price ofthe
securities and any other details as were not complete in the red-herringprospectus
shall be filed in a case of a listed public company with the Securitiesand Exchange
Board and Registrar, and in any other case with the Registrar only.
Red-Herring Prospectus: Section 60B (4) defines ―Red-herring prospectus means a
prospectus which does not have complete particulars on the price of securities and the
quantum of securities offered‘.
According to section 60B (1) of the companies Act, every public company making an
issue of securities may circulate information memorandum to the public before filing of
prospectus. According tosection 2(19B), information memorandum means ‗a process
undertaken prior to thefiling of prospectus by which a demand for the securities proposed to
be issued by the company is elicited, and the price and terms of issue for such securities is
assessed by means of notice, etc‘.
A company inviting subscription by an information memorandum shall be bound to
file a prospectus prior to the opening of the subscription lists and the offer as red-herring
prospectus, at least 3 days before the opening of offer [Section 60B (2)]. Exact issue size or
issue price is not mentioned in the red-herring prospectus.
On the basis of offers received, company will finalise the issue price and issue size
andthen close the offer. After closure of offer of securities, a final prospectus will be
preparedstating the total capital mobilised whether by way of debts, or share capital and the
closingprice of securities and any other details as were not complete in red-herring
prospectus.The prospectus will be filled with ROC and also with SEBI in case of listed
company [Section 60B (9)].
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Section 60B(7) provides that the applicant or proposed subscriber shall exercise his/her
rights to withdraw from the application on any intimation of variation within seven days from
the date of such intimation. In addition, the subscribers have to indicate such withdrawal in
writing to the company and the underwriters.
Contents Abridged Prospectus
The Central Government has simultaneously with the revision of Schedule II
prescribed the salient features of prospectus for the purposes of Section 56(3) of the Act.
For the purpose, Rule 4CC has been included in the Companies (Central Government‘s)
General Rules and Forms, 1956. As per rule 4CC, the salient features required to be
included in the abridged prospectus shall be in Form 2A.
Form 2A requires information to be given under nine heads detailed below, besides the
statements on refund of application money in the event the minimum subscription is not
received or on payment of interest if there is delay in refund of excess application money.
1. General Information
2. Capital Structure of a company
3. Terms of present issue
4. Particulars of issue
5. Company, Management and project
6. Financial performance of the company for the last five years
7. Payments/refunds
8. Particulars of Companies under this management
9. Management‘s perception of risk factors
Let us discuss briefly on the nine heads:
1. General Information:under this head, the company is required to give the following
information:
a. The name and address of registered office of the company
b. Name(s) of the Stock Exchange(s) at which the issue is listed opening,
closing and earliest closing dates of the issue
c. Name and address of lead managers
d. Name and address of trustees under debentures trust deeds (in case of
debenture/issue),
e. Rating for the debenture/preference shares, if any, obtained from CRISIL or
any recognised rating agency
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2. Capital Structure of the Company:Under this head, particulars of existing position
about issued, subscribed and paid-up capital, size of present issue giving separately
reservations for preferential allotment to promoters and others. In addition, particulars
of paid-up capital after the present issue and after conversion of debentures, if
applicable, are required to be stated.
3. Terms of the Present Issue:Under this head, information related to the authority for
the issue, terms of payment and procedure, time schedule for allotment and issue of
certificates, procedure for applying including availability of forms, prospectus and
mode of payment and special tax benefits to company and shareholders under the
Income-tax Act are required to be furnished.
4. Particulars of the Issue: Under the head, particulars related to objects of the issue,
the project cost and means of financing including contribution of promoters are to be
specified.
5. Company, Management and Project: Under this head, the following information is
required to be furnished.
a. History, main objects and present business of the company
b. Background of the promoters, managing director/whole-time director and
names of nominees of institutions, if any, on the Board of directors
c. Location of the project
d. Plant and machinery, technology, process, etc.
e. Collaboration, performance guarantee, if any, or assistance in marketing by
the collaborators
f. Infrastructure facilities for raw materials and utilities like water, electricity, etc.
g. Schedule of implementation of the project and progress made so far, giving
details of land acquisition, execution of civil works, installation of plant and
machinery, trial production, date of commercial production, if any.
h. The products —
i. Nature of Product(s) — Consumer, industrial and end users.
ii. Existing, licensed and installed capacity of the product, demand of the
product-existing and estimated in the coming years as estimated by a
Government authority or by any other reliable institution, giving the
source of information.
iii. Approach to marketing and proposed marketing set up.
iv. In case of company providing services, relevant information in regard
to nature/extent of services, etc. are to be furnished.
i. Future prospects: The expected year when the company would be able to
earn net profit and declare dividend.
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6. Financial performance of the Company for the last 5 years:Under the head
―financial performance of the company‖, information based on the audited annual
accounts is required to be given under the following heads for the last five years:
a. Balance sheet data: Equity capital, reserves (state revaluation reserve, the
year of revaluation and its monetary effect on assets) and borrowings.
b. Profit & Loss data: Sales, gross profit, net profit, and dividend paid, if any.
c. Any change in accounting policies during the last three financial years and
their effect on the profits and the reserves of the company.
d. Stock market quotation of shares/debentures of the company, if any (high/low
price in each of the last three years and monthly high/low price during the last
six months).
7. Payments/Refunds: Under this head, particulars about the payments details are to
be disclosed, very particularly refunds, debentures, fixed deposits, interest on fixed
deposits, debenture interest, and institutional dues, up to date. In case, payments/
refunds have not been made, details of the arrears, if any, are required to be
furnished.
8. Particulars of Companies under the Same Management : Under this head, the
following particulars in regard to the listed companies under the same management
within the meaning of Section 370(1B) which made any capital issue in last three
financial years as required to be stated:
(a) Name of the Company
(b) Year of issue
(c) Type of issue (public/right/composite)
(d) Amount of issue
(e) Date of closure of issue
(f) Date of dispatch of share/debenture certificate completed
(g) Date of completion of the project
(h) Rate of dividend paid.
9. Management‟s Perception of Risk Factors:Under this head, the company is
required to specify the risk factors which the management perceives, e.g., sensitivity
to foreign exchange rate fluctuations, difficulty in availability of raw materials of in
marketing of products, cost/time overrun.
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Declaration: Lastly the directors are required to make declaration as under:
―If the company does not receive application money for at least 90 per cent of
the issued amount, the entire subscription will be refunded within ninety days from
the date of closure of the issue. If there is delay in the refund of application money for
more than 8 days after the company becomes liable to pay the excess amount, the
company will pay interest for the delayed period at the prescribed rates in Sub-
sections (2) and (2A) of Section 73. No statement made in this form shall contravene
any of the provisions of the Companies Act, 1956 and the rules made thereunder‖.
Voluntary Statement in Prospectus: In addition to the compulsory particulars as
discussed above, a company may voluntarily disclose some significant development/facts in
the prospectus, red herring prospectus or a statement in lieu of prospectus. The objective of
additional disclosure is to tell the truth. It must not conceal any fact which ought to be
disclosed.
In brief, the true nature of the company‘s venture and the position should be
disclosed which is called the golden rule as to the framing of prospectus. It is therefore
obligatory on the part of those responsible for the issue of prospectus, not only to provide
accurately all the relevant facts but also not to omit any fact which may be relevant for the
prospective investor to know about the company.
Deemed Prospectus -Offer for Sale of Existing Shares
In order to avoid the rigorous requirements of prospectus, one practice was to issue
share to another person (often called –Issue House). Such person would then make further
offer of sale of their shares to public by advertisements, etc. In order to curb this tendency,
section 64 provides that ‗offer of sale‘ or advertisement of such ‗Issue House‘ will be deemed
to be prospectus issued by the company, which is called deemed prospectus. All
enactments and rules of law as to the contents of prospectus and as to the liability in respect
of statements, omissions from prospectus under Section 60, the persons making the offer of
sale to the public are to be deemed as directors of the company [Section 64(4)].
The ‗offer of sale‘ by Issue House will not be considered as ‗Prospectus‘ only when a
company receives full consideration in respect of shares or debentures allotted to
IssueHouse or agreed to be allotted to them, and offer of sale is made at least 6 monthsafter
the shares were allotted to them [Section 64(2)].
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Additional information to be stated in such documents are (1) net amount of
consideration received or to be received by the company in respect of shares or debentures
to whichoffer relates and (2) place and time at which the contract under which the shares
ordebentures have been allotted or are to be allotted may be inspected [Section 64(3)].
Liability for Untrue Statement
It is now clear that a prospectus must be complete in all respects and perfect in all
details. In other words nothing should be omitted and nothing must be untrue in a
prospectus. In case an untrue statement occurs in a prospectus, there may arise
a. Civil liability
b. Criminal Liability
Every person who is a director of the company at the time of the issue of the prospectus,
every promoter of the company and every person, including an expert, who has authorised
the issue of a prospectus, shall be liable.
Before discussing who is liable and what circumstances, let us understand what an untrue
statement is.
In order to protect the interests of prospective investors in the shares or debentures
of a company, the law describes a wider meaning to this term. The decision about the
statement is true or untrue, it is to be judged by the context in which it appears and the
totality of impression the statement would create. Therefore, section 65 of the Companies
Act provides that a statement included in a prospectus shall be deemed to be untrue, if the
statement is misleading in the form and context in which it is included. It also provides that
where the omission from a prospectus of any matter is considered to mislead, the
prospectus shall be deemed to be a prospectus in which an untrue statement is included, in
respect of such omission.
Any person who takes shares on the faith of statement of facts contained in a
prospectus canwithdraw the contract if those statements are false or untrue. However, the
words ‗untrue statement‘ haveto be construed as explained in Section 65(1)(a), it says that a
statement included in aprospectus shall be deemed to be untrue, if the statement is
misleading in the form andcontext in which it is included. Again, where the omission from a
prospectus of any matter is considered to mislead, the prospectus shall be deemed to be a
prospectus in which an untrue statement is included, in respect of such omission (Section
65(1)(b)).
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Section 62 (2) describes the circumstances when a director is not liable for untrue
statement appears in the prospectus.
As a director(s) is held liable for the issue of prospectus consists an untrue statement.
However, he/she will be forgiven from such liability under section 62 and 56. The details are
given below:
A. According to Section 62 of the Act, if the director can show:
1. The director is being consented to become a director and had withdrawn his consent
before the issue of prospectus and that it was issued without his/her authority or
consent
2. Once the director aware that the prospectus was issued without his authority or
consent, he gave reasonable public notice of the issue having been made without his
knowledge or consent immediately, or
3. After the issue of the prospectus and before allotment, if he or she knows of any
untrue statement therein, he/she may withdraw his/her consent for giving reasonable
public notice of the withdrawal of stating the true reason.
4. As a director, he/she had a reason to believe and it was true before the allotment,
he/she can claim that statement have made on the authority of an expert or public
official document.
5. The statement had given by an expert and had not withdrawn his consent to the
issue of the prospectus and before delivery of a copy of the prospectus for
registration.
B. A director or other person sued for non-compliance of Section 56 of the Act may define
himself by proving that
1. The director had no knowledge of the matter not disclosed;
2. The contravention was an honest mistake of fact;
3. the matter not disclosed was immaterial or was otherwise such as ought to be
excused by the opinion of the Court.
A subscriber (after the allotment) brought action against a Director in respect of false
statement in the prospectus. As a director, he/she relied on the promoters who prepared the
prospectus. In such scenario, is the director liable?
The answer is yes. The director of a company is held liable for such statements.
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I hope that you have understood about the prospectus, its contents, and who is liable for the
untrue statement in the prospectus. Let us move on the allotment of shares:
Allotment of Shares
The next logical understanding is required about allotment of shares. After receive
the application from the public, it is important to send the acceptance letter to them. Then
only, the subscriber will become a member of the company, until his name is placed on the
register of members. Allotment is an appropriation of shares to an applicant for shares and
appropriation made out of un-appropriated capital of the company. A contract between the
company and the applicant could emerge only whentheallotment is made by a resolution of
the Board of Directors or authorised committee on behalf of the board. In case a company
reissued the forfeited shares are not called it an allotment. According to section 72(1), no
allotment shall be made until the beginning of the 5th day from the date of issue of
prospectus. This is known at the time of opening of subscription list. The subscription list for
public issues should be kept open for at least 3 working days, maximum of 22 days (if the
issue was underwriting) and 10 days (for other cases) this fact should be stated in the
prospectus as well. This objective of this provision is to give sufficient time to subscribe of
shares.
General Principles regarding allotment: The following general principles should be
observed with regard to allotment of shares:
(1) As stated above, the allotment of shares should be made by Board of Directors of the
company or committee authorized on behalf of the board.
(2) The allotment of shares must be made within a reasonable time. In case a company
takes longer time to allot the shares, an applicant may refuse to accept the shares.
(3) The allotment should be absolute and unconditional. It means that a company should
allot the shares to the applicant in the same conditions stated in the application form.
Allotment of shares subject to certain conditions is void. Similarly, if the number of
shares allotted is less than those applied for, it cannot be termed as absolute
allotment.
(4) As mentioned earlier sending of letter of allotment or allotment advice will be taken
as a valid communication even if the letter is lost in transit
(5) No valid allotment can be made on an oral request. Section 41 requires that a person
should agree in writing to become a member.
(6) If shares are allotted on an application of a minor, the allotment will be void.
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Minimum subscription, refund and restriction on use of application money
Minimum subscription is the amount that are required capital to begin with which is in the
opinion of directors. This minimum amount should not be less than 5% of the nominal
amount of share capital along with application (section 69(3)). In addition, this amount
should be collected within 120 days of the issue of prospectus. The collected amount should
be deposited in the schedule bank and can be utilised to meet the following expenditure:
a. Purchase of property
b. Any preliminary expenses
c. Underwriting commission
d. Working capital
e. The repayment of borrowed by the company for the above stated purposes
f. Any other expenditure stating in the nature and purpose with estimated in each case.
However, if a company fails to mobilise the minimum subscription of 90% of the
nominal capital that are mentioned in the prospectus within 90 days from the closing of the
issue, the company must refund the amount to the applicants. In case of development, no
time limit is prescribed therein. Therefore, a company is believed to obtain the minimum
subscription plus development amount within 90 days of the closure of the issue (Part I
schedule II of the companies Act).
If a company wish to their stock to be listed on any recognised stock exchange, it is
essential to follow the SEBI guidelines. It says that a company unable to receive the
minimum subscription and development amount within 120 days of the opening of the issue,
the money should be repaid within 10 days after such 120 days. The company shall be liable
to repay that amount with interest at prescribed rate (currently 15% per annum).
According to section 73 of the Act states for paying interest on excess application
money from the expiry of the 78 th day from closing of subscription. Therefore, the refund of
application money within 120 days from the opening ofsubscription list is without prejudice to
the company‘s liability for payment ofinterest on delayed refunds. Further it is also required
to make a declaration of any delay to refund at the prescribed rate under section 763(2),
(2A) of the Act.
In case a public limited company is applied for listing of shares in any recognised stock
exchange, the following are the rules to be followed:
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1. If a company wishes to be listed in a recognised stock exchange, the name of the
stock exchanges should be mentioned in the prospectus (section 73(1)).
2. In case any exchange has not been granted by the stock exchange before expiry of
10 weeks from the date of closing the subscription, the allotment made shall become
void (section 73(1A). However, a company may appeal against the decision of any
stock exchange refusing for enlistment (section 22 of the SCRA, 1956). In such
situation, the allotment shall not be void until the dismissal of the appeal.
3. In case a company has not been applied or having been applied for has not been
received, the application money must be refunded to the applicants without any
interest. If the money is notrefunded within 8 days after the company becomes liable
to repay it, the company and everydirector of the company who is in default shall, on
and from the expiry of the 8 thday bejointly and severally liable to repay the money
with interest at such rate which shall not beless than 4% and not more than 15% as
may be prescribed (Section 73(2)).
4. All money that are received as application and allotment shall be kept in a separate
bank accountmaintained with a scheduled bank, until the permission is granted,
failure to do so is apunishable offence (Section 73(3).
For a moment, assume that a company is allotted the shares to the applicants. If a company
has allotted the shares without following the rules of section 69 and 70, it is considered as
irregular allotments. The following are some circumstances:
A. When the company has issued a prospectus, the allotment is irregular if :
1. A company has not been able to mobilize the minimum subscription amount
2. A company has not collected the money which is less than 5% of nominal
amount
3. A company has not kept the collected money in a Scheduled Bank
B. Where the company has not issued a prospectus, the allotment is irregular if:
1. A company does not file with the Registrar for registration
2. A statement in lieu of prospectus at least 3 days before ‗ the first allotment of
shares‘
Let us discuss the effects of irregular allotment:
Allotment of shares is voidable at the option of the attotee. However the option must be
exercised by the allotee either of the following way:
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a. Within 2 months after holding of the statutory meeting of the company
b. The company is not required to hold a statutory meeting or the allotment is made
after the holding of statutory meeting, within 2 month after the date of allotment
(section 71(1))
The irregular allotment is voidable even if the company goes into liquidation in the
meantime (section 71(2).
For a moment, assume that a company has received 80% of the minimum
subscription of 5% nominal capital stated in the prospectus. Before reading the 90% level,
the company has allotted this to an applicant. The application money has deposited in a
Scheduled Bank, but company withdrew some amount for purchase certain assets for the
company before finalization of the allotment. Is it irregular allotment? The answer is that the
allotment is irregular. The applicant may refuse to accept the allotment of shares on the
ground that the allotment is violated of the companies Act 1956. However, it is the option of
the applicant.
Let us move the next topic. It is essential for you to learn about underwriting.
Underwriting
Underwriting of securities is a contract between the company and second party. The
second party is known as underwriters. Generally underwriter promise to sell all the shares
of a company to the public, they will buy all the shares or debentures if they are unsold. For
this service, a company use to pay commission to the underwriters. It is called as
underwriting commission. Typically there are three ways of underwriting agreements.
a. Complete underwriting: It refers to an individual (s) or institution (s) is agreeing to
subscribe of all shares or debentures irrespective of the responses from the public.
This process iscalled complete underwriting.
b. Partial underwriting: In contrast to the above, an individual (s) or institution (s) is
agreeing to undertake partially.
c. Firm underwriting: It refers to an individual (s) or institution (s) is agreeing to sell a
define number of shares or debentures in addition to the shares or debentures he has to
take under the underwriting agreement.
Let us know about the disclosure requirements.
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Disclosure Requirements
The provisions of the Companies Act, 1956 regarding disclosure of underwriting
agreement are as follows:
1. Disclosure in the Prospectus. The name of the underwriters and resourcefulness
to discharge their obligations in the opinion of directors should be mentioned in the
prospectus. In addition, the number of shares or debentures which the underwriters
have agreed to subscribe along with the amount or rate of commission payable to
them should be disclosed in the prospectus or statement in lieu of prospectus, as the
case may be (Section 76)
2. Disclosure in Statutory Report. It shall set out the extent, if any, to which each
underwriting contract, if any, has not been carried out and the reasons therefore.
3. Disclosure of sums payable. All sums payable by commission and brokerage etc.
must be disclosed in the Balance Sheet, under the heading Miscellaneous
Expenditure (Schedule VI of the Companies Act).
Payment of Underwriting Commission
Payment of underwriting commission is regulated by the provisions of Companies
Act, 1956 under section 76. The conditions to be fulfilled for paying underwriting commission
are:
a. The payment of commission should be authorised by AoA.
b. Name, address of the underwriters and number of shares or debentures underwritten
by each of them must be stated in the prospectus
c. The commission should not exceed 5% in case of shares or 2.5% in case of
debentures
d. The rate should be disclosed in the prospectus and the same should be filed with the
Registrar along with a copy of underwriting contract before the payment of the
commission.
Section 76 (4A) clarifies that commission to the underwriters is payable only in respect of
those shares or debentures that are offered to the public for subscription.However where,
(i) a person, who for a commission has subscribed (or agreed tosubscribe) for
shares or debentures of a company and before the issue of theprospectus (or
statement in lieu of prospectus) for such shares or debentures, someother
person (or persons) has subscribed for any or all of them, and
(ii) Such a facttogether with the aggregate amount of commission payable to the
underwriter isdisclosed in such prospectus (or statement in lieu of
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prospectus), then the companymay pay commission to the underwriter in the
respect of his subscription irrespectiveof the fact that the shares or
debentures have already been subscribed.
Buyback of Shares
After the share of a company has been allotted to the subscribing members, the
subscribers have no right over the money paid. All the shareholder have the right to vote at
the general meetings of the company or the right to receive dividends or right to such other
benefits which may have been prescribed. The only option left with the shareholder in order
to realise the price of the share is to transfer the ownership of the share to some other
person or to the company itself. If a shareholder sells its share to its company itself or a
company buys its share back from its shareholders, it is termed as buy-back of shares.
Typically, a company can of buy back its own shares for the following reasons:
a. To return surplus cash to shareholders
b. To increase the underlying share price
c. To support the share prices during temporary weakness.
d. To achieve or maintain a target capital structure of a company.
e. To prevent or inhibit unwelcome take-over bids
Sources of Funds for buy back of shares: Section 77A of theCompanies Amendment
Act 1999 prescribes for the sources of buying back of shares or other specified securities by
a company. The details are given below:
1. Free reserves, or
2. Securities premium account, or
3. The proceeds of any shares or specified securities (note that specified securities
include ESOPs or other securities as may be notified by the Central Government
from time to time)
No buy back of any shares or securities shall be made out of the proceeds of an earlier issue
of the same kind of shares of same kind of securities
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Requirements for buy-back of shares Sub clause (2) of section 77A prescribes the conditions/requirements for a buyback of
shares. The following are the conditions:
a. The buyback should be authorised by the Articles of Association of the company.
b. A special resolution has been passed at the general meeting of the company for
authorising the buyback of shares. However, if the buyback is or less than 10% of the
total paid up equity share capital, a simple board resolution is enough.
c. Provided that no offer of buy back shall be made within 365 days reckoned from the
date of proceeding offer of buy back.
d. The buyback is or less than 25% of the total paid up equity share capital and free
reserves of the company
e. The ratio of debt owned by the company is not more than twice the capital and its
free reserves after such buy back.
f. All the shares or other specified securities for buy back are fully paid up.
g. The buyback of shares or other specified securities listed on any recognised stock
exchange is in accordance with the regulations made by the SEBI in this behalf
h. The buy back in respect of shares and other specified securities other than those
specified in the aforesaid clause is in accordance with the guidelines specified.
Disclosure in the explanatory statement: The notice of the meeting at which a resolution
for buy back is proposed to be passed has to be accompanied by an explanatory statement
stating –
a) A full and complete disclosure of all material facts
b) The necessity for buy back
c) The class of securities intended to be bought back under the buyback
d) The amount to be invested under buyback (Section 77A (3))
Requirements to be complied with after buy-back: Sections 77A and 77AA of the
Companies Act, 1956 (as amended by the Companies (Amendment) Act, 1999) are dealt
about the requirements to be complied after buyback of shares. The details are given below:
1. Section 77A (7) prescribes that the securities bought back should be extinguished
and physically destroyedwithin 7 days after completion of buy-back
2. A company cannot issue same kind of sharesor security (which was bought back)
within 24 months from the date of completion of buy-back. Issue of rights issue is
also not permissible in this period. However, the following are permitted:
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a. A company may issue of different class security that is other than one which
wasbought back
b. A company go for bonus issue
c. Existing obligations such as conversion of warrants
d. ESOPs and Sweat Equity
e. A company may convert of preference shares or debentures into equity
shares(Section 77A (8)).
Section 77A (9) requires that a company should maintain a register showing details such as
securities bought back andconsideration paid for the buy-back, date of cancellation of
securities, dateof extinguishment and physical destruction of securities other
prescribedparticulars.
Section 77 (10) prescribes that a company has to be filed with the RoC and SEBI if the
company is listed, within 30 days.
Section 77A requires if the buy-back is from free reserves, a sum equal to the nominal value
ofshares purchased will be transferred to capital redemption reserve account and the same
will be disclosed in the balance sheet of thecompany.
So far we have discussed about the prospectus and share allotment within the Companies
Act 1956. The rest will be dealt in the subsequent chapters. Let us discuss about
management and administration, and winding-up of acompany
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Chapter 3
Share Capital and Debentures
We have learnt about the meaning of share capital and its types in the last chapter.
In this chapter, we will discuss about increasing and decreasing of share capital, forfeitures
of shares and issue of debentures and related aspects as well.
The share capital of a company are divided into small fraction/units, it is called
shares. Section 2(46) of the Companies Act 1956 defines share is a share in the share
capital. It carries certain rights and liabilities of a shareholder in the company. As discussed
in the previous chapter, a private limited company cannot give the invitation to the public for
shares or debentures. The provisions of the Companies Act 1956 related to increasing and
decreasing share capital and debentures are discussed in the next section.
Alternation of Share Capital: A company can issue its shares by various methods. A
company may wish to alter its share capital is possible if AoA of a company authorised
(section 94 of the Companies Act) in the following manner:
1. Increasing authorised capital by issuing new shares
2. Consolidation of shares or subdividing of shares
3. Convert shares into stock, or vice versa
4. A company can cancel unsubscribed shares and reduced to the extent on the
authorised capital
A company may alter its share capital by passing a n ordinary resolution in the
general meeting. Cancellation of shares shall not be deemed to be a reduction of share
capital under section 94 of the companies Act. The proper communication should be
communicated to the Registrar within 30 days after effecting the change. However, the
reduction of capital is to be followed stringent norms. Let us discuss the same.
Reduction of Share Capital: The following are the provision relating to reduce the share
capital of a company:
1. Section 100 (1) of the Companies Act provides that subject to confirmation of the
Tribunal, a company may reduce its share capital if its AoA authorises and by
passing a special resolution in the general meeting by any of the following ways:
a. Extinguish or reduce the share capital if the share capital is not paid-up
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b. Either with or without extinguishing or reducing liability on any of its shares
cancel any paid-up share capital which is lost, or unrepresented by available
assets; or
c. Either with or without extinguishing or reducing liability on any of its shares,
pay off any paid-up share capital which is in excess of the wants of the
company,
2. Passing a special resolution is necessary to reducing the share capital of a company
by altering MoA.
3. Obtaining consent from the creditors to reduce the share capital
The following are the procedures adopted by the company while reducing the share capital:
1. A special resolution is to be passed under Section 100 as discussed above.
2. An application is to be made under Section 101 to the Court for an order by
confirmingthe reduction.
3. After the petition for Court‘s confirmation is filed, the Court must settle the list
ofcreditors who are entitled to object such as creditors having a debt or a
claimadmissible on a winding up.
4. The Court must ascertain the names of those creditors and the nature and amountof
their debts or claims.
5. The Court may publish notices fixing a day or days within which the creditors
notentered on the list are to claim to be so entered or are to be excluded from the
rightof objecting to the reduction.
However, the Court has discretionary power having regard to any special
circumstances of the case to direct that the provisions of Section 101(2) shall not apply as
regards anyclasses of creditors. The special circumstances should be convincing to the
Court. After being satisfied the Court may make an order confirming the reduction on such
termsand conditions as it thinks fit. The company then has to put the words ―and reduced‖
tothe name of the company.
It is important to know that there is difference between reduction and diminution of
capital. Let us discuss the same now.
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Section 94(3) of the Companies Act, 1956 specifically states that diminution does not
constitute a reduction of capital within the meaning of the Companies Act. Distinction can be
made between the two on the following grounds:
(i) Diminution of capital is the cancellation of the unsubscribed part of the issued capital.
On the other hand, reduction of capital involves reduction of subscribed capital or
paid-upcapital.
(ii) Both require authorisation by articles. The only difference is the type of resolution.
Diminution requires ordinary resolution and reduction requires a special
resolution.
(iii) Diminution does not needan order/confirmation by the Court/Tribunal (Section 94(2)),
butreduction needs such confirmation (Section 101).
(iv) A Company may be ordered to add the words ‗and reduced‘ after its name in caseof
reduction, but no such order can be passed in case of diminution.
Share Warrants
Share warrant is a document which a public company issues in conformity with
statutory requirements and states that the holder of the warrant is entitled to certain number
of shares specified therein. Share warrant is a bearer document and the ownership title to
the shares specified therein can be transferred by mere delivery of the share warrants. It is a
negotiable instrument to the extent.
Distinction between a share warrant and a share certificate
1. Both private and public limited companies issue share certificates, but share warrant
can be issued only by public companies.
2. For issue of share warrant is possible only if a company is empowered to do so by its
AoA and has obtained approval of the Central government. No such requirements for
issuing shares certificates.
3. A share warrant could be issued for fully paid-up shares, but share certificate is to be
issued even for the shares partly paid-up.
4. The holder of a share certificate is a member of the company, but the holder of a
share warrant is not a member stated in the AoA.
5. A share warrant is by commercial usage as a negotiable instrument. A share
certificateis not.
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6. A share warrant can be transferred by mere delivery and no registration of transfer
with the company is required. On the other hand, ownership transfer is possible by
delivery along with the share certificate. In addition, the transfer iscomplete when it is
registered by the company.
7. No stamp duty is payable on transfer of a share warrant, but stamps duty is payable
on transfer of shares specified in a share certificate.
8. To become a director of a company, he/she needs to have some qualification shares,
but a share warrantdocuments not constitute such a qualification
9. A share certificate is a document showing prima facie title to the sharesrepresented
thereby. A share warrant is the share security itself, transformed forthe purpose of
negotiation into a different character.
10. The holder of a share certificate can present a petition for winding up of thecompany,
but the holder of a share warrant cannot do so.
11. Dividend is paid to the holder of a share certificate by the issue of a dividend in his
favour. Dividend due on a share warrant is advertised in newspapersand is payable
to the holder of the dividend warrant on presentation of the relevantcoupon attached
to the share warrant.
Let us discuss now about the forfeiture of shares.
Forfeitures and surrender of Shares
When a shareholder fails to pay calls, the company, if empowered by its articles, may cease
from the members of a company, it is called forfeit the shares. If a shareholder has not paid
any call on the day fixed for payment thereof by a company and fails to pay it even after his
attention is drawn to it by the secretary by registered notice, the Board of Directors pass a
resolution to the effect that such shares be forfeited. Shares once forfeited become the
property of the company and may be sold on such terms as directors decideaccordingly.
Upon forfeiture, the original shareholder ceases to be member and his name must be
removed from the register of members from the company. In contrast to the above, after the
allotment of shares, sometimes a shareholder is not able to pay the further calls and returns
his shares to the company for cancellation. Such voluntary return of shares to the company
by the shareholder himself is called surrender of shares.
Conditions to be satisfied for forfeiture
1. Forfeiture-must be authorized by the Articles of the company and must be for the
benefit of the company.
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2. According to Article 29, Table A, the company must serve a notice on the defaulting
shareholder requiring payment of unpaid call together with interest that has accrued
before shares can be forfeited. This notice period must not be less than 14 days from
the date of service of notice for the payment.
3. According to Article 30, Table A, the company state the event of non-payment of the
amount due within the period mentioned in the notice, the shares in respect of which
the call was made will be liable for forfeited. In case the notice is defective in any
respect, the forfeiture will be invalid.
4. Article 31 requires the directors must pass a resolution for forfeiting the shares if
defaulting shareholders does not pay the amount within the specified time as
required by the notice. Failing to pass the resolution, the forfeiture is invalid.
5. The power to forfeit shares must be exercised by the directors in goodfaith and for
the benefit of the company.
We have discussed various aspects of share capital. As you know that in order to do
business, it is essential to have adequate share capital. Sometimes, it is not enough to do
business with internally generated funds i.e. share capital and accumulated profit.
Obliviously a business is resorted to external sources of funds such as External Commercial
Borrowing (ECB), debentures, bank loan, public deposits etc. Let us discuss the same in the
rest of this chapter.
Debt Capital
Companies have several options to raise funds for their needs. If you mobilise funds
through share capital, shareholders of a company shares the ownership. If a company does
not like to increase extra ownership, they cannot issue further share capital. The only option
is in such situation is debt capital. Debt capital is a funds supplied by lenders which is a part
of a firm‘s capital structure. Essentially, it means that investors (lenders) agree to make a
loan to a company and receives the debt capital along with the interest. Let us discuss the
types of borrowings:
Types of Borrowings: A company uses various kinds of borrowings to fulfil their
requirements. Generally it is classified as given below:
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A. Based on the Tenure: This classification is based on the period.
1. Long term borrowings:A company borrows for a period ranging for five
years or more are known as Long term borrowings. Typically this type
borrowing is made against on fixed assets of the company.
2. Short Term Borrowings:A company borrows for a period of upto one year is
known as short term borrowings.Generally, short term borrowings are to meet
the working capital need of the company and made on hypothecation of stock
and debtors.
3. Medium Term Borrowings –A Company borrowed funds for a period
ranging from two to five years are termed as medium term borrowings. The
commercial banks normally finance purchase of land, machinery, vehicles
and so on.
B. Based on the Security:
1. Secured borrowing: A company borrowed funds against the assets of the
company on a proprietary basis are termed as secured borrowings.
2. Unsecured Borrowings: In contrast to the secured borrowings, a company
borrowed fund without the support of the assets of the company is termed as
unsecured borrowings.
C. Based on the numbers of investors
1. Syndicated borrowing: A company borrowed funds and itrequires a large or
sophisticated borrowing facility this is commonly provided by a group of
lenders known as a syndicate under a syndicated loan agreement. The
borrower uses one agreement covering the whole group of banks and
different types of facility rather than entering into a series of separate loans,
each with different terms and conditions.
2. Bilateral borrowing: on the other hand, itrefers to a borrowing made by a
company from a particular bank/financial institution. Generally borrowings
have a single contract between the company and the borrower.
D. Based on type of Investors:
1. Private borrowing: Itcomprises bank-loan type of obligations, whereby the
company takes loan from a bank/financial Institution
2. Public borrowing: Itis a general definition covering all financial instruments
that are freely tradable on a public exchange or over the counter, with few if
any restrictions i.e. Debentures, Bonds etc.
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Debentures
A debenture is a document given by a company under its common seal as an evidence of a
debt to the holder usually arising out of a loan and most commonly (but not necessarily)
secured by an Asset. According to section 117, this instrument does not carry any voting
rights at any general meeting of the company.
Characteristics of Debentures: The following are the general features of a debenture:
1. Typically, a debenture is in the form of a certificate (like a share certificate) issued
under the common seal of the company to a holder.
2. The certificate is an acknowledgement by the company of its obligation to a holder.
3. Generally, the principal payments will be paid on the date of maturity. However, it is
not essential. A company may issue perpetual or irredeemable debentures with no
undertaking to pay the amount. Section 120 of the Act states that debentures are not
invalid simply because they are made irredeemable only on the happening of a
contingency, however remote, or on the expiration of a period, however long.
4. A debenture usually provides for payment of interest (agreed frequency, say annually
or semi-annually) until the principal sum is paid back to the holder.
5. A debenture is, as a rule, one of a series, although a single debenture is not
uncommon. There may be a single debenture issued to one person.
6. A debenture generally contains aAssets on an undertaking of the company, or on
some class of its assets or on some part of its profits. Remember that this is not an
essential element.
7. Section 117 states that the debentures carry no voting rights at any meeting of the
company.
8. Fixed deposit is not debenture. The Department of Company Affairs has clarified that
a fixed deposit receipt may be regarded as a security but not as a debenture within
the meaning of this sub-section [Department‘s Letter No. 8/2/58-PR, dated 10-12-
1958].
Types of Debentures: Typically it is classified into different categories on the basis of
A. Based on Convertibility:
1. Non-Convertible Debentures (NCD): As name suggest, the instruments retain
the debt character as discussed above and cannot be converted into equity
shares.
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2. Partly convertible Debentures (PCD):These instruments are converted into
equity shares in the future partially. The intimation will be given in advance. In
addition the issuer decides the ratio of conversion. Normally this is decided at the
time of conversion.
3. Fully Convertible Debentures (FCD): These are fully convertible into equity
shares. The rest of the process is same as discussed in PCD. In addition, after
the conversion, the investors enjoy the status of shareholders of the company
and carry voting rights.
4. Optionally Convertible Debentures (OCD): The investors have the option to
either convert into equity or have the same status of debentures. The rest of the
process is same as discussed in PCD.
B. On the basis of Security
1. Secured Debentures: As name suggest that these instruments are secured
against the assets (generally fixed assets) of the company. In case of defaulting
in making payment of interest or principal, the assets are sold and repay the
liability to the investors.
2. Unsecured Debentures: The instruments are unsecured. It does not mean that
they do not get anything. These investors are treated along with other unsecured
creditors of the company.
C. On the basis of Redeemability
1. Redeemable Debentures: It refers to the debentures which are issued with a
condition that the debentures will be redeemed at a fixed date or upon demand,
or after notice, or under a system of periodical drawings. Debentures are
generally redeemable and on redemption these can be reissued or cancelled.
The person who has been re-issued the debentures shall have the same rights
and priorities as if the debentures had never been redeemed.
2. Irredeemable debentures: As name suggest, it refers to the debentures has
perpetual life. The holder cannot demand the payment as long as the compay is
a going concern. However, they demand at the time of liquidation.
D. On the basis of registration
1. Registered Debenture : it refers to the debenture carry the name of the holder on
the debenture certificate and who is registered by the company as the holder on
the register of debentures. Transfer of ownership mechanism is same as
discussed for shares.
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2. Bearer Debentures: Bearer debentures on the other hand, are made out to
bearer, and are negotiable instruments, and so transferable by mere delivery like
share warrants. The person to whom a bearer debenture is transferred become a
―holder in due course‖ and unless contrary is shown, is entitled to receive and
recover the principal and the interest accrued thereon.
Public Companies (Terms of Issue of Debentures and of Raising of Loans with Option
to Convert such Debentures or Loans into Shares) Rules, 1977
The powers conferred by Section 642 with clause (a) of the proviso to sub-clause (3)
of Section 81 of the Companies Act, 1956 the Central Government hereby makes the
following rules for issuing debentures of a public companies, namely:
1. Short title and commencement
(i) These rules may be called the Public Companies (Terms of and issues of
Debentures and Raising of Loans with Option to Convert such Debentures or
Loans into Shares) Rules, 1977.
(ii) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions: In these rules, unless the context otherwise requires:
(a) ‗Act‘ means the Companies Act, 1956
(b) ―Public financial institution‖ means:
(i) Any of the financial institutions specified in Sub-section (1) of Section 4A of the
Act;
(ii) Any of the other institutions specified by the Central Government to be public
financial institutions under Sub-section (2) of the said Section 4A.
(b) ‗Scheduled Bank‘ means a bank included in the Second Schedule to the Reserve
Bank of India Act, 1934, but does not include co-operative banks, regional rural
banks and foreign banks.
3. Particulars regarding the terms of issue of debentures or the terms of raising of loans by a
public company does not require the approval of the Central Government under clause
(a) of the proviso to Sub-section (3) of Section 81 of the Act, if such terms conform to the
following requirements, namely:
(a) The debentures or loans may be issued or raised either through private subscription
or through the issue of a prospectus to the public;
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(b) a public financial institution or scheduled bank either underwrites or subscribes to or
sanctions the whole or part of the issue of debentures or the raising of loans, as the
case may be;
(c) When and where necessary, the consent of the Central Government under the
provisions of the Capital Issues (Control) Act, 1947 (20 of 1947), is obtained for the
issue of shares consequent upon the conversion of debentures or loans into equity
capital
Provided that a public financial institution or a scheduled bank shall not convert all or part of
debentures or loans unless:
(a) The company that has issued the debentures or raised the loan, has defaulted in the
repayment/redemption of, or payment of interest on, such loans or debentures; and
(b) Such scheduled bank or public financial institution has given the company notice of
its intention to convert such loans or debentures atleast 30 days prior to the intended
date of conversion.
Public Financial Institutions: The following institutions have been specified as public
financial institutions under Section 4A(1) of the Companies Act, 1956, and are relevant for
the purposes of Rules 2(b) and 3 of the Public Companies (Terms of Issue of Debentures
and Raising of Loans with option to Convert such Debentures into Shares) Rules:
1. The Industrial Credit and Investment Corporation of India Limited, a company
formed and registered under the Companies Act, 1913 (7 of 1913);
2. The Industrial Finance Corporation of India established under Section 3 of the
Industrial Finance Corporation Act, 1948 (15 of 1948);
3. The Industrial Development Bank of India, established under Section 3 of the
Industrial Development Bank of India Act, 1964 (18 of 1964);
4. The Life Insurance Corporation of India, established under Section 3 of the
Life Insurance Corporation Act, 1956 (31 of 1956);
5. The Unit Trust of India, established under Section 3 of the Unit Trust of India
Act, 1963 (52 of 1963);
6. The Infrastructure Development Finance Company Ltd., a company formed
and registered under this Act;
Besides, various other public financial institutions are specified by the Central Government
under Section 4A (2) from time to time.
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Debenture Trust Deed
The Companies (Amendment) Act, 2000 had introduced Section 117A, after Section
117 of the Companies Act, 1956, which provides that
(1) A trust deed for securing any issue of debentures shall be in such form and
shall be executed within such period as may be prescribed.
(2) A copy of the trust deed shall be opened to inspection to any member or
debenture holder of the company and a member shall also be entitled to
obtain copies of such trust deed on payment of such sum as may be
prescribed.
(3) If a copy of the trust deed is not made available for inspection or is not given
to on demand by, any member or debenture holder, the company and the
officer of the company who is in default shall be punishable for each offence,
with fine which may extend to five hundred rupees for every day during which
the offence continues.
A trust deed is one of several instruments required to be executed to secure redemption of
debentures and payment of interest on due dates. The trust deed should be in the form and
be executed within such period as may be prescribed. Besides, the SEBI (Debenture
Trustees) Rules 1993 and the SEBI (Debenture Trustees) Regulations 1993 are app licable
to the listed companies. A trustee should be registered with SEBI by obtaining a certi ficate of
registration in accordance with the conditions provided therein in the rules of the Act. In
addition, the aforesaid Regulations ‗inter alia‘ provide procedure for registration,
responsibilities and obligations of debenture trustees and also prescribe contents of trust
deed. Under Section 119 of the Act, trustees of the trust deed for debenture holders are
made liable for breach of trust where they do not exercise due care and diligence required of
them as trustees. Therefore, any term in the trust deed which exempts the trustee from his
liability to indemnify for breach of trust is void and has no legal effect.
Advantages of Trust Deed:The trust deed has some advantages as follows:
i. If the company makes default, the trustees are then ready to take necessary steps,
instead of leaving it to the initiative of some debentureholders.
ii. The trustee is normally given the power to sell and thus realize the security without
the aid of the Court.
iii. The legal estate is vested in the trustee, and where necessary, the mortgage or
charge is registered. This prevents a subsequent legal mortgage from priority.
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iv. The title deeds of the mortgaged property are deposited with trustees and the
company is prevented from misusing these title deeds for any purpose.
v. The trustees ensure that the mortgaged property is kept insured and maintained in
proper condition.
Appointment of Debenture Trustees and Duties of Debenture Trustees:Section
117B of the Companies (Amendment) Act, 2000 states that no company shall issue a
prospectus or a letter of offer to the public for subscription of its debentures, unless the
company has, before such issue, appointed one or more debenture trustees for such
debentures. Further, consent of the debenture trustee or trustees (for their appointment as a
trustee) should be stated in the prospectus or the letter of offer. Provided that no person
shall be appointed as a debenture trustee, if he/she
(a) Beneficially holds shares in the company;
(b) Is beneficially entitled to moneys which are to be paid by the company to the
debenture trustee;
(c) Has entered into any guarantee in respect of principal debts secured by debentures
or interest thereon.
Sub section 2 describe the functions of the debenture trustees and shall generally be to
protect the interest of holders of debentures (including the creation of securities within the
stipulated time) and to redress the grievances of holders of debentures effectively .
As per Sub-section (3) in particular, and without prejudice to the generality of the foregoing
functions, a debenture trustee may take such other steps as he/she may deem fit:
(a) To ensure that the assets of the company issuing debentures and each of the
guarantors are sufficient to discharge the principal amount at all times;
(b) To satisfy himself that the prospectus or the letter of offer does not contain
any matter which is inconsistent with the terms of the debentures or with the
trust deed;
(c) To ensure that the company does not commit any breach of covenants and
provisions of the trust deed;
(d) To take such reasonable steps to remedy any breach of the convenants of
the trust deed or the terms of issue of debentures;
(e) To take steps to call a meeting of holders of debentures as and when such
meeting is required to be held.
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Where at any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the principal
amount as and when it becomes due, the debenture trustee may file a petition before the
Central Government. The Central Government may, after hearing the company and any
other person interested in the matter, by an order, impose such restrictions on the incurring
of any further liabilities as the Central Government thinks necessary in the interests of
holders of the debentures (Sub-section 4).
The duties of a debenture trustee have been described in detail in the Regulation 15
of the SEBI (Debenture Trustee) Regulations, 1993. On the appointment of a Debenture
trustee, the above conditions are required to be complied with. Where the company is a
listed company, the SEBI Regulations should also be followed. These details will be
discussed in later chapters.
Liability of Company to Create Security and Debenture Redemption Reserve:
Section 117C of the Companies (Amendment) Act, 2000, a company
(1) Shall create a debenture redemption reserve for the redemption of such debentures,
to which adequate amounts shall be credited, from out of its profits every year until
such debentures are redeemed.
(2) Creditedthe amount to the debenture redemption reserve account and shall not be
utilized by the company except for the purpose aforesaid.
(3) Referred to in Sub-section (1) and shall pay interest and redeem the debentures in
accordance with the terms and conditions of their issue.
(4) fails to redeem the debentures on the date of maturity, the Company Law Board may,
on the application of any or all the holders of debentures shall, after hearing the
parties concerned, direct, by order, the company to redeem the debentures forthwith
by the payment of principal and interest due thereon.
(5) If default is made in complying with the order of the Company law board under Sub-
section (4), every officer of the company who is in default, shall be punishable with
imprisonment which may extend to three years and shall also be liable to a fine of not
less than five hundred rupees for every day during which such default continues.
The debenture redemption reserve is required to be created for both, accrued and un-
accrued debentures. In the case of partly-paid debentures, Debenture Redemption Reserve
is to be created for non-convertible portion only.
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Debenture Redemption Reserve (DRR):
A. Section 117C of the Act requires that every company to create a DRR. Adequate amount
shall be credited out of its profits every year until such debentures are redeemed and
shall utilize the same exclusively for redemption of a particular set or series of
debentures only. There is no obligation on the part of the company to create DRR if there
is no profit for that particular year. However, vide Circular No. 9/2002 dated 18th April,
2002, Ministry of Company Affairs has clarified that:
1. No DRR is required for debentures issued by AIFIs (All India Financial
Institutes) regulated by Reserve Bank of India and banking companies for
both public as well as privately placed debentures. For other Financial
Institutions within the meaning of Section 4A of the Act, DRR will be as
applicable to NBFCs registered with RBI.
2. For NBFCs registered with the RBI under Section 45-IA of the RBI Act,1997,
the adequacy of DRR will be 50 per cent of the value of debentures issued
through public issue as per present SEBI guidelines and no DRR is required
in the case of privately placed debentures
3. For manufacturing and infrastructure companies, the adequacy of DRR will be
50 per cent of the value of the debentures issued through public issue and 25
per cent for privately placed debentures.
4. Section 117C will apply to debentures issued and pending to be redeemed
and as such DRR is required to be created for debentures issued prior to 13th
December 2000 and pending redemption subject to clarifications issued
herein.
5. Section 117C will apply to non-convertible portion of debentures issued
whether they are fully or partly convertible.
B. Ministry of Company Affairs has clarified that for housing finance companies
registered with the National Housing bank under Housing Finance Companies
(―NHB‖) Directions, 2001 adequacy of DRR will be 50% of the value of debentures
issued through public issues. No DRR is required in the case of privately placed
debentures. (referCircular No. 4/2003 dt. 16.2.03).
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Issue of Debentures
Issue of the debentures is set out in MoA of the company. Unless stated in MoA, a company
cannot issue the debentures. With regard to the procedures of issue of debentures, it is
similar to the issue of shares in a company. However, debentures can be issued at a
discount without any restriction, if AoA authorises the same. The reason is being that it does
not form part of the capital of the company. There is no ceiling (minimum or maximum) for
the rate of interest payable on debentures. Any rate of interest can be paid on the
debentures. Even zero rates of interest debentures can be issued. Section 122 of the Act
provides that specific performance of a contract to give debentures may be enforced by an
order of the Court against the company and that the company may specifically enforce
against anyone an agreement to take debentures. No company is permitted to issue
debentures carrying voting rights at any general meeting of the company.
Public Sector Bonds
During the budget session of Parliament in 1985, Finance Minister made an
announcement for flotation of bonds by telecommunication and power section. Under the
Scheme, the Government corporate bodiesas may be specified in area of telecommunication
and power and any other section, as might be notified by the Government, were permitted to
issue bonds forthe following circumstances:
(a) setting up of new projects; and/or
(b) expansion or diversification of existing project; or
(c) meeting normal capital expenditure for modernisation; or
(d) For augmenting the long term resources of the company for working
capital requirements.
In July 1986 this scheme was extended to other public sector enterprises. In addition to the
earlier series of telecom and power sector bonds, government introduced the scheme for
issue of tax free bonds for all the sectors. The maximum rate of interest was 10% for the
new series and the period of redemption upto 10 years which could be increased in suitable
cases, as may be approved by the Government. The interest income from these bonds is
completely free from income-tax. The bonds were also exempt from Wealth Tax without any
limit. These bonds were also transferable by endorsement and delivery. The scheme
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provided for facility of buy back also. These bonds were required to be listed on any
recognised Stock Exchanges.
The guidelines for issue of bonds as issued by Office of Controller of Capital Issues under
the Ministry of Finance have now become obsolete in view of the repeal of Capital Issues
Control Act. However, the SEBI guidelines for debentures equally apply to bonds as well.
Besides, PSEs have to comply with the other administrative instructions issued by the
Ministry of Finance from time to time.
Foreign Bonds:Companies have now permitted to issue bonds from other countries
capital market, Euro-Bond in particularly. Indian business enterprises can tap this source of
raising foreign currency funds by issue of foreign bonds. In 1986, a new development in
India‘s participation in global market was the floating of the India's Fund in the United
Kingdom by the Unit Trust of India in collaboration with Merril Lynch International Capital
Managers. The India‘s fund was established to enable non-resident Indians and other
persons or firms resident outside India to invest in the securities market in India through
subscription to the shares of the fund. Indian company can, with the approval of the Ministry
of Finance, issue American Depository Receipts/Global Depository Receipts/Foreign
Currency Convertible Bonds.
Developments in Corporate Debt Financing
The instruments used by the corporate sector to raise funds are selected on the basis of the
following:
(i) Investors‘ preference for a given instrument;
(ii) The regulatory framework, where under the company has to issue the
security.
Currently, Convertible debenture is the most popular instrument to raise funds from
the markets. The factors such as tax liability of the company, the purpose for which the funds
are required, debt servicing ability and willingness to broad base the sharehold ing of the
company, influence the choice of the instrument. In the recent years, new financial
instruments have emerged in the financial market. The following are some of the salient
features of debt instruements:
1. Convertible capital issuemeans the issue made in the form of partly or wholly
convertible issue, with varying conversion terms and premium on par value of equity.
2. Zero coupon bondsrefer to those bonds which are sold at a discount from its eventual
maturity value and have zero interest rate.
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3. Shares with differential rights signifies a share with differential right to vote, dividend
etc. The investor is compensated for renouncing the voting right through a higher rate
of dividend than that on the conventional voting share.
4. Secured Premium Notes with Detachable Warrants (SPN), which is issued along with
detachable warrant, is redeemable after a notified period, say 4 to 7 years. The
warrants attached to it ensure the holder the right to apply to get allotted equity
shares, provided SPN is fully paid.
5. Non-convertible Debentures with Detachable Equity Warrants:- The holder of NCDs
with detachable equity warrants is given an option to buy a specific number of shares
from the company at a predetermined price within a definite time frame.
6. Zero Interest fully Convertible Debentures: The investors in zero interest fully
convertible debentures will not be paid any interest.
7. Equity Shares with Detachable Warrants: In this category, along with fully paid equity
shares, detachable warrants are issued which will entitle the warrant holder to apply
for a specified number of shares at a predetermined price.
8. Fully Convertible Cumulative Preference Shares (Equipref):- Equipref is a recent
introduction in the market. It has two parts: A and B. Part A, is convertible into equity
shares automatically and compulsorily on the date of allotment without any further act
or application by the allottee and Part B will be redeemed at part-converted into
equity shares after a lock-in-period at the option of the investors.
9. Secured zero interest Partly Convertible Debentures with Detachable and separately
tradable warrants: The instrument has two parts - Part A is convertible into equity
shares at a fixed amount on the date of allotment and Part B - non-convertible to be
redeemed at par at the end of a specific period from the date of allotment. Part B will
carry a detachable and separately tradable warrant which will provide an option to
the warrant holder to receive equity share for every warrant held at a price as worked
out by the company.
10. Fully convertible Debentures with interest (optional):- This instrument will not yield
any interest for a short period, say 6 months. After this period, option is g iven to the
holders of FCDs to apply for equities at 'premium' for which no additional amount
needs to be payable. This option needs to be indicated in the application form itself.
However, interest on FCDs payable at a determined rate from the date of fir st
conversion to second/final conversion and in lieu of it equity shares will be issued.
11. Deep discount bond refers to those bonds which are sold at discount value by the
company and on maturity face value is paid to the investors.
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12. Option bonds covers those cumulative and non-cumulative bonds where interest is
payable on maturity periodically and redemption premium is offered to attract
investors.
13. Global depository receipts is a form of depository receipt on certificate created by the
Overseas Depository Bank outside India denominated in dollar and issued to non-
resident investor against the issue of ordinary shares on foreign currency convertible
bonds of issuing company.
It is a quasi-debt instrument which is issued by any corporate entity, international
agency or sovereign state to the investors all over the world.
14. External Commercial borrowings are defined to include commercial bank loans,
buyers‘ credit, suppliers‘ credit, securitised instruments such as Floating Rate Notes
and Fixed Rate Bonds etc. credit from official export credit agencies and commercial
borrowings from the private sector window of Multilateral Financial Institutions such
as International Finance Corporation (Washington, ADB, AFIC, CDCetc). It is
permitted by the Government as a source of finance for Indian corporates for
expansion of existing capacities and fresh investments.
15. Derivatives: Derivatives are contracts which derive their values from the value of one
or more other assets known as underlying assets. Some of the most commonly
traded derivatives are futures, options and swaps.
A. Futures: Futures is a contract to buy or sell an underlying financial instrument
at a specified future date at a price when the contract is entered.
B. Options: An option contract conveys the right to buy or sell a specific security
or commodity at specified price within a specified period of time. The right to
buy is referred to as a call option whereas the right to sell is known as 'put
option'.
New Instruments in Money Market
(1) Certificate of deposit (CD): CD is a document of title to a time deposit. Being a bearer
document, CDs are readily negotiable and are attractive; both to the banker and to the
investors in that, the banker is not required to en-cash the deposits prematurely, while
the investor can sell the same in the secondary market. This ensures ready liquidity.
Minimum size of issue of a CD is Rs. 1 lakh.
(2) Commercial paper (CP): CP refers to unsecured promissory notes issued by credit
worthy companies to borrow funds on a short term basis. It can be issued in
denominations of Rs. 5 lakh or multiples thereof.
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Chapter 4
Management & Control, and Winding up of companies
Introduction
After having the detailed discussion about various aspects of share capital, debentures, and
their issues, prospectus in the previous chapters, Let us understand about the management
and control and winding up of companies in this chapter. As you are aware, company is a
separate legal entity, but it is not a living person. In order to achieve the objectives stated in
MoA of the company, company depends on Board of Directors (collectively) and directors
(individually). This chapter deals with the concept of director, their qualifications,
appointment, removal, remuneration, etc. After that we will discuss the procedure of winding-
up of companies.
When a company is registered under the Companies Act 1956, it becomes a
separate legal entity. It needs somebody to operate the business for signing, executing the
documents, analysing and taking decisions to achieve the objectives of a company that has
been stated in the MoA, on behalf of an entity, known as Board of Directors (BoD). They will
be selected according to the procedure prescribed in the Act and the AoA. Members of the
BoD are known as directors, who unless especially authorised by the Board of directors of
the Company, do not possess any power of management of the affairs of the company.
Acting collectively as a Board of directors, they can exercise all the powers of the company
except those, which are prescribed by the Act to be specifically exercised by the company in
general meeting. The company‘s performance depends on the efficient functioning of a
director(s). They formulate the policies that are required by the company and establish a set
up within an organisation to implement those policies to achieve the objectives as stated in
the MoA.
Definition of Director
As discussed above, the control of a company and authority rests with Board of
Directors. Section 253 of the Act provides that only an individual, and not a body corporate,
association or firm shall be appointed as director. Further, Section 2(13) defines a director as
including any person occupying the position of director by whatever name called. The
definition clearly says that a person is a director if he or she does whatever a director does
normally. In simple words, it based purely on function.
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The Act offers no further guidance on the functions and duties of directors. One may,
therefore, attempt a functional definition of directors as the individuals who direct, control,
manage or superintend the affairs of a company in the form of the Board of directors. As a
body, they frame the general policy of the company, direct its affairs, appoint the company‗s
officers, ensure that they carry out their duties and recommend to the shareholders
regarding distribution of dividend as per its Articles of Association. The collective body in
whom the authority is vested and through whom the company acts is called the ―Board of
directors‖ or the ―Board‖ .
TYPES OF DIRECTORS
a. Executive Director: Executive director (ED) is a common post in many
organizations, but theCompanies Act does not define the phrase. Typically, he or she
is the one who is responsible for the administration of a business. They perform
operational and strategic business functions such as managing peoples, looking after
assets, hiring and firing, entering into contracts, and so on. They are usually
employed by the company and paid a salary and hence they are protected by
employment law.
i. Managing Director: Section 2(26) of the Companies Act, 1956 defines
‗managing director means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by
its Board of directors or, by virtue of its MoA, is entrusted with [substantial
powers of management] which would not otherwise be exercisable by
him/her, and includes a director occupying the position of a managing
director, by whatever name called: [Provided that the power to do
administrative acts of a routine nature when so authorized by the Board. In
addition, a managing director of a company shall exercise his powers subject
to the superintendence, control and direction of its Board of directors].
ii. Whole time Director: According to Section 269(1), a Whole-time Director
includes a director in the whole-time employment of the company. Thus, a
whole-time director means a director who devotes all his time and attention to
the management of the company. Where a director is appointed to act as
Technical Director, Legal Director, Work Director and Sales Director on full
time basis he/she is a whole-time director of the company. A whole-time
director is also a managerial person [See Section 268(1)].
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b. Non-executive Director: Generally, non-executive directors do not get involved in
the day-to-day running of the business. He/she may or may not be an independent
director.
c. Nominee Directors: Nominee directors are appointed by financial institutions or
banks, which extend term loans and/or working capital assistance or any other type
of financial assistanceto companies. They are a powerful tool of project supervision,
monitoring and control, particularly following the issue of Government guidelines
enjoining financial institutions to nominate directors on the boards of companies
enjoying substantial assistance.
d. Independent Directors: In Clause 49 of the listing agreement, the term
‗Independent Directors‘ has been defined as ‗Independent director‘ shall mean non-
executive director of the company who:
1. apart from receiving director‗s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and
associates which may affect independence of the director;
2. is not related to promoters or persons occupying management positions at
the board level or at one level below the board;
3. has not been an executive of the company in the immediately preceding three
financial years;
4. is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
ii. the statutory audit firm or the internal audit firm that is associated with
the company, and
iii. the legal firm(s) and consulting firms(s) that have a material
association with the company.
5. is not a material supplier, service provider or customer or a lessor or lessee of
the company, which may affect independence of the director.
6. is not a substantial shareholder of the company i.e. owning two percent or
more of the block of voting shares.
7. is not less than 21 years of age.
For the purposes of above definition of independent directors:
a. Associate shall mean a company, which is an associate as defined in Accounting
Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial
Statements, issued by the institute of Chartered Accountants of India.
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b. “Senior management” shall mean personnel of the company who are members of its
core management team excluding Board of Directors. Normally, this would comprise all
members of management one level the executive directors, including all functional heads.
c. “Relative” shall mean ―relative as defined in section 2(41) and section 6 read with
Schedule IA of the Companies Act, 1956.
As per clause 49 of the Listing Agreement which deals with good Corporate
Governance Practices, every company, to which this clause applicable shall have an
optimum combination of executive and non-executive directors with not less than 50 percent
of the Board of directors comprise of non-executive directors. The number of independent
directors would depend whether the Chairman is executive or non-executive. In case of a
non-executive Chairman, at least one-third of Board should comprise of independent
directors and in case of an executive Chairman, at least half of Board should comprise of
independent directors. Further where the non-executive Chairman is a promoter of the
company or is related to any promoter or person occupying management positions and the
Board level or at one level below the Board, at least one-half of the Board of the company
shall consist of independent director. All pecuniary relationship or transactions of the non-
executive directors‘ vis-à-vis the company should also be disclosed in the Annual Report of a
company.
e. Interested Directors: Interested Directormeans any director whose presence
cannot, by reason of Section 300, count for the purpose of forming a quorum at a
meeting of the Board, at the time of the discussion or vote on any matter.
f. GovernmentDirectors: The Central Government has the power to appoint directors
under Section 408 of the Act.
Let us discuss the qualifications that are required to be an director of a company in the next
section.
Qualifications of Directors
Though the Companies Act, 1956 does not lay down any qualifications for a person
to be appointed as a director of a company, it clearly states disqualifications of directors that
are contained in Section 274 of the Act as under:
1. A person shall not be capable of being appointed director of a company, if a person
(a) has been found to be of unsound mind by a Court of competent jurisdiction
and the finding is in force
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(b) is an un-discharged insolvent
(c) has applied to be adjudicated as an insolvent and his application is pending
(d) has been convicted by a Court of any offence involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months,
and a period of five years has not elapsed from the date of expiry of the
sentence
(e) has not paid any call in respect of the shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the
last day fixed for the payment of the call
(f) an order disqualifying him for appointment as director has been passed by
Court in pursuance of Section 203 and is in force unless the leave of the
Court has been obtained for his appointment in pursuance of that section; or
(g) such person is already a director of a public company which, -
i. has not filed the annual accounts and annual returns for any
continuous three financial years commencing on and after first day of
April 1999; or
ii. has failed to repay its deposit or interest thereon on due date or
redeem its debentures on due date or pay dividend and such failure
continues for one year or more:
iii. Provided that such person shall not be eligible to be appointed as a
director of any other public company for a period of five years from the
date on which such public company, in which he is a director, failed to
file annual accounts and annual returns under sub-clause (a) or has
failed to repay its deposit or interest or redeem its debentures on due
date or pay dividend referred to in clause.
2. The Central Government may, by notification in the Official Gazette, remove
(a) the disqualification incurred by any person in virtue of clause (d) of Sub-section (1),
either generally or in relation to any company or companies specified in the notification;
or
(b) The disqualification incurred by any person in virtue of clause (e) of sub-section (1)
3. A private company which is not a subsidiary of a public company may, by its articles,
provide that a person shall be disqualified for appointment as a director on any grounds in
addition to those specified in Sub-section (1).
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Companies (Disqualification of Directors under Section 274(1) (G) of the Companies
Act, 1956) Rules, 2003
The Ministry of Finance, Department of Company Affairs has issued the Notification
with regard to Companies [Disqualification of Directors under Section 274(1)(g) of the
Companies Act, 1956] Rules, 2003. (Refer the notification dated 21 st October 2003.
In terms of Companies (Disqualification of Directors under Section 274(1)(g) of the
Companies Act, 1956) Rules, 2003, a responsibility has been imposed on the disqualified
directors and the companies of such directors to file returns in Form DD-A and DD-B
respectively to the Registrar of Companies. The format of these forms has been prescribed
as Annexure I.
Disqualification Provisions – Significance thereof
The purpose of these provisions is firstly to set some standards of corporate
managers, a degree of competence and responsibility and to save the owners, the
shareholders and at large the community from the consequences of mismanagement.
Under Section 202 it is an offence for an undischarged insolvent to take part in or be
concerned in the management of a company. An undischarged insolvent and one who has
applied for adjudication as an insolvent are disqualified from being appointed as a director.
The prohibition on insolvents from managing companies is not intended to punish them, but
is to protect the community.
Qualification Shares
There is no statutory requirement that a director must hold qualification shares in the
company in which he is a director. Hence, a person may be a director in a company without
being its member unless the AoA stated otherwise. However, the AoA usually provide for a
share qualification. The modern view is that holding a nominal share qualification does not
make a director more responsible. If the articles of a company provide for share qualification,
Section 270 lays down that—
(a) Each director must obtain his qualification shares within two months after his
appointment as director.
(b) Any provision in the articles shall be void in so far as it requires a person to hold the
qualification shares before his appointment as a director or to obtain them within a
shorter time than two months after his appointment as such.
(c) The nominal value of the qualification shares shall not exceed Rs. 5,000 or the
nominal value of the one share where it exceeds Rs.5000/-
(d) For the purpose of any provision in the articles requiring a director to hold a specified
share qualification, the bearer of a share warrant should not be deemed to be the
holder of the shares specified in the warrant.
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It is important to note the following:
a. A director who accepts his qualification shares as a secret gift from promoters of a
company is guilty of a gross breach of trust and he is liable to give up the shares.
(a) A director can act for two months without possessing the qualification shares
required under the Articles. If a director fails to acquire his qualification shares within
two months after his appointment or at any time thereafter ceases to hold the share
qualification his office shall become vacant on the expiry of that period [Section
283(1)(a)].
(b) Under Section 272 of the Companies Act if a person acts as a director after the
expiry of the said period of two months without holding the qualification shares, such
director shall be punishable with fine which may extend to five hundred rupees for
every day of default.
Directors who need not hold qualification shares
(c) A director appointed by the Central Government on the Board of any company under
Section 408 of the Act need not hold qualification shares [Section 408(4)]. The
nominee directors representing those financial institution that are established by a
separate statute of Parliament are not required to acquire the qualifying shares by
virtue of enabling provisions contained in the concerned statute e.g. Section 30A of
the IDBI Act, Section 27 of the SFCS Act, Section 19A of the UTI Act.
(d) Similarly, the directors who by the articles of association of the company are not
required to hold qualification shares, need not hold such shares.
Number of Directors: According to Section 252 of the Companies Act, 1956 every public
company shall have at least three directors, at least two directors in case of private
company. AoA of companies usually provide for the minimum and maximum number of
directors for its Board. Section 258 of the Act lays down that a company in general meeting
may by ordinary resolution, increase or reduce the number of its directors within the limits
fixed in that behalf by its AoA. However, this is subject to the provisions of Sections 252, 255
and 259 of the Act. Only the Board of directors have the power of increasing or reducing the
number of directors and make proposal for the same to the general body. U/s 259 of the Act,
increase in the number of directors under certain circumstances requires Central
Government‗s approval.
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Appointment of Directors: Directors may be appointed in the following ways:
(i) By subscribers to the Memorandum (First Directors) Section 254.
(ii) By members in general meeting — Sections 255, 256, 257, 265.
(iii) By Board of directors (Sections 260, 262 and 313)
(iv) By Central Government (Sections 408 and 409)
(v) By third-parties if the articles provide.
(vi) By small shareholders, if the articles so provide.
Director Identification Number (DIN): The concept of a Director Identification Number
(DIN) has been introduced for the first time with the supplement of Sections 266A to 266G of
Companies (Amendment) Act, 2006. As such, all the existing and intending Directors have to
obtain DIN within the prescribed time-frame as notified. Director Identification Number (DIN)
is an unique Identification Number allotted to an individual who is an existing director of a
company or intends to be appointed as director of a company pursuant to section 266A &
266B of the Companies Act, 1956
Removal of Directors: A director may be removed from office before the expiry of his term
by
(a) Shareholders of the Company;
(b) Central Government; or
(c) Company Law Board.
(a) Removal by shareholders: According toSection 284(1) of the Act, the shareholders of a
company may remove a director before the expiry of the period by passing an ordinary
resolution at a general meeting. However, the following directors cannot be removed by the
company unless otherwise specified in the terms of their appointment:
(a) a director who appointed by the Central Government under Section 408;
(b) a director of a private company holding office for life on the first day of April, 1952
whether or not he is subject to retirement under an age limit by virtue of the
articles or otherwise;
(c) where the company has availed itself of the option to appoint not less than two-
thirds of the total number of directors according to the principle of proportional
representation under Section 265;
(d) A director appointed by a Financial Institution/Bank under the terms of a loan
agreement.
The right given by Section 284 is a statutory right which cannot be taken away by the
memorandum, articles or by any contract or any other document and if it is sought to be
taken away, such a provision will be void [see Section 9].
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(b) Removal of directors by the Central Government: Chapter IVA of the Act comprising
Section 388B to 388E contains provisions regarding power of the Central Government to
remove managerial personnel of a Company from office on the basis of
recommendationfrom the Company Law Board. The Central Government may state a case
against the person and refer the same to the Company Law Board with the request that
Company Law Board may inquire into the case and record the decision as to whether or not
such person is a fit and proper person to hold the office of director or other management
office. The Central Government may make such a reference to the Company Law Board
where it is of the opinion that there are circumstances suggesting:
(a) that any person concerned in the conduct and management of the affairs of
company is or has been in connection therewith guilty of fraud, misfeasance
persistent negligence or default in carrying out his obligations and functions
under the law, or breach of trust; or
(b) that the business of a company is not or has not been conducted and
managed by such person in accordance with sound business principles or
prudent commercial practices; or
(c) that a company is or has been conducted and managed by such person in a
manner which is likely to cause, or has caused, serious injury or damage to
the interest of the trade, industry or business to which such company
pertains; or
(d) That the business of a company is or has been conducted and managed by
such person with intent to defraud its creditors, members or any other person
or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to
public interest.
The person against whom the case is presented under this section is joined as a respondent
to the application. The application shall contain a concise statement of circumstances and
materials as the Central Government may consider necessary for the purpose of the inquiry.
(c) Removal by Company Law Board: Where on an application to the Company Law
Board for prevention of oppression under Section 397 and mismanagement under Section
398 of the Act, the Company Law Board finds that the relief ought to be granted, it may by
order, terminate or set aside any agreement of the company with a director or managing
director or other personnel on such terms and conditions as it may think just and equitable.
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Where the appointment of the director is so terminated or set aside, he/she cannot, except
with leave of the Company Law Board, serve any company in a management capacity for a
period of five years. He also cannot sue the company for damages or compensation for loss
of office.
Retirement of Directors: A director ceases to hold office if he retires by rotation at an
annual general meeting unless he/she offers him/herself for re-election and get re-elected at
the same meeting. Special circumstances may justify continuation of directors who would
have retired by rotation if a meeting was held.
Resignation of Directors: The Companies Act does not make express provision for the
resignation of a director. A director may resign his/her office in the manner provided by the
articles. If the articles contain no provision regarding the resignation by a director, he /she
may resign his/her office at any time by giving reasonable notice to the company, no matter
whether the company accepts it or not.
Remuneration of Directors: Directors are not the servants of the company and in the
absence of a specific agreement or provisions are not entitled to remuneration for their
services.The remuneration paid to directors is subject to the provisions of Section 198, 309
and Schedule XIII of the Companies Act. However, the term managerial remuneration has
not been defined in the Act. A reference to Sections 198, 309 to 311 and 387 suggests that
directors of the company and manager, if any, constitute managerial personnel and naturally
includes a managing director or a whole time director and they are entitled to receive
managerial remuneration. Even a person carrying administrative designation of manager like
general manager as an executive will not be included as managerial personnel.
Meaning of Managerial Remuneration:To remunerate means to pay, compensate, or
reward for work, etc. Managerial remuneration may take the form of monthly payments, say,
salary or a specified percentage of net profits or a commission and/or by way of a fee for
each meeting of the Board (called sitting fee) Besides, Section 198(4) provides the
expression remuneration‗ shall also include:
(a) any expenditure incurred by the company in providing any rent free accommodation,
or any other benefit or amenity in respect of accommodation free of charge, to any of
its directors or manager;
(b) any expenditure incurred by the company in providing any other benefit or amenity
free of charge or at a concessional rate to any of the persons aforesaid;
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(c) any expenditure incurred by the company in respect of any obligation or service,
which, but for such expenditure by the company, would have been incurred by any of
the persons aforesaid; and
(d) any expenditure incurred by the company to effect any insurance on the life of, or to
provide any pension, annuity or gratuity for any of the persons aforesaid or his
spouse or child.
Again, payment received by a director for holding an office or place of profit under the
company is not managerial remuneration. This has been made clear by the specific
provision of Sub-section (1) of Section 309. Section 198(1) lays down 11% of the net profits
as the overall ceiling on the total managerial remuneration payable by a public company or a
private company, which is a subsidiary of a public company, to its directors (which mean all
directors including managing and whole-time directors) and manager. Section 309(1)
provides that the remuneration payable to the directors of a company, including any
managing or whole-time director shall be determined in accordance with and subject to the
provisions of Section 198 and this section either by the articles of the company or by a
resolution or, if the articles so require by a special resolution passed by the company in
general meeting and the remuneration payable to any such director determined as aforesaid
shall be inclusive of the remuneration payable to such director for services rendered by him
in any other capacity.
According to Sub-section (3) of Section 309, a director which is either in the whole
time employment of the company or a managing director may be paid remuneration either by
way of a monthly payment or at a specified percentage of the net profits of the company or
partly by one way and partly by other. However, except with the approval of the Central
Government such remuneration shall not exceed five per cent of the net profits for one such
director, and if there is more than one such director, ten per cent for all of them together.
Therefore, remuneration payable to managing director, whole time director and manager
who are in the whole time employment of the company shall not exceed five per cent of the
net profits for one such director, and if there is more than one such director, ten per cent for
all of them together.
Remuneration to Non-Executive Directors: Section 309(4) provides that a director who is
neither in the whole-time employment of the company nor a managing director may be paid
remunerationeither:
(a) by way of a monthly, quarterly or annual payment with the approval of the Central
Government; or
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(b) By way of commission, if the company by special resolution authorises such
payment.
(a) Provided that in either case, the remuneration paid to such director, or where there
are more than one such directors, to all of them together shall not exceed:
i. one per cent of the net profits of the company, if the company has managing
or whole-time director or manager;
ii. three per cent of the net profits of the company in any other case.
The company in general meeting may, by a special resolution and with the approval
of the Central Government, authorise the payment of commission at a rate higher than one
per cent or, three per cent of its net profits as the case may be. The special resolution by
which payment is sanctioned will remain in operation for not more than five years, but may
be renewed for five years term from time to time provided the renewal is made in the last
year of the previous term. However, the approval of Central Government will be necessary
for payment of any remuneration to non-executive directors in terms of Section 310. A
company shall not require approval of the Central Government for making payment of
remuneration by way of commission to its Non-whole time Director(s) in addition to the sitting
fee if the total commission to be paid to all those Non-whole time Directors does not exceed
1% of the net profit of the company if it has a whole time director(s) or 3% of the net profit of
the Company if it does not have a Managing Director or Whole-time director(s).
So far we have learnt about the concept of directors, their appointment, removal,
remuneration and so on. Now let us learn about the powers and duties of directors.
POWERS OF A COMPANY
As discussed above, directors acting collectively i.e. Board of Directors are
authorized to do what the company is authorized to do unless barred by restrictions on their
powers by the provisions of the Companies Act, 1956, the MoA or AoA of the company.In all
other cases the Board is entitled to exercise all its powers, except express provisions are
made that the powers of a company in respect of any matter are to be excised by the
company in general meeting. Board of Directors (directors together) are the authority for
conducting the affairs of the company (Section 291). The directors shall exercise their
powers bonafide and in interest of the company. The directors while exercising their powers
do not act as agents for themajority or even all the members and so the members cannot by
resolution passed by a majority or even unanimously supercede the direc tor‗s powers, or
instruct them how they shall exercise their powers.
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The relationship of the Board of directors with the shareholders is more of federation
than one of subordinates and superior. Some powers are especially reserved for the Board
e.g. appointing directors in casual vacancies, the power to issue debentures, etc. On the
other hand, some powers are exclusively reserved for the members in general meeting e.g.
borrowing in excess of the paid-up capital and free reserves, selling or disposing off the
whole or substantially the whole of the undertaking etc. However, in the following exceptional
cases, the general body of shareholders is competent to act even in matters delegated to the
Board:
(a) Directors Acting Mala Fide: The general body of shareholders can intervene when
it is proved that the directors have acted for improper motive or arbitrarily or
capriciously.
(b) Incompetent Board: The general body of shareholders may exercise the powers
vested in the Board when the Board is incompetent to act, for instance, where all the
directors are interested in the transaction or the Board is unwilling to act, or when
there are no validly appointed directors functioning.
(c) Deadlock in the Board: If the directors are unable or unwilling to act, on account of
deadlock, the shareholders have the inherent power to act.
From the above, it is clear that the residuary powers can be pressed into service by
the shareholders in general meeting.
EXERCISE OF POWERS: The powers of the Board may be grouped under the following
heads:
(1) Powers exercisable only at Board meetings;
(2) Powers exercisable only with the consent of the company in general
meeting; and
(3) All other powers which, subject to the provisions of the Act, the
company is authorised to exercise.
Powers to be exercised only at Board Meetings: Section 292(1) of the Act provides that
the Board of directors of a company shall exercise the following powers on behalf of the
company, and it shall do so only by means of resolution passed at a meeting of the Board:
(a) To make calls on shareholders in respect of money unpaid on their shares
(b) To authorise the buy-back as per the provisions of Section 77A
(c) To issue debentures
(d) To borrow moneys otherwise than on debentures
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(e) To invest the funds of the company; and
(f) To make loans
The Board, may, however, by a resolution passed at a meeting, delegate to any committee
of directors, the managing director, the manager or any other principal officer of the
company or in the case of a branch office of the company, a principal officer of the branch
office, the powers specified in clauses (c), (d) and (e), to the extent specified below on such
conditions as the Board may prescribe.
The directors can also exercise the power to print share certificates as per the provisions of
the Companies (Issue of Share Certificate) Rules, 1960, in their Board meetings. Every
resolution of the Board delegating the powers must specify:
(a) The total amount outstanding any one time up to which the money may be borrowed
by the delegate under clause (c); [Section 292(2)].
(b) The total amount up to which the funds of the company may be invested and the
nature of the investment which may be made by the delegate under clause (d);
[Section 292(3)].
(c) The total amount up to which loans may be made by the delegate, the purpose for
which the loans may be made, and the maximum amount of loans which may be
made for each such purpose in individual cases under clause (e) [Section 292(4)].
The Board of Directors is competent by resolution to enhance the rates of interest in
exercise of the powers under Sub-sections (1)(b) and (1)(c) of Section 292. The exercise of
that power is not controlled by Section 293.
Power to borrow money [Sub-section (1)(c)]:According to this section, The company‗s
power of borrowing may also be exercised by delegating to agents other than directors
unless prohibited by the AoAof the company. The expression of borrowing moneyis not
confined to the taking of money on the promise to return it, with or without interest; it will also
include the entering into any arrangement for deferred payment of the price of machinery,
raw materials, etc.
Power to give security (Implied Power):The power to borrow implies that a power to
secure the borrowings by mortgage or a charge on the company‗s assets. Unpaid calls can
be charged under the general powers to borrow, but a company cannot give by way of
security books and registers which it is bound to keep under the Companies Act.
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Borrowing for ultra vires purposes: Borrowing beyond the powers of the company, or the
directors, is an ultra vires borrowing and does not have the effect, legal or equitable. Any
instrument executed or security given therefor is void and no action lies to recover the
money. In one case, Board of directors passed a resolution for borrowing of money for an
ultra vires purpose. The same being beyond the powers of the directors and the company, it
did not bind the company.
Section 58A - restrictions on borrowing powers:The Board of directors and others who
exercise borrowing powers for or on behalf of any non-banking company have to take
particular care to see that the directions of Reserve Bank as well as the provisions of Section
58A are complied with. Whenever any company receives any money in the form of deposit it
must be noted that the Reserve Bank directions under Section 45-L of the Reserve Bank of
India Act have effect notwithstanding anything otherwise provided in the Companies Act or
any other law, as it is so expressly provided by Section 45-Q of that Act.
Other Powers to be exercised at Board Meetings: Besides the above powers, there are
certain other powers which the Board of directors can exercise only at its meeting. These
powers are—
(a) Section 77A empowers to form opinion about solvency of the Company in respect of
buy- back of shares.
(b) Section 262 provides the power to fill up casual vacancies in the office of directors.
(c) Section 292A gives the power to constitute Audit Committee and specify terms of
reference thereof
(d) the power to make donation to political parties [proviso to Sub-section (2) of Section
293A];
(e) the power to accord sanction for specified contracts in which one or more directors
are interested [Section 297(4)];
(f) disclosure of interest by a director [Section 299(1)];
(g) the power to receive notice of disclosure of directors‗ interest [Section 299(3)(c)];
(h) the power to receive notice of disclosure of directors‗ shareholding [Section 308(2)];
(i) the power to appoint or employ a person as managing director if he is the managing
director or manager of one and not more than one other company [Section 316(2)];
(j) the power to invest in shares or debentures of any other body corporate under
Section 372A;
(k) the power to appoint or employ a person as its manager if he is the manager EP-CL-
15 485
(a) or managing director of other company [Section 386(2)];
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(l) the power to make a declaration of solvency where it is proposed to wind up the
company voluntarily [Section 488(1)];
(m) Approval of text of advertisement for inviting public deposits [Section 58A read with
rule 4(4) of the Companies (Acceptance of Deposits) Rules, 1975].
DUTIES OF DIRECTORS
The duties of directors are multifarious and they vary from company to company
depending upon the type and size of its activities. The duties of directors may be divided
under two heads:
1. Statutory duties and
2. Fiduciary and general duties
Statutory duties: Statutory duties are the duties and obligations imposed by the Companies
Act. Important amongst them are:
(a) Duty to attend Board meetings– Section 283(1)(g) imposes a statutory duty on the
directors to attend Board Meeting. Although a director may not be able to attend all
the meetings but if he/she fails to attend three consecutive meetings or all meetings
for a period of three months whichever is longer, without obtaining leave of absence
from the Board, his office shall automatically fall vacant.
(b) Duty not to contract without Board‟s consent: The directors should not enter into
contracts with company in violation of the provisions of Section 297 of the Act.
(c) Duty to disclose interest (Sections 299-300):Section 299 imposes an obligation on
a director to disclose the nature of his/her concern or interest whether (direct or
indirect) if any, at a meeting of the Board of directors. A director is in a fiduciary
position. A person in fiduciary position is not permitted to obtain profit from his
position except with the consent of his beneficiaries or other persons to whom he
owes the duty. In terms of Section 300 an interested director shall not participate or
vote in Board‗s proceedings.
(d) Duty of Director etc. to make disclosure : Section 305 enacts an obligation on
every director managing director, manager or secretary of a company who is
appointed to or relinquishes the office or director, managing director, manager or
secretary or any other body corporate (including foreign company) shall within 20
days of such change, disclose to the company. If he fails to do so, he/she shall be
punishable with fine with may extend to Rs.5000.
(e) Duty of Directors to make disclosure of Shareholding: Section 308 enforces an
obligation that every director and every person deemed to be a director by virtue of
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Sub-section (10) of Section 307 shall give notice, in writing, of the matters relating to
him/her as required under Section 307 of the Act. The Directors and deemed
director(s) giving the notice shall take all reasonable steps to secure that it is brought
up and read at the meeting of the Board next after it is given. Any person, who fails to
comply with the provisions, shall be punishable with imprisonment for a term which
may extend to two years or with fine which may extend to Rs.50000 or with both.
(f) Duty in connection with the general meeting: The directors have to convene
statutory meeting, annual general meetings (AGMs) and also extraordinary general
meetings [Sections 165, 166 & 169]. The Companies Act confers the duty of the
preparation and placing at the annual general meeting along with the balance sheet
and profit and loss account, a report on the company‗s affairs. The Board‗s report
must also include a Directors‘ Responsibility Statement as provided under sub-
section (2AA) of Section 217. Closely related thereto is the duty of authenticating and
approving annual financial statement under Section 215 of the Companies Act.
Section 321 further provides that if the price paid to a retiring director for his/her shares in
the company is in excess of the price paid to other shareholders or any other valuable
consideration has been given to him, it shall also be regarded as compensation and should
be disclosed to the shareholders. No director can receive any such payment from the
company itself.
Fiduciary and General duties:
The directors have several duties to discharge under the common law some of which
have been evolved by courts from time to time, having regard to the position of directors in
the company. Some of these duties are given below:
(1) Duty not to be negligent and not to commit or let others to commit tortuous acts.
(2) Duty not to exceed powers.
(3) Duty to have regard to and act in the best interests of the company and its
stakeholders.
(4) Duty to creditors if business is conducted with intend to defraud them.
(5) Duty of confidentiality.
(6) Duty not to exercise powers for a collateral purpose.
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(7) Duty not to misapply company assets.
(8) Duty not to compete with the company.
LIABILITIES OF DIRECTORS
Under the Companies Act, 1956, the liabilities of company directors are plenty. The directors
have always to be on guard lest they should incur any liability for any default or viola tion of
any provision. Their civil and criminal liabilities may be grouped under certain heads for
convenience of consideration and discussion. They are:
1. Liability to outsiders;
2. Liability to the company;
3. Liability to the shareholders;
4. Liability for statutory defaults and violations
Liability to outsiders:Directors of a company may personally become liable to outside
parties in the following cases:
(a) When they enter into contracts on behalf of the company:
(i) if the contracts are ultra vires the company
(ii) if they act outside the scope of their own authority
(iii) if they act in their own name and not for and on behalf of the company
Secondly, if the directors act beyond their powers, they will be personally liable for
damages, say, if he/she negotiates a loan which exceeds the limits of the borrowing
powers as laid down by the MoA or misrepresent to the bank that a resolution was
passed authorising him to sign cheques where in fact, he was not so authorised.
(b)When they issue a prospectus:
(i) In violation of the provisions of the Companies Act, 1956 and the SEBI
(ICDR) Regulations;
(ii) Which contains mis-statements(s);
(c) When they are found guilty of fraud;
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(d) When they allot shares in an irregular manner; EP-CL-15 506
(e) When their liability has been made unlimited under Sections 322 and 323 of the
Act.
(f) When the Court orders that the directors are personally liable for all or any of the
debts or liabilities of the company for fraudulent trading on the part of the company.
2. Liability to the Company
The directors are liable to the company in the following cases:
(a) When they are negligent in the performance of their duty as directors and the company
suffers loss, etc. There are no set standards of skills and care but only general principles
which may be applied to determine whether a director has been negligent depending on the
facts of each case. It is not possible or practical to take every possible care
(b) When they commit an act which is ultra vires their powers or ultra vires the company.
(c) When any illegal act or breach of trust is committed by them.
Liability to the Shareholders
The position of the directors in respect of the company‗s properties and the rights
conferred upon them to be exercised as directors is that of a trustee. If they commit any
breach of trust or indulge in wrongful uses of their rights and the company suffers loss, they
have to make good the loss. Similarly, if shareholders suffer loss due to the negligence of
the directors they are personally liable for the loss.
Liability for Statutory Defaults and Violations: Under the Companies Act, 1956, the
directors are required to ensure compliance with the several provisions of the Act and
penalties have been prescribed for defaults and/or non-compliance. The directors are liable
for consequences in the following situations:
(a) If, they issue a prospectus in contravention of Section 57 or 58 of the Companies Act,
1956, they are liable to be punished with fine, which may extend to fifty thousand
rupees (Section 59).
(b) Pursuant to the provisions of Section 69 (5) of the Act, directors of a company shall
be jointly and severally liable to repay share application money with interest at the
rate of six per cent per annum from the expiry of one hundred and thirtieth day after
the first issue of the prospectus, if the minimum subscription as stated in the
prospectus has not been received by the company.
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(c) The directors of a company, according to Section 71 (3) of the Act, who knowingly
contravene, or willfully authorise or permit the contravention of any of the provisions
of Section 69 or 70 of the Act with respect to the allotment of shares or debentures,
shall be liable to compensate the company and the allottee respectively for any loss,
damage or costs which the company or the allottee may have sustained or incurred
thereby.
(d) Section 73 (2) and (2A) of the Act lays down that the directors of a company shall be
jointly and severally liable to repay the share application money with interest at the
rate of 15% presently prescribed, from the expiry of the eighth day from the day the
company becomes liable to repay it.
(e) The directors are liable under Section 207 of the Act to be punished with simple
imprisonment for a term which may extend to three years and shall be liable to a fine
of one thousand rupees for every day, if they fail to distribute dividend within thirty
days of its declaration by the shareholders.
(f) Directors knowingly contravening the provisions of Section 300 of the Act by
participating and/or voting in Board proceedings relating to any contract or
arrangement in which they are interested or concerned, shall be liable for punishment
which may extend to fifty thousand rupees as per Sub-section (4) of the said Section.
Sub-section (4) of Section 299 declares that every director who fails to comply with
the provisions of Sub-section (1) or (2) of Section 299 with regard to disclosure of
their interest at Board meetings, shall be liable to punishment which may extend to
fifty thousand rupees and also he vacates the office of director automatically under
Section 283(1)(l).
(g) The directors of a company, who are knowingly party to any contravention of the
provisions of Sub-section (1) or (3) of Section 295 of the Act, which deal with loan to
directors without the previous approval of the Central Government, shall be liable to
punishment either with fine which may extend to fifty thousand rupees or with simple
imprisonment for a term which may extend to six months.
There are numerous other provisions in the Companies Act, for default or violation whereof
the directors are liable to varying degrees of punishments and fines or both.
Liability under other Corporate Laws
Apart from the directors‘ liability for violations of the Companies Act, they are also liable for
violation of the provisions of other corporate laws, important among them being: Income-tax
Act and the Rules, Sales-Tax Act and Rules, Central Excise and Salt Act and the Rules,
Customs Act and the Rules, Foreign Exchange Management Act. Negotiable Instruments
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Act, 1881 and the Rules, Provident Fund Laws, Employees State Insurance Laws and
various industrial and labour laws. The managing director and the members of the Board of
directors can be prosecuted under environmental laws like the Water (Prevention and
Control of Pollution) Act, 1974.
Criminal Liability
Finally, directors may incur criminal liability either at common law, or under any statute,
notably the Companies Act or the Indian Penal Code. Under the Companies Act, criminal
proceedings against directors may be instituted in pursuance of the following sections,
among others, resulting in imprisonment:
a. Section 44(4) — Filing of prospectus containing untrue statements — two years
imprisonment and/or fine uptoRs. 50,000.
(c) Section 58A(6)(b) — Inviting deposits in contravention of the Rules, or manner or
conditions — five years‘ imprisonment and fine.
(d) Section 58A (10) — Failure to repay deposits as ordered by the CLB — Three years
imprisonment and fine.
(e) Section 63 — Criminal liability for mis-statement in prospectus — imprisonment upto
two years or fine uptoRs. 50,000 or both.
(f) Section 68 — Fraudulently inducing persons to invest money — imprisonment upto
five years, or fine Rs. 1,00,000 or both.
(g) Section 73 — Failure to repay excess application money — imprisonment upto one
year and fine up toRs. 50,000.
(h) Section 105 — Concealing name of creditor — imprisonment upto one year or fine or
both.
(i) Section 202(1) — Un-discharged insolvent acting as director — imprisonment upto
two years or fine uptoRs. 50,000 or both.
(j) Section 207 — Default in distributing dividends — imprisonment upto 3 years and
fine uptoRs. 1,000 for every day.
(k) Section 209A — Failure to assist Registrar or any officer so authorised by the Central
Government in inspection of books of account, etc. — imprisonment upto one year
and fine not less than Rs. 50,000.
(l) Section 210(5) — Failure to lay balance sheet etc. at annual general meeting
imprisonment upto six months or fine uptoRs. 10,000 or both.
(m) Section 211(8) — Failure to comply Section 211 regarding form of balance sheet and
matters to be stated — imprisonment upto six months or fine upto 10,000.
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(n) Section 217(5) — Failure to attach to balance sheet a report of the Board
imprisonment upto six months for each offence or fine uptoRs. 20,000 or both.
(o) Section 221(4) — Failure to supply information to auditor — imprisonment upto six
months, or fine uptoRs. 50,000 or both.
(p) Section 250(9) — Improper issue of shares — imprisonment upto six months or fine
uptoRs. 50,000 or both.
(q) Section 293A(5) — Contribution to political parties in contravention of Section 293A
— three years imprisonment and fine.
(r) Section 295 (4) — Grant of loan to directors — Simple imprisonment upto six months
or fine uptoRs. 50,000.
(s) Section 308(3) — Failure to disclose shareholdings — imprisonment upto two years
or fine uptoRs. 50,000 or both.
(t) Section 372A — Giving loans to other bodies corporate in excess of the limits
prescribed under Section 372A — imprisonment upto two years or fine uptoRs.
50,000.
(u) Section 407(2) — Acting as director after removal by Court — imprisonment upto one
year, or fine uptoRs. 50,000 or both.
(v) Section 488(3) — False declaration of company‗s solvency — imprisonment upto six
months or fine uptoRs. 50,000 or both.
Monitoring and Management
The persons concerned with the working of a company may be divided into two groups:
(1) the managerial persons who formulate and guide the policies of the company and
monitor the administration of its business and
(2) the administrative staff which attends to the day to day work of the office and the
functions of the company‗s business in accordance with the decisions of the
managerial person(s).
(1) The managerial persons include the following:
(a) Directors
(b) Managing director(s) or/and whole time director(s)
(c) Manager
They work under the control and supervision of the Board of Directors. They are
assisted by company secretary, statutory auditors, (financial and costing), internal
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auditors, legal advisors and other consultants (technical or otherwise) etc. Under
Section 197A of the Act, simultaneous appointment or employment of Managing
Director and Manager is prohibited. Under Section 292A of the Act an Audit
Committee is required to be constituted by every public company having paid up
share capital of rupees 5 crore or more for monitoring financial function thereof. A
listed company has to constitute, in addition to Audit Committee, Remuneration
Committee, Shareholders‘ Investors‘ Grievance Committee and Management
Committee.
The appointment of directors, managing/whole time director(s) or manager is to be
made in accordance with the provisions of the Act and the company‗s memorandum
and articles. The Board of directors may distribute the executive functions of the
company to the qualified and experienced persons as heads of production, purchase,
sale, administration legal etc, for monitoring the overall working of the company
various committees like Project committee, Capital Expenditure Committee, Works
Committee, Finance Committee, Administration Committee may be constituted.
(2) The Administrative staff works under the heads of departments like production,
marketing, purchase, accounts, legal, personnel, taxation, secretarial, research and
development, advertisements, establishment, labour, etc. in accordance with the decisions
of the Board of directors and authority delegated to managing/whole-time director(s) or
manager or any other chief executive officer of the company.
In accordance with the inclusive definitions provided by Section 2(30) of the Act,
―officer includes any director, manager or secretary or any person in accordance with
whose directions or instructions the Board of Directors or any one or more of the directors is
or are accustomed to act. However, the Board of directors of the company is collectively
responsible for its working. All directors are singly and jointly liable for all acts of
commissions and omissions done in managing the affairs of the company, unless any
individual director or officer is made responsible for a particular function by delegation of
authority. As such, the managing/whole-time director(s) or manager shall be accountable for
the functions delegated to them by the Board of directors and for default, contravention or
non-compliance; they are personally liable until they prove their bonafide.
Winding up of a company is the stage, whereby the company takes its last breath. It
is a process by which business of the company is wound up, and the company ceases to
exist anymore. All the assets of the company are sold, and the proceedings collected are
used to discharge the liabilities on a priority basis. This section deals with the concept and
various modes of winding up. Let us discuss about the same.
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Winding-up Companies
Corporate Collapse indicates business failure of the company that may occur due to
inadequate capital, fraudulent business practices, management inexperience and
incompetence, failure to respond to change, recession, obsolescence, excessive gearing
and so on. The Companies Act, 1956, provides various remedies to deal with such business
failures such as arrangement, reconstruction, amalgamation, and winding-up. Winding-up of
a company is a process of putting an end to the life of a company. It is a proceeding by
means of which a company is dissolved and in the course of such dissolution its assets are
collected, its debts are paid off out of the assets of the company or from contributions by its
members, if necessary. If any surplus is left, it is distributed among the members in
accordance with their rights.
The main purpose of winding up of a company is to realize the assets and pay the
debts of the company expeditiously and fairly in accordance with the law. However, the
purpose must not be exploited for the benefit or advantage of any class or person entitled to
submit petition for winding up of a company. It may be noted that on winding up, the
company does not cease to exist as such except when it is dissolved. The administrative
machinery of the company gets changed as the administration is transferred in the hands of
the liquidator. Even after commencement of the winding-up, the property and assets of the
company belong to the company until dissolution takes place. On dissolution of the company
ceases to exist as a separate entity and becomes incapable of keeping property, suing or
being sued. Therefore in between the winding up and dissolution, the legal status of the
company continues and it can be sued in the court of law.
Company cannot be Adjudged Insolvent: The winding up of a company is not the same
thing as the insolvency of a company. The general rule in regard to winding up is that if the
members of a company desire that the company should be dissolved or if it becomes
insolvent or is otherwise unable to pay its debts, or if for any reason it seems desirable that it
should cease to exist, it is wound up. It is obvious that a company may be wound up even
when it is perfectly solvent if a company goes for reconstruction. Moreover , a company can
never be declared as bankrupt, although it is unable to pay its debts. Consequently, we may
put the proposition that in so far as inability to pay debts is concerned, a bankruptcy of an
individual under the insolvency law is the same thing as a winding up of a company under
the company law, but a company can also be wound up for reasons other than inability to
pay its debts.
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Following are some of the differences between the effects of insolvency of an
individual or a firm and winding up of a company:
i. In the case of insolvency, the whole of the insolvent‘s property is taken out of his
hands and rests in the Court (under the Provincial Insolvency Act, 1920) or the
Official Assignee (Under the Presidency towns Insolvency Act, 1909). In winding up,
on the other hand, the property remains vested in the company, subject to its being
administered for the purposes of winding up as the company retains its complete
existence. Its legal death comes only when it is formally dissolved.
ii. In insolvency, an insolvent individual can obtain his discharge and continue living and
working free from the burden of his debts. A company in liquidation cannot obtain its
discharge and continue free from the burden of its debts. The liquidator winds up its
affairs and then terminates it through dissolution.
iii. Although in the administration of the assets of an insolvent company the insolvency
rules apply, they are, however, not identical with those of insolvency. For example,
the ―reputed ownership‖ clause of insolvency law has no application in the case of a
company in liquidation.
iv. In the case of an individual, the administration of his property by the Official Assignee
or the Official Receiver occurs only if he is declared an insolvent by the Court. But
the assumption of the directors‟ powers by the liquidator, occurs even if the
company is fully solvent. Liquidation or winding up, even of an solvent company can
be proceeded with the aid of the court, as in voluntary winding up.
Winding Up and Dissolution: The terms ―Winding up‖ and ―Dissolution‖ are sometimes
incorrectly used to mean the same thing. According to the Companies Act, 1956, the legal
implications of these two terms are quite different. Moreover,there are fundamental
differences exist between them with regard to the legal procedure involved in it. The
following are the main points of distinction:
1. The entire procedure for bringing aboutproper end to the life of a company, according
to the Law, is divided into two stages – ‗winding up‘ and ‗dissolution‘. Winding up is
the first stage in the process whereby assets are realised, liabilities are paid off and
the surplus, if any, distributed among its members. Dissolution is the final stage
whereby the existence of the company is withdrawn by the law.
2. The liquidator appointed by the company or the Court carries out the winding up
proceedings, but the order for dissolution can be passed by the Court only.
3. According to the Companies Act the liquidator can represent the company in the
process of winding up. This can be done till the order of dissolution is passed by the
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Court. Once the Court passes dissolution orders the liquidator can no longer
represent the company.
4. Creditors can prove their debts in the winding up, but not on the dissolution of the
company.
5. Winding up in all cases does not culminate in dissolution. Even after paying all the
creditors there may still be a surplus; company may earn profits during the course of
beneficial winding up; there may be a scheme of compromise with creditors while
company is in winding up and in all such events the company will in all probability
come out of winding up and hand over back to shareholders/old management.
Dissolution is an act which puts an end to the life of the company.
Winding up is only a process, whereas the dissolution puts an end to the existence of
the company. Under section 559 of the Act, unless and otherwise the dissolution declared as
void. It prevents any proceedings being taken against promoters, directors or officers of the
company to recover money or property due or belonging to the company or to prove a debt
due from the company. When the company is dissolved, the statutory duty of the liquidator
towards the creditors and contributories is gone, but if he has committed without complying
with the requirements of the Act, he is liable to damages to the creditors.
Modes of Winding up: A company registered under the Companies Act, 1956 may be
wound up by any of the following modes:
1. By the Court i.e. compulsory winding up;
2. Voluntary winding up, which may be either:
(a) Members‟ voluntary winding up; or
(b) Creditor‟ s voluntary winding up;
3. Winding up subject to the supervision of the Court.
Section 425 of the Companies Act, 1956 lays down the above three modes of
winding up. It also provides that the provisions of the Act with respect to winding up of a
company. It shall apply, unless the contrary appears, to the winding up of a company in any
of these three modes. In every winding up, a liquidator or liquidators is or are appointed to
administer to the property of the company. He/she or they must sell the assets of the
company and pay off to creditors in their proper order. If any amounts lefts out, the residue
amounts are to be distributed among the members according to their rights.
Winding Up By the Court
Winding up by the Court or compulsory winding up is initiated by an application by
way of petition to the appropriate Court for a winding up of a company.
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A winding up petition has to be resorted to only when other means of healing an
indisposed company are of absolutely no advantage. Generally, remedies are provided to
the statute on matters concerning the management and running of company as good as
possible. The extreme and irretrievable step of winding up must be resorted to only in very
compelling circumstances only. According to section 10 of the companies Act, 1956, it is
primarily the High Court which has the jurisdiction to wind up companies in relation to the
place at which registered office of the company. In addition, the Central Government may
empower any District Court to exercise that jurisdiction, presumably to reduce the burden of
the High Court. However, district court empowered only small companies with the paid-up
capital of less than one lakh rupees and having their registered office within the District.
Sections 435 to 438 of the Act advise wide powers upon the High court to regulate
the conduct of such proceedings (i.e smoothing the winding up process). Accordingly the
High Court, which is the winding up Court, may direct a District Court to retain and continue
winding up proceedings which should not really have been commenced in that Court
(Section 437). Also, it may withdraw any winding up, which is in progress in a District Court
from that Court and proceed with the winding up itself, or transfer it to another District Court
(Section 436). Lastly, the High Court can pass orders under any of the foregoing sections at
any time and at any stage, whether or not an application in that behalf is made by any of the
parties to the proceedings (Section 438). There must be strong reasons to order winding up
as it is a last resort to be adopted.
Grounds on which a Company may be wound up by the Court
Under Section 433, a company may be wound up by the court if
A. The company has passed a special resolution of its being wound up by the Court; or
B. The company is in Default in delivering the statutory report to the Registrar or in
holding the statutory meeting; or
C. The company does not commence business within a year from its incorporation or
suspends business for a whole year; or
D. the number of its members in the case of a public company is reduced below seven
and in the case of a private company, below two; or
E. It is unable to pay its debts; or
F. The Court is of the opinion that it is just and equitable that it should be wound up.
G. The company has made a default in filing with the registrar its balance sheet and
profit and loss account or annual returns for any five consecutive financial years.
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H. the company has acted against the interests of the sovereignty and integrity of India,
the security of the State, friendly relations with foreign States, public order, decency
or morality, or
I. the court is of the opinion that the company should be wound up under the
circumstances specified in Section 424G provided that the tribunal shall make order
for winding up of a company under clause
J. an application made by the Central Government or a State Government.
The winding up petition is not a legitimate means of seeking to enforce payment of debt,
which is bonafide disputed by the company.
Who may file Petition for the Winding Up?An application for the winding up of a company
has to be made by way of petition to the Court through an appropriate person. A petition
may be submitted under Section 439 by any of the following persons:
(a) the company; or
(b) any creditor (s) including any contingent or prospective creditor or creditors; or
(c) any contributory (s); or
(d) all or any of the parties specified above in clauses (a), (b), (c) , whether together or
separately; or
(e) the Registrar; or
(f) Any person authorised by the Central Government in the case falling under Section
243, i.e., following upon a report of inspectors.
VOLUNTARY WINDING UP
Generally the companies are wound up voluntarily as it is easier process in relation
to the above discussed mode. However, this process is different from a compulsory winding
up. Although creditors may apply to the court for required direction to settle their affairs,
sometimes they may prefer to settle amicably and hence winding up the company on its
own.One or more liquidators are to be appointed by the company for the purpose of winding
up the affairs and distributing the assets of the company in general meeting. The
remuneration of the liquidators is also required to be fixed by the company in general
meeting. Unless the remuneration as aforesaid is fixed the liquidators shall not take charge
of his/their offices (Section 490). The following are the circumstances in which a company
may be wound up voluntarily:
(a) when the period fixed for the duration of the company as mentioned in its articles has
expired; or the event, on the happening of which the articles provide that the
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company is to be dissolved has occurred; and the company passes a resolution in
general meeting requiring the company to be wound up voluntarily;
(b) If the company passes a special resolution that the company is wound up voluntarily
(Section 484 (1)).
In these two cases only an ordinary resolution may be passed in the general meeting of
the company. Apart from these two cases, a company has to pass a special resolution for
winding up of a company on voluntarily. Further, a proper notice required for the respective
meetings must be given to all the members. The next step is that after passing the resolution
(whether ordinary or special), must be advertised within 14 days of the passing of the
resolution in the Official Gazette and also in some newspaper circulating in the district where
the registered office of the company is situated. A voluntary winding up commences from the
date of the passing of the resolution in the general meeting either for voluntary winding up or
a petition is presented for winding up by the Court.
Kinds of Voluntary Winding Up: Section 488(5) divides voluntary winding up into two
kinds:
(i) Members‟ voluntary winding up; and
(ii) Creditors‟ voluntary winding up.
Members‟ Voluntary Winding Up: When the company is solvent and is able to pay its
liabilities in full, it need not consult the creditors or call their meeting. Its directors, or where
they are more than two, the majority of its directors may, at a meeting of the Board, make a
declaration of solvency verified by an affidavit stating that they have made full enquiry into
the affairs of the company and that having done so they have formed an opinion that the
company has no debts or that it will be able to pay its debts in full within such period not
exceeding three years from the commencement of the winding up as may be specified in the
declaration. A winding up in the case of which such a declaration has been made and
delivered in accordance with Section 488 is referred to as ―a member‘s voluntary winding
up‖. A winding up in the case of which such a declaration has not been so made and
delivered is referred to as a ―creditors‟ voluntary winding up‖ [Section 488(5)].
Powers of the Court to Intervene in Voluntary Winding Up: In voluntary winding up it is
left to the company, as long as the contributories and the creditors to settle their affairs
without intervention of the Court as far as possible. However, the Companies Act, 1956,
contains certain provisions which provide a means of access to the Court with a view to
speed up the liquidation proceedings and to overcome the difficulties that may arise in the
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course of liquidation. The Court will intervene in the voluntary winding up whenever it is
satisfied that such an intervention will be just and beneficial. In appropriate cases the Court
can be approached for compulsory winding up (Section 440) or winding up being conducted
under the supervision of the Court (Section 522).
The Court is vested with the following powers in voluntary winding up:
(a) Section 515 (1) states that the court can appoint the Official Liquidator or any other
person as liquidator where no liquidator is acting.
(b) Section 515 (2) states that the course can remove the liquidator and appoint the
Official Liquidator or any other person as liquidator on justifiable cause being shown.
(c) Section 515(3) allows determining the remunerations of liquidator when the Official
Liquidator is appointed as a liquidator.
(d) Section 517 allows amending, varying, confirming or setting aside the arrangement
entered into between a company and its creditors on an appeal being made by any
creditor or contributory within 3 weeks of the completion of the arrangement
(e) On an application of the Liquidator or contributory or creditor:
a. to determine any question arising in the winding up of a company [Section
518(1)(a)];
b. to exercise, as respects the enforcing of calls, the staying of suits or other
legal proceedings or any other matter, all or any of the powers which the
Court might exercise if the company were being wound up by the Court
[Section 518(1)(b)].
(f) To set aside any attachment, distress or execution started against the estate or
effects of the company after the commencement of the winding up on such terms as
it thinks fit on an application made by the liquidator, creditor or contributory if the
Court is satisfied that it is just and beneficial to do so [Section 518(3) and (4)].
(g) To order public examination of any person connected with promotion or formation of
a company or any officer connected with the affairs of the company in regard to
matters of promotion or formation or conduct of the business of the company or as to
his conduct or dealing as officer thereof. Such an examination can be ordered on a
report of the liquidator where he is of the opinion that a fraud has been committed by
the persons aforesaid in the formation or promotion of the company or in the conduct
of its affairs [Section 519(1)].
COMMENCEMENT OF WINDING UP
Section 441 of the Companies Act provides for the provisions relevant to
commencement of winding up of a company. The winding up of a company by the Court is
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deemed to commence at the time of the presentation of the petition for winding up. But
where, before the presentation of the petition, a resolution has been passed by the
company, for voluntary winding up, the winding up shall be deemed to have commenced at
the time of the passing of the resolution. Any proceedings taken in voluntary winding up will
be deemed to have been validly taken unless the Court directs otherwise on proof of fraud or
mistake. In all other cases, the winding up of a company must be deemed to have
commenced at the time of the presentation of the petition for the winding up [Section 441]. It
may be noted here that voluntary winding up shall be deemed to commence at the time
when resolution for voluntary winding up is passed (Section 486).
WINDING UP OF UNREGISTERED COMPANIES
Section 582 of the Act specifies ―unregistered companies‖, which may be wound up by the
order of the Court under the provisions of Part X of the Act. By virtue of that section, an
―unregistered company‖ does not include the following:
(a) a railway company incorporated by any Act of Parliament or other Indian Law
or;
(b) a company registered under the Companies Act, 1956; or
Except as aforesaid, any partnership, association or company consisting of more than seven
members at the time when the petition for winding up the partnership, association or
company, as the case may be, is presented before the Court, will be deemed to be an
unregistered company and may be wound up by the order of the Court. It should be noted
that if the number of members is not more than seven, the Court has no jurisdiction to wind
up such a company.
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Chapter 5
Genesis and Development of Regulatory framework of Indian
Capital Market
An overview of Indian Securities Market
We have learnt in the previous chapters about various acts, rules, regulations,
guiltiness in relation to form a company and winding up of a company from the perspective
of Companies Act 1956. However it is not enough for fund raising in capital market. Let us
discuss the same in the following chapters.
Money plays an important role in an individual‘s life as well as organisation. Your role
as a manager is more challenging. Suppose you are manager of a small company, you need
additional funds to get the company off the ground. It is not possible at all times to get the
contribution from the owner(s). The next task of yours is to persuade other people who have
surplus money for lending. Finding the lender is a difficult task for you. Where are they
located? Whether they have investing attitude? (Note that all savers are not investors). How
much they are willing to lend? Likewise you should find answer for many such questions.
Conversely, you may have surplus funds that are not required/ needed for a short period of
time. If your savings are kept in the form of cash then they do not earn anything. Hence you
have to find a temporary repository for your saving until it is required for your business in
future. This results in investment. The same is true in case of individuals.
Where can one invest or borrow? What are the instruments available for you to invest your
money? Who is acting as an intermediary to gap between the units of surplus to those of
deficit?
In order to know the answer for these questions and to perform your key activities, you need
to understand about securities market.
As we have discussed above, the seekers of funds (i.e. borrowers) have to find the supplier
of funds (lenders). Without securities market, borrower would have difficulty in finding the
lender themselves. Note that securities market does not refer to a physical location. Thus,
the place/network/platform where the savers and lenders meet to trade the financial
securities is called financial market. Securities market is the forum that allows suppliers and
demanders of money to make financial transactions via different intermediaries through the
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trading of various financial instruments. It allows you to do the transactions (i.e.
investing/mobilising the money through securities) quickly and at a fair price. Securities
market plays a pivotal role in the country‘s economic development. An efficient securities
market is therefore essential for increasing the standard of living among the people and
thereby supporting economic growth. Moreover, understanding the securities market helps
you to have the money when you need it and even when you want it, also to make better
decisions and thereby achieving your personal or organisation‘s goal. Therefore, it is
imperative to understand the securities market and its regulations thoroughly. The purpose
of this chapter is to provide the readers with a broad view of the securities market, types of
markets, their organisation, and their general behaviour.
Types of Securities Market
Securities markets are classified into categories viz. Money market and Capital market. The
money market refers to the market where short-term securities (with maturities less than one
year) are bought and sold. On the other hand, capital market refers to the market where
long-term securities (with maturities more than one year) are bought and sold. The capital
markets are further classified into two categories, primary and secondary.
Primary market is the market where the securities are sold to the public at first time. The
Initial Public Offer (IPO) is an important vehicle of primary market among all. Secondary
market is the market where the securities are bought and sold after they have been issued in
the primary market. The companies that issued securities involve transactions in the primary
market, whereas, secondary market transactions involve buyers and sellers of securities
rather than the company. The secondary market consists of the various stock exchanges,
which are the forums that allow the buyers and sellers of securities to buy and sell the
securities. Only listed companies can participate in the trading activities. There is a separate
market which is called Over-the-counter (OTC) market, to buy and sell the securities of
unlisted and small companies.
The secondary market has further bifurcated into two components viz., the spot market and
future market. The sport refers to the securities that are traded for immediate delivery and
payment. On the other hand, future market refers to the securities that are traded for future
delivery and payment. Another variant of future market is called options market. It gives the
rights to the option holders to exercise the contract at pre-determined rate and date.
Stock Exchanges in India
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Stock Index is a barometer for the stock market in any country. At present 24 stock
exchanges operate all over India. There are two major stock exchanges in India namely
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) that helps to measure
the movement of select equity shares and publishing a number relative to the base number.
Though they have a many indices, each index has a flagship index. Sensitivity Index
(SENSEX) is a flagship index of BSE and nifty is a flagship index of NSE.
The Bombay Stock Exchange: The BSE has been in existence since 1975, which is the
oldest in Asia. A Sensex comprises 30 stocks representing a sample of large and leading
companies. The selection of stocks are made on the basis of market activity with due
representation given to major sectors. The base year of Sensex is 1978-79. Initially this
index was calculated based on the full market capitalisation method. It was shifted to free
float methodology with effect from 1st September 2003. The base value of Sensex is 100.
The calculation of index is as follows:
Market capitalisation is calculated by closing price of the stocks multiplied with its numbers
of shares outstanding. Total market capitalisation is calculated by adding the 30 individual
market capitalisations of all the companies in the index. The closing price of a stock is the
weighted average price of for the last trades that are traded in the last 15 minutes of the
given trading day. During market hours, the prices of the stocks, at which latest trades are
executed, are used to compute the Sensex at every 15 seconds and communicated the
same to the world. This index is known as value weighted index.
The National Stock Exchange (NSE): The NSE was founded in 1992 and started
functioning in 1994. It comprises 50 stocks representing of 23 sectors of the country. This
index is owned and managed by India Index Services and Products Ltd. (IISL), which is a
joint venture between NSE and CRISIL. The base year of the value weighted index is 1995
and the value is 1000. This index represents about 67 per cent of its free float market
capitalisation. This index had adopted the free-float methodology with effect from June 26,
2009. It accounts about 70 per cent of the market share in the spot trading. This index
competes with Sensex in terms of reduction in costs, market efficiency and innovation.
Trading Hours and settlement cycle
Most of the trading takes place on either of the stock exchanges or combination of the both.
Both exchanges follow the same trading mechanism, trading hours, settlement process, etc.
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till today although they have established in different years. Both exchanges follow a T+2
rolling settlement system with regard to equity spot market. It means that any trade taking
place on Monday gets settled by Wednesday. The following are the trading hours:
Session Timing
Pre-open Trading Session 09:00 – 09:15
Trading Session 09:15-15:30
Position Transfer Session 15:30-15:50
Closing Session 15:50-16.05
Option Exercise Session 16:05
The above said trading sessions are on all working days of the week except Saturday, and
Sunday and holidays declared by the Exchanges in advance. As you aware, all the shares
are in dematerialised form and held in depository for quick processing, convenience,
accessibility and quick and safe settlement. The delivery of shares will take place through
clearing house. Both exchanges have its own clearing houses viz. Central Depository
Securities Limited (CDSL) and National Depository Securities Limited (NDSL).
Trading Mechanism
Trading at both the exchanges takes place through an open electronic screen based trading
system i.e. limit order book. In which order matching is done by the trading computer. In
simple words, the entire trading process is order driven, which means that market orders
placed by the investors (buyers and sellers) are automatically matched with the best limit
orders. As a result, it brings more transparency by displaying all buy and sell orders in the
trading screen. However, there is no guarantee that orders will be executed. Orders could be
placed through intermediaries‘ viz., brokers.
Regulation of Securities Market
The Government of India has consistently tried to lay down the legislations to protect
investors and participants in the financial market place. Significant among all the legislations
governing the activities of participants in the securities are as follows:
a. The SEBI Act 1992- The act was established to protect investors and development
of the market and regulate the securities market fairly. In addition, it regulates all the
corporate, intermediaries and persons associated with secur ities market. The act
empowers the SEBI to conduct enquiries, audits, inspection of all concerned
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adjudicate offences. Moreover, it has powers not only to permit any individual or
institutions to trade in the securities market, it has power to penalise those
intermediaries in case of violations of the Act, Rules, and Regulations made there
under. Note that it has full autonomy and authority to regulate and develop an orderly
securities market.
b. The Companies Act 1956 – This act was established to lay down the code of
conduct for the corporate in relation to issue, allotment of securities, and ownership
transfer of securities, disclosures to be made to in public issues, and disclosures of
corporate reactions time to time. This act ensures the company to disclose the
required information in relation to projects, dividends, mergers and acquisitions,
annual reports, and so on periodically.
c. The Securities Contract (Regulations) Act, 1956 – The act provides the rules and
regulations of transactions in securities through recognised stock exchanges. This
act aims to prevent undesirable trading activities, to listing the securities, and
contracts in securities.
d. The Depositories Act 1996 – Earlier share certificates are in hard copy. Buying and
selling the securities consume more time in transferring one to another. There is a
possibility of losing/missing certificates during the transit, delay in settlement and so
on. If affects the efficiency of the market practices. To overcome this problem, this
act was established to maintain the shares in electronic format (it is known as demat)
with the objective of ensuring quick transferability, security and accuracy. All listed
companies securities are available in electronic form. It helps to reduce the
settlement from 7 days to 2 days.
Government has framed the rules and regulations under the above mentioned legislation for
registration; regulate all market intermediaries, prevention of insider trading practices, etc.
Under these act, government and SEBI issue notifications, guidelines, and circulars that
needs to be complied with by market participants regularly. It is important for you to update
regularly.
Regulators
The responsibility for regulating and developing the securities market is shared by the
following agencies:
1. Department of Economic Affairs (DEA)
2. Ministry of Corporate Affairs (MCA)
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3. Reserve Bank of India
4. Securities Exchange Board of India (SEBI)
Although there are four major regulators sharing their responsibility, the overall responsibility
of development, regulation and supervision of the stock market rests with the SEBI. All the
activities of these agencies are coordinated by the High Level Committee on Capital
Markets. Generally all the notifications, rules, circulars issued by SEBI under the securities
laws are appellable before a Securities Appellable Tribunal.
Securities and Exchange Board of India
The SEBI act and The Depositaries act are mostly administered by SEBI which was formed
in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down
market rules in line with the best market practices. Prior to SEBI, Controller of Capital Issues
was the regulatory authority. Controller was derived authority from the Capital Issues
(Control) Act, 1947. Till 1995, SEBI was a non-statutory body without power. It was given
additional statutory power in the year of 1995 by doing amendment in the SEBI Act 1992.
Again in April 1998, the Government of India passed a resolution to constitute SEBI as a
regulator. It is managed by six members‘ viz.
a Chairman (who is nominated by central government based on his/her
ability, integrity, having knowledge in laws, finance, economics, accountancy,
and administration or any other discipline which, in the opinion of the
Government in this regard)
Two members (officers of central ministry who deals with finance and
administration of the Companies Act 1956;
One member from the RBI, and
The remaining five other members are nominated by the central government.
Among the five members, at least three members shall be whole-time
members.
Departments of SEBI
In order to regulate and develop the securities market effectively, SEBI is divided into
various departments which is given below:
1. Primary market department: This department is primarily responsible for the issues
that are related to primary market activities viz. regulations regarding underwriters,
registrars to issue, credit rating agencies, share transfer agents, debenture trustees,
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and merchant bankers to an issue of portfolio managers. In addition, the department
deals with disclosure norms and investors‘ protection and regulations in relation to
Self-Regulatory Organisations.
2. Secondary Market Department: The department looks after the secondary market
in relation to protection of secondary market investors, regulation and committees of
stock brokers, sub-brokers, delisting of securities, demutualisation and
corporatization of the stock markets.
3. Venture Capital Department: The department deals with the job of regulating Indian
and foreign venture capital firms.
4. Mutual Funds Department: As name suggest, it is responsible for the regulation of
mutual funds that operate in the securities market.
5. Collective Investment Schemes (CIS): This department regulates the collective
investment schemes. Any scheme or arrangement made or offered by any company
under which the contributions, payments made by the investors, are pooled and
utilised with a view to receive profits, income and produce, is managed on behalf of
the investors is a CIS.
6. Takeovers Department: This department looks after the acquiring the substantial
amount of shares and takeover of companies.
7. Legal Department: This department looks after the legal litigations and legal related
issues. Moreover it plays a role of legal advisor for an organisation.
8. Foreign Institutional Investors Department: The department looks after the
registration process and functioning of FII in India.
9. Depositories Department: This department regulates the Depositories Participants
and acts as custodians of securities.
10. Derivatives Department: The department takes of the regulation and promotion of
derivative instruments.
11. Investigation, Enforcement and Surveillance Department: This department acts
as a regulator of the securities market. Its responsibilities include investigating and
surveying security markets and their transactions to catch persons not following the
acts prescribed by the SEBI Act.
The office of SEBI is situated at Mumbai with its regional offices at Kolkata, Delhi & Chennai.
Functions of SEBI
Chapter IV of SEBI Act, 1992 describes the powers and functions of the board. Section 11
of the Act lays down the primary functions of SEBI. The main functions are:
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a. Regulating the securities markets and any other markets
b. Regulating and recognition of Stock exchanges
c. Registering and regulating the activities of various intermediaries namely Brokers,
sub-brokers, share transfer agents, bankers to an issue, merchant bankers,
underwriters, portfolio managers, investment advisors and any other intermediaries
who may wish to associate with securities market
d. Registering and regulating the functions of the depositories, participants, custodians
of securities, foreign institutional investors, and credit rating agencies
e. registering and regulating the functions of venture capital funds and collective
investment schemes, including mutual funds and plantation schemes
f. Promotion and regulation of SRAs
g. Prohibiting fraudulent and unfair trade practices relating to securities markets;
h. Promoting investors‟ education and training of intermediaries of securities markets;
i. Prohibiting insider trading in securities;
j. Regulating substantial acquisition of shares and takeover of companies;
k. 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;
l. Calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any central, state or provincial Act
in respect of any transaction in securities which is under investigation or inquiry by
SEBI;
m. conducting research for the above purposes;
Powers of SEBI
For carrying out the duties assigned to it under the Act, SEBI has been vested with all the
powers of a Civil Court under the Code of Civil Procedure, 1908.The following are the
powers:
1. The discovery and production of books of account and other documents at the place
and time.
2. Summoning and enforcing the attendance of persons and examining them on oath.
3. Inspection of any books, registers and other documents of any person listed in
section 12 of the Act, namely stock brokers, sub brokers, share transfer agents,
bankers to an issue, trustee of trust deed, registrar to an issue, merchant bankers,
underwriters, portfolio managers, investment advisors and other such intermediaries
associated with securities markets.
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4. Inspection of any book or register or other document or record of any listed company
or a public company which intends to get its securities listed on any recognized stock
exchange.
5. Issuing commissions for the examination of witnesses or documents.
6. As per Section 11(4) SEBI, may, by an order or for reasons to be recorded in writing
take any of the following measures either pending investigation or inquiry or on
completion of such investigation or enquiry in order to protect the interest of investors
or the securities market:
a. Suspend the trading of any security in a recognised stock exchange.
b. Restrain persons from accessing the securities market and prohibit any
person associated with securities market to buy, sell or deal in securities.
c. Suspend any office-bearer of any stock exchange or self-regulatory
organisation from holding such position.
d. Impend and retain the proceeds or securities in respect of any transaction
which is under investigation.
e. Attach for a period not exceeding one month, with prior approval of a
magistrate, one or more bank accounts of any intermediary or any person in a
matter involving violation of the provision of the SEBI Act or rules or
regulations stated thereunder.
f. Direct any intermediary or any person associated with the securities market in
any manner not to dispose of or alienate an asset forming part of any
transaction which is under investigation.
The SEBI Board may take any of the measures in clause (d), (e), and (f) in respect of any
listed companies or a public limited company intending to get its securities listed in any
recognised stock exchanges, where it suspects the company to be indulging in insider
trading or fraudulent and unfair trade practices relating to the securities market.
7. In order to protect the investors, the SEBI may issue special orders and/or specify by
regulation in relation to prospectus, offer documents, and advertisement for procuring
funds. The following are the special regulation and orders:
a. Specify by regulation:
i. Matter relating to issue of capital, transfer of securities and matter
related thereto.
ii. The method in which such matters are disclosed
b. Specify by special order:
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i. Prohibit any company from issuing prospectus, any offer document of
issue advertisement, and advertisement for procuring funds if they
failed to fulfil the compliance of SEBI
ii. Specify the conditions subject to which these documents can be
issued.
8. It has the power to specify the requirements for listing and transfer of securities
In addition to the above, the following are the other powers of SEBI:
a. Levy penalties for certain offenses
b. Levy fee and other charges wherever it requires
c. Issue order/direction in the interest of investors or orderly development of
securities market. However, such orders can be issued after conducting an
investigation in relation to that matter.
d. To receive the appeals by the companies against the decision of stock
exchanges to refuse listing of their securities.
e. Suspend or cancel the registration of any intermediary if they abide the code
of conduct and norms.
Is there any provision to appeal against SEBI order? Yes. One has to appeal petition to
the Central Government against the SEBI order. Moreover, the appeal has to be filed within
30 days from the date of communication of the order. However, depending on the situation,
the Government may extent the period by a further 15 days if it is satisfied that the appellant
has sufficient cause for not preferring the appeal within 30 days.
Registration of Intermediaries
As an individual, you could buy or sell securities through self-directed online
investment or to use traditional stock brokers. The intermediaries‘ registration is mandatory.
Chapter V of the Act provides for registration of various Intermediaries such as stock-broker,
sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an
issue, merchant banker, underwriter, portfolio manager, investment adviser and such other.
No Intermediaries who may be associated with securities market shall buy sell or deal in
securities except under, and in accordance with, the conditions of a certificate of registration
obtained from SEBI in accordance with the regulations made under Section 12(1) of this Act.
The SEBI may, by order, suspend or cancel a certificate of registration in such manner as
may be determined by regulations. However no such order shall be made unless the person
concerned has been given a reasonable opportunity of being heard. Chapter VA of the Act
deals with prohibition of manipulative and deceptive devices, insider trading and substantial
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acquisition of securities or control. Section 12A of the Act provides that no person shall
directly or indirectly on the following activities:
a. use or employ, in connection with the issue, purchase or sale of any securities listed
or proposed to be listed on a recognized stock exchange, any manipulative or
deceptive device or contrivance in contravention of the provisions of this Act or the
rules or the regulations made thereunder;
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 recognized 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 recognized 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
recognized stock exchange in contravention of the regulations made under this Act.
The detail discussion of registration and regulation towards intermediaries are discussed in
the following chapters.
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Chapter 6
The Securities Contracts (Regulation) Act, 1956
Overview
The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the Act),
contains of 31 sections. The act was enacted to keep a watertight vigil over all the stock
exchanges of India since 20th February 1957. Initially the Act was formerly administered by
the Central Government. Presently, the Securities Exchange Board of India (SEBI)
empowered to administer almost all the provisions of the Act after enactment of the
Securities and Exchange Board of India Act, 1992. It is important to note that by virtue of the
provisions of the Act, the business of dealing in securities cannot be carried out without a
license from SEBI. Any stock exchange which is desired to be an recognised has to submit
an application under section 3 of the Act to SEBI. SEBI will grant recognition and prescribe
conditions including that of having SEBI's representation (maximum three persons) on the
Stock Exchange and prohibiting the Stock Exchange from amending its rules without SEBI's
prior approval. In the event of not abiding conditions prescribed by SEBI, the recognition of
stock exchange can be withdrawn in the interest of the trade or public. For example, every
Stock Exchange is obliged to furnish annual reports to SEBI. SEBI is authorised to call for
periodical returns from the recognised Stock Exchanges and make enquired in relation to
their affairs. Further, without prior approval from SEBI, Stock Exchanges are not allowed to
make/ amendment of rules, bylaws for the regulation and control of contracts. The Central
Government and SEBI have the power to supersede the governing body of any recognized
stock exchange and to suspend its business permanently or temporarily.
As discussed, a public limited company has no obligation to have its shares listed on
a recognized Stock Exchange. However, if a company intends to offer its shares or
debentures to the public for subscription by issue of a prospectus, the company must apply
to one or more recognised stock exchanges for permission before issuing such prospectus.
However, SEBI can compel the listing of securities by public Companies if it is of the opinion
that is necessary or expedient in the interest of the public (Section 21 of the Act ). In the
event of the Stock Exchange refusing to list the securities of any public company, an appeal
to SEBI is provided under the Act. In order to regulate and promote health stock market in
India, this act was enacted in 1956 by Parliament. This act applies to whole of India. Let us
discuss now the same.
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Definitions (Section 2) In this Act, unless the context otherwise requires—
• ―Contract‖ means a contract for or relating to the purchase or sale of securities:
„(aa) ―Corporatisation‖ means the succession of a recognised stock exchange,
being a body of individuals or a society registered under the Societies
Registration Act, 1860, by another stock exchange, being a company
incorporated for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities carried on by such individuals or society;
(ab) ―Demutualisation‖ means the segregation of ownership and management
from the trading rights of the members of a recognised stock exchange in
accordance with a scheme approved by the Securities and Exchange Board of
India;
(ac) ―derivative‖ includes—
• a security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
• a contract, which derives its value from the prices, or index of prices, of
underlying securities;
(b) ―Government security‖ means a security created and issued, whether before or
after the commencement of this Act, by the Central Government or a State
Government for the purpose of raising a public loan and having one of the forms
specified in clause (2) of Section 2 of the Public Debt Act 1944 (18 of 1944);
(c) ―member‖ means a member of a recognised stock exchange;
(d) ―option in securities‖ means a contract for the purchase or sale of a right to buy or
sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a
tejimandi, a galli, a put, a call or a put and call securities;
(e) ―prescribed‖ means prescribed by rules made under this Act;
(f) ―recognised stock exchange‖ means a stock exchange which is for the time
beingrecognised by the Central Government under Section 4;
(g) ―Rules‖, with reference to the rules relating in general to the constitution and
management of a stock exchange, includes, in the case of a stock exchange
which is an incorporated association, its memorandum and articles of
association;
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‗(ga) ―scheme‖ means a scheme for corporatisation or demutualisation of a
recognised stock exchange which may provide for-
(i) The issue of shares for a lawful consideration and provision of trading rights
inlieu of membership cards of members of a recognised stock exchange;
(ii) the restrictions on voting rights;
(iii) the transfer of property, business, assets, rights, liabilities,
recognitions,contracts of the recognised stock exchange, legal proceedings by, or
against,the recognised stock exchange, whether in the name of the recognised
stockexchange or any trustee or otherwise and any permission given to, or by,
therecognised stock exchange;
(iv) the transfer of employees of a recognised stock exchange to another recognised
stock exchange;
(v) any other matter required for the purpose of, or in connection with, the
corporatisation or demutualisation, as the case may be, of the recognised stock
exchange;
(gb) ―Securities Appellate Tribunal‖ means a Securities Appellate Tribunal
establishedunder sub-section (1) of section 15K of the Securities and Exchange
Board of IndiaAct, 1992 (15 of 1992);
(h) ―Securities‖ include—
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketablesecurities of a like nature in or of any incorporated company or other
bodycorporate;
(ia) derivative;
(ib) units or any other instruments issued by any collective investment scheme to the
investors in such schemes;
(ic) Security receipt as fefined in clause(2g) under section 2 of the Securitisationand
Reconstruction of Financial Assets and Enforcement of Security interestAct, 2002.
(id) units or any other such instrument issued to the investors under any mutual fund
scheme;
(ie) any certificate or instrument (by whatever name called), issued to an investorby
any issuer being a special purpose distinct entity which possesses any debt or
receivable, including mortgage debt, assigned to such entity, andacknowledging
beneficial interest of such investor in such debt or receivable,including mortgage
debt, as the case maybe;
(ii) Government securities;
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(iia) such other instruments as may be declared by the Central Government to
besecurities; and
(iii) Rights or interests in securities;
(i) ―Spot delivery contract‖ means a contract which provides for—
(a) actual delivery or securities and the payment of a price therefor either on the
same day as the date of the contract or on the next day, the actual period taken
for the despatch of the securities or the remittance of money therefor through
the post being excluded from the computation of the period aforesaid if the
parties to the contract do not reside in the same town or locality;
(b) Transfer of the securities by the depository from the account of a beneficial
owner to the account of another beneficial owner when such securities are dealt
with by a depository;
(j) ―Stock exchange‖ means
(a) Anybody of individuals, whether incorporated or not, constituted
beforecorporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 whether under a
scheme of corporatisation and demutualisation or otherwise, for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in
securities;‘
Recognition of Stock Exchanges
As discussed above, dealing in securities can be provided for only by recognised
Stock Exchanges. Power to recognise Stock Exchange vests with Central Government,
However,Central Government has delegated these powers to SEBI vide its notification No.
F.No.1/57/SE/93 dated 13.9.94.
Application for recognition (Section 3): Any Stock Exchange desirous of being
recognised may make an application to SEBI in the prescribed manner.According to sub
section 1, every application must be accompanied with Bye-Laws, Rules, and Regulations
and must contain specific details on:
(1) The governing body of Stock Exchange, its constitution and powers of
managementand manner in which its business is transacted.
(2) Powers and duties of office bearers of the Stock Exchange.
(3) Various classes of members, qualification for membership and the
exclusion,suspension,expulsion and re-admission, suspension, expulsion and
readmission of members.
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(4) The procedure for registration of Partnerships as members to stock exchange and
rules to nomination of authorised representatives and clerks
Currently constitution of Stock Exchanges is not uniform. A few of the Exchanges
areregistered as companies while some exchanges are constituted as ―Association of
persons‖ and rest of the Exchanges are constituted as ‗guarantee companies‘. Membership
provisions, composition of Board, Powers of governing Board are defined in the Articles of
the Exchange. Rules governing listing, trading and settlement, penalties and prohibitions,
disciplinary and defaults are defined in Bye-laws of the Exchange.
Granting of Recognition (Section 4)
1. Central Government/SEBI after making inquiry and obtaining confirmation from
theapplicant and satisfied about that
(a) Rules and Bye-Laws are in conformity with the conditions prescribed with a
view to ensure fair dealings and to protect investors.
(b) Stock Exchange is willing to comply with any condition that SEBI may impose
forcarrying out the object of this Act (the nature of securities, area etc).
(c) The recognition would be in the interest of trade and also in the public interest
maygrant recognition to stock exchange subject to the conditions that it may
impose.
2. The conditions imposed may prescribe under clause (a) of subsection (1) for the
grant of recognition to the stock exchanges may include
(a) Qualification for membership of stock exchange.
(b) Manner in which contracts shall be entered into and enforced as
betweenmembers.
(c) Representation of Central Government on Board of Exchanges.
(d) Maintenance of accounts of members and their audit.
3. Grant of recognition shall be published in Gazette of India and also in official gazette
of State in which stock exchange is located, and such recognition shall have effect as
from the date of its publication in the Gazette of India.
4. No application for the grant of recorgnition can be refused unless an opportunity of
being heard is given to theStock Exchange. Reason for refusal will be communicated
to the exchange in writing.
5. No rules of a recognised stock exchange relating to any of the matters specified in
sub-section (2) of section 3 shall be amended except with the approval of the Central
Government.
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Corporatisation and demutualisation of stock exchanges (Section 4A)
On and from the appointed date, all recognised stock exchanges (if not corporatized
and demutualised before the appointed date) shall be corporatized and demutualised
inaccordance with the provisions contained in section 4B:
Provided that the Securities and Exchange Board of India may, if it is satisfied that
anyrecognised stock exchange was prevented by sufficient cause from being corporatised
and demutualised on or after the appointed date, specify another appointed date in respect
of that recognised stock exchange and such recognised stock exchange may continue as
such before such appointed date.
Explanation: For the purposes of this section, ―appointed date‖ means the date
which the Securities and Exchange Board of India may, by notification in the Official Gazette,
appoint and different appointed dates may be appointed for different recognised stock
exchanges:
[Procedure for corporatisation and demutualisation.(Section 4B)
It provides
(1) all recognised stock exchanges referred to in section 4A shall, within such time as
may be specified by the Securities and Exchange Board of India, submit a scheme
for corporatisation and demutualisation for its approval:
Provided that the Securities and Exchange Board of India may, by notification in the
Official Gazette, specify name of the recognised stock exchange, which had already
been corporatized and demutualised, and such stock exchange, shall not be required
to submit the scheme under this section.
(2) On receipt of the scheme referred to in sub-section (1), the Securities and Exchange
Board of India may, after making such enquiry as may be necessary in this behalf
and obtaining such further information, if any, as it may require and if it is satisfied
that it would be in the interest of the trade and also in the public interest, approve the
scheme with or without modification.
(3) No scheme under sub-section (2) shall be approved by the Securities and Exchange
Board of India if the issue of shares for a lawful consideration or provision of trading
rights in lieu of membership card of the members of a recognised stock exchange or
payment of dividends to members have been proposed out of any reserves or assets
of that stock exchange.
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(4) Where the scheme is approved under sub-section (2), the scheme so approved shall
be published immediately by:
(a) The Securities and Exchange Board of India in the Official Gazette;
(b) The recognised stock exchange in such two daily newspapers circulating in India,
asmay be specified by the Securities and Exchange Board of India.
and upon such publication, notwithstanding anything to the contrary contained in this
Act or any other law for the time being in force or any agreement, award, judgment,
decree or other instrument for the time being in force, the scheme shall have effect
and be binding on all persons and authorities including all members, creditors,
depositors and employees of the recognised stock exchange and on all persons
having any contract, right, power, obligation or liability with, against, over, to, or in
connection with, the recognised stock exchange or its members.
5. Where the Securities and Exchange Board of India is satisfied that it would not be in
the interest of the trade and also in the public interest to approve the scheme under
sub-section(2), it may, by an order, reject the scheme and such order of rejection
shall be published by it in the Official Gazette:
Provided that the Securities and Exchange Board of India shall give a reasonable
opportunity of being heard to all the persons concerned and the recognised stock
exchange concerned before passing an order rejecting the scheme.
6. The Securities and Exchange Board of India may, while approving the scheme under
subsection (2), by an order in writing, restrict
(a) the voting rights of the shareholders who are also stock brokers of the
recognisedstock exchange;
(b) the right of shareholders or a stock broker of the recognised stock exchange to
appoint the representatives on the governing board of the stock exchange;
(c) the maximum number of representatives of the stock brokers of the recognised
stock exchange to be appointed on the governing board of the recognised stock
exchange,which shall not exceed one-fourth of the total strength of the
governingboard.
7. The order made under sub-section (6) shall be published in the Official Gazette and
on the publication thereof, the order shall, notwithstanding anything to the contrary
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contained in the Companies Act, 1956, or any other law for the time being in force,
have full effect.
8. Every recognised stock exchange, in respect of which the scheme for corporatisation
or demutualisation has been approved under sub-section (2), shall, either by fresh
issue of equity shares to the public or in any other manner as may be specif ied by
the regulations made by the Securities and Exchange Board of India, ensure that at
least fifty-one per cent. of its equity share capital is held, within twelve months from
the date of publication of the order under subsection(7), by the public other than
shareholders having trading rights:
Provided that the Securities and Exchange Board of India may, on sufficient cause being
shown to it and in the public interest, extend the said period by another twelve months.]
Withdrawal of Recognition (Section 5)
Sub section 1 states that, if Central Government is of the opinion that recognition
given to an Exchange must bewithdrawn, it may withdraw the recognition after serving a
written notice on governing Board of the Exchange. However, withdrawal will not a ffect
validity of Contracts entered into before the date of withdrawal notification.
Sub-section 2 provides that, Where the recognised stock exchange has not been
corporatised or demutualised or it fails to submit the scheme referred to in sub-section (1) of
section 4B within the specified time therefore or the scheme has been rejected by the
Securities and Exchange Board of India under sub-section (5) of section 4B, the recognition
granted to such stock exchange under section 4, shall, notwithstanding anything to the
contrary contained in this Act, stand withdrawn and the Central Government shall publish, by
notification in the Official Gazette, such withdrawal of recognition:
Provided that no such withdrawal shall affect the validity of any contract entered into
or made before the date of the notification, and the Securities and Exchange Board of India
may, after consultation with the stock exchange, make such provisions as it deems fit in the
order rejecting the scheme published in the Official Gazette under sub-section (5) of section
4B.‖
Power to call for Information (Section 6)
1. Every Stock Exchange should furnish periodical returns to SEBI in the prescribed
format. These Returns contains information on current affairs of the Exchange
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including volume and value of transactions, short deliveries, and important decisions
taken by Board etc as prescribed.
2. Every Stock Exchange has to maintain books of accounts and other documents not
exceeding 5 years. These books may be inspected by SEBI at any point of time.
3. SEBI may by order in writing call for information or explanation relating to affairs of
anExchange or its member. SEBI also has the power to appoint one or more inquiry
officers who may submit their report to SEBI.
4. Every Director, Manager, Secretary or officer of the Exchange is bound to
provideinformation to Enquiry officer or SEBI representatives, who are looking into
the affairs ofthe Exchange.
5. Every other person or body of persons who has had dealings in the course of
business with any of the persons mentioned in clauses (a), (b) and (c), whether
directly or indirectly; shall be bound to produce before the authority making the
inquiry all such books of account, and other documents in his custody or power
relating to or having a bearing on the subject-matter of such inquiry and also to
furnish the authorities within such time as may be specified with any such statement
or information relating thereto as may be required of him.
SEBI carries out regular inspection of all Exchanges at periodical intervals. Apart from this if
market condition warrants it carries out special investigation into the affairs of the
Exchange(s).
Annual Report (Section 7):Every Stock Exchange is required to furnish a copy of Annual
Report to SEBI as well asCentral Government.
Rules Restricting Voting Rights (Section 7A)
1. A stock exchange is empowered to make rules or amend any rules made by it to
provide for all or any of the following matters, namely:—
A. the restriction of voting rights to members only in respect of any matter
placedbefore the stock exchange at any meeting;
B. the regulation of voting rights in respect of any matter placed before the
stockexchange at any meeting so that each member may be entitled to have one
voteonly, irrespective of his share of the paid-up equity capital of the stock
exchange;
C. the restriction on the right of a member to appoint another person as his proxy
toattend and vote at a meeting of the stock exchange;
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D. Such incidental, consequential and supplementary matters as may be necessary
to give effect to any of the matters specified in clauses (a), (b) and (c).
2. No rules of a recognised stock exchange made or amended in relation to any
matterreferred to in clauses (a) to (d) of sub-section (1) shall have effect until they
have beenapproved by the Central Government and published by that Government in
the OfficialGazette and, in approving the rules so made or amended, the Central
Government maymake such modifications therein as it thinks fit, and on such
publication, the rules asapproved by the Central Government shall be deemed to
have been validly made,notwithstanding anything to the contrary contained in the
Companies Act, 1956 (1 of1956)].
Currently all exchanges provide for one member one vote. Only member can be
appointed as proxy. Any amendment should be duly approved by Central Government and
such amendment becomes effective only after such approval.
Power of Central Government to Make Rules (Section 8)
Central Government after consultation with Stock Exchange may by order in writing
direct Stock Exchange(s) to make or amend rules within two months from the date of such
order. If an Exchange fails to comply with order Central Government on its own may make or
amend the rules.
Clearing corporation (Section 8A)
1. A recognised stock exchange may, with the prior approval of the Securities and
Exchange Board of India, transfer the duties and functions of a clearing house to a
clearing corporation,being a company incorporated under the Companies Act, 1956,
for the purpose of :
(a) the periodical settlement of contracts and differences thereunder;
(b) the delivery of, and payment for, securities ;
(c) Any other matter incidental to, or connected with, such transfer.
2. Every clearing corporation shall, for the purpose of transfer of the duties and
functions of a clearing house to a clearing corporation referred to in sub-section (1),
make bye-laws and submit the same to the Securities and Exchange Board of India
for its approval.
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3. The Securities and Exchange Board of India may, on being satisfied that it is in the
interest of the trade and also in the public interest to transfer the duties and functions
of a clearing house to a clearing corporation, grant approval to the bye-laws
submitted to it under subsection(2) and approve transfer of the duties and functions
of a clearing house to a clearing corporation referred to in sub-section (1).
4. The provisions of sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 shall, as far as may be,
apply to a clearing corporation referred to in sub-section (1) as they apply in relation
to a recognised stock exchange.‖.
Power to Stock Exchange to Make Bye-Laws (Section 9)
1. Any recognised stock exchange may, subject to the previous approval of the
Securities and Exchange Board of India, make bye-laws for the regulation andcontrol
of contracts.
2. In particular, and without prejudice to the generality of the foregoing power, such
byelaws may provide for:
a. the opening and closing of markets and the regulation of the hours of trade;
b. A clearing house for the periodical settlement of contracts and
differencesthereunder, the delivery of and payment of securities, the passing on
of delivery orders and the regulation and maintenance of such clearing house;
c. the submission to the Securities and Exchange Board of India by the
clearinghouse as soon as may be after each periodical settlement of all or any of
thefollowing particulars as the Securities and Exchange Board of India may, from
time to time, require, namely:
(i) the total number of each category of security carried over from one
settlementperiod to another;
(ii) the total number of each category of security, contracts in respect of
whichhave been squared up during the course of each settlement
period;
(iii) the total number of each category of security actual delivered at each
clearing;
d. The publication by the clearing house of all or any of the particulars submitted
tothe Securities and Exchange Board of India under clause (c) subject to the
directions, if any, issued by the Securities and Exchange Board of India in
thisbehalf;
e. The regulation or prohibition of blank transfers;
f. The number and classes of contracts in respect of which settlements shall be
madeor differences paid through the clearing house;
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g. The regulation, or prohibition of budlas or carry-over facilities;
h. The fixing, altering or postponing of days for settlements;
i. The determination and declaration of market rates, including the opening,
closing,highest and lowest rates for securities;
j. The terms, conditions and incidents of contracts, including the prescription of
margin requirements, if any, and conditions relating thereto, and the forms of
contracts in writing.
k. the regulation of the entering into, making, performance, rescission and
termination, of contracts, including contracts between members or between a
member and his constituent or between a member and a person who is not a
member, and the consequences of default or insolvency on the part of a seller or
buyer or intermediary, the consequences of a breach or omission by a seller or
buyer and the responsibility of members who are not parties to such contracts;
l. The regulation of taravani business including the placing of limitation thereon;
m. the listing of securities on the stock exchange, the inclusion of any security for
thepurpose of dealings and the suspension or withdrawal of any such securities,
and the suspension or prohibition of trading in any specified securities;
n. the method and procedure for the settlement of claims or disputes, including
settlement by arbitration;
o. the levy and recovery of fees, fines and penalties;
p. the regulation of the course of business between parties to contracts in
anycapacity;
q. the fixing of a scale of brokerage and other charges;
r. the making, comparing, settling and costing of bargains;
s. the emergencies in trade which may arise, whether as a result of pool or
syndicatedoperations or cornering or otherwise, and the exercise of powers in
suchemergencies including the power to fix maximum and minimum prices for
securities;
t. the regulation of dealing by members for their own account;
u. the separation of the functions of jobbers and brokers;
v. the limitations on the volume of trade done by any individual member in
exceptionalcircumstances;
w. the obligation of members to supply such information or explanation and to
producesuch documents relating to the business as the governing body may
require.
3. The bye-laws made under this section may:
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a. specify the bye-laws, the contravention of which shall make a contract
entered intootherwise than in accordance with the bye-laws void under sub-
section (1) ofsection 14;
b. provide that the contravention of any of the bye-laws shall render the
memberconcerned liable to one or more of the following punishments,
namely:
(i) fine
(ii) expulsion from membership
(iii) suspension from membership for a specified period
(iv) Any other penalty of a like nature not involving the payment of
money.
4. Any bye-laws made under this section shall be subject to such conditions in regard
to previous publication as may be prescribed and, when approved by the Securities
and Exchange Board of India shall be published in the Gazette of India and also inthe
Official Gazette of the State in which the principal office of the recognised Stock
Exchange is situate, and shall have effect as from the date of its publication in the
Gazette of India:
Provided that if the Securities and Exchange Board of India is satisfied in any case that in
the interest of the trade or in the public interest any bye-laws should be made immediately, it
may, by order in writing specifying the reasons therefor, dispense with the condition o f
previous publication.
Power of SEBI (Section 10)
SEBI on its own in consultation with Board of Exchange or on request of Exchange
may amend any Bye-law relating to matters covered under Section 9 above after recording
reasons for so doing. Amended law should be published in Gazette notification and also in
theOfficial Gazette of the State in which the principal office of the recognised stockexchange
is situate, and on the publication thereof in the Gazette of India, the bye-laws somade or
amended shall have effect as if they had been made or amended by the recognised stock
exchange concerned.
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If an Exchange has objection to the amendments made by SEBI, it may within 2 months of
the publication thereof in the Gazette of India under sub-section (2),apply to SEBI for
revision. All amendments come into effect from date of Gazette notification.However, in
respect of amendments by Exchange keeping public interest in mind SEBI in its discretion
may specifically waive the condition of pre-publication.
Power of Central Government Superseding governing body of Stock Exchange
(Section 11)
SEBI/Central Government are vested with power to supersede the Board of Stock
Exchange after serving on governing body a notice in writing and after giving opportunity to
the governing Board to be heard in the matter, it may, by notification in the Officer Gazette.
SEBI may by notification in official gazette declare governing Board of an Exchange as
superseded and may appoint person/s to perform and exercise all powers of Board.
Power to suspend business of Recognised Stock Exchange (Section 12) : Central
Government if it deems it is vested with power to suspend business for period not exceeding
7 days by notification in gazette, and, if in the opinion of the Central Government, the interest
of the trade or the public interest requires that the period should be extended, may be
extended by a like notification.
Provided that where the period of suspension is to be extended beyond the first period,no
notification extending the period of suspension shall be issued unless the governingbody of
the 40[recognised stock exchange] has been given an opportunity of being heardin the
matter.
Power to issue directions (Section 12A)
If, after making or causing to be made an inquiry, the Securities and Exchange Board of
India is satisfied that it is necessary
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing
corporation, or such other agency or person, providing trading or clearing or
settlement facility in respect of securities, being conducted in a manner
detrimental to the interests of investors or securities market; or
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(c) to secure the proper management of any such stock exchange or clearing
corporation oragency or person, referred to in clause (b),it may issue such
directions,
1. to any stock exchange or clearing corporation or agency or person
referred to inclause (b) or any person or class of persons associated
with the securities market; or
(i) to any company whose securities are listed or proposed to be listed in
a recognised stock exchange,
as may be appropriate in the interests of investors in securities and the securities market.
CONTRACTS AND OPTIONS IN SECURITIES
Contracts in notified Area (Section 13)
Central Government may declare applicability of this Section to a State or States or area by
notification, thereupon every contract entered into between members of a recognised stock
exchange or recognised stock exchanges will only be legal. Contracts entered into between
persons other than members of a recognised stock exchange or recognised stock
exchanges shall be illegal.However, this provision would not be applicable to spot delivery
transaction.
―Provided that any contract entered into between members of two or more recognised stock
exchanges in such State or States or area, shall–
a. be subject to such terms and conditions as may be stipulated by the respective
stockexchanges with prior approval of Securities and Exchange Board of India;
b. require prior permission from the respective stock exchanges if so stipulated by the
stock exchanges with prior approval of Securities and Exchange Board of India.‖.
Establishment of Additional Stock Exchange (Section 13A)
According to Section 13A of the Securities Contracts (Regulation) Act, 1956, a Stock
Exchange may establish additional trading floor with the prior approval of the
SecuritiesExchange Board of India in accordance with the terms and conditions stipulated by
the said Board.For the purpose of this section ‗Additional Trading Floor‘ means a trading ring
or tradingfacility offered by a recognized stock exchange outside its area of operation to
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enable the investor to buy and sell securities through such trading floor under the regulatory
frame work of that Stock Exchange.
Contracts in notified areas to be void in certain circumstances (Section 14)
1. Any contract entered into in any State or area specified in the notification
undersection 13 which is in contravention of any of the bye-laws specified in that
behalf under clause (a) of sub-section (3) of section 9 shall be void:
(i) as respects the rights of any member of the recognised stock exchange who
hasentered into such contract in contravention of any such bye-law, and also
(ii) as respects the rights of any other person who has knowingly participated in
thetransaction entailing such contravention.
2. Nothing in sub-section (1) shall be construed to affect the right of any person
otherthan a member of the recognised stock exchange to enforce any such contract
or torecover any sum under or in respect of such contract if such person had no
knowledgethat the transaction was in contravention of any of the bye-laws specified
in clause (a) ofsub-section (3) of section 9.
Members not to act as Principals
Members of Stock Exchange normally carry out transactions on behalf of investor
and hence, principal agent relationship exists. Member can enter into transaction as principal
with another member of the Exchange only. If he desires to enter into contract as principal
with a non-member then he has to get written consent from such person to act as principal.
Contract note should indicate that member is acting as Principal. ‗Spot delivery‘ contracts
would be outside the previous of this section.
Contracts in „derivative‟
Notwithstanding anything contained in any other law for the time being in force, contracts in
derivative shall be legal and valid if such contracts are:
(a) Traded on stock exchange.
(b) Settled on clearing house of the Exchange in accordance with Rules and Bye-Laws
of the Exchange.
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Listing of Securities
Public issue and listing of securities referred to in sub-clause (ie) of clause (h)
ofsection 2 (New Section 17A)
No companies stock are not listed unless the issuer fulfils such eligibility criteria and
complies with such other requirements as may be specified by regulations made by the
Securities and Exchange Board of India.Where the permission applied for listing has not
been granted or refused by the recognised stock exchanges or any of them, the issuer shall
forthwith repay all moneys, if any, received from applicants in pursuance of the offer
document, and if any such money is not repaid within eight days after the issuer becomes
liable to repay it, the issuer and every director or trustee thereof, as the case may be, who is
in default shall, on and from the expiry of the eighth day, be jointly and severally liable to
repay that money with interest at the rate of fifteen per cent per annum.
In reckoning the eighth day after another day, any intervening day which is a public
holiday under the Negotiable Instruments Act, 1881, (26 of 1881) shall be disregarded, and if
the eighth day (as so reckoned) is itself such a public holiday, there shall for the said
purposes be substituted the first day thereafter which is not a holiday.All the provisions of
this Act relating to listing of securities of a public company on arecognised stock exchange
shall, mutatis mutandis, apply to the listing of the securities of the nature referred to in sub-
clause (ie) of clause (h) of section 2 by the issuer, being a special purpose distinct entity .
Prohibition on non-recognised Stock Exchanges (Section 19): No person except
with the permission of Central Government shall organise or assist inorganising or be a
member of unrecognised Stock Exchange for the purpose of carrying out transaction in
securities.
Listing of Securities
While shares are issued to public through public issue, listing of Securities with recognised
Stock Exchange is mandatory.Section 21 of SCRA provides that where company or person
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has applied for listing, such person or Company has to comply with provisions of Listing
Agreement. Conditions for listing of Securities are specified in Securities Contracts
(Regulation) Rules, 1957 in details.
Delisting of securities (Section 21A)
1. A recognised stock exchange may delist the securities, after recording the
reasonstherefore, from any recognised stock exchange on any of the ground or
grounds as may be prescribed under this Act: Provided that the securities of a
company shall not be delisted unless the company concerned has been given a
reasonable opportunity of being heard.
2. A listed company or an aggrieved investor may file an appeal before the
SecuritiesAppellate Tribunal against the decision of the recognised stock exchange
delisting thesecurities within fifteen days from the date of the decision of the
recognised stock exchange delisting the securities and the provisions of sections 22B
to 22E of this Act, shall apply, as far as may be, to such appeals:Provided that the
Securities Appellate Tribunal may, if it is satisfied that the company was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within
a further period not exceeding one month.‖
Refusal of Listing & Appeal (Section 22)
When Stock Exchanges refuse listing to a company, it has to furnish reasons for
refusal to the company. Section 73(1) of Companies Act specifies the time period within
which stock exchange has to grant listing permission.If Exchange fails to do so within the
time limit or refuses to list, Company may within 15 days make an appeal to the Central
Government. The Central Government may after hearing the Stock Exchange vary or set
aside the decision of the Stock Exchange or grant permission for listing. No appeal under
this section shall be allowed after commencement of Securities Laws (Second Amendment)
Act, 1999, since appeal before Securities Appellate Tribunal is permitted under Section 22A.
Appeal before Securities Appellate Tribunal (Section 22A)
Where a Stock Exchange refuses listing or is unable to grant listing within time frame
(15 days) prescribed, company is entitled to appeal to Securities Appellate Tribunal (SAT).
SAT after hearing the Exchange may vary or set aside Exchange‘s order or grant or refuse
permission.
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Powers of SAT (Section 22B)
1. The Securities Appellate Tribunal shall not be bound by the procedure laid downby
the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles
ofnatural justice and, subject to the other provisions of this Act and of any rules,
theSecurities Appellate Tribunal shall have powers to regulate their own
procedureincluding the places at which they shall have their sittings.
2. The Securities Appellate Tribunal shall have, for the purpose of discharging
theirfunctions under this Act, the same powers as are vested in a civil court under the
Code ofCivil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the
following matters,namely:—
(a) Summoning and enforcing attendance of any person and examing him on oath;
(b) Requiring discovery and product of documents;
(c) Receiving evidence on affidavits;
(d) Issuing commissions for the examination of witnesses or documents;
(e) Reviewing its decisions;
(f) Dismissing an application for default or deciding it ex parte;
(g) Setting aside any order of dismissal of any application for default or any order
passed by it ex parte; and
(h) Any other matter which may be prescribed.
Legal Representation (Section 22C)
The appellant may either appear in person or authorise one or more chartered accountants
or company secretaries or cost accountants or legal practitioners or any of itsofficers to
present his or its case before the Securities Appellate Tribunal
Appeal to High Court (Section 22F)
Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file
an appeal to the Supreme Court within sixty days from the date ofcommunication of the
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decision or order of the Securities Appellate Tribunal to him onany question of law arising
out of such order:
Provided that the Supreme Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed withina further
period not exceeding sixty days.]
Penalties and Procedure
(Section 23)
Any person who—
a. without reasonable excuse (the burden of proving which shall be on him) fails
tocomply with any requisition made under sub-section (4) of section 6; or
b. enters into any contract in contravention of any of the provisions contained
insection 13 or section 16; or
c. contravenes the provisions contained in section 17 or section 17A or section
19; or
d. enters into any contract in derivative in contravention of section 18A or the
rulesmade under section 30; or
e. owns or keeps a place other than that of a recognised stock exchange which
isused for the purpose of entering into or performing any contract in
contravention of any of the provisions of this Act and knowingly permits such
place to be used for such purposes; or
f. manages, controls, or assists in keeping any place other than that of a
recognisedstock exchange which is used for the purpose of entering into or
performing anycontracts in contravention of any of the provisions of this Act or
at which contractsare recorded or adjusted or rights or liabilities arising out of
contracts are adjusted,regulated or enforced in any manner whatsoever; or
g. not being a member of a recognised stock exchange or his agent authorised
assuch under the rules or bye-laws of such stock exchange or not being a
dealer insecurities licensed under section 17, canvasses, advertises or touts
in any mannereither for himself or on behalf of any other person for any
business connected withcontracts in contravention of any of the provisions of
this Act; or
h. joins gathers or assists in gathering at any place other than the place of
businessspecified in the bye-laws of a recognised stock exchange any person
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or persons formaking bids or offers or for entering into or performing any
contracts incontravention of any of the provisions of this Act;
shall, without prejudice to any award of penalty by the Adjudicating Officer under this Act, on
conviction, be punishable with imprisonment for a term which may extend to ten years or
with fine, which may extend to twenty-five crore rupees, or with both.
Any person who enters into any contract in contravention of the provisions contained
in section 15 or who fails to comply with the provisions of section 21 or section 21A
or with the orders of the Central Government under section 22, (or with the orders of
the Securities Appellate Tribunal) shall, without prejudice to any award of penalty by
the Adjudicating Officer under this Act, on conviction, be punishable with
imprisonment for a term which may extend to ten years or with fine, which may
extend to twenty-five crore rupees, or with both.
Penalty for failure to furnish information, return, etc (Section 23A)
Any person, who is required under this Act or any rules made thereunder, -
1. to furnish any information, document, books, returns or report to a recognised
stockexchange, fails to furnish the same within the time specified therefore in the
listing agreement or conditions or bye-laws of the recognised stock exchange, shall
be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less for each such failure;
2. to maintain books of account or records, as per the listing agreement or conditions,
or byelaws of a recognised stock exchange, fails to maintain the same, shall be liable
to a penalty of one lakh rupees for each day during which such failure continues or
one crore rupees,whichever is less.
Penalty for failure by any person to enter into an agreement with clients (Section 23B)
If any person, who is required under this Act or any bye-laws of a recognised stock
exchange made thereunder, to enter into an agreement with his client, fails to enter into such
an agreement, he shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less for every such failure.
Penalty for failure to redress Investors‟ grievances (Section 23C)
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If any stock broker or sub-broker or a company whose securities are listed or
proposed to be listed in a recognised stock exchange, after having been called upon by the
Securities and Exchange Board of India or a recognised stock exchange in writing, to
redress the grievances of the investors, fails to redress such grievances within the time
stipulated by the Securities and Exchange Board of India or a recognised stock exchange,
he or it shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less.
Penalty for failure to segregate securities or moneys of client or clients (Section 23D)
If any person, who is registered under section 12 of the Securities and Exchange
Board of India Act, 1992 as a stock broker or sub-broker, fails to segregate securities or
moneys of the client or clients or uses the securities or moneys of a client or clients for self
or for any other client, he shall be liable to a penalty not exceeding one crore rupees.
Penalty for failure to comply with provision of listing conditions or delisting
conditions or grounds (Section 23E)
If a company or any person managing collective investment scheme or mutual fund,
fails to comply with the listing conditions or delisting conditions or grounds or commits a
breach thereof, it or he shall be liable to a penalty not exceeding twenty-five crore rupees.
Penalty for excess dematerialisation or delivery of unlisted securities (Section 23F)
If any person dematerialises securities more than the issued securities of a company
ordelivers in the stock exchanges the securities which are not listed in the recognised stock
exchange or delivers securities where no trading permission has been given by the
recognised stock exchange, he shall be liable to a penalty not exceeding twenty-five crore
rupees.
Penalty for failure to furnish periodical returns, etc (Section 23G)
If a recognised stock exchange fails or neglects to furnish periodical returns to the
Securities and Exchange Board of India or fails or neglects to make or amend its rules or
bye-laws as directed by the Securities and Exchange Board of India or fails to comply with
directions issued by the Securities and Exchange Board of India, such recognised stock
exchange shall be liable to a penalty which may extend to twenty-five crore rupees.
Penalty for contravention where no separate penalty has been provided (Section 23H)
Whoever fails to comply with any provision of this Act, the rules or articles or bye-
laws or the regulations of the recognised stock exchange or directions issued by the
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Securities and Exchange Board of India for which no separate penalty has been provided,
shall be liable to a penalty which may extend to one crore rupees.
Power to adjudicate (Section 23- I)
1. For the purpose of adjudging under sections 23A, 23B, 23C, 23D, 23E, 23F, 23G
and 23H, the Securities and Exchange Board of India shall appoint any officer not
below the rank of a Division Chief of the Securities and Exchange Board of India 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.
2. While holding an inquiry, the adjudicating officer shall have power to summon and
enforce the attendance of any person acquainted with the facts and circumstances of
the case to give evidence or to produce any document, which in the opinion of the
adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry
and if, on such inquiry, he is satisfied that the person has failed to comply with the
provisions of any of the sections specified in subsection (1), he may impose such
penalty as he thinks fit in accordance with the provisions of any of those sections.
Factors to be taken into account by the adjudicating officer (Section 23 J)
While adjudging the quantum of penalty under section 23-I, 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.
Crediting sum realised by way of penalties to Consolidated Fund of India (Section
23K)
All sums realised by way of penalties under this Act shall be credited to the
Consolidated Fund of India.
Appeal to Securities Appellate Tribunal (Section 23L)
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1. Any person aggrieved, by the order or decision of the recognised stock exchange or
the adjudicating officer or any order made by the Securities and Exchange Board of
India under section 4B, may prefer an appeal before the Securities Appellate Tribunal
and the provisions of sections 22B, 22C, 22D and 22E of this Act, shall apply, as far
as may be, to such appeals.
2. Every appeal under sub-section (1) shall be filed within a period of forty-five days
from the date on which a copy of the order or decision is received by the appellant
and it shall be in such form and be accompanied by such fee as may be prescribed:
Provided that the Securities Appellate Tribunal may entertain an appeal after the
expiry of the said period of forty-five days if it is satisfied that there was sufficient
cause for not filing it within that period.
3. On receipt of an appeal under sub-section (1), 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.
4. The Securities Appellate Tribunal shall send a copy of every order made by it to
theparties to the appeal and to the concerned adjudicating officer.
5. The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall
be dealt with by it as expeditiously as possible and endeavour shall be made by it to
dispose of the appeal finally within six months from the date of receipt of the appeal.
Offences (Section 23M)
1. Without prejudice to any award of penalty by the adjudicating officer under this Act, if
any person contravenes or attempts to contravene or abets the contravention of the
provisions of this Act or of any rules or regulations or bye-laws made thereunder, for
which no punishment is provided elsewhere in this Act, he shall be punishable with
imprisonment for a term which may extend to ten years, or with fine, which may
extend to twenty-five crore rupees or with both.
2. If any person fails to pay the penalty imposed by the adjudicating officer or fails to
comply with any of his directions or orders, he shall be punishable with imprisonment
for a term which shall not be less than one month but which may extend to ten years,
or with fine, which may extend to twenty-five crore rupees, or with both.
Composition of certain offences (Section 23N)
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Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any
offence punishable under this Act, not being an offence punishable with imprisonment only,
or with imprisonment and also with fine, may either before or after the institution of any
proceeding, be compounded by a Securities Appellate Tribunal or a court before which such
proceedings are pending.
Power to grant immunity (Section 23 O)
1. The Central Government may, on recommendation by the Board, if the
CentralGovernment is satisfied, that any person, who is alleged to have violated any
of the provisions of this Act or the rules or the regulations made thereunder, has
made a full and true disclosure in respect of alleged violation, grant to such person,
subject to such conditions as it may think fit to impose, immunity from prosecution for
any offence under this Act, or the rules or the regulations made thereunder or also
from the imposition of any penalty under this Act with respect to the alleged violation:
Provided that no such immunity shall be granted by the Central Government in cases
where the proceedings for the prosecution for any such offence have been instituted
before the date of receipt of application for grant of such immunity:
Provided further that the recommendation of the Securities Exchange Board of India
under this sub-section shall not be binding upon the Central Government.
2. An immunity granted to a person under sub-section (1) may, at any time, be
withdrawn by the Central Government, if it is satisfied that such person had, in the
course of the proceedings, not complied with the condition on which the immunity
was granted or had given false evidence, and thereupon such person may be tried
for the offence with respect to which the immunity was granted or for any other
offence of which he appears to have been guilty in connection with the contravention
and shall also become liable to the imposition of any penalty under this Act to which
such person would have been liable, had not such immunity been granted.
Offences by Companies (Section 24)
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1. Where an offence has been committed by a company, every person who, at the
timewhen the offence was committed, was in-charge of, and was responsible to, the
company for the conduct of the business of the company as well as the company,
shall be deemed to be guilty of the offence, and shall be liable to be proceeded
against and punished accordingly.
Provided that nothing contained in this sub-section shall render any such person liable to
any punishment provided in this Act, if he proves that the offence was committed without
his knowledge or that he exercised all due diligence to prevent the commission of such
offence.
2. Notwithstanding anything contained in sub-section (1), where an offence under this
Act has been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to any gross
negligence on the partof any director, manager, secretary or other officer of the
company, such director,manager, secretary or other officer of the company, shall
also be deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly
.
Explanation.—For the purpose of this section—
(a) ―company‖ means any body corporate and includes a firm or other association
ofindividuals, and
(b) ―director‖, in relation to—
(i) a firm, means a partner in the firm;
(ii) any association of persons or a body of individuals, means any member
controlling the affairs thereof.
3. The provisions of this section shall be in addition to, and not in derogation o f
theprovisions of Section 22A.
Cognizance of offences by courts (Section 26)
1. No court shall take cognizance of any offence punishable under this Act or any rules
or regulations or bye-laws made thereunder, save on a complaint made by the
Central Government or State Government or the Securities and Exchange Board of
India or arecognised stock exchange or by any person.
2. No court inferior to that of a Court of Session shall try any offence punishable under
this Act.
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Miscellaneous
Title to Dividends (Section 27)
1. It shall be lawful for the holder of any security whose name appears on the books of
the company issuing the said security to receive and retain any dividend declared by
thecompany in respect thereof for any year, notwithstanding that the said security
hasalready been transferred by him for consideration, unless the transferee who
claims thedividend from the transferor has lodged the security and all other
documents relating tothe transfer which may be required by the company with the
company for beingregistered in his name within fifteen days of the date on which the
dividend became due.
Explanation.—The period specified in this section shall be extended—
a. in case of death of the transferee, by the actual period taken by his
legalrepresentative to establish his claim to the dividend;
b. in case of loss of the transferee, by the actual period taken for the
replacementthereof; and
c. in case of delay in the lodging of any security and other documents relating to
thetransfer due to causes connected with the post, by the actual period of the
delay.
(2) Nothing contained in sub-section (1) shall affect—
A. the right of a company to pay any dividend which has become due to any
personwhose name is for the time being registered in the books of the company as
theholder of the security in respect of which the dividend has become due; or
B. the right of the transferee of any security to enforce against the transferor or anyother
person his rights, if any, in relation to the transfer in any case where thecompany has
refused to register the transfer of the security in the name of thetransferee.
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Right to Receive Income from Collective Investment Scheme(Section 27A)
1. It shall be lawful for the holder of any securities, being units or other instruments
issued by collective investment scheme, whose name appears on the books of the
collective investment scheme, issuing the said security to receive and retain any
income in respect of units or other instruments issued by the collective investment
scheme in respect thereof for any year, outwithstanding that the said security, being
units or otherinstruments issued by collective investment scheme, has already been
transferred by him for consideration, unless the transferee who claims the income in
respect of units orother instruments issued by collective investment scheme from the
transfer or has lodged the security and all other documents relating to the transfer
which may be required by the collective investment scheme with the collective
investment scheme for being registered in his name within fifteen days of the date on
which the income in respect of units or other instruments issued by the collective
investments scheme became due.
Explanation: The period specified in this section shall be extended—
a. in case of death of the transferee, by the actual period taken by his
legalrepresentative to establish his claim to the income respect of units or
otherinstrument issued by collective investment scheme;
b. in case of loss of the transfer deed by theft or any other cause beyond the control
ofthe transferee, by the actual period taken for the replacement thereof; and
c. in case of delay in the lodging of any security, being units or other instrumentsissued
by the collective investment scheme and other documents relating to thetransfer due
to causes connected with the post, by the actual period of the delay.
(2) Nothing contained in sub-section (1) shall affect—
a. the right of a collective investment scheme to pay any income from units or
otherinstruments issued by collective investment scheme which has become due to
any person whose name is for the time being registered in the books of the
collective investment scheme as the holder of the security being units or other
instruments issued by collective investment scheme in respect of which the
income in respect of units or other instruments issued by collective scheme has
become due; or
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b. the right of transferee of any security, being units or other instruments issued by
collective investment scheme, to enforce against the transferor or any other personhis
rights, if any, in relation to the transfer in any case where the company has refused
to register the transfer of the security being units or other instruments issued by
the collective investment scheme in the name of the transferee.
Right to receive income from mutual fund (Section 27B)
1. It shall be lawful for the holder of any securities, being units or other instruments
issued by any mutual fund, whose name appears on the books of the mutual fund
issuing the said security to receive and retain any income in respect of units or other
instruments issued by the mutual fund declared by the mutual fund in respect thereof
for any year, notwithstanding that the said security, being units or other instruments
issued by the mutual fund, has already been transferred by him for consideration,
unless the transferee who claims the income in respect of units or other instruments
issued by the mutual fund from the transferor has lodged the security and all other
documents relating to the transfer which may be required by the mutual fund with the
mutual fund for being registered in his name within fifteen days of the date on which
the income in respect of units or other instruments issued by the mutual fund became
due.
Explanation.- The period specified in this section shall be extended –
a. in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the income in respect of units or other
instrument issued by the mutual fund;
b. in case of loss of the transfer deed by theft or any other cause beyond the control
oftransferee, by the actual period taken for the replacement thereof; and
c. in case of delay in the lodging of any security, being units or other instruments issued
by the mutual fund, and other documents relating to the transfer due to causes
connected with the post, by the actual period of the delay.
2. Nothing contained in sub-section (1) shall affect-
a. the right of a mutual fund to pay any income from units or other instruments issued
by the mutual fund which has become due to any person whose name is for the time
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being registered in the books of the mutual fund as the holder of the security being
units or other instruments issued by the mutual fund in respect of which the income in
respect of units or other instruments issued by mutual fund has become due; or
b. the right of transferee of any security, being units or other instruments issued by the
mutual fund, to enforce against the transferor or any other person his rights, if any, in
relation to the transfer in any case where the mutual fund has refused to register the
transfer of the security being units or other instruments issued by the mutual fund in
the name of the transferee.‖.
Act not to apply in Certain Cases (Section 28)
(1) The provisions of this Act shall not apply to—
a. the Government, the Reserve Bank of India, any local authority or any corporation
set up by a special law or any person who has effected anytransaction with or
through the agency of any such authority as is referred to in this clause;
b. any convertible bond or share warrant or any option or right in relation thereto,
in so far as it entities the person in whose favour any of the foregoing has been
issued to obtain at his option from the company or other body corporate, is
during the same or from any of its shareholders‘ or duly appointed agents, share
of the company or other body corporate whether by conversion of the bond or
warrant or otherwise, on the basis of the price agreed upon when the same was
issued.
2. Without prejudice to the provisions contained in sub-section (1), if the Central
Government is satisfied that in the interest of trade and commerce or the economic
development of the country it is necessary or expedient so to do, it may, by notification
in the Official Gazette, specify any class of contracts as contracts to which this Act or any
provision contained therein shall not apply, and also the conditions, limitations, or
restrictions, if any, subject to which it shall not so apply.
Power to delegate (Section 29A)
29A. The Central Government may, by order published in the Official Gazette, direct thatthe
powers (except the power under section 30) exercisable by it under any provision ofthis Act
shall, in relation to such matters and subject to such conditions, if any, as may bespecified in
the order, be exercisable also by the Securities and Exchange Board of Indiaor the Reserve
Bank of India constituted under section 3 of the Reserve Bank of IndiaAct, 1934 (2 of 1934).]
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Power to Make Rules (Section 30)
1. The Central Government may, by notification in the Official Gazette make rules for
the purpose of carrying into effect the objects of this Act.
2. In particular, and without prejudice to the generality of the foregoing power, such
rules may provide for,
a. the manner in which applications may be made, the particulars which they
shouldcontain and the levy of a fee in respect of such applications;
b. the manner in which any inquiry for the purpose of recognizing any stockexchange
may be made, the conditions which may be imposed for the grant ofsuch recognition,
including conditions as to the admission of members if the stockexchange concerned
is to be the only recognised stock exchange in the area; andthe form in which such
recognition shall be granted;
c. the particulars which should be contained in the periodical returns and annualreports
to be furnished to the Central Government;
d. the documents which should be maintained and preserved under section 6 and the
periods for which they should be preserved;
e. the manner in which any inquiry by the governing body of a stock exchange shall be
made under section 6;the manner in which the bye-laws to be made or amended
under this Act shallbefore being so made or amended be published for criticism;
f. the manner in which applications may be made by dealers in securities for licences
under section 17, the fee payable in respect thereof and the period of such licences,
the conditions subject to which licences may be granted, includingconditions relating
to the forms which may be used in market contracts, thedocuments to be maintained
by licensed dealers and the furnishing of periodical information to such authority as
may be specified and the revocation of licences for breach of conditions;
g. the requirements which shall be complied with—
i. by public companies for the purpose of getting their securities listed on any
stock exchange;
ii. by collective investments scheme for the purpose of getting their units listed
on any stock exchange;
(ha) the grounds on which the securities of a company may be delisted from any
recognised stock exchange under sub-section (1) of section 21A;
(hb) the form in which an appeal may be filed before the Securities Appellate
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Tribunal under sub-section (2) of section 21A and the fees payable in respect
of such appeal;
(hc) the form in which an appeal may be filed before the Securities Appellate
Tribunal under section 22A and the fees payable in respect of such appeal;
(hd) the manner of inquiry under sub-section (1) of section 23-I;
(he) the form in which an appeal may be filed before the Securities Appellate
Tribunal under section 23L and the fees payable in respect of such appeal;
(i) any other matter which is to be or may be prescribed.
Power of Sebi to Make Regulations (Section 31)
Without prejudice to the provisions contained in section 30 of the Securities and
Exchange board of India Act, 1992 (15 of 1992), the Securities and Exchange Board of India
may, by notification in the Official Gazette, make regulations consistent with the provisions of
this Act and the rules made thereunder to carry out the purposes of this Act.In particular, and
without prejudice to the generality of the foregoing power, such regulations may provide for
all or any of the following matters, namely:-
(a) the manner, in which at least fifty-one per cent of equity share capital of a
recognized stock exchange is held within twelve months from the date of
publication of the order under sub-section (7) of section 4B by the public other
than the shareholders having trading rights under subsection (8) of that
section;
(b) the eligibility criteria and other requirements under section 17 A
Every regulation made under this Act shall be laid, as soon as may be after it is made,
before each House of Parliament, while it is in session for a total period of thirty days which
may be comprised in one session or in two or more successive sessions, and if, before the
expiry of the session immediately following the session or the successive sessions
aforesaid, both Houses agree in making any modification in the regulation shall thereafter
have effect only in such modified form or be of no effect, as the case may be; so, however,
that any such modification or annulment shall be without prejudice to the validity of anything
previously done under that regulation.
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Chapter 7
The Securities and Exchange Board of India Act, 1992
Overview
The Securities and Exchange Board of India Act was passed by the Parliament as
Act No. 15 of 1992 and received the assent of the President on 4th April, 1992. However, the
act received, the Securities and Exchange Board of India Act, 1992 (hereinafter referred as
"The SEBI Act") is having retrospective effect and is deemed to have come into force on
January 30, 1992. The purpose of the SEBI act is as follows:
(i) To Protect the interests of investors in securities
(ii) To Promote the development of the securities market
(iii) To regulate the securities market, and
(iv) For matters connected therewith or incidental thereto
This SEBI Act contains only 35 sections and governs all the Stock Exchanges and
the Securities Transactions in India. We have learnt about SEBI and its characteristics in
chapter 5. The duty of the board is to protect the interest of investors in securities and to
promote the development of and to regulate the securities market by such measures, as it
thinks fit (section 31 of the SEBI Act). SEBI has been empowered to regulate the business
in Stock Exchanges, to register and regulate 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, etc., to register
and regulate the working of collective investment schemes including mutual funds, to prohibit
fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct
enquiries and audits of the stock exchanges, etc.
As you are aware, all Stock Exchanges are required to be registered with SEBI under
the provisions of the Act, under Section 12 of the SEBIAct.It is equally important thatall the
stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment
advisers and such other intermediary who may be associated with the Securities Markets
are obliged to register with the Board and the Board has the power to suspend or cancel
such registration. The Board is bound by the directions given by the Central Government
from time to time on questions of policy and the Central Government has the right to
supersede the Board. The Board is also obliged to submit a report to the Central
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Government every year about its activities, policies and programmes. Any one is unhappy
with the decision made by theBoard; one is entitled to appeal to the Central Government.
We will discuss the SEBI Act in detail with regard to stock broking system which consists of
various intermediaries. Let us discuss them one by one.
.
History of the Legislation
The Securities and Exchange Board of India was set up to achieve the following
objectives:
(i) To promote fair dealings by the issuers of securities and ensure a market place
wherethey can raise funds at a relatively low cost.
(ii) To provide' a degree of protection to the investors and safeguard their rights
andinterests so that there is a steady flow of savings into the market.
(iii) To regulate and develop a code of conduct and fair practices by intermediaries
likebrokers, merchant bankers, etc., with a view to making them competitive
andprofessional.
Securities legislation in any country has two objectivesviz., regulation of
stockexchanges (where securities are traded) and protection of the interests of the investors
(thosewho subscribe to securities). Whenever stock markets have crashed/facedany
problem in any country, theGovernments have enacted and enforced the Securities and
Exchange Acts to tighten thecontrols, and ensure fair play in the securities business. This
happened in the United Statesafter the Black Thursday crash of October 29, 1929 and the
Securities Exchange Act, 1934was passed by the US Congress. Similarly, in the United
Kingdom the Financial ServicesAct, 1986 was passed after the severe crash of October 27,
1986. In line of this, SEBI Act 1992 was passed after the severe crash of April 28, 1992.
The laws relating to securities in India are as follows:
1. The Companies Act,1956,
2. The Securities Contracts (Regulation) Act, 1956, and
3. The Capital Issues (Control) Act, 1947
It was found that the above mentioned legislation was scattered in different laws and
theadministrative agencies did not have proper manpower or expertise to ensure a fair deal
toinvestors. Further, there was no monitoring or prosecuting machinery to check
malpractices, insidertrading, uncontrolled market pricing etc.Moreover, there was a need to
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regulate mutual funds and venture capital. Realising the need topromote a healthy and
growth oriented securities market, the Government of India in 1988constituted an interim
body, the Securities and Exchange Board of India by a resolution of theDepartment of
Economic Affairs in the Ministry of Finance. It was proposed that this administrative body
would be a precursor to the statutory Board (SEBI) with which it would be ultimately merged.
Stock-brokers and Sub-brokers Rules
Stockbroker is a member who deals in securitiesof a recognized stock exchange.
They play an important role in the secondary market helping both buys and sellers. In order
to work as a stockbroker, one has to register with SEBI is mandatory. SEBI is empowered
toimpose conditions while granting the certificate of registration. The buyers and sellers of
stock market may be either broker or a client. A broker can place an order to buy and to sell
the same securities on behalf of clients and on their own. However, they have to issue
necessary contract note for each and every transaction indicating whether the transaction
has been entered into by him as a principal or as an agent for another .
A sub-broker is one who works along with the main broker and is not directly
registered with the stock exchange as a member. He acts on behalf of the stock broker as
an agent or otherwise for assisting the investors in buying, selling or dealing in securities
through such stock brokers. In exercise of the powers conferred by section 30 of the SEBI
Act, 1992 (15 of 1992) and came into effect on October 23, 1992.
A. Short title and commencement:
1. These rules may be called the Securities and Exchange Board of India (Stock
Brokers and Sub-Brokers) Rules, 1992.
2. They shall come into force on the date of their publication in the Official Gazette.
B. Definitions
In these rules, unless the context otherwise requires:
(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(b) "Certificate" means a certificate of registration issued by the Board;
(c) "Rules" means the Securities and Exchange Board of India (Stock Brokers and Sub-
Brokers) Rules, 1992;
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(d) "Stock exchange" means a stock exchange which is for the time being recognised by
the Central Government under Section 4 of the Securities Contracts (Regulation) Act,
1956 (42 of 1956);
(e) "Stock broker" means a member of a stock exchange;
(f) "Sub-broker" means any person not being a member of a stock exchange who acts
on behalf of a stock-broker as an agent or otherwise for assisting the investors in
buying, selling or dealing in securities through such stock-brokers;
(g) "Regulations" means the Securities and Exchange Board of India (Stock Brokers and
Sub- Brokers) Regulations, 1992.
Application for Registration of stock brokers: Chapter II of the regulation containing 1 to
10 deals with registration of stock brokers. A broker who is seeking registration with SEBI
has to submit an application through the stock exchange of which he/she is a member. The
stock exchange shall forward the application to the Board as early as possible, but not later
than 30 days from the date of its receipt of the application.An application by a stock broker
for grant of a certificate of registration shall be made through the Stock exchange or stock
exchanges.
Furnishing information and clarification:The Board may require the applicant to furnish
such further information or clarifications regarding the dealings in securities and related
matters to consider the application for granting a certificate of registration. The applicant or
its principal officer shall, if so required, appear before SEBI for personal representation.
Consideration Application:SEBI shall take into account the following aspects before
granting a certificate:
(a) whether the applicant is eligible to be admitted as a member of a stock exchange;
(b) whether he has the necessary infrastructure like adequate office space, equipment
and manpower to effectively discharge his activities;
(c) whether he has any past experience in the business of buying, selling or dealing in
securities;
(d) Whether he was subjected to disciplinary proceedings under the rules, regulations
and bye-laws of a stock exchange with respect to his business as a stock broker
involving either himself or any of his partners, directors or employees; and
(e) whether he is a fit and proper person
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Procedure for registration: The Board on being satisfied that the stock broker is eligible
shall grant a certificate of registration in Form D to him/herand send intimation to that
effect to the stock exchange or stock exchanges as the case may be. However, subject
to the conditions as stipulated by SEBI for registration, a stock broker holding a
certificate of registration with respect to membership of a recognised stock exchange
having nationwide trading terminals shall be eligible for trading on SME platform
established by such stock exchange without obtaining a separate certificate of
registration for trading on the SME platform. Regulation 6A lays down the conditions of
registration.
Abide by Code of Conduct:The stock broker holding a certificate shall at all times abide
by the Code of Conduct as specified in Schedule II of the Regulations.
Procedures where registration is not granted
(a) Where an application for grant of a certificate under regulation 3, does not fulfil the
requirements mentioned in regulation 5, the board may reject the application after
giving a reasonable opportunity of being heard.
(b) The refusal to grant the registration certificate shall be communicated by SEBI within
30 days of such refusal to the concerned stock exchange and to the applicant stating
therein the grounds on which the application has been rejected.
(c) An applicant may, being aggrieved by the decision of the Board, may apply within a
period of 30 days from the date of receipt of such intimation, to SEBI for
reconsideration of its decision.
(d) SEBI shall reconsider an application made and communicate its decision as soon as
possible in writing to the applicant and to the concerned stock exchange.
Effect of refusal of certificate of registration : The stock broker whose application for grant
of a certificate has been refused by SEBI shall not, on and from the date of the receipt of
SEBI‗s communication, buy, sell or deal in securities as a stock broker.
Payment of fees and the consequences of failure to pay fees:Every applicant eligible for
grant of a certificate of registration shall pay such fees and in such manner as specified in
Schedule III to the regulations. However SEBI may on sufficient cause being shown, permit
the stock broker to pay such fees at any time before the expiry of 6 months from the date on
which such fees become due.
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Where a stock broker fails to pay the fees as provided, SEBI may suspend the
registration certificate, where upon the stock broker shall cease to buy, sell or deal in
securities as a stock broker.
Registration of sub-brokers
Chapter III of the Regulations from 11 to 16 deal with registration of sub-brokers. A sub-
broker cannot act unless he/she holds a certificate granted by SEBI. If a sub-broker is being
a member of any recognised stock exchange, he/she merely charges his affiliation from one
stock broker to another stock broker being a member of the same stock exchange. There is
no other requirement of obtaining fresh certificate for recognised stock exchange and to
trade on SME platform.
Application for Registration of Sub-broker:Regulation 11A lays down that an application
by a sub-broker for the grant of certificate shall be made in Form-B. Such application from
the sub-broker applicant shall be accompanied by a recommendation letter in Form-C from a
stock broker of a recognised stock exchange with whom the former is to be affiliated along
with two references including one from his banker. The application form shall be submitted to
the stock exchange of which the stock broker with whom he/she is to be affiliated is a
member. The stock exchange on receipt of an application shall verify the information
contained therein and shall also certify that the applicant is eligible for registration as per
criteria specified in sub-regulation (5) below:
1. In the case of an individual:
a. The applicant is not less than 21 years of age;
b. The applicant has not been convicted of any offence involving fraud or
dishonesty;
c. The applicant has at least passed 12th standard equivalent examination from
an Institution recognised by the Government. However, SEBI may relax this
criterion on merits having regard to the applicant‗s experience;
d. The applicant is a fit and proper person.
2. In the case of partnership firm or a body corporate, the partners or directors as the
case may be shall comply with the requirements contained in clauses (a) to (c) of sub
regulation (I).
It is also to be assessed whether the applicant has necessary infrastructure like adequate
office space, equipment and manpower to effectively discharge his activities. The applicant
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should be person recognised by the stock exchange as a sub-broker affiliated to a member
broker of the stock exchange. The stock exchange shall forward the application form of such
applicants, alongwith recommendation letter issued by the stock broker with whom he
affiliated alongwith a recognition letter issued by the stock exchange to SEBI within 30 days
from the date of its receipt.
Procedure for registration: The board on being satisfied that the sub-broker is eligible,
shall grant a certificate in Form-E to the sub-broker and send intimation to that effect to the
stock exchange or exchanges as the case may be. SEBI may grant a certificate of
registration to the applicant subject to the terms and conditions as laid down by SEBI in
Regulation 12A. Regulation 12A lays down the conditions of registration. Any registration
granted by SEBI shall be subject to the following conditions:
(a) The sub-broker shall abide by the rules, regulations and bye-laws of the stock
exchange which are applicable to him;
(b) where the sub-broker proposes to change his status or constitution, he shall obtain
prior approval of SEBI for continuing to act as such after the change;
(c) he/she shall pay fees charged by SEBI;
(d) he/she shall take adequate steps for redress of grievances, of the investors within
one month of the date of receipt of the complaint and keep SEBI informed about the
number, nature and other particulars of the complaints received from such investors;
and
(e) he/she is authorized in writing by a stock-broker being a member of a stock
exchange for affiliating himself in buying, selling or dealing in securities.
Procedures where registration is not granted:
(a) Where an application for grant of a certificate does not fulfil the requirements
mentioned in Regulation 11A, SEBI may reject the application after g iving a
reasonable opportunity of being heard.
(b) The refusal to grant the certificate shall be communicated by SEBI within 30 days of
such refusal to the concerned stock exchange and to the applicant in writing stating
therein the grounds on which the application has been rejected.
(c) An applicant being aggrieved by the decision of SEBI may, within a period of 30 days
from the date of receipt of such intimation apply to SEBI for reconsideration of the
decision.
(d) SEBI shall reconsider an application made and communicate its decision to the
applicant in writing and to the concerned stock exchange as soon as possible.
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Effect of refusal: A person whose application for grant of a certificate has been refused by
SEBI shall, on and from the date of communication of refusal under regulation 13 cease to
carry on any activity as a sub-broker.
General Obligations and Inspection: The sub-broker has the following general obligations:
1. The sub-broker shall-
(a) pay the fees as per Schedule III;
(b) abide by the Code of Conduct specified in Schedule II;
(c) enter into an agreement with the stock broker for specifying the scope of his authority
and responsibilities;
(d) comply with the rules, regulations and bye laws of the stock exchange;
(e) not be affiliated to more than one stock broker of one stock exchange.
2. The sub-broker shall keep and maintain the books and documents specified in the
Regulations specified in regulation 17 except for the books and documents referred to in
clauses (h), (i), (j), (k), (l), and (m) of sub regulation (1) of regulation 17.
3. No director of a stock broker can act as a sub-broker to the same stock broker.
The general obligations and responsibilities, procedure for inspection and for taking action in
case of default shall be the same for both stock brokers and sub-brokers.
Registration of Trading and Clearing Members
Chapter IIIA consisting of Regulation 16A to 16I deals with registration of trading and
clearing members.
Application for Registration:
1. Regulation 16A on the procedure for application for registration requires that an
application for grant of certificate of registration by a trading member of a derivatives
exchange or derivatives segment of a stock exchange shall be made in Form-AA of
Schedule-I, through the concerned derivatives exchange or derivatives segment of a
stock exchange of which he is a member.
2. An application for grant of certificate of registration by a clearing member or self-
clearing member of the clearing corporation or clearing house of a derivatives
exchange or derivatives segment of a stock exchange shall be made in Form-AA of
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Schedule-I, through the concerned clearing corporation or clearing house of which is
he/she a member.
Provided that a trading member who also seeks to act as a clearing member or self-
clearing member shall make separate applications for each activity in Form AA of
Schedule I.
3. The concerned exchange shall forward the application to SEBI as early as possible
as but not later than 30 days from the date of its receipt.
Furnishing of Information and clarification:The Board may require the applicant or the
concerned stock exchange or segment or clearing house or corporation to furnish such other
information or clarification regarding the trading and settlement in derivatives and matters
connected thereto, to consider the application for grant of a certificate. The applicant or its
principal officer, if so required shall appear before SEBI for personal representation.
Consideration of Application:
A. The board shall take into account the following aspects while considering the
application, namely, whether an applicant -
1. is eligible to be admitted as a trading member or a clearing member as the case
may be;
2. has the necessary infrastructure like adequate office space, equipment and man
power to effectively undertake his activities; and
3. he/she is/was subjected to disciplinary procedures under the rules, regulations
and bye-laws of any stock exchange with respect to his business, involving either
himself or any of his partners, directors or employees;
4. has any financial liability which is due and payable to the SEBI.
B. The applicant shall also have a net worth as may be specified from time to time and
the approved user and sales personnel of the trading member shall have passed a
certification programme approved by the Board.
C. An applicant who desires to act as a clearing member shall also have a minimum net
worth of Rs. 300 lakhs and shall deposit at least a sum of Rs. 50 lakhs or higher
amount with a clearing corporation or a clearing house of the derivatives exchange or
derivatives segment in the form specified from time to time.
D. An applicant who derives to act as a self-clearing member, in addition shall
complying with the requirement of minimum net-worth of Rs. 100 lakhs and shall
deposit at-least a sum of Rs. 50 lacs or higher amount with the clearing corporation
or clearing house of the derivatives exchange or derivatives segment in the form
specified from time to time.
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E. Net worth in this context shall mean paid up capital plus free reserves and other
securities approved by the Board from time to time (but does not include fixed assets,
pledged securities, value of members card, non-allowable securities which are
unlisted, bad deliveries, doubtful dates and advances of more than three months and
debt/advances given to the associate persons of the members), pre-paid expenses,
losses, intangible assets and 30% value of marketable securities.
Procedure for Registration for Trading and Clearing Member: On being satisfied
that the applicant is eligible, SEBI shall grant a certificate in Form-DA of Schedule-I to the
applicant and send intimation to that effect to the derivative segment of the stock exchange
or derivatives exchange or clearing corporation or clearing house as the case may be.
Procedure where registration is not granted:
A. Where an application under regulation 16A does not fulfil the requirements under
regulation 16C, SEBI may reject the application after giving a reasonable opportunity
to the applicant of being heard.
B. The refusal to grant such certificate shall be communicated by SEBI within 30 days of
such refusal to the concerned segment of stock exchange or clearing corporation or
clearing house and to the applicant stating therein the grounds on which the
application has been rejected.
C. If aggrieved by the decision of SEBI as referred to above, the applicant may apply
within a period of 30 days from the date of receipt of such information to SEBI for
reconsideration of its decision.
D. SEBI shall reconsider the application and communicate its decision as soon as
possible in writing to the applicant and to the concerned segment of stock exchange
or clearing house or corporation.
Effect of refusal:If certificate of registration is refused to an applicant, an applicant shall not
from the date of receipt of SEBI‗s letter of rejection under sub-regulation (2) or sub-
regulation (4) of regulation 16E, deal in or settle the derivatives contracts as a member of the
derivatives exchange as a member of derivatives exchange, segment, clearing corporation
or clearing house.
Payment of fees and consequences of failure to pay fee:Every applicant eligible for grant
of certificate as a trading or clearing member or self-clearing member, shall pay such fee as
may be specified in schedule IV. If the fee is not paid, SEBI may suspend or cancel the
registration after giving an opportunity of being heard where upon the trading or clearing
member shall cease to deal in and settle the derivatives contract.
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Registration of Trading and Clearing Members of Currency Derivatives Segment
Chapter IIIB containing Regulation 16J to 16R deals with registration of trading and
clearing member of currency derivative segment.
Application for Registration:
1. Regulation 16J provide that the application for grant of certificate of registration by a
trading member of currency derivatives segment of a stock exchange shall be made
in Form AB of Schedule I, through the concerned currency derivatives segment of a
stock exchange of which he is a member.
2. An application for grant of certificate of registration by a clearing member of the
clearing corporation or clearing house of currency derivatives segment of a stock
exchange shall be made in Form AB of Schedule I, through the concerned clearing
corporation or clearing house of which he is a member.
Provided that a trading member who also seeks to act as a clearing member shall
make separate applications for each activity in Form AB of Schedule I.The currency
derivatives segment or clearing house or corporation, as the case may be, shall
forward the application to the Board as early as possible as but not later than thirty
days from the date of its receipt.
Furnishing information and Clarification:
1. The Board may require the applicant or the concerned stock exchange or segment or
clearing house or corporation to furnish such other information or clarifications,
regarding the trading and settlement in currency derivatives and matters connected
thereto, to consider the application for grant of a certificate.
2. The applicant or its principal officer shall, if so required, appear before SEBI for
personal representation.
Consideration of Application:
1. The Board shall take into account for considering the grant of a certificate all matters
relating to dealing and settlement in currency derivatives and in particular the
following, namely, whether the applicant,
a. is eligible to be admitted as a trading member or a clearing member
b. has the necessary infrastructure like adequate office place, equipment and
man-power to effectively undertake his activities;
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c. he is subjected to disciplinary proceedings under the rules, regulations and
bye-laws of any stock exchange with respect to his business involving either
himself or any of his partners, directors or employees;
d. has any financial liability which is due and payable to the Board under these
regulations.
2. An applicant shall also have a net worth of Rs. 1 Crore and shall ensure that its
approved user and sales personnel have passed a certification programme approved
by SEBI. An applicant, who desires to act as a clearing member, shall have a
minimum net worth of Rs. 10 crore and shall deposit at least a sum of Rs. 50 lacs or
higher amount with the clearing corporation or clearing house of the currency
derivatives segment in the form specified from time to time.
Registration Procedure: The Board on being satisfied that the applicant is eligible; SEBI
shall grant a certificate in Form DB of Schedule I, to the applicant and send an intimation to
that effect to the currency derivatives segment of the stock exchange or clearing corporation
or clearing house, as the case may be.
Procedure where registration is not granted:
1. Where an application for the grant of a certificate does not fulfill the requirements
SEBI may reject the application of the applicant after giving a reasonable opportunity
of being heard.
2. The refusal to grant the certificate of registration shall be communicated by SEBI
within 30 days of such refusal to the currency derivatives segment of the stock
exchange, or clearing house or corporation and to the applicant stating therein the
grounds on which the application has been rejected.
3. An applicant may, if aggrieved by the decision of SEBI as referred to above, the
applicant may apply within a period of thirty days from the date of receipt of such
information to SEBI for reconsideration of its decision.
4. SEBI shall reconsider an application made and communicate its decision as soon as
possible in writing to the applicant and to the currency derivatives segment of the
stock exchange or clearing house or corporation.
Effect of Refusal: An applicant, whose application for the grant of a certificate of registration
has been refused by SEBI shall not on and from the date of receipt of the communication
deal in or settle the currency derivatives contracts as a member of the currency derivatives
segment of the stock exchange or clearing corporation or clearing house.
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General Obligations and Responsibilities: The code of conduct specified for the stock
broker as stipulated in Schedule-II shall be applicable to the trading member, clearing
member and self-clearing member. They shall at all times abide by the same.
A. Maintaining proper books of accounts, records and so on:Regulation 17 and 18
deal with the general obligations and responsibilities of stock brokers. It lays down
that every stock broker shall keep and maintain books of accounts, records and
documents namely –
a. Register of Transactions (Sauda book);
b. clients ledger;
c. general ledger;
d. journals;
e. cash book;
f. bank pass book;
g. Documents register including particulars of securities received and delivered
in physical form and the statement of account and other records relating to
receipt and delivery of securities provided by the depository participants in
respect of dematerialised securities,
h. Members contract books showing details of all contracts entered into by him
with other members of the same exchange or counterfoils or duplicates of
memos of confirmation issued to such other members;
i. counterfoils or duplicates of contract notes issued to clients;
j. written consents of clients in respect of contracts entered into as principals;
k. margin deposit book;
l. registers of accounts of sub-brokers;
m. an agreement with sub-broker specifying scope of authority, and
responsibilities of the stock brokers as well as sub-brokers and an agreement
with the sub-broker and with the client of sub-broker..
B. Every stock broker shall intimate to SEBI the place where the books of accounts,
records and documents are maintained.
C. They shall, after the close of each accounting period, furnish to SEBI if so required,
as soon as possible but not later than 6 months from the close of the said period, a
copy of the audited balance sheet and profit and loss account for the said accounting
period.
Provided that, If this is not possible, the stock broker shall keep SEBI informed of the
same together with the reasons for the delay and the period of time by which such
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documents would be furnished to SEBI. Every stock broker shall preserve the books
of accounts and other records for a minimum period of 5 years.
Stock broker shall not deal with any person as sub-broker unless such person has been
granted certificate of registration by SEBI.
Compliance Officer: Every stock broker is required to appoint a compliance officer who
shall be responsible for monitoring the compliance of the Act, rules and regulations,
notifications, guidelines, instructions etc. issued by the Board and for redressal of investors‘
grievances. Compliance officer shall immediately and independently report to the Board
about any non-compliance observed by him.
Procedure for Inspection
Regulations 19 to 24 provides for procedure for inspection.
Board‟s right to inspect: Where it appears necessary to SEBI, it may appoint one or more
persons as inspecting authority to undertake inspection of the books of accounts other
records and documents of the stock brokers for any of the purposes specified in sub-
regulations (2).
The purposes referred to in sub-regulations (1) shall be as follows:
(a) to ensure that the books of account and other books are being maintained in
the manner required,
(b) that the provisions of the Act, rules and regulations as well as the provisions
of the Securities Contracts (Regulation) Act, 1956 and the rules made
thereunder are being complied with,
(c) to investigate into the complaints received from investors, other stock brokers,
sub-brokers or any other person on any other matter having a bearing on the
activities of the stock brokers, and
(d) to investigate suo-motu in the interest of securities business or investors
interest into the affairs of the stock broker.
Procedures for Inspection: The following are the procedures:
1. Before undertaking inspection, the board shall give a reasonable notice to the stock
broker for that purpose.
2. Notwithstanding anything contained in sub-regulation 91), if SEBI is satisfied that in
the interest of the investors or in public interest, no such notice should be given, it
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may by an order in writing, direct that the inspection be taken up without such notice
to the stock broker.
3. On being empoweredby SEBI, the inspecting authority shall undertake the inspection
and the stock broker concerned shall be bound to discharge his obligations to
facilitate and co-operate for the conduct of inspection by the said authority as
provided under regulation 21.
Obligations of stock-broker:
1. It shall be the duty of every director, proprietor, partner, officer and employee of the
stock broker who is being inspected, to produce to the inspecting authority such
books, accounts and other documents in his custody or control and furnish him with
the statements and information relating to the transactions in securities market within
such time as the inspecting authority may require.
2. The stock broker shall allow the inspecting authority to have reasonable access to
the premises occupied by such stock broker or by any other person on his behalf and
also extend reasonable facility for examining any books, records, documents and
computer data in the possession of the stock broker or any other person and also
provide copies of documents or other materials which in the opinion of the inspecting
authority are relevant.
3. The inspecting authority in the course of inspection shall be entitled to examine or
record statements of any member, director, partner, proprietor and employee of the
stock broker.
4. It shall be duty of every director, proprietor, partner, officer and employee of stock
broker to give the said authority all assistance in connection with the inspection,
which the stock broker may be reasonably expected to give.
Submission of Report along with findings:The inspecting authority shall, as soon as
possible, submit an inspection report to the Board who shall after consideration of inspection
or investigation report take such action as it may deem fits and appropriate including action
under Chapter V of SEBI (Intermediaries) Regulations, 2008. On receipt of the explanation, if
any, from the stock brokers, the board may call upon the stock-broker to take such
measures as the Board may deem fir in the interest of the securities market.
Appointment of Auditor: The board is also empowered to appoint a qualified auditor to
investigate into the books of accounts or the affairs of the stock broker. The auditor so
appointed shall have the same powers of the inspecting authority as enumerated above and
the obligations of the stock broker as detailed above shall be applicable to the investigation.
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Procedure for Action in Case of Default: A stock broker or a sub-broker who
a. Fails to comply with any conditions subject to the registration granted
b. contravenes any of the provisions of the Act,
c. contravenes the rules or regulations or bye-laws of the stock exchange shall be liable
to any off the penalties specified in sub-regulation (2):
(i) Monetary penalty under Chapter VIA of the Act.
(ii) Penalties as specified under Chapter V of SEBI (Intermediaries) Regulations,
2008 including suspension or cancellation of certificate of registration as a
stock broker or a sub-broker.
(iii) Prosecution under Section 24 of the Act.
Liability for monetary penalty: A stock broker or a sub-broker shall be liable for monetary
penalty in respect of the following violations, namely—
1. Failure to file any return or report with SEBI.
2. Failure to furnish any information, books or other documents within 15 days of issue
of notice by SEBI.
3. Failure to maintain books of account or record as per the Act, rules or regulations
framed thereunder.
4. Failure to redress the grievances of investors within 30 days of receipts of notice
from SEBI.
5. Failure to issue contract notes in the form and manner specified by the Stock
Exchange of which such broker is a member.
6. Failure to deliver any security or make payment of the amount due to the investor
within 48 hours of the settlement of trade unless the client has agreed in writing
otherwise.
7. Charging of brokerage which is in excess of brokerage specified in the regulations or
the bye-laws of the stock exchange.
8. Dealing in securities of a body corporate listed on any stock exchange on his own
behalf or on behalf of any other person on the basis of any unpublished price
sensitive information.
9. Procuring or communicating any unpublished price sensitive information except as
required in the ordinary course of business or under any law.
10. Counselling any person to deal in securities of anybody corporate on the basis of
unpublished price sensitive information.
11. Indulging in fraudulent and unfair trade practices relating to securities.
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12. Execution of trade without entering into agreement with the client under the Act, rules
or regulations framed thereunder or failure to maintain client registration form or
commission of any irregularities in maintaining the client agreement.
13. Failure to segregate his own funds or securities from the client‗s funds or securities
or using the securities or funds of the client for his own purpose or for purpose of
any other client.
14. Acting as an unregistered sub-broker or dealing with unregistered sub-brokers.
15. Failure to comply with directions issued by SEBI under the Act or the regulations
framed thereunder.
16. Failure to exercise due skill, care and diligence.
17. Failure to seek prior permission of SEBI in case of any change in its status and
constitution.
18. Failure to satisfy the net worth or capital adequacy norms, if any, specified by SEBI.
19. Extending use of trading terminal or any unauthorized person or place.
20. Violations for which no separate penalty has been provided under these regulations.
Liability for action under the Enquiry Proceeding: A stock broker or a sub-broker shall be
liable for any action as specified in SEBI (Intermediaries) Regulations, 2008 including
suspension or cancellation of his certificate of registration as a stock broker or a sub-broker,
as the case may be, if he—
1. ceases to be a member of a stock exchange; or
2. has been declared defaulter by a stock exchange and not readmitted as a member
within a period of six months; or
3. surrender his certificate of registration to SEBI; or
4. has been found to be not a fit and proper person by SEBI under these or any other
regulations; or
5. has been declared insolvent or order for winding up has been passed in the case of a
broker or sub-broker being a company registered under the Companies Act, 1956; or
6. or any of the partners or any whole-time director in case a broker or sub-broker is a
company registered under the Companies Act, 1956 has been convicted by a court
of competent jurisdiction for an offence involving moral turpitude; or
7. fails to pay fee as per Schedule III of these regulations; or
8. fails to comply with the rules, regulations and bye-laws of the stock exchange of
which he is a member; or
9. fails to co-operate with the inspecting or investigating authority; or
10. fails to abide by any award of the Ombudsman or decision of the Board under the
Securities and Exchange Board of India (Ombudsman) Regulations, 2003; or
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11. fails to pay the penalty imposed by the Adjudicating Officer; or
12. indulges in market manipulation of securities or index; or
13. indulges in insider trading in violation of SEBI (Prohibition of Insider Trading)
Regulations, 1992; or
14. violates SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003; or
15. commits violation of any of the provisions for which monetary penalty or other
penalties could be imposed; or
16. fails to comply with the circulars issued by SEBI; or
17. Commits violations specified in Regulation 26 which in the opinion of SEBI are of a
grievous nature.
Liability for prosecution: A stock broker or a sub-broker shall be liable for prosecution
under Section 24 of the Act for any of the following violations, namely
1. Dealing in securities without obtaining certificate of registration from the Board as a
stock broker or a sub-broker.
2. (ii) Dealing in securities or providing trading floor or assisting in trading outside the
recognized stock exchange in violation of provisions of the Securities EP-SLC-6 258
3. Contract (Regulation) Act, 1956 or rules made or notifications issued thereunder.
4. Market manipulation of securities or index.
5. Indulging in insider trading in violation of SEBI (Prohibition of Insider Trading)
Regulations, 1992.
6. Violating SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003.
7. Failure without reasonable cause—
a. to produce to the investigating authority or any person authorized by him in
this behalf, any books, registers, records or other documents which are in his
custody or power; or
b. to appear before the investigating authority personally or to answer any
question which is put to him by the investigating authority; or
c. to sign the notes of any examination taken down by the investigating
authority.
8. Failure to pay penalty imposed by the adjudicating officer or failure to comply with
any of his directions or orders.
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Chapter 8
DEPOSITORIES
Learning Objectives
The study will enable the readers to understand
1. The Concept and Overview of Depository System
2. Legal framework for depository system in India
3. Provisions of Depositories Act, 1996
4. Overview of SEBI(Depositories and Participants) Regulations, 1996
5. About National Securities Clearing Corporation Limited (NSCCL), and
6. NSCCL rules and regulations and by-laws
Introduction
As you aware, companies issue shares and bonds. Typically it is issued in the form
of physical certificates that the investor had to keep safe and then forward to the buyer once
sold. While selling the shares, settlement process took longer time and gave an opportunity
to issues such as fake securities and bad deliveries. All these reasons and the improvement
in technology gave birth to depositories which is an electronic mode of holding
securities.However, in case of a depository, the deposits are securities, such as shares,
debentures, bonds and government securities, in an electronic form. This system provides a
safe and efficient system of trading and settlement, Depositories Act, 1996 was enacted. A
depository resembles a bank. SEBI notified Regulations in order to provide the regulatory
framework for the depositories. Depositories gave a new dimension and a new scope for
conducting transactions in capital market-primary as well as secondary, on an electronic
book entry basis. We will discuss the definition, rules, regulations and bye-laws of
depositories in the following sections.
Definition
According to Section 2(e) of the Depositories Act, 1996, Depository means a company
formed and registered under the Companies Act, 1956 and which has been granted a
certificate of registration under Section 12(1A) of the Securities and Exchange Board of India
Act, 1992.
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As per Section 2(10) of the Companies Act, 1956, a company means a company as defined
in Section 3 of the Act. According to Section 3 company means a company formed and
registered under the Companies Act, 1956. A depository cannot act as a depository unless it
obtains a certificate of commencement of business from SEBI.
Depositories in India
There are two Depositories functioning in India, namely
1. The National Securities Depository Limited (NSDL), and
2. The Central Depository Services (India) Limited (CDS).
Under the provisions of the Depositories Act, 1996, these Depositories provide various
services to investors and other Participants in the capital market, such as,
Dematerialization i.e. converting physical certificates into their electronic form
Dematerialisation i.e. converting securities in DeMat form into physical certificates
Assisting in repurchase / redemption of mutual fund units
Electronic settlement of trades in stock exchanges connected to NSDL
Pledging or hypothecation of the dematerialized securities against loan
Electronic credit of securities allotted in public issue, rights issue
Receipt of non-cash corporate benefits such as bonus, in electronic form
Freezing of DeMat account to avoid debits from the account
Nomination facilities for DeMat accounts
Services related to change of address
Effective transmission of securities
Other facilities such as holding debt instruments in the same account or availing
stock lending / borrowing facility
All the securities held by a depository shall be dematerialized and shall be in a
fungible form. In order to utilize the services offered by a depository, the investor has to open
an account with the depository through a participant. The process is similar to the opening of
an account with any of the bank branches to utilize services of that bank. Registration of the
depository is required under SEBI (Depositories and Participants) Regulations, 1996.
Registration is a precondition to the functioning of the depository. Depository and depository
participant both are regulated by SEBI.
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Depository Participants
Services provided by NSDL and CDSL are carried out through their agents known as
Depository Participants [DPs]. DPs are appointed by depositories after an approval from
SEBI. According to SEBI regulations, 3 categories of entities such as banks, financial
institutions, and SEBI registered tradingmembers qualify for becoming DPs
Difference between depository and custodian: Both depository and custodial services are
responsible for safe keeping of securities. However they are different in the sense that the
Depository can legally transfer beneficial ownership, which a custodian cannot. The main
objective of a Depository is to minimize the paper work involved with the ownership, trading
and transfer of securities.
Benefits of depository system
The system provides numerous direct and indirect benefits that are given below:
1. Elimination of bad deliveries
2. Elimination of all risks associated with physical
3. Immediate transfer and registration of securities
4. Faster disbursement of non-cash corporate benefits like rights, bonus, etc.
5. Reduction in brokerage by many brokers for trading in dematerialised securities
6. Reduction in handling of huge volumes of paper and periodic status reports to
investors on their holdings and transactions, leading to better contro ls.
7. Elimination of problems related to change of address of investor, transmission, etc.
Elimination of problems related to selling securities on behalf of a
DEPOSITORY SYSTEM - AN OVERVIEW
As mentioned above, the Depository System functions are similar to the banking system. A
comparison of a depository with a bank would give better understanding:
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Table 1: Comparison of a Depository with a Bank
Depositories Banks
Hold securities in an account Hold funds in an account
Transfer securities between accounts on the instruction of the account holder
Transfers funds between accounts on the instruction of the account holder
Assist in transfer of ownership without having to handle securities
Assist in transfers without having to handle money
Facilitates safekeeping of shares
Facilitates safekeeping of money
As mentioned above, share certificates of the investors are to be dematerialised and
their names are required to be entered in the records of depository as beneficial owners.
Consequentto these changes, the investors‘ names in the companies‘ register are replaced
by the name of depository as the registered owner of the securities. However, the depository
does not have any voting rights or other economic rights in respect of the shares as a
registered owner. The beneficial owner (i.e. Investors) continues to enjoy all the rights and
benefits, subject to all the liabilities in respect of the securities held by a depository.
This system would help to carry out without the movement of papers, savings both
cost and time for various corporate actions such as IPOs, rights, conversions, bonus,
mergers/amalgamations, subdivisions & consolidations. As the beneficiary owners‘
information are readily available, they will get the information on changes in shareholding
pattern on a regular basis, which enables the issuer to efficiently monitor the changes in
shareholdings. The Depository system links the issuing corporates, Depository Participants
(DPs), the Depositories and clearing corporation/ clearing house of stock exchanges. This
network facilitates holding of securities in the electronic form and effects transfers by means
of account transfers.
Legal Framework
The legal framework for a depository system has been laid down by the Depositories
Act, 1996 and is regulated by SEBI. The depository business in India is regulated by –
a. The Depositories Act, 1996
b. The SEBI (Depositories and Participants) Regulations, 1996
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c. Bye-laws of Depository
d. Business Rules of Depository.
Apart from the above, Depositories are also governed by certain provisions of:
a. The Companies Act, 1956
b. The Indian Stamp Act, 1899
c. Securities and Exchange Board of India Act, 1992
d. Securities Contracts (Regulation) Act, 1956
e. Benami Transaction (Prohibition) Act, 1988
f. Income Tax Act, 1961
g. Bankers‗ Books Evidence Act, 1891
The legal framework for depository system as envisaged in the Depositories Act,
1996 provides for the establishment of single or multiple depositories. A Eligible body for
providing depository services must be formed and registered as a company under the
Companies Act 1956 as well as registered with SEBI. They should obtain a Certificate of
Commencement of Business from SEBI on fulfilment of the prescribed conditions. The
investors who wish to join depository mode are required to enter into an agreement with
depository through a participant who acts as an agent of depository. The agencies such as
custodians, banks, financial institutions, large corporate brokerage firms, non-banking
financial companies etc. act as participants of depositories. The companies issuing
securities are also required to enter into an agreement with the Depository.
THE DEPOSITORIES ACT, 1996
1. Short title, extent and commencement
(1) This Act may be called the Depositories Act, 1996.
(2) It extends to the whole of India.
(3) It shall be deemed to have come into force on the 20th day ofSeptember, 1995.
2. Definitions
1. In this Act, unless the context otherwise requires,-
a. "beneficial owner" means a person whose name is recorded as such with a
depository;
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b. "Board" means the Securities and Exchange Board of Indiaestablished under
section 3 of the Securities and Exchange Board ofIndia Act, 1992 (15 of
1992);
c. "bye-laws" means bye-laws made by a depository under section26;
d. "Company Law Board" means the Board of Company LawAdministration
constituted under section 10E of the Companies Act,1956 (1 of 1956);
e. "depository" means a company formed and registered under theCompanies
Act, 1956 (1 of 1956) and which has been granted acertificate of registration
under sub-section (1A) of section 12 of theSecurities and Exchange Board of
India Act, 1992 (15 of 1992);
f. "issuer" means any person making an issue of securities;
g. "participant" means a person registered as such under subsection(1A) of
section 12 of the Securities and Exchange Boardof India Act, 1992 (15 of
1992);
h. "prescribed" means prescribed by rules made under this Act;
i. "record" includes the records maintained in the form of books orstored in a
computer or in such other form as may bedetermined by regulations;
j. "registered owner" means a depository whose name is enteredas such in the
register of the issuer;
k. "regulations" means the regulations made by the Board;
[(Ka) ―Securities Appellate Tribunal‖ means a Securities AppellateTribunal
established under sub-section (1) of section 15K of theSecurities and
Exchange Board of India Act, 1992 (15 of 1992);]
l. "security" means such security as may be specified by theBoard;
m. "service" means any service connected with recording ofallotment of
securities or transfer of ownership of securities in therecord of a depository.
2. Words and expressions used herein and not defined but defined in theCompanies
Act, 1956 (1 of 1956) or the Securities Contracts (Regulation)Act, 1956 (42 of 1956)
or the Securities and Exchange Board of India Act,1992, (15 of 1992) shall have the
meanings respectively assigned to themin those Acts.
3. Certificate of commencement of business by depositories:
1. No depository shall act as a depository unless it obtains a certificate
ofcommencement of business from the Board.
2. A certificate granted under sub-section (1) shall be in such form as maybe specified
by the regulations.
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3. The Board shall not grant it certificate under sub-section (1) unless it issatisfied that
the depository has adequate systems and safeguards toprevent manipulation of
records and transactions:
Provided that no certificate shall be refused under this section unless the depository
concerned has been given a reasonableopportunity of being heard.
RIGHTS AND OBLIGATIONS OF DEPOSITORIES, PARTICIPANTS, ISSUERS AND
BENEFICIAL OWNERS
4. Agreement between depository and participant
1. A depository shall enter into an agreement with one or more participantsas its agent.
2. Every agreement under sub-section (1) shall be in such form as may bespecified by
the bye-laws.
5. Services of depository: Any person, through a participant, may enter into an agreement,
in such formas may be specified by the bye-laws, with any depository for availing its
services.
6. Surrender of certificate of security.
1. Any person who has entered into an agreement under section 5 shallsurrender the
certificate of security, for which he seeks to avail the services ofa depository, to the
issuer in such manner as may be specified by theregulations.
2. The issuer, on receipt of certificate of security under sub- section (1),shall cancel the
certificate of security and substitute in its records the nameof the depository as a
registered owner in respect of that security and informthe depository accordingly.
3. A depository shall, on receipt of information under sub-section (2), enterthe name of
the person referred to in sub-section (1) in its records, as thebeneficial owner.
7. Registration of transfer of securities with depository
1. Every depository shall, on receipt of intimation from a participant,register the transfer
of security in the name of the transferee.
2. If a beneficial owner or a transferee of any security seeks to havecustody of such
security, the depository shall inform the issueraccordingly.
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8. Options to receive security certificate or hold securities withdepository.
1. Every person subscribing to securities offered by an issuer shallhave the option
either to receive the security certificates or hold securitieswith a depository.
2. Where a person opts to hold a security with a depository, the issuer shallintimate
such depository the details of allotment of the security, and onreceipt of such
information the depository shall enter in its records thename of the allottee as the
beneficial owner of that security.
9. Securities in depositories to be in fungible form
1. All securities held by a depository shall be dematerialised and shall be in afungible
form.
[(2) Nothing contained in sections 153, 153A, 153B, 187B, 187C and 372of the
Companies Act, 1956 (1 of 1956) shall apply to a depository inrespect of securities
held by it on behalf of the beneficial owners.]
10. Rights of depositories and beneficial owner
1. Notwithstanding anything contained in any other law for the time being inforce, a
depository shall be deemed to be the registered owner for thepurposes of effecting
transfer of ownership of security on behalf of abeneficial owner.
2. Save as otherwise provided in sub-section (1), the depository as aregistered owner
shall not have any voting rights or any other rights inrespect of securities held by it.
3. The beneficial owner shall be entitled to all the rights and benefits and besubjected to
all the liabilities in respect of his securities held by adepository.
11. Register of beneficial owner
Every depository shall maintain a register and an index of beneficial ownersin the manner
provided in sections 150, 151 and 152 of the Companies Act,1956 (1of 1956).
12. Pledge or hypothecation of securities held in a depository
1. Subject to such regulations and bye-laws, as may be made in thisbehalf, a beneficial
owner may with the previous approval of thedepository create a pledge or
hypothecation in respect of a security ownedby him through a depository.
2. Every beneficial owner shall give intimation of such pledge orhypothecation to the
depository and such depository shall thereupon makeentries in its records
accordingly.
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3. Any entry in the records of a depository under sub-section (2) shall beevidence of a
pledge or hypothecation.
13. Furnishing of information and records by depository and issuer.
1. Every depository shall furnish to the issuer information about the transferof securities
in the name of beneficial owners at such intervals and in suchmanner as may be
specified by the bye-laws.
2. Every issuer shall make available to the depository copies of the relevantrecords in
respect of securities held by such depository.
14. Option to opt out in respect of any security
1. If a beneficial owner seeks to opt out of a depository in respect of anysecurity he
shall inform the depository accordingly.
2. The depository shall on receipt of intimation under sub- section (1) makeappropriate
entries in its records and shall inform the issuer.
3. Every issuer shall, within thirty days of the receipt of intimation from thedepository
and on fulfilment of such conditions and on payment of suchfees as may be specified
by the regulations, issue the certificate ofsecurities to the beneficial owner or the
transferee, as the case may be.
15. Act 18 of 1891 to apply to depositories
The Bankers' Books Evidence Act, 1891 shall apply in relation to adepository as if it were a
bank as defined in section 2 of that Act.
16. Depositories to indemnify loss in certain cases
1. Without prejudice to the provisions of any other law for the time being inforce, any
loss caused to the beneficial owner due to the negligence of thedepository or the
participant, the depository shall indemnify such beneficialowner.
2. Where the loss due to the negligence of the participant under sub-sectionis
indemnified by the depository, the depository shall have the right torecover the same
from such participant.
17. Rights and obligations of depositories, etc.
1. Subject to the provisions of this Act, the rights and obligations of thedepositories,
participants and the issuers whose securities are dealt withby a depository shall be
specified by the regulations.
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2. The eligibility criteria for admission of securities into the depository shallbe specified
by the regulations.
ENQUIRY AND INSPECTION
18. Power of Board to call for information and enquiry
1. The Board, on being satisfied that it is necessary in the public interest orin the
interest of investors so to do, may, by order in writing,
a. call upon any issuer, depository, participant or beneficial owner tofurnish in
writing such information relating to the securities held in adepository as it may
require; or
b. Authorise any person to make an enquiry or inspection in relation tothe affairs
of the issuer, beneficial owner, depository or participant,who shall submit a
report of such enquiry or inspection to it within suchperiod as may be
specified in the order.
2. Every director, manager, partner, secretary, officer or employee of thedepository or
issuer or the participant or beneficial owner shall on demandproduce before the
person making the enquiry or inspection all informationor such records and other
documents in his custody having a bearing on thesubject matter of such enquiry or
inspection.
19. Power of Board to give directions in certain cases
Save as provided in this Act, if after making or causing to be made anenquiry or inspection,
the Board is satisfied that it is necessary-
(i) in the interest of investors, or orderly development of
securitiesmarket; or
(ii) to prevent the affairs of any depository or participant
beingconducted in the manner detrimental to the interests of
investors orsecurities market,it may issue such directions-
(a) to any depository or participant or any person associated with
thesecurities market; or
(b) To any issuer,as may be appropriate in the interest of investors
or the securities market.
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19A. Penalty for failure to furnish information, return, etc.,
Any person, who is required under this Act or any rules or regulations or bye-laws made
thereunder,
a. to furnish any information, document, books, returns or report to theBoard,
fails to furnish the same within the time specified therefor, he shallbe liable to
a penalty of one lakh rupees for each day during which suchfailure continues
or one crore rupees, whichever is less for each suchfailure;
b. to file any return or furnish any information, books or other documentswithin
the time specified therefor in the regulations or bye-laws, fails to filereturn or
furnish the same within the time specified therefor, he shall beliable to a
penalty of one lakh rupees for each day during which suchfailure continues or
one crore rupees, whichever is less;
c. To maintain books of account or records, fails to maintain the same, heshall
be liable to a penalty of one lakh rupees for each day during whichsuch failure
continues or one crore rupees, whichever is less.
19B. Penalty for failure to enter into an agreement
If a depository or participant or any issuer or its agent or any person, who
isregistered as an intermediary under the provisions of section 12 of theSecurities and
Exchange Board of India Act, 1992 (15 of 1992), and isrequired under this Act or any rules
or regulations made thereunder, to enterinto an agreement, fails to enter into such
agreement, such depository orparticipant or issuer or its agent or intermediary shall be liable
to a penalty ofone lakh rupees for each day during which such failure continues or one
crorerupees, whichever is less for every such failure.
19C. Penalty for failure to redress investors' grievances
If any depository or participant or any issuer or its agent or any person, who
isregistered as an intermediary under the provisions of section 12 of theSecurities and
Exchange Board of India Act, 1992, after having been calledupon by the Board in writing, to
redress the grievances of the investors, failsto redress such grievances within the time
specified by the Board, such depository or participant or issuer or its agents or intermediary
shall be liableto a penalty of one lakh rupees for each day during which such
failurecontinues or one crore rupees, whichever is less.
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19D. Penalty for delay in dematerialisation or issue of certificate of securities
If any issuer or its agent or any person, who is registered as an intermediaryunder
the provisions of section 12 of the Securities and Exchange Board ofIndia Act, 1992 (15 of
1992), fails to dematerialise or issue the certificate ofsecurities on opting out of a depository
by the investors, within the timespecified under this Act or regulations or bye-laws made
thereunder or abetsin delaying the process of dematerialisation or issue the certificate
ofsecurities on opting out of a depository of securities, such issuer or its agent or
intermediary shall be liable to a penalty of one lakh rupees for each dayduring which such
failure continues or one crore rupees, whichever is less.
19E. Penalty for failure to reconcile records
If a depository or participant or any issuer or its agent or any person, who
isregistered as an intermediary under the provisions of section 12 of theSecurities and
Exchange Board of India Act, 1992 (15 of 1992), fails toreconcile the records of
dematerialised securities with all the securities issuedby the issuer as specified in the
regulations, such depository or participant orissuer or its agent or intermediary shall be liable
to a penalty of one lakhrupees for each day during which such failure continues or one crore
rupees, whichever is less.
19F. Penalty for failure to comply with directions issued by Board under section 19 of
the Act
If any person fails to comply with the directions issued by the Board undersection 19,
within the time specified by it, he shall be liable to a penalty of onelakh rupees for each day
during which such failure continues or one crorerupees, whichever is less.
19G. Penalty for contravention where no separate penalty has been provided:
Whoever fails to comply with any provision of this Act, the rules or theregulations or
bye-laws made or directions issued by the Board thereunder forwhich no separate penalty
has been provided, shall be liable to a penaltywhich may extend to one crore rupees.
19H. Power to adjudicate
a. For the purpose of adjudging under sections 19A, 19B, 19C, 19D, 19E,19F and 19G,
the Board shall appoint any officer not below the rank of aDivision Chief of the
Securities and Exchange Board of India to be anadjudicating officer for holding an
inquiry in the prescribed manner after givingany person concerned a reasonable
opportunity of being heard for thepurpose of imposing any penalty.
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b. While holding an inquiry, the adjudicating officer shall have power tosummon and
enforce the attendance of any person acquainted with the factsand circumstances of
the case to give evidence or to produce any document,which in the opinion of the
adjudicating officer, may be useful for or relevantto the subject-matter of the inquiry
and if, on such inquiry, he is satisfied thatthe person has failed to comply with the
provisions of any of the sectionsspecified in sub-section (1), he may impose such
penalty as he thinks fit inaccordance with the provisions of any of those sections.
19I. Factors to be taken into account by adjudicating officer
While adjudging the quantum of penalty under section 19H, the adjudicatingofficer
shall have due regard to the following factors, namely:-
(a) the amount of disproportionate gain or unfair advantage, whereverquantifiable, made
as a result of the default;
(b) the amount of loss caused to an investor or group of investors as aresult of the
default;
(c) The repetitive nature of the default.
19J. Crediting sums realized by way of penalties to Consolidated Fundof India
All sums realised by way of penalties under this Act shall be credited to the
Consolidated Fund of India."
PENALTY
20. Offences
1. Without prejudice to any award of penalty by the adjudicating officer underthis Act, if
any person contravenes or attempts to contravene or abets thecontravention of the
provisions of this Act or of any rules or regulations orbye-laws made thereunder, he
shall be punishable with imprisonment for aterm which may extend to ten years, or
with fine, which may extend to Rs.25 crore rupees, or with both.
If any person fails to pay the penalty imposed by the adjudicating officer orfails to
comply with any of his directions or orders, he shall be punishable withimprisonment
for a term which shall not be less than one month but whichmay extend to ten years,
or with fine, which may extend to twenty-five crorerupees, or with both.]
189
21. Offences by companies
1. Where an offence under this Act has been committed by a company,every person
who at the time the offence was committed was in charge of,and was responsible to,
the company for the conduct of the business of thecompany, as well as the company,
shall be deemed to be guilty of the offenceand shall be liable to be proceeded
against and punished accordingly:
Provided that nothing contained in this sub-section shall render anysuch person
liable to any punishment provided in this Act, if he proves thatthe offence was
committed without his knowledge or that he had exercised alldue diligence to prevent
the commission of such offence.
2. Notwithstanding anything contained in sub-section (1), where anoffence under this
Act has been committed by a company and it is proved thatthe offence has been
committed with the consent or connivance of, or isattributable to any neglect on the
part of, any director, manager, secretary orother officer of the company, such
director, manager, secretary or otherofficer shall also be deemed to be guilty of the
offence and shall be liable tobe proceeded against and punished accordingly.
Explanation: For the purposes of this section, -
(a) "company" means any body corporate and includes a firm or
otherassociation of individuals; and
(b) "Director", in relation to a firm, means a partner in the firm.
MISCELLANEOUS
22. Cognizance of offences by courts
1. No court shall take cognizance of any offence punishable under this Actor any rules
or regulations or bye-laws made thereunder, save on a complaintmade by the
Central Government or State Government or the Securities andExchange Board of
India or by any person. Act or any regulations or bye-laws made thereunder, save on
a complaint made by the Board.
2. No court inferior to that of a Court of Session shall try any offence punishable under
this Act.
22A. Composition of certain offences
Notwithstanding anything contained in the Code of Criminal Procedure, 1973(2 of
1974), any offence punishable under this Act, not being an offencepunishable with
190
imprisonment only, or with imprisonment and also with fine,may either before or after the
institution of any proceeding, be compoundedby a Securities Appellate Tribunal or a court
before which such proceedingsare pending.
22B. Power to grant immunity
1. The Central Government may, on recommendation by the Board, if theCentral
Government is satisfied, that any person, who is alleged to haveviolated any of the
provisions of this Act or the rules or the regulations madethereunder, has made a full
and true disclosure in respect of alleged violation,grant to such person, subject to
such conditions as it may think fit to impose,immunity from prosecution for any
offence under this Act, or the rules or theregulations made thereunder or also from
the imposition of any penalty underthis Act with respect to the alleged violation:
Provided that no such immunity shall be granted by the CentralGovernment in cases
where the proceedings for the prosecution for any suchoffence have been instituted
before the date of receipt of application for grantof such immunity:
Provided that recommendation of the Board under this sub-sectionshall not be
binding upon the Central Government.
2. An immunity granted to a person under sub-section (1) may, at any time,be
withdrawn by the Central Government, if it is satisfied that such personhad, in the
course of the proceedings, not complied with the condition onwhich the immunity was
granted or had given false evidence, and thereuponsuch person may be tried for the
offence with respect to which the immunitywas granted or for any other offence of
which he appears to have been guiltyin connection with the contravention and shall
also become liable to theimposition of any penalty under this Act to which such
person would havebeen liable, had not such immunity been granted.
23. Appeals
1. Any person aggrieved by an order of the Board made 8[before thecommencement of
the Securities Laws (Second Amendment) Act, 1999]under this Act, or the
regulations made thereunder may prefer an appeal tothe Central Government within
such time as may be prescribed.
2. No appeal shall be admitted if it is preferred after the expiry of the periodprescribed
therefor;
Provided that an appeal may be admitted after the expiry of the periodprescribed
therefor if the appellant satisfies the Central Government thathe had sufficient cause
for not preferring the appeal within the prescribedperiod.
191
3. Every appeal made under this section shall be made in such form andshall be
accompanied by a copy of the order appealed against and by suchfees as may be
prescribed.
4. The procedure for disposing of an appeal shall be such as may
beprescribed:Provided that before disposing of an appeal, the appellant shall begiven
a reasonable opportunity of being heard.
23A. Appeal to Securities Appellate Tribunal
1. Save as provided in sub-section (2), any person aggrieved by an orderof the Board
made, on and after the commencement of the SecuritiesLaws (Second Amendment),
Act, 1999, under this Act, or the regulationmade thereunder, [or by an order made by
an adjudicating officer underthis Act] may prefer an appeal to Securities Appellate
Tribunal havingjurisdiction in the matter.
2. No appeal shall lie to the Securities Appellate Tribunal from and ordermade by the
Board with the consent of the parties.(3)Every appeal under sub-section (1) shall be
filed within a period offorty-five days from the date on which a copy of the order made
by theBoard is received by the person referred to in sub-section (1) and it shallbe in
such form and be accompanied by such fees as may be prescribed:
Provided that the Securities Appellate Tribunal may entertain an appealafter the
expiry of forty-five days if it is satisfied that there was sufficientcause for not filing it
within that period.
3. On receipt of an appeal under sub-section (1), the Securities AppellateTribunal may,
after giving the parties to the appeal an opportunity of beingheard, pass such orders
thereon as it thinks fit, confirming, modifying orsetting aside the order appealed
against.
4. The Securities Appellate Tribunal shall send a copy of every ordermade by it to the
Board and parties to the appeal.The appeal filed before the Securities Appellate
Tribunal under subsectionshall be dealt with by it as expeditiously as possible
andendeavour shall be made by it to dispose of the appeal finally within sixmonths
from the date of receipt of the appeal.
23B. Procedure and powers of Securities Appellate Tribunal
(1) The Securities Appellate Tribunal shall not be bound by the procedurelaid down by the
Code of Civil Procedure, 1908 (5 of 1908), but shall beguided by the principles of natural
justice and, subject to the other provisionsof this Act and of any rules, the Securities
192
Appellate Tribunal shall havepowers to regulate their own procedure including the places
at which theyshall have their sittings.
(2) The Securities Appellate Tribunal shall have, for the purpose ofdischarging their
functions under this Act, the same powers as are vested in acivil court under the Code of
Civil Procedure, 1908 (5 of 1908), while trying asuit in respect of the following matters,
namely:-
(a) Summoning and enforcing the attendance of any person andexamining him on
oath;
(b) Requiring the discovery and production of documents;
(c) Receiving evidence on affidavits;
(d) Issuing commissions for the examination of witnesses or documents;
(e) Reviewing its decisions;
(f) Dismissing an application for default or deciding it ex parte;
(g) Setting aside any order of dismissal of any application for default or anyorder
passed by it ex parte; and
(h) any other matter which may be prescribed.
(3) Every proceeding before the Securities Appellate Tribunal shall bedeemed to be a
judicial proceeding within the meaning of sections 193and 228, and for the purposes of
section 196 of the Indian Penal Code(45 of 1860) and the Securities Appellate Tribunal
shall be deemed tobe a civil court for all purposes of section 196 and chapter XXVI of
theCode of Criminal Procedure, 1973 (2 of 1974).
23C. Right to legal representation
The appellant may either appear in person or authorize one or morechartered accountants
or company secretaries or cost accountants or legalpractitioners or any of its officers to
present his or its case before theSecurities Appellate Tribunal.
Explanation. -For the purposes of this section,--
a. ―chartered accountant‖ means a chartered accountant asdefined in clause (b) of
sub-section (1) of section 2 of Chartered AccountantsAct, 1949 (38 of 1949) and
who has obtained a certificate of practice undersub-section (1 )of section 6 of that
Act;
b. ―company secretary‖ means a company secretary as defined inclause (c) of sub -
section (1) of section 2 of Company Secretaries Act, 1980(56 of 1980) and who
has obtained a certificate of practice under sub-section1 of section 6 of that Act;
193
c. ―cost accountant‖ means a cost accountant as defined in clauseof sub-section (1)
of section 2 of Cost and Works Accountants Act, 1959(23 of 1959) and who has
obtained a certificate of practice under sub-section1 of section 6 of that Act;
d. ―Legal practitioner‖ means an advocate, vakil or an attorney ofany High Court,
and includes a pleader in practice.
23D. Limitations
The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as maybe, apply to an
appeal made to a Securities Appellate Tribunal.
23E. Civil Court not to have jurisdiction
No Civil Court shall have jurisdiction to entertain any suit or proceeding inrespect of any
matter which a Securities Appellate Tribunal is empowered byor under this Act to determine
and no injunction can be granted by any courtor other authority in respect of any action
taken or to be taken. In pursuanceof any power conferred by or under this Act.]
23F. Appeal to Supreme Court
Any person aggrieved by any decision or order of the Securities AppellateTribunal may file
an appeal to the Supreme Court within sixty days fromthe date of communication of the
decision or order of the SecuritiesAppellate Tribunal to him on any question of law arising
out of such order:
Provided that the Supreme Court may, if it is satisfied that theappellant was prevented by
sufficient cause from filing the appeal withinthe said period, allow it to be filed within a further
period not exceedingsixty days.]
24. Power of Central Government to make rules.
1. The Central Government may, by notification in the Official Gazette,make rules for
carrying out the provisions of this Act.
2. In particular, and without prejudice to the generality of the foregoingpower, such rules
may provide for all or any of the following matters,namely:-
―(a) the time within which an appeal may be preferred under sub -section (1) of
section 23;‖
(aa) the time within which an appeal may be preferred under sub-section(1) of
section 23;]
194
(b) the form in which an appeal may be preferred under sub-section (3) ofsection 23
and the fees payable in respect of such appeal;
(c) the procedure for disposing of an appeal under sub-section (4) ofsection 23;
[(d) the form in which an appeal may be filed before the SecuritiesAppellate Tribunal
under section 23A and the fees payable in respect of suchappeal.]
25. Power of Board to make regulations.
1. Without prejudice to the provisions contained in section 30 of theSecurities and
Exchange Board of India Act, 1992 (15 of 1992), the Boardmay, by notification in the
Official Gazette, make regulations consistent withthe provisions of this Act and the
rules made thereunder to carry out thepurposes of this Act.
2. In particular, and without prejudice to the generality of the foregoingpower, such
regulations may provide for-
a. the form in which record is to be maintained under clause (i) of subsectionof
section 2;
b. the form in which the certificate of commencement of business shall beissued
under sub-section (2) of section 3;
c. the manner in which the certificate of security shall be surrenderedunder sub-
section (1) of section 6;
d. the manner of creating a pledge or hypothecation in respect of securityowned
by a beneficial owner under sub- section (1) of section 12;
e. the conditions and the fees payable with respect to the issue ofcertificate of
securities under sub-section (3) of section 14;
f. the rights and obligations of the depositories, participants and theissuers
under sub-section (1) of section 17;
g. the eligibility criteria for admission of securities into the depositoryunder sub-
section (2) of section 17.
26. Power of depositories to make bye-laws.
1. A depository shall, with the previous approval of the Board, make byelawsconsistent
with the provisions of this Act and the regulations.
2. In particular, and without prejudice to the generality of the foregoingpower, such bye-
laws shall provide for-
(a) the eligibility criteria for admission and removal of securities in thedepository;
(a) the conditions subject to which the securities shall be dealt with;
(b) the eligibility criteria for admission of any person as a participant;
195
(c) the manner and procedure for dematerialisation of securities;
(d) the procedure for transactions within the depository;
(e) the manner in which securities shall be dealt with or withdrawn froma
depository;
(f) the procedure for ensuring safeguards to protect the interests ofparticipants
and beneficial owners;
(g) the conditions of admission into and withdrawal from a participantby a
beneficial owner;
(h) the procedure for conveying information to the participants andbeneficial
owners on dividend declaration, shareholder meetings andother matters of
interest to the beneficial owners;
(i) the manner of distribution of dividends, interest and monetarybenefits
received from the company among beneficial owners;
(j) the manner of creating pledge or hypothecation in respect ofsecurities held
with a depository;
(k) inter se rights and obligations among the depository, issuer,participants and
beneficial owners;
(l) the manner and the periodicity of furnishing information to theBoard, issuer
and other persons;
(m) the procedure for resolving disputes involving depository, issuer,company or
a beneficial owner;
(n) the procedure for proceeding against the participant committingbreach of the
regulations and provisions for suspension andexpulsion of participants from
the depository and cancellation ofagreements entered with the depository;
(o) the internal control standards including procedure for auditing,reviewing and
monitoring.
3. Where the Board considers it expedient so to do, it may, by order inwriting, direct a
depository to make any bye-laws or to amend or revoke anybye-laws already made
within such period as it may specify in this behalf.
4. If the depository fails or neglects to comply with such order within thespecified period,
the Board may make the bye-laws or amend or revoke thebye-laws made either in
the form specified in the order or with suchmodifications thereof as the Board thinks
fit.
196
27. Rules and regulations to be laid before Parliament
Every rule and every regulation made under this Act shall be laid, as soon asmay be
after it is made, before each House of Parliament, while it is insession, for a total period of
thirty days which may be comprised in onesession or in two or more successive sessions,
and if, before the expiry of thesession immediately following the session or the successive
sessionsaforesaid, both Houses agree in making any modification in the rule orregulation or
both Houses agree that the rule or regulation should not bemade, the rule or regulation shall
thereafter have effect only in such modifiedform or be of no effect, as the case may be; so,
however, that any suchmodification or annulment shall be without prejudice to the validity of
anythingpreviously done under that rule or regulation.
28. Application of other laws not barred
The provisions of this Act shall be in addition to, and not in derogation of, anyother law for
the time being in force relating to the holding and transfer ofsecurities.
29. Removal of difficulties.
1. If any difficulty arises in giving effect to the provisions of this Act, theCentral
Government may, by order published in the Official Gazette, makesuch provisions
not inconsistent with the provisions of this Act as appear to itto be necessary or
expedient for removing the difficulty:
Provided that no order shall be made under this section after the expiry ofa period of
two years from the commencement of this Act.
2. Every order made under this section shall be laid, as soon as may be afterit is made,
before each House of Parliament.
30. Amendments to certain enactments.
The enactments specified in the Schedule to this Act shall be amended in the manner
provided therein.
31. Repeal and saving.
1. The Depositories (Third) Ordinance, 1996 (Ord. 28 of 1996) is herebyrepealed.
2. Notwithstanding such repeal, anything done or any action taken under thesaid
Ordinance shall be deemed to have been done or taken under thecorresponding
provisions of this Act.
197
THE SCHEDULE: AMENDMENTS TO CERTAIN ENACTMENTS
(See section 30)
PART I
AMENDMENT TO THE INDIAN STAMP ACT, 1899 (2 OF 1899)
AMENDMENT
After section 8, the following section shall be inserted, namely:-
8A, Securities not liable to stamp duty- Notwithstanding anything contained in this Act,-
1. an issuer, by the issue of securities to one or more depositories shall, in respect of
such issue, bechargeable with duty on the total amount of security issued by it and
such securities need not be stamped;
2. where an issuer issues certificate of security under sub-section (3) of section 14 of
the Depositories Act,1996, on such certificate duty shall be payable as is payable on
the issue of duplicate certificate under this Act;
3. transfer of registered ownership of shares from a person to a depository or from a
depository to abeneficial owner shall not be liable to any stamp duty;
4. Transfer of beneficial ownership of shares, such shares being shares of a company
dealt with by adepository shall not be liable to duty under article 62 of Schedule I of
this Act.
Explanation. -For the purposes of this section, the expressions "beneficial owner‖,
"depository" and "issuer", shall have the meanings respectively assigned to them in
clauses (a), (e)'and (f) of sub-section (1) of section 2of the Depositories Act, 1996.
Amendments to The Companies Act, 1956 (1 Of 1956) Amendments
1. In section 2, after clause (45A), the following clause shall be inserted, namely: -'(45B)
"Securities and Exchange Board of India" means the Securities and Exchange Board
of Indiaestablished under section 3 of the Securities and Exchange Board of India
Act, 1992 (15 of 1992).‘
2. After section 2, the following section shall be inserted, namely:-
"2A. Words and expressions used and not defined in this Act but defined in the
Depositories Act, 1996shall have the same meanings respectively assigned to them
in that Act.".
198
3. In section 41, after sub-section (2), the following sub- section shall be inserted,
namely:-
"(3) Every person holding equity share capital of company and whose name is
entered as beneficial ownerin the records of the depository shall be deemed to be a
member of the concerned company.".
4. In section 49, in sub-section (5), after clause (b), the following clause shall be
inserted, namely:-
"(c) from holding investments in the name of a depository when such investment are
in the form ofsecurities held by the company as a beneficial owner.".
5. In section 51, the following proviso shall be inserted, namely:-
"Provided that where the securities are held in a depository, the records of the
beneficial ownership maybe served by such depository on the company by means of
electronic mode or by delivery of floppies ordiscs.‖
6. Section 83 shall be omitted.
7. In section 108, after sub-section (2), the following sub- section shall be inserted,
namely:-
"(3) Nothing contained in this section shall apply to transfer of security effected by the
transferor andthe transferee both of whom are entered as beneficial owners in the
records of a depository.‖
8. In section 111, after sub-section (13), the following sub- section shall be inserted,
namely:-
(14) In this section "company" means a private company and include a pr ivate
company which hadbecome a public company by virtue of section 43A of this Act.'.
9. After section 111, the following section shall be inserted, namely:-
Rectification of register on transfer-111A. (1)
a. In this section, unless the context otherwise requires, ―company" means a
company other than acompany referred to in sub-section (14) of section 111
of this Act.
b. Subject to the provisions of this section, the shares or debentures and any
interest therein of a company shall be freely transferable.
c. The Company Law Board may, on an application made by a depository,
company, participant or investor orthe Securities and Exchange Board of
India within two months from the date of transfer of any shares ordebentures
held by a depository or from the date on which the instrument of transfer or
the intimation oftransmission was delivered to the company, as the case may
be, after such enquiry as it thinks fit, direct anycompany or depository to
rectify register or records if the transfer of the shares or debentures is in
199
contravention of any of the provisions of the Securities and Exchange Board
of India Act, 1992 (15 of 1992. Orregulations made thereunder or the Sick
Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).
d. The Company Law Board while acting under sub- section (3), may at its
discretion make such interim orderas to suspend the voting rights before
making or completing such enquiry.
e. The provisions of this section shall not restrict the right of a holder of shares
or debentures, to transfer suchshares or debentures and any person
acquiring such shares or debentures shall be entitled to voting rightsunless
the voting rights have been suspended by an order of the Company Law
Board.
f. Notwithstanding anything contained in this section, any further transfer, during
the pendency of theapplication with the Company Law Board, of shares or
debentures shall entitle the transferee to voting rightsunless the voting rights
in respect of such transferee have also been suspended.
g. The provisions of sub-sections (5), (7), (9), (10) and (12) of section 111 shall,
so far as may be, apply to theproceedings before the Company Law Board
under this section as they apply to the proceedings under thatsection.'.
10. In section 113, after sub-section (3), the following sub- section shall be inserted,
namely:-
"(4) Notwithstanding anything contained in sub-section (1), where the securities are
dealt with in a depository,the company shall intimate the details of allotment of
securities to depository immediately on allotment of suchsecur ities.".
11. In section 150, in sub-section (1), in clause (b), the words "distinguishing each share
by its number" shall beomitted.
12. In section 152, in sub-section (1), in clause (b), the words "distinguishing each
debenture by its number" shall beomitted.
13. After section 152, the following section shall be inserted, namely:-
Register and index of beneficial owners.―152A. The register and index of beneficial
owners maintained by a depository under section 11 of theDepositories Act, 1996,
shall be deemed to be an index of members and register and index of debenture
14. Holders, as the case may be, for the purposes of this Act.".In Schedule II, in Part II,
in clause C, after sub-clause (9), the following sub-clause shall be inserted, namely:-
"9A. The details of opinion to subscribe for securities to be dealt with in a depository."
200
Amendments to the securities contracts (regulation) act, 1956 (42 of 1956)
AMENDMENTS
1. In section 2, for clause (i), the following clause shall be substituted, namely:-'(i) "spot
delivery contract" means a contract which provides for-
a. actual delivery of securities and the payment of a price therefor either on the
same day as the date of thecontract or on the next day, the actual periods
taken for the dispatch of the securities or the remittance ofmoney therefor
through the post being excluded from the computation of the period aforesaid
if the parties tothe contract do not reside in the same town or locality;
b. transfer of the securities by the depository from the account of a beneficial
owner to the account of anotherbeneficial owner when such securities are
dealt with by a depository;'.
2. Section 22A shall be omitted.
Amendment to the Income-Tax Act, 1961 (43 of 1961)
In section 45, after sub-section (2), the following sub-section shall be inserted, namely:-
'(2A),where any person has had at any time during previous year any beneficial interest in
any securities, then,any profits or gains arising from transfer made by the depository or
participant of such beneficial interest inrespect of securities shall be chargeable to income-
tax as the income of the beneficial owner of the previousyear in which such transfer took
place and shall not be regarded as income of the depository who is deemed tobe the
registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories
Act, 1996, andfor the purposes of-
(i) Section 48; and
(ii) Proviso to clause (42A) of section 2,
the cost of acquisition and the period of holding of any securities shall be determined
on the basis of the first-infirst-out method.
Explanation: For the purposes of this subsection, the expressions "beneficial owner",
"depository"and "security" shall have the meanings respectively assigned to them in clauses
(a), (e) and (l) ofsub-section (1) of section 2 of the Depositories Act, 1996.'.
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Amendment to the Benami Transactions (Prohibition) Act, 1988 (45 of 1988)
In section 3, for sub-section (2), the following sub-section shall be substituted, namely:-
(2) Nothing in sub-section (1) shall apply to-
(a) the purchase of property by any person in the name of his wife or unmarried daughter
and it shallbe presumed, unless the contrary is proved, that the said property had been
purchased for the benefitof the wife or the unmarried daughter;
(b) The securities held by a-
(i) Depository as a registered owner under sub-section (1) of section 10 of the
Depositories Act, 1996;
(ii) participant as an agent of a depository.
Explanation: The expressions "depository" and "participant" shall have the meanings
respectively assigned to them in clauses (e) and (g) of sub-section (1) of section 2 of
the Depositories Act, 1996.'
Amendments to the securities and exchange board of India act, 1992 (15 of 1992)
1. In section 2, in sub-section (2), for the words, brackets and figures "the Securities
Contracts (Regulation) Act,1956", the words, brackets and figures "the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) or the Depositories Act, 1996" shall be
substituted.
2. In section 11, in sub-section (2), in clause (ba), for the words "depositories,
custodians", the words "depositories, participants, custodians" shall be substituted.
3. In section 12, in sub-section (1A), for the words "depository, custodian", at both the
places where they occur, the words "depository, participant, custodian" shall be
substituted.
4. In section 16, in sub-section (1), for the words "this Act", the words and figures "this
Act or the Depositories Act, 1996" shall be substituted.
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Audit under SEBI (Depositories and Participants) Regulations, 1996
Regulation 55A of SEBI (Depositories and Participants) Regulations, 1996 provides that
every issuer shall submit audit report on a quarterly basis to the concerned stock exchanges
audited by a practicing Company Secretary or a qualified Chartered Accountant, for the
purposes of reconciliation of the total issued capital, listed capital and capital held by
depositories in dematerialized form, the details of changes in share capital during the quarter
and the in-principle approval obtained by the issuer from all the stock exchanges where it is
listed in respect of such further issued capital.
The audit report is required to give the updated status of the register of members of the
issuer and confirm that securities have been dematerialized as per requests within 21 days
from the date of receipt of requests by the issuer and where the dematerialization has not
been effected within the said stipulated period, the report would disclose the reasons for
such delay.
The issuer is under an obligation to immediately bring to the notice of the depositories and
the stock exchanges, any difference observed in its issued, listed, and the capital held by
depositories in dematerialized form.
Internal Audit of Operations of Depository Participants
The two Depository service providers in India, viz., National Securities Depository Ltd.
(NSDL) and Central Depository Services (India) Limited (CDS) have allowed Company
Secretaries in Whole-time Practice to undertake internal audit of the operations of
Depository Participants (DPs).
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National Securities Clearing Corporation Limited
Introdcution
With effect from January 1, 2004, the provisions of the Bye -laws, Rules and Regulations of
CCIL, in so far as they relate to dealing operations shall be applicable and continue to bind
and govern the members of Clearcorp Dealing Systems (India) Limited, as if these Bye -
laws, Rules an d Regulations are enacted Bye- laws, Rules and Regulations of Clearcorp D
ealing Systems (India) Limited.
Committees for Managing Operations: The Board shall have power to appoint
Committee(s) for looking after /managing any aspect of the Corporation‘s business
operations with such powers and responsibilities as may be delegated by the Board.
Regulations
1. The Board may frame Regulations from time to time for the functioning
andoperations of Clearing Corporation and to regulate the functioning, operationsand
conduct of the Members of Clearing Corporation.Without prejudice to the generality
of the foregoing, the Board may prescribeRegulations from time to time; inter alia,
with respect to:
a. Norms, procedures and terms a nd conditions for admission, continuationor
cessation of Members;
b. norms, procedures and terms and conditions relating to dealing onDealing
System ( s ) ;
c. norms, procedures and terms and conditions to be complied with
foradmission of Trades for Clearing and Settlement by Clearing Corporation;
d. norms, procedures and terms and conditions for Clearing and Settlementof
Trades in securities, CBLO‘s, Forex, derivatives and other segmentsthrough
novation with Clearing Corporation as the counter- party orotherwise.;
e. norms, procedures and terms and conditions for guaranteed settlementby
Clearing Corporation;prescription from time to time, and administration of
penalties, fines andother consequences, including suspension/e expulsion of
Members fromClearing Corporation for defaults or breach or violation of the
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Bye- laws,Rules and Regulations, directives or orders of Clearing Corporation
;
f. norms, procedures and terms and conditions for imposition andadministration
of different types of margins, limits and other charges andrestrictions that may
be imposed by Clearing Corporation from time totime;
g. determination from time of time, of fees, system usage charges,transaction
charges, deposits, margins , penal and other charges and othermonies
payable to Clearing Corporation by Members;
h. Supervision of the clearing operations and promulgation of such
businessrules and Codes of Conduct as it may deem fit;
a. settlement of disputes, complaints, claims arising between Members
interrelating to securities, CBLOs, foreign exchange, money market
andderivative instruments and such other dealing and clearing segments
andinstruments as are cleared and settled through Clearing
Corporationincluding settlement by arbitration and/or such other dispute
resolutionmechanism as Clearing Corporation may decide from time to time;
b. Administration , maintenance and investment of the corpus of the Fund(s)set
up by Clearing Corporation including Settlement Guarantee Fund;
i. establishment, norms, terms and conditions, functioning and proceduresof
clearing house, clearing through depository or other arrangementsincluding
custodial services and Settlement Banks for Clearing andSettlement;
j. norms, procedures and terms and conditions in respect of, incidental to
orconsequential to, annulment, cancellation or closing out of Trades;
k. dissemination of information and announcements;
l. Any other matter as may be decided by the Board.
Members
1. Clearing Corporation may admit Members in accordance with the Rules
andRegulations to be prescribed by the Board and on compliance of such termsand
conditions as per Bye laws, Rules and Regulations, the Member shall paysuch fees,
security deposits and other monies as may be specified by the Boardfrom time to
time, on admission as Member. Any fees, deposits, remittance,other monies
available with Clearing Corporation but belonging to any Memberunder Bye- laws,
Rules and Regulations s hall be subject to a first andparamount lien for any sum due
or reasonably expected to be due to ClearingCorporation and for all its claims against
the Member for due fulfilment ofengagements, obligations and liabilities of Members
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arising out of or incidentalto any Trades which are made subject to Bye - laws, Rules
and Regulations ofClearing Corporation. Clearing Corporation shall be entitled to
adjust orappropriate such fees, deposits and other monies towards such dues
andclaims, to the exclusion of the other claims against the Member, without
anyreference to the Member.
2. A Member of any segment may clear and settle Trades pertinent to thatsegment
through Clearing Corporation in such manner and mode as may beprescribed by
Clearing Corporation.
3. Members may transact, clear and settle Trades either on their own account oron
behalf of the constituents unless otherwise specified by ClearingCorporation from time
to time.
4. In the event of any such change in control or reorganization, amalgamation /merger of
the Member, Clearing Corporation shall have a right to call for suchinformation, data
and documentation as may be deemed necessary forreviewing such membership and
the member shall provide the same to ClearingCorporation and also extend al l the
necessary c o- operation in this regard.
5. Any person admitted to Membership of Clearing Corporation shall be bound byall Bye
- laws, Rules, Regulations as amended from time to time a s if such Byelaws,Rules
and Regulations are terms and conditions of one singleindependent contract between
Clearing Corporation on the one part and theMember on the other part and Clearing
Corporation and each one of theMember multilaterally inter - se.
6. Concept of Novation: Each transaction entered into by a Member with anotherMember
shall be deemed to have been individually novated by a newobligation, being a
contract with Clearing Corporation under Bye - laws, Rulesand Regulations for the
same value date. The amounts that would otherwisehave been deliverable or
receivable by each Member to or from every otherMember on such settlement date
shall be netted and replaced by a contract forthe net deliverable or receivable to or
from Clearing Corporation.
DEALING SYSTEM
1. Clearing Corporation shall not be liable for any unauthorized deals on
itsdealing system by any entity acting in the name of the member.
2. Clearing Corporation may accept on its dealing system only those deals
whichcomply with the provisions prescribed in these Bye - laws, Rules
andRegulations.
3. Clearing Corporation may, at its discretion, approve, defer, or reject
dealsreceived by it for matching, clearing and settlement for not conforming to
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any ofthe provisions specified in Bye- laws, Rules and Regulations of the
concernedsegment.
4. Deals may be effected through auction, order driven, quote driven and/or
suchother system as may be put in place by Clearing Corporation for such
purpose.
5. Deals may be affected by electronic media or computer network or such
othermedia as specified by Clearing Corporation from time to time.
6. Business Hours
a. The business hours for transactions in various segments shall be
applicable asper the window of operations stated in the
Regulations of the concernedsegment.
b. Clearing Corporation would normally function on all the days,
excludingSundays and those days that are declared as holidays
under the NegotiableInstruments Act, 1881 and such other days
on which transactions/settlementmay not take place as declared
by RBI or such other authority.
7. Suspension and Prohibition
i. Clearing Corporation, upon notification, may prohibit, suspend at any
time thedealing system for such period as it may determine and at the
expiration ofsuch period, Clearing Corporation may reactivate the
dealing system subject tosuch conditions as it deems fit.
ii. Clearing Corporation, at its discretion, may suspend a member from
its dealingsystem for violation of any of the provisions of Bye- Laws,
Rules andRegulations and the suspension shall continue until
Clearing Corporationdecides to withdraw such suspension.
8. Inviolability of Transaction
8.1. Clearing Corporation may, to protect the interests of the members and for
proper regulation of deal matching, suomoto annul deal(s) at any time,
ifClearing Corporation is satisfied for reasons to be recorded in writing that
suchdeal(s) is/are vitiated by fraud, material mistake, misrepresentation or
marketor price manipulation and other misdemeanour.
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CLE ARING AND SETTLEMENT O F TRADES
1. Clearing And Settlement Of Trades: Clearing Corporation shall clear and
settle Trades as provided in Bye - laws,Rules and Regulations including those
concluded on Clearcorp dealingsystem s, Trades reported / done on
Negotiated Dealing System or other tradesas may be specified by Clearing
Corporation .
2. Refusal of Admission of Trades: Clearing Corporation may, at its
discretion, approve, defer, or reject suchTrades for Clearing and Settlement
by Clearing Corporation, subject to suchterms as it deems fit. Notwithstanding
the foregoing, Clearing Corporation shall not be responsible for the title,
ownership, genuineness, regularity andvalidity of the document delivered or
received and in regard to the loss anddamages arising there from , which
shall be dealt with in accordance with theprovisions of Bye - Laws, Rules and
Regulations thereof.
3. Arrangement For Clearing And Settlement: Clearing and Settlement of
Trades submitted by Members shall be effected byadopting and using such
arrangements, systems, agencies or procedures asmay be prescribed or
specified by Clearing Corporation from time to time andthe same shall be
forthwith binding on the Members.
4. Operational parameters for clearing:
(a) Clearing corporation may determine and announce from time to
timeoperational parameters for the clearing of Trades through
ClearingCorporation which the Members shall adhere to.
(b) Without prejudice to the generality, the operational parameters mayinclude:
1. Risk exposure limits, including net debit cap in respect of
Forextransactions, which may be computed with reference to
thecontribution to the Settlement Guarantee Fund / collaterals ,
suchcontribution/fixation being based on certain performance
parameters ofthe Members as decided by Clearing Corporation from
time to time;
2. other matters which may affect the clearing of Trades, keeping
inview the larger interest of the members ;
3. determining types of Trades permitted for a Member and i n respect
ofa security/CBLO/foreign exchange, money market, derivative or
othertransactions;
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4. determining functional details of the Clearing and Settlement
systemincluding the system design, user infrastructure and system
operation;
5. determining the margin payment obligation;
6. determining the margin requirements in the form of funds or
securitiesand the nature of securities;
7. determining the Settlement Guarantee Fund and its
composition,value, form, tenor etc;
8. Such other parameter as may be decided by Clearing
Corporationfrom time to time.
5. Clearing Hours: The hours for Clearing and Settlement of different segments
of ClearingCorporation shall be such as may be decided by Clearing
Corporation from timeto time.
6. Closing Out
a. A trade admitted for Clearing and Settlement may be closed out on failureof a
Member to comply with any of the provisions relating to delivery,payment and
settlement of Trades or on any failure to fulfil the terms andconditions subject
to which the trade has been made, or such othercircumstances as the
Clearing Corporation may specify from time to time.The trade may be closed
out by Clearing Corporation in such manner,within such time frame and
subject to such conditions and procedures asthe Clearing Corporation may
prescribe from time to time.
b. Without prejudice to the generality of the foregoing, Clearing Corporat ionmay
close out trade with suitable compensation in securities/CBLO‘s orforeign
currency or monies or in such other form as Clearing Corporationmay deem
fit to the buyer/seller in case of trades in GovernmentSecurities, derivatives
and Forex , lender/borrower in case of repo andCBLO transactions .
c. Clearing Corporation has the right of clos e out and/or liquidation and
thesame shall not limit or exclude any other rights which ClearingCorporation
possess whether by agreement, or an applicable law orotherwise. Clearing
Corporation shall have the general and global right to set - off all amounts
owed by a defaulting party under these Bye- laws,Rules and Regulations.
7. Failure To Meet Obligations: In the event a Member fails to meet its
obligations to Clearing Corporationarising out of the Clearing and Settlement
operations of admitted trade,Clearing Corporation may charge such interest,
impose such penalties andfines and take such disciplinary action including
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suspension and cessation ofmembership, as it may determine from time to
time. Any disciplinary actionwhich Clearing Corporation takes pursuant to the
above shall not affect theobligations of the Member to Clearing Corporation or
any remedy to whichClearing Corporation may be entitled against the
Member under Bye- laws,Rules and Regulations.
8. Fees and charges: Clearing corporation may prescribe from time to time the
fees, charges andrecoveries to be levied on the Members in respect of
Clearing and Settlementof their Trades.
MARGINS
1. Margin Requirements: Clearing Corporation may stipulate margin requirements for
its varioussegments and the nature thereof, and vary the same from time to time
using such criteria as may be deemed prudent for acceptance of trades for
Clearingand Settlement through Clearing Corporation and the Member shall
furnishmargin in the required form, as a condition precedent, for acceptance of
tradesfor Clearing and Settlement.
2. Forms of Margin: The margins to be provided by a Member under Bye - Laws,
Rules andRegulations shall be in funds, securities, foreign currency –
denominatedpapers or any other form as approved by Clearing Corporation.
A Member depositing margins in the form of funds, securities, foreign currency–
denominated papers or in any other form as approved by ClearingCorporation , by
way of pledge or otherwise or in such other mode as may beprescribed by Clearing
Corporation from time to time, may always maintain thevalue thereof at not less than
the quantum of margin required at any given timecovered by them by providing
further security to the satisfaction of ClearingCorporation which shall determine the
value and such valuation shall conclusively fix the amount of any deficiency to be
made up from time to time.
3. Contribution to SGF to Be Part of Margin: Contribution made by any Member
towards SGF under Chapter IX of Bye- lawsshall be deemed to be a part of Margin
contribution by such Member.
4. Utilisation For Failure To Meet Obligations: Clearing Corporation at its discretion
shall be entitled to appropriate to itselfany amount paid by a Member in the form of
margin or any other payment orproceeds or disposal of any other s ecurity or foreign
currency towards fulfillingthe Member‘s obligations arising out of Clearing and
Settlement.
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DISPUTE RESOLUTION / ARBITRATION
1. All Claims, differences or disputes between the Members inter - se arising out ofor in
relation to dealings , contracts or transactions executed or reported asspecified by
Clearing Corporation and made subject to the Byelaws, and Rulesor with reference
to anything incidental thereto or in pursuance thereof or relatingto their validity,
constructi on, interpretation, fulfillment or the rights, obligationsand liabilities of the
parties thereto and including any question of as to suchdealings, transactions and
contracts have been entered into or not shall besubmitted to arbitration in
accordance with the provisions of these Bye- laws andRules.
2. All Claims, differences or disputes between the Member(s) on the one hand andon
the other hand Clearing Corporation arising out of or in relation to settlementof
dealings, contracts or transactions executed or reported as specified byClearing
Corporation or with reference to anything incidental thereto or inpursuance thereof or
relating to their validity, construction, interpretation,fulfillment or the rights, obligations
and liabilities of the parties thereto andincluding any question of whether such
dealings, transactions and contracts havebeen entered into or not shall be submitted
to arbitration in accordance with theprovisions of these Byelaws and Rules.
3. In all dealings, contracts and transaction s, which are made subject to theByelaws
and Rules, the provisions relating to arbitration as provided in theseByelaws and
Rules shall form and shall be deemed to form part of the dealings,contracts and
transactions and the parties shall be deemed to have entered intoan arbitration
agreement in writing by which all claims, differences of the naturereferred to in
Byelaws(1) and (2) above shall be submitted to arbitration as perthe provisions of
these Byelaws and Rules.
4. Clearing Corporation may, from ti me to time prescribe Rules for the matterswhich in
the opinion of Clearing Corporation are required to be dealt with in theRules to
facilitate arbitration including the procedure to be followed by theparties in arbitral
proceedings, the procedure to be followed by the arbitrator inconducting the arbitral
proceedings, specified time periods in the stages ofarbitral proceedings and the
costs, expenses of arbitration proceedings. ClearingCorporation from time to time
may amend, modify, alter, repeal, or add to theprovisions of the Rules.
DEFAULT
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1. Declaration of Default: A Member may be declared a defaulter by
direction/circular/notification of Clearing Corporation,if:
a. it is unable to ful fill its Clearing or Settlement obligations; or
b. it admits or discloses its inability to fulfill or discharge its duties, obligations
andliabilities; or
c. it is unable to fulfill within the specified time the margin obligationsincluding initial an
d mark - to - market margins;
d. it fails or is unable to pay within the specified time the damages and themoney
difference due on a closing-out effected against it under Byelaws,
e. Rules and Regulations; orit fails to pay any sum due to Clearing Corporation as
ClearingCorporation may from time to time prescribe; or
f. it fails to abide by the Dispute Resolution mechanism or arbitration awardas laid
down under Byelaws, Rules and Regulations; or
i. Proceedings have been commenced for winding up against it;
ii. it is in breach of Bye -law No. 7 of this Chapter;
g. under any other circumstances as may be decided by ClearingCorporation from time
to time after due notice in writing to the Member.
2. Member‟s Duty to Inform: A Member shall be bound to notify Clearing Corporation
immediately on theoccurrence of any of the circumstances specified in Bye - law
No.1 of this Chapter.A Member shall forthwith inform Clearing Corporation in writing
as and when anynotice is received by the Member, in connection with institution of
any winding upproceedings against it and no Member shall initiate any proceedings
for windingup without the prior written consent of Clearing Corporation. The Member
furtherundertakes to inform Clearing Corporation in writing on the onset of
anycircumstance which is likely to result into it being wound up or which is likely to,or
may render it liable to, any winding up proceedings.
3. Notice of Declaration of Default: Upon a Member being declared a defaulter,
Clearing Corporation shall forthwithissue a notice to all the Members.
4. Defaulter to Give Information: A defaulter shall submit to Clearing Corporation
such statement of accounts;information and particulars of its affairs as the Clearing
Corporation may fromtime to time require and if so desired shall appear before
Clearing Corporation atits meetings held in connection with its default.
5. Defaulter‟s Assets: Clearing Corporation may call in and realize the security / funds
withheld,margins and securities and / or funds contributed by a defaulter in order
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torecover all monies, securities and other assets due, payable or deliverable to
thedefaulter by any other Member in respect of any trade settled or cleared subjectto
Bye -laws, Rules and Regulations of Clearing Corporation and such assetsbelonging
to or receivable by the defaulting Member shall be made over toClearing Corporation
for the benefit, and on account of Clearing Corporation forwhich valid discharge shall
be given by Clearing Corporation.
6. Payment to Clearing Corporation:
(a) All monies, Securities/ foreign currencies/foreign securities and other assetsdue,
payable or deliverable to the defaulter must be paid or delivered toClearing
Corporation within such time of the declaration of default as ClearingCorporation may
direct.
(b) The Member declared as defaulter shall reimburse Clearing Corporation allout of the
pocket expenses including legal and any other expenditure incurredby Clearing
Corporation in connection with a default or any other activityundertaken by Clearing
Corporation with or on behalf of such a Member.
7. Cessation of The Member: A Member shall be entitled to the repayment of
contribution made by it or anybalance remaining, after necessary adjustment under
the provisions of Bye- laws, Rules and Regulations, in the Settlement Guarantee
Fund after:
a. it ceases to be a Member;
b. all Trades pending, at the time it ceases to be a Member which couldresult in
a charge to the Settlement Guarantee Fund, have been closedand settled;
and
c. all obligations to Clearing Corporation for which the Member wasresponsible
while being a Member have been satisfied or, at the discretionof the Clearing
Corporation, have been deducted/realized by ClearingCorporation from the
Member‘s actual contribution; provided however, thatthe Member shall have
presented to Clearing Corporation suchindemnities or guarantees as Clearing
Corporation deems satisfactory.
8. Indemnity:
a. Without prejudice to the other rights and remedies available to ClearingCorporation,
a Member shall indemnify and keep indemnified, ClearingCorporation against any
loss/damage suffered by Clearing Corporation inproviding the services by Clearing
Corporation to the Member and any otherloss, damage, cost, expenses (including
reasonable attorney fees) arisingfrom a Member‘s default, misconduct or negligence
on the part of the Memberor any employee, agent, servant or representative of the
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Member. This shallbe a continuing indemnity notwithstanding cessation of
membership.
b. Clearing Corporation shall hold harmless its members against any default onthe part
of Clearing Corporation.
DISCIPLINARY PROC EEDINGS, PENALTIES,SUSPENSION AND EXPULSION
1. Disciplinary Jurisdiction: Clearing Corporation may expel or suspend under censure
and/or warn and/orwithdraw all or any of the Membership rights of a Member if it be
guilty ofcontravention, non -compliance, disobedience, disregard or evasion of any ofthe
Bye Laws, Rules and Regulations of Clearing Corporation or of anyresolutions, orders,
notices, directions or decisions or rulings of ClearingCorporation or of any other
Committee or officer of Clearing Corporationauthorised in that behalf or of any conduct,
proceeding or method of businesswhich the Board in its absolute discretion deems
inconsistent with just andequitable principles or detrimental to the interests, reputation of
ClearingCorporation or prejudicial or subversive to its objects and purposes.
2. Penalty For Breach Of Bye -Laws, Rules And Regulations:
a. Every Membe r shall be liable to suspension, expulsion or withdrawal of allor any of
its membership rights and/or to payment of fine and/or to becensured, reprimanded
or warned for contravening, disobeying,disregarding or willfully evading any of Bye -
laws, Rules an d Regulationsor any resolutions, orders, notices, directions, decisions
or rulingshereunder of Clearing Corporation, or of the Board, Executive
Committee,Managing Director or any officer of Clearing Corporation;
b. Clearing Corporation may at its disc retion charge such penalty as it maydeem fit for
delayed and/or non- payments arising out of default, close outand liquidation by a
Member;The Member declared as defaulter shall reimburse Clearing Corporationall
out of pocket expenses including legal and any other expenditureincurred by Clearing
Corporation in connection with a default or any otheractivity undertaken by Clearing
Corporation with or on behalf of such aMember.
3. Membership Suspension:
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3.1 A Member shall be liable for immediate suspension from Membership uponit‘s :
a. Suspension from trading in any of the securities in the NDS which formpart of the
instruments for which Clearing Corporation providesClearing and Settlement
services;
b. Being suspended from using RBI INF INET;
c. Being suspended from using RBI RTGS;
d. Being suspended/ordered for suspension from undertaking activity bya regulatory
body, Court, Law Enforcement Agency or any otherstatutory body/agency authorised
to do so;
e. Being wound up or ordered to be wound up under extant Laws orwhere the winding
up has commenced against such Member;
f. Being suspended from any business segment of Clearing Corporation;
g. An act of default in delivery of either funds and/or Securities / CBLOsfor more than
three occasions or as such number of occasions as maybe decided by Clearing
Corporation on its own or to fall in line withextant Regulatory guidelines, if any, in a
financial half - year inSecurities/CBLO segment transactions and three occasions in
afinancial half - year in Forex segment transactions which in the opinionof Clearing
Corporation warrants immediate suspension;
h. Failure on more than six occasions in a financial half year, to meet anymargin
obligations at the end of the business day on which suchdemand was made on the
Member which in the opinion of ClearingCorporation warrants immediate suspension;
i. Failure to operate within Risk Exposure Limits on more than sixoccasions in a
financial half year which in the opinion of ClearingCorporation warrants immediate
suspension;
j. Failure to operate within prescribed risk exposure limits for any twoconsecutive
business days which in the opinion of ClearingCorporation warrants immediate
suspension;
k. Failure on more than one occasion to meet its default obligation on theday after
settlement which in the opinion of Clearing Corporationwould warrant immediate
suspension;
l. Failure to abide by Bye - laws, Rules and Regulations of ClearingCorporation;
m. Becoming liable for disciplinary proceedings or such proceedings asare initiated
and/or proposed to be initiated against a Member.
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n. A Member shall also be liable for immediate suspension of its membershiprights for
any other cause which in the opinion of Clearing Corporation warrantssuch
suspension;
o. Such suspension may be in force till such time as the same is specificallyremoved by
Clearing Corporation on Clearing Corporation being satisfied thatthe conditions for
suspension no longer exist.
3.2 Suspension may be of two types – (a) temporary i.e., for a period of amaximum of
seven business days or such number of days as may bedecided by Clearing
Corporation: (b) long term i.e., for a period exceedingthe one mentioned under (a)
above ;
3.3 Upon suspension of membership, Clearing Corporation shall notify suchsuspension
to other Members;
3.4 Notwithstanding the non -receipt of notice relating to suspension of aMember by
another Member, the obligations of such other Memberstowards Clearing
Corporation shall continue to subsist. ClearingCorporation shall not in any manner be
liable for any Trades that mayhave taken place between the suspended Member and
other Members;
3.5 After such disablement, Clearing Corporation shall communicate the information to
other members. Managing Director of Clearing Corporationor a Committee of not less
than two officials nominated by the ManagingDirector (MD) may disable a Member
from accessing the facilities ofClearing Corporation if in the opinion of the MD or the
Committee ofofficials circumstances exist warranting disablement pending
suspension.
Provided that, within 4 hours after such disablement, the MD or theCommittee of
officials as the case may be shall record in writing thereasons for such disablement
provided however that the same shall bereported at the next Board or the Committee
meeting whichever is earlier.After such disablement, Clearing Corporation shall
communicate theinformation to other members.
3.6 Notwithstanding anything contained in any of the Bye laws, if a Member isrestrained
from undertaking any activity including the dealing in securitiesby any
regulatory/statutory body, court, such Member shall ipsofactostand suspended from
the membership of Clearing Corporation .
4. Reconsideration/Review: The Board may, on its own or on appeal by the Member
concerned, reconsiderand rescind, revoke or modify its order fining, censuring,
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warning orwithdrawing all or any of the membership rights of the Member. In
likemanner, the Board may rescind, revoke or modify a resolution expelling
orsuspending any Member.
5. Consequences of Suspension: The suspension of a clearing Member shall among
others, have the followingconsequences:
a. Suspension shall be effective immediately upon the Member being notifiedto
that effect by Clearing Corporation unless otherwise specificallymentioned.
Upon suspension, Clearing Corporation shall not accept anyobligation
whatsoever on behalf of such suspended Member. However,the suspended
Member will continue to be li able to Clearing Corporationin respect of all its
outstanding Trades and/or other dues, if any, arisingout of actions undertaken
by Clearing Corporation for and on behalf ofsuch Member prior to such
suspension;
b. Suspension of Membership Rights: A suspended Member shall during the
terms of its suspension, bedeprived of and excluded from all rights and
privileges of membership butmay be proceeded against by Clearing
Corporation for any offencecommitted by it before suspension in such manner
as may be necessaryto protect the interest of Clearing Corporation;
c. Rights of creditors unimpaired: Suspension shall not affect the rights of a
Member(s) who is a creditor ofthe suspended Member(s) on account of
Trades settled/to be settled through Clearing Corporation and rights of
Clearing Corporation;
d. Fulfilment of Deals and Obligations: The suspended Member shall be
bound to fulfil all its obligations underand complete all the Trades outstanding
against its name in the books ofClearing Corporation at the time of its
suspension.
6. Consequences Of Expulsion: The expulsion of a Member shall, among others,
have the followingconsequences namely:
a. Membership Rights forfeited: The expelled Member shall forfeit its right of
membership to ClearingCorporation and all rights and privileges as a Member
of ClearingCorporation including any right to enforce any claim or any interest
in anyproperty or funds against Clearing Corporation but the liabilities of such
aMember to Clearing Corporation shall continue and remain unaffected
bysuch expulsion;
b. Rights of creditors unimpaired: Expulsion shall not affect the rights of a
Member who is a creditor of theexpelled Members on account of Trades
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settled/to be settled throughClearing Corporation or rights of Clearing
Corporation;
c. Fulfilment of Deals and Obligations: Expelled Member shall be bound to
fulfil its obligations under andcomplete the Trades outstanding against its
name in the books of ClearingCorporation at the time of its expulsion.
MISCELLANEOUS
1. Save as otherwise specifically provided in the Bye Laws, Rules and Regulationsby
Clearing Corporation in respect of Clearing and Settlement arrangement,
inpromoting, facilitating, assisting, regulating, managing and operating theClearing
and Settlement, Clearing Corporation shall not be deemed to haveincurred any
liability, and accordingly no claim or recourse in respect of or inrelation to any
trading/dealing in securities, FOREX transactions, derivatives andsuch other
segments and instruments as Clearing Corporation may undertakeClearing and
Settlement in, or any matter connected therewith shall lie againstClearing
Corporation , its Directors, employees, officers or any authorizedperson(s) ac ting for
Clearing Corporation in good faith .
2. No claim, suit, prosecution or other legal proceeding shall lie against
ClearingCorporation , its Directors, employees, officers or any authorised
person(s)acting for Clearing Corporation in respect of anything which is done or
intendedto be done in good faith in pursuance of any order or other binding
directiveissued to Clearing Corporation under any law or delegated legislation for
thetime being in force or anything done pursuant to the provisions of the Bye-
laws,Rules and Regulations.
3. Clearing Corporation shall have the unfettered discretion to part with/discloseor
disseminate such information concerning the Members trade settled andcleared
through Clearing Corporation as deemed necessary to Regulatory,Governmental or
other agencies. Clearing Corporation may also provideaggregated information to the
press and media.
4. Clearing Corporation shall not be held responsible or liable for any fai lure ofcomputer
systems, telecommunication network and other equipment installed atthe Member‘s
office premises. Clearing Corporation shall have the right toinspect and supervise all
computer systems, software programmes, telecommunicationequipment, etc. as
prescribed by Clearing Corporation at itsoffice and/or office/premises of the Member
where such equipment may beinstalled and the Member shall not make any
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alterations, modifications andchanges to such equipment without the prior written
consent of ClearingCorporation.
5. No failure or delay on the part of Clearing Corporation in the exercise of anypower,
right or privilege here under shall operate as a waiver thereof, nor shallany failure or
delay in exercise of such power, right or privilege precludeClearing Corporation from
further exercise thereof.
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CHAPTER 9
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating To
Securities Market) Regulations, 2003&
SEBI (Prohibition of Insider Trading) Regulations, 1992
Learning Objectives
After reading this chapter, you should be able to understand
1. the fraudulent and unfair trade practices of securities market
2. how the SEBI prohibiting the fraudulent and unfair trade practices
3. how to protect from those unfair trade practices
4. the impact of insider trading on a securities market
5. overview of SEBI regulation to curb the insider trading and to protect the investors
Introduction
The regulation is of crucial importance in securities markets as the absence of
conditions of perfect competition and existence of information asymmetry make it possible
for certain participants to take unfair advantage of other investors by exploiting the regulatory
inadequacy. Malpractices such as price manipulation and frauds, not only cause substantial
financial loss to investors. It also disables the orderly functioning of securities markets and
the efficient allocation of investible resources of the economy. Increased integration of
India‘s capital markets with global markets implies that the state of the regulatory
environment in the Indian securities market is now of relevance to both domestic as well as
foreign retail investors. In order to prohibit fraudulent and unfair trade practices relating to
securities market, the SEBI were enacted regulations in October 1995. It empowers SEBI to
investigate into violations committed by any person including an investor, issuer or an
intermediary associated with the securities market. In simple words, no person should buy,
sell or otherwise deal in securities in a fraudulent manner as a pr incipal or agent.
Similarly, Insider trading affects the securities market performance and against the
general public. Insider trading refers to the dealings (buying or selling) a company‘s
securities on the basis of confidential information relating to the company which is not
published and not known to the general public, used to make profit or avoid los in
transactions in securities of the company. In simple words, if the person who is part of
management or close to them on the basis of undisclosed price sensitive information trades
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the shares. The director of a listed company, member of management, an employee of the
company or by any other person such as auditor, agent, advisor, analyst, stock exchange
people, government officials, and consultant and so on are referred as insiders. Dealing in
securities by the insider is considered as illegal, because they use the insider information
and helps them to make profit or avoid losses who do not have access of those information.
The price of securities reflects the available information which is assumption of Efficient
Market Hypotheses (EMH). Insiders‘ actions affect the fair dealings and the same should be
stopped in the interest of general investors.
Let us discuss the definitions, rules and regulations in this regard in the following
sections.
SEBI ((Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations, 2003
Short title and commencement
1. These regulations may be called the Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets)
Regulations, 2003.
2. They shall come into force on the date of their publication in the Official Gazette.
Definitions
In these regulations, unless the context otherwise requires:
(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of
1992);
(b) "dealing in securities" includes an act of buying, selling or subscribing pursuant
to any issue of any security or agreeing to buy, sell or subscribe to any issue of any
security or otherwise transacting in any way in any security by any person as
principal, agent or intermediary referred to in section 12 of the Act.
(c) "fraud" includes any act, expression, omission or concealment committed whether
in a deceitful manner or not by a person or by any other person with his connivance
or by his agent while dealing in securities in order to induce another person or his
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agent to deal in securities, whether or not there is any wrongful gain or avoidance of
any loss, and shall also include-
1. a knowing misrepresentation of the truth or concealment of material fact in order
that another person may act to his detriment;
2. a suggestion as to a fact which is not true by one who does not believe it to be
true;
3. an active concealment of a fact by a person having knowledge or belief of the
fact;
4. a promise made without any intention of performing it;
5. a representation made in a reckless and careless manner whether it be true or
false;
6. any such act or omission as any other law specifically declares to be fraudulent,
7. deceptive behaviour by a person depriving another of informed consent or full
participation,
8. a false statement made without reasonable ground for believing it to be true.
9. The act of an issuer of securities giving out misinformation that affects
the market price ofthe security, resulting in investors
beingeffectively misled eventhough they did not rely on the statement itself or
anything derived from it other than the market price.
And "fraudulent" shall be construed accordingly;
Nothing contained in this clause shall apply to any general comments made in good faith in
regard to –
a. the economic policy of the government
b. the economic situation of the country
c. trends in the securities market or
d. Any other matter of a like nature
Whether such comments are made in public or in private:
e. "Investigating Authority" means any officer of the Board not below the rank
of Division Chief, authorized by the Board to undertake investigation under
Section 11C of the Act;
f. "Securities" means securities as defined in section 2 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956).
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(b) Words and expressions used and not defined in these regulations, but defined in the Act
or in the rules or regulations made thereunder, shall have the meanings respectively
assigned to them in the Act or rules or regulations made thereunder, as the case may be.
Prohibition of certain dealings in securities
No person shall directly or indirectly-
(a) Buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed or
proposed to be listed in a recognized stock exchange, any manipulative or deceptive
device or contrivance in contravention of the provisions of the Act or the rules or the
regulations made there under;
(c) Employ any device, scheme or artifice to defraud in connection with dealing in or issue
of securities which are listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which operates or would operate as
fraud or deceit upon any person in connection with any dealing in or issue of securities
which are listed or proposed to be listed on a recognized stock exchange in
contravention of the provisions of the Act or the rules and the regulations made
there under.
Prohibition of manipulative, fraudulent and unfair trade practices
(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a
fraudulent or an unfair trade practice in securities.
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if
it involves fraud and may include all or any of the following, namely:-
(a) Indulging in an act which creates false or misleading appearance of trading in
the securities market;
(b) dealing in a security not intended to effect transfer of beneficial ownership but
intended to operate only as a device to inflate, depress or cause fluctuations
in the price of such security for wrongful gain or avoidance of loss;
(c) Advancing or agreeing to advance any money to any person thereby inducing
any other person to offer to buy any security in any issue only with the
intention of securing the minimum subscription to such issue;
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(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person
any money or money‘s worth for inducing such person for dealing in any
security with the object of inflating, depressing, maintaining or causing
fluctuation in the price of such security;
(e) Any act or omission amounting to manipulation of the price of a security;
(f) publishing or causing to publish or reporting or causing to report by a person
dealing in securities any information which is not true or which he does not
believe to be true prior to or in the course of dealing in securities;
(g) Entering into a transaction in securities without intention of performing it or
without intention of change of ownership of such security;
(h) Selling, dealing or pledging of stolen or counterfeit security whether in
physical or dematerialized form;
(i) An intermediary promising a certain price in respect of buying or selling of a
security to a client and waiting till a discrepancy arises in the price of such
security and retaining the difference in prices as profit for himself;
(j) An intermediary providing his clients with such information relating to a
security as cannot be verified by the clients before their dealing in such
security;
(k) An advertisement that is misleading or that contains information in a distorted
manner and which may influence the decision of the investors;
(l) An intermediary reporting trading transactions to his clients entered into on
their behalf in an inflated manner in order to increase his commission and
brokerage;
(m) An intermediary not disclosing to his client transactions entered into on his
behalf including taking an option position;
(n) circular transactions in respect of a security entered into between
intermediaries in order to increase commission to provide a false appearance
of trading in such security or to inflate, depress or cause fluctuations in the
price of such security;
(o) Encouraging the clients by an intermediary to deal in securities solely with the
object of enhancing his brokerage or commission.
(p) An intermediary predating or otherwise falsifying records such as contract
notes.
(q) An intermediary buying or selling securities in advance of a substantial client
order or whereby a futures or option position is taken about an impending
transaction in the same or related futures or options contract.
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(r) Planting false or misleading news which may induce sale or purchase of
securities.
INVESTIGATION
Power of the Board to order investigation
Where the Board, the Chairman, the member or the Executive Director (hereinafter referred
to as ―appointing authority‖) has reasonable ground to believe that
(a) the transactions in securities are being dealt with in a manner detrimental to the
investors or the securities market in violation of these regulations
(b) any intermediary or any person associated with the securities market has violated
any of the provisions of the Act or the rules or the regulations
it may, at any time by order in writing, direct any officer not below the rank of Division Chief
(hereinafter referred to as the ―Investigating Authority‖) specified in the order to investigate
the affairs of such intermediary or persons associated with the securities market or any other
person and to report thereon to the Board in the manner provided in section 11C of the Act.
Powers of Investigating Authority
Without prejudice to the powers conferred under the Act, the Investigating Authority shall
have the following powers for the conduct of investigation, namely:
1. to call for information or records from any person specified in section 11(2)(i)
of the Act;
2. to undertake inspection of any book, or register, or other document or record
of any listed public company or a public company (not being intermediaries
referred to in section 12 of the Act) which intends to get its securities listed on
any recognized stock exchange where the Investigating Authority has
reasonable grounds to believe that such company has been conducting in
violation of these regulations
3. to require any intermediary or any person associated with securities market in
any manner to furnish such information to, or produce such books, or
registers, or other documents, or record before him or any person authorized
by him in this behalf as he may consider necessary if the furnishing of such
information or the production of such books, or registers, or other documents,
or record is relevant or necessary for the purposes of the investigation;
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4. to keep in his custody any books, registers, other documents and record
produced under this regulation for a maximum period of one month which
may be extended up to a period of six months by the Board:
Provided that the Investigating Authority may call for any book, register other
document or record if the same is needed again
Provided further that if the person on whose behalf the books, registers, other
documents and record are produced requires certified copies of the books,
registers, other documents and record produced before the Investigating
Authority, he shall give certified copies of such books, registers, other
documents and record to such person or on whose behalf the books,
registers, other documents and record were produced
5. to examine orally and to record the statement of the person concerned or any
director, partner, member or employee of such person and to take notes of
such oral examination to be used as an evidence against such person:
Provided that the said notes shall be read over to, or by, and signed by, the
person so examined
6. to examine on oath any manager, managing director, officer or other
employee of any intermediary or any person associated with securities market
in any manner in relation to the affairs of his business and may administer an
oath accordingly and for that purpose may require any of those persons to
appear before him personally.
Power of the Investigating Authority to be exercised with prior approval
The Investigating Authority may, after obtaining specific approval from the Chairman or
Member also exercise all or any of the following powers, namely:-
a. to call for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or Provincial Act in
respect of any transaction in securities which are under investigation;
b. to make an application to the Judicial Magistrate of the first class having jurisdiction for
an order for the seizure of any books, registers, other documents and record, if in the
course of investigation, the Investigating Authority has reasonable ground to believe that
such books, registers, other documents and record of, or relating to, any intermediary or
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any person associated with securities market in any manner may be destroyed,
mutilated, altered, falsified or secreted;
c. to keep in his custody the books, registers, other documents and record seized under
these regulations for such period not later than the conclusion of the investigation as he
considers necessary and thereafter to return the same to the person, the company or the
other body corporate, or, as the case may be, to the managing director or the manager
or any other person from whose custody or power they were seized:
Provided that the Investigating Authority may, before returning such books, registers,
other documents and record as aforesaid, place identification marks on them or any part
thereof ;
d. Save as otherwise provided in this regulation, every search or seizure made under this
regulation shall be carried out in accordance with the provisions of the Code of criminal
Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code.
Duty to co-operate, etc.
a. It shall be the duty of every person in respect of whom an investigation has been
ordered under regulation 7-
I. to produce to the Investigating Authority or any person
authorized by him such books, accounts and other documents and record in
his custody or control and to furnish such statements and information as the
Investigation Authority or the person so authorized by him may reasonably
require for the purposes of the investigation;
II. to appear before the Investigation Authority personally when
required to do so by him under regulation 6 or regulation 7 to answer any
question which is put to him by the Investigation Authority in pursuance of the
powers under the said regulations.
b. Without prejudice to the provisions of sections 235 to 241 of the Companies Act,
1956 (1 of 1956), it shall be the duty of every manager, managing director, officer
and other employee of the company and every intermediary referred to in section 12
of the Act or every person associated with the securities market to preserve and to
produce to the Investigating Authority or any person authorized by him in this behalf,
all the books, registers, other documents and record of, or relating to, the company
or, as the case may be, of or relating to, the intermediary or such person, which are
in their custody or power.
c. Without prejudice to the generality of the provisions of sub-regulations (1) and (2),
such person shall -
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I. allow the Investigating Authority to have access to the premises occupied by
such person at all reasonable times for the purpose of investigation;
II. extend to the Investigating Authority reasonable facilities for examining any
books, accounts and other documents in his custody or control (whether kept
manually or in computer or in any other form) reasonably required for the
purposes of the investigation;
III. provide to such Investigating Authority any such books, accounts and
records which, in the opinion of the Investigating Authority, are relevant to the
investigation or, as the case may be, allow him to take out computer out-
prints thereof.
Submission of report to the Board
The Investigating Authority shall, on completion of investigation, after taking into account all
relevant facts, submit a report to the appointing authority:
Provided that the Investigating Authority may submit an interim report pending completion of
investigations if he considers necessary in the interest of investors and the securities market
or as directed by the appointing authority.
Enforcement by the Board
The Board may, after consideration of the report referred to in regulation 9, if satisfied that
there is a violation of these regulations and after giving a reasonable opportunity of hearing
to the persons concerned, issue such directions or take such action as mentioned in
regulation 11and regulation 12:
Provided that the Board may, in the interest of investors and the securities market, pending
the receipt of the report of the investigating authority referred to in regulation 9, issue
directions under regulation 11:
Provided further, the Board may, in the interest of investors and securities market, dispense
with the opportunity of pre-decisional hearing by recording reasons in writing and shall give
an opportunity of post-decisional hearing to the persons concerned as expeditiously as
possible.
a. The Board may, without prejudice to the provisions contained in sub-sections (1), (2),
(2A) and (3) of section 11 and section 11B of the Act, by an order, for reasons to be
recorded in writing, in the interests of investors and securities market, issue or take any
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of the following actions or directions, either pending investigation orenquiry or on
completion of such investigation or enquiry, namely:-
I. suspend the trading of the security found to be or prima-faciefound to be
involved in fraudulent and unfair trade practice in a recognized stock exchange;
II. restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities;
III. suspend any office-bearer of any stock exchange or self-regulatory organization
from holding such position;
IV. impound and retain the proceeds or securities in respect of any transaction which
is in violation or prima facie in violation of these regulations;
V. direct any intermediary or any person associated with the secur ities market in any
manner not to dispose of or alienate an asset forming part of a fraudulent and
unfair transaction:
VI. require the person concerned to call upon any of its officers, other employees or
representatives to refrain from dealing in securities in any particular manner;
VII. prohibit the person concerned from disposing of any of the securities acquired in
contravention of these regulations;
VIII. direct the person concerned to dispose of any such securities acquired in
contravention of these regulations, in such manner as the Board may deem fit, for
restoring the status-quo ante;
b. The Board shall issue a press release in respect of any final order passed under sub -
regulation (1) in at least two newspapers of which one shall have nationwide circulation
and shall also put the order on the website of the Board.
Suspension or cancellation of registration
The Board may, without prejudice to the provisions contained in sub-sections (1), (2), (2A)
and (3) of section 11 and section 11B of the Act, by an order, for reasons to be recorded in
writing, in the interests of investors and securities market take the following action against an
intermediary:
Issue a warning or censure
suspend the registration of the intermediary; or
cancel of the registration of the intermediary
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Provided that no final order of suspension or cancellation of an intermediary for violation of
these regulations shall be passed unless the procedure specified in the regulations
applicable to such intermediary under the Securities and Exchange Board of India
(Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations,
2002 is complied with.
Repeal and savings
a. The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 1995 is hereby repealed.
b. Notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995,
any violation of regulations 3, 4, 5 and 6 of the SEBI (Prohibition of Fraudulent and
Unfair Trade Practices Relating to Securities Market) Regulations, 1995 shall be
investigated and proceeded against in accordance with the procedure laid down in these
regulations.
c. Notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995,
any investigation pending, at the commencement of these regulations shall be continued
and disposed of in accordance with the procedure laid down in these regulations.
The SEBI Prohibition of Fraudulent and Unfair Trade Practices (FUTP) laws relating to
Securities Market Regulations,1995, brought into force after the scams of early 1990s,
were repealed by 2003. According to the new laws (SEBI, 2003) the scope of the
definition of ―fraud‖ was comprehensively broadened. The definition now includes any
act, expression, omission or concealment while dealing in securities, committed
deliberately or not, by a person or with his connivance (or by his agent) in order to induce
others to deal in securities.
The Amended FUTP regulation of 2003 provides a seemingly all-encompassing
definition of fraudulent or an unfair trade practice as any act or omission amounting to
manipulation of the price of a security. The above is now to be considered an offence
whether or not there is any wrongful gain or avoidance of any loss in such dealings. The
new Act also covers frauds such as providing misinformation to the public and any
pretentious transactions, which can cause fluctuations in prices thus inducing others to
buy or sell
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SEBI (Prohibition of Insider Trading) Regulations, 1992
Short title and commencement
1. These regulations may be called the Securities and Exchange Board of India
(Prohibition of Insider Trading) Regulations, 1992.
2. These regulations shall come into force on the date of their publication in the Official
Gazette.
Definitions
In these regulations, unless the context otherwise requires:-
a. “Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
b. “body corporate” means a body corporate as defined in section 2 of the Companies
Act, 1956 (1 of 1956);
c. “connected person” means any person who –
i. is a director, as defined in clause (13) of section 2 of the Companies Act,
1956 (1 of 1956) of a company, or is deemed to be a director of that company
by virtue of subclause (10) of section 307 of that Act; or
ii. Occupies the position as an officer or an employee of the company or holds a
position involving a professional or business relationship between himself and
the company, whether temporary or permanent, and who may reasonably be
expected to have an access to unpublished price sensitive information in
relation to that company.
Explanation - For the purpose of clause (c), the words ―connected person‖ shall
mean any person who is a connected person six months prior to an act of insider
trading.
d. “dealing in securities” means an act of subscribing, buying, selling or agreeing to
subscribe, buy, sell or deal in any securities by any person either as principal or
agent;
e. “insider” means any person who, is or was connected with the company or is
deemed to have been connected with the company and who is reasonably expected
to have access to unpublished price-sensitive information in respect of securities of a
company, or (ii) has received or has had access to such unpublished price sensitive
information;
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f. “investigating authority‖ means any officer of the Board or any other person, not
being a firm, body corporate or an association of persons, having experience in
dealing with the problems relating to the securities market and who is authorized by
the Board under Chapter III;
g. “officer of a company” means any person as defined in clause (30) of Section 2 of
the Companies Act, 1956 (1 of 1956) including an auditor of the company;
h. “person is deemed to be a connected person”, if such person –
i. is a company under the same management or group or any subsidiary company
thereof within the meaning of subsection (1B) of section 370, or sub-section (11)
of section 372 of the Companies Act, 1956 (1 of 1956) or sub-clause (g) of
section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of
1969) as the case may be; or
ii. is an intermediary as specified in section 12 of the Act,
iii. Investment Company, Trustee Company, Asset
iv. Management Company or an employee or director thereof or an official of a stock
exchange or of clearing house or corporation;
v. is a merchant banker, share transfer agent, registrar to an issue, debenture
trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment
Company or an employee thereof, or, is a member of the Board of Trustees
vi. of a mutual fund or a member of the Board of Directors of the Asset Management
Company of a mutual fund or is an employee thereof who has a fiduciary
relationship with the company;
vii. is a member of the Board of Directors, or an employee, of a public financial
institution as defined in Section 4A of the
viii. Companies Act, 1956;
ix. is an official or an employee of a Self-regulatory Organization recognized or
authorized by the Board of a regulatory body;
x. is a relative of any of the aforementioned persons;
xi. is a banker of the company;
i. relatives of the connected person; or
j. is a concern, firm, trust, Hindu Undivided Family, Company or Association of Persons
wherein any of the connected persons mentioned in sub-clause (i) of clause (c), of
this regulation or any of the persons mentioned in subclauses (vi), (vii) or (viii) of this
clause have more than 10% of the holding or interest;
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k. “Price sensitive information” means any information which relates directly or
indirectly to a company and which if published is likely to materially affect the price of
securities of company.
Explanation - The following shall be deemed to be price sensitive information:-
i. periodical financial results of the company;
ii. intended declaration of dividends (both interim and final);
iii. issue of securities or buy-back of securities;
iv. any major expansion plans or execution of new projects;
v. amalgamation, mergers or takeovers;
vi. disposal of the whole or substantial part of the undertaking; and
vii. significant changes in policies, plans or operations of the company;
l. “relative” means a person, as defined in Section 6 of the Companies Act, 1956 (1 of
1956);
m. “stock exchange” means a stock exchange which is recognized by the Central
Government or Securities and Exchange Board of India under Section 4 of Securities
Contracts (Regulation) Act, 1956 (42 of 1956);
n. “Unpublished information” means information which is not published by the
company or its agents and is not specific in nature.
o. “Working day” shall mean the working day when the regular trading is permitted on
the concerned stock exchange where securities of the company are listed.
Explanation - Speculative reports in print or electronic media shall not be considered as
published information.
Prohibition on dealing, communicating or counselling on matters relating to insider
trading:
No insider shall –
(i) either on his own behalf or on behalf of any other person, deal in securities of a
company listed on any stock exchange when in possession of any unpublished
price sensitive information; or
(ii) communicate or counsel or procure, directly or indirectly, any unpublished price
sensitive information to any person who while in possession of such unpublished
price sensitive information shall not deal in securities:
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PROVIDED, that nothing contained above shall be applicable to any communication
required in the ordinary course of business or profession or employment or under any law.
3B. Regulation 3A not to apply in certain cases
(1) In a proceeding against a company in respect of regulation 3A, it shall be a defence
to prove that it entered into a transaction in the securities of a listed company
when the unpublished price sensitive information was in the possession of an
officer or employee of the company, if:
(a) the decision to enter into the transaction or agreement was taken on its behalf
by a person or persons other than that officer or employee; and
(b) such company has put in place such systems and procedures which
demarcate the activities of the company in such a way that the person who
enters into transaction in securities on behalf of the company cannot have
access to information which is in possession of other officer or employee of
the company; and
(c) it had in operation at that time, arrangements that could reasonably be
expected to ensure that the information was not communicated to the person
or persons who made the decision and that no advice with respect to the
transactions or agreement was given to that person or any of those persons
by that officer or employee; and
(d) the information was not so communicated and no such advise was so given.
(2) In a proceeding against a company in respect of regulation 3A which is in possession
of unpublished price sensitive information, it shall be defence to prove that
acquisition of shares of a listed company was as per the Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,
1997.
Violation of provisions relating to insider trading
Any insider, who deals in securities in contravention of the provisions of Regulation 3 or 3A
shall be guilty of insider trading.
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Power to make inquiries and inspection
(1) If the Board suspects that any person has violated any provision of these regulations,
it may make inquiries with such persons or any other person as mentioned in
clause (i) of sub-section (2) of Section 11 as deemed fit, to form a prima facie
opinion as to whether there is any violation of these regulations.
(2) The Board may appoint one or more officers to inspect the books and records of
insider(s) or any other persons as mentioned in clause (i) of sub-section (2) of
Section 11 for the purpose of sub-regulation (1).
Board‟s right to investigate
(1) Where the Board, is of prima facie opinion, that it is necessary to investigate and
inspect the books of account, either records and documents of an insider or any
other person mentioned in clause (i) of sub-section (1) of section 11 of the Act for any
of the purposes specified in sub-regulation (2), it may appoint an investigating
authority for the said purpose.
(2) The purpose referred to in sub-regulation (1) may be as follows:
(a) to investigate into the complaints received from investors, intermediaries or
any other person on any matter having a bearing on the allegations of insider
trading; and
(b) to investigate suo-moto upon its own knowledge or information in its
possession to protect the interest of investors in securities against breach of
these regulations.
Procedure for investigation
1. Before undertaking any investigation under Regulation 5, the Board shall give a
reasonable notice to insider for that purpose.
2. Notwithstanding anything contained in sub-regulation (1), where the Board is
satisfied that in the interest of investors or in public interest no such notice should be
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given, it may by an order in writing direct that the investigation be taken up without
such notice.
3. On being empowered by the Board, the investigating authority shall undertake the
investigation and inspection of books of account and the insider against whom an
investigation is being carried out an insider or any other person mentioned in clause
(i) of sub-section (1) of Section 11 of the Act shall be bound to discharge his
obligations as provided in Regulation 7.
Obligations of insider on investigation by the Board
1. It shall be the duty of every insider, who is being investigated, or any other person
mentioned in clause (i) of sub-section (1) of Section 11 of the Act, to produce to the
investigating authority such books, accounts and other documents in his custody or
control and furnish the authority with the statements and information relating to the
transactions in securities market within such time as the said authority may require.
2. The insider or any other person mentioned in clause (i) of sub section (2) of Section
11 of the Act shall allow the investigating authority to have reasonable access to the
premises occupied by such insider and also extend reasonable facility for examining
any books, records, documents and computer data in his possession of the stock-
broker or any other person and also provide copies of documents or other materials
which, in the opinion of the investigating authority are relevant.
3. The investigating authority, in the course of investigation, shall be entitled to examine
or record statements of any member, director, partner, proprietor and employee of
the insider or any other person mentioned in clause (i) of sub-section (2) of Section
11 of the Act.
4. It shall be the duty of every director, proprietor, partner, officer and employee of the
insider to give to the investigating authority all assistance in connection with the
investigation, which the insider or any other person mentioned in clause (i) of sub-
section (2) of section 11 of the Act may be reasonably expected to give.
Submission of Report to the Board
The investigating authority shall, within reasonable time of the conclusion of the
investigation, submit an investigation report to the Board.
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Communication of findings, etc.
1. The Board shall, after consideration of the investigation report communicate the
findings to the person suspected to be involved in insider trading or violation of
these regulations.
2. The person to whom such findings have been communicated shall reply to the
same within 21 days.
3. On receipt of such a reply or explanation, if any, from such person, the Board
may take such measures as it deems fit to protect the interests of the investors
and in the interests of the securities market and for the due compliance of the
provisions of the Act, the Regulations made thereunder including the issue of
directions under Regulation 11.
Appointment of Auditor
Notwithstanding anything contained in regulation 4A and regulation 5, the Board may
appoint a qualified auditor to investigate into the books of account or the affairs of the insider
or any other person mentioned in clause (i) of sub-section (1) of section 11 of the Act:
PROVIDED that, the auditor so appointed shall have the same powers of the inspecting
authority as stated in regulation 5 and the insider shall have the obligations specified in
regulation 7.
Directions by the Board
The Board may without prejudice to its right to initiate criminal prosecution under Section 24
or any action under Chapter VI A of the Act, to protect the interests of investor and in the
interests of the securities market and for due compliance with the provisions of the Act,
regulation made thereunder issue any or all of the following orders, namely:-
(a) directing the insider or such person as mentioned in clause (i) of sub-section
(2) of Section 11 of the Act not to deal in securities in any particular
manner;
(b) prohibiting the insider or such person as mentioned in clause (i) of sub-
section (2) of Section 11 of the Act from disposing of any of the securities
acquired in violation of these Regulations;
(c) restraining the insider to communicate or counsel any person to deal in
securities;
(d) declaring the transaction(s) in securities as null and void;
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(e) directing the person who acquired the securities in violation of these
regulations to deliver the securities back to the seller:
PROVIDED that in case the buyer is not in a position to deliver such
securities, the market price prevailing at the time of issuing of such
directions or at the time of transactions whichever is higher, shall be paid
to the seller;
(f) directing the person who has dealt in securities in violation of these
regulations to transfer an amount or proceeds equivalent to the cost price
or market price of securities, whichever is higher to the investor protection
fund of a recognised stock exchange.
POLICY ON DISCLOSURES AND INTERNAL PROCEDURE FOR PREVENTION OF
INSIDER TRADING
Code of internal procedures and conduct for listed companies and other entities:
(1) All listed companies and organizations associated with securities markets
including:
1 the intermediaries as mentioned in Section 12 of the Act, asset
management company and trustees of mutual funds;
2 the self-regulatory organizations recognized or authorized by the Board;
3 the recognized stock exchanges and clearing houses or corporations;
4 the public financial institutions as defined in Section 4A of the Companies
Act, 1956; and
5 the professional firms such as auditors, accountancy firms, law firms,
analysts, consultants, etc., assisting or advising listed companies, shall
frame a code of internal procedures and conduct as near thereto the
Model Code specified in Schedule I of these Regulations without diluting it
in any manner and ensure compliance of the same .
(2) The entities mentioned in sub-regulation (1), shall abide by the Code of
Corporate Disclosure Practices as specified in Schedule II of these
Regulations.
(3) All entities mention in sub-regulation (1), shall adopt appropriate mechanisms
and procedures to enforce the codes specified under sub-regulations (1) and
(2).
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(4) Action taken by the entities mentioned in sub-regulation (1) against any
person for violation of the code under sub-regulation (3) shall not preclude the
Board from initiating proceedings for violation of these Regulations.
Disclosure of interest or holding by directors and officers and substantial
shareholders in listed companies Initial Disclosure:
a. Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company, in Form A, the number of shares
or voting rights held by such person, on becoming such holder, within 2
working days of:- (a) the receipt of intimation of allotment of shares; or
b. The acquisition of shares or voting rights, as the case may be.
c. Any person who is a director or officer of a listed company,shall disclose
to the company in Form B the number of shares or voting rights held and
positions taken in derivatives by such person and his dependents (as
defined by the company), within two working days of becoming a director
or officer of the company.
Continual Disclosure
a. Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company, in Form C, the number of shares or
voting rights held and change in shareholding or voting rights, even if such
change results in shareholding falling below 5%, if there has been change in such
holdings from the last disclosure made under sub-regulation (1) or under this sub-
regulation; and such change exceeds 2% of total shareholding or voting rights in
the company.
b. Any person who is a director or officer of a listed company, shall disclose to the
company and the stock exchange where the securities are listed in Form D, the
total number of shares or voting rights held and change in shareholding or voting
rights, if there has been a change in such holdings of such person and his
dependents (as defined by the company) from the last disclosure made under
sub-regulation (2) or under this sub-regulation, and the change exceeds Rupees
5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights,
whichever is lower.
c. The disclosure mentioned in sub-regulations (3) and (4) shall be made within two
working days of;
1 the receipt of intimation of allotment of shares; or
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2 the acquisition or sale of shares or voting rights, as the case may be.
Disclosure by company to stock exchanges
Every listed company, within two working days of receipt, shall disclose to all stock
exchanges on which the company is listed, the information received under sub-regulations
(1), (2), (3) and (4) in respective formats specified in Schedule III.
E-filing
The disclosures required under this regulation may also be made through electronic filing in
accordance with the system devised by the stock exchange.
Action in case of default
Without prejudice to the directions under regulation 11, if any person violates provisions of
these regulations, he shall be liable for appropriate action under section 11, 11B, 11D,
Chapter VIA and Section 24 of the Act.
Appeal to the Securities Appellate Tribunal
Any person aggrieved by an order of the Board under these regulations may prefer an
appeal to the Securities Appellate Tribunal.
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Chapter 10
SEBI (Portfolio Managers) Regulations, 1993
Learning objectives
After reading this chapter, the reader will understand
1. The role of portfolio managers in securities market
2. Regulatory framework under which they have to perform their role
3. Code of conduct of portfolio managers
Introduction
Portfolio manager means any person who pursuant to contract or arrangement
with the client, advises or directs or undertakes on behalf of the client (whether as a
discretionary portfolio manager or otherwise) the management or administration of a
portfolio of securities or the funds of the clients as the case may be. Discretionary
portfolio manager is defined as one who exercises or may exercise, under a contract
relating to portfolio management, any degree of discretion as to the investment or the
management of the portfolio of the securities or the funds of the client. Portfolio means
the combination of two or more stocks. However, portfolio refers to the total holdings of
securities belonging to any person. A portfolio manager thus, with professional
experience and expertise in the field, studies the market and adjusts the investment mix
for his client on a continuing basis to ensure safety of investment and reasonable returns
therefrom.
SEBI issued SEBI (Portfolio Managers) Regulations, 1993 in exercise of the
powers conferred by Section 30 of SEBI Act, 1992. These regulations took effect from
7th January, 1993. Regulation 3A lays down that an application by a portfolio manage r
for grant of the certificate shall be made to SEBI in the prescribed form-A and shall be
accompanies by a non-refundable application fee, as specified in Clause (1) of Schedule
II, to be paid in the manner specified in Part B thereof. Incomplete applicat ions shall be
rejected after the applicant is given an opportunity to remove within the time specified
such objections on the application as may be indicated by SEBI. Before disposing the
application, SEBI may require the applicant to furnish further infor mation or clarification
and the applicant or its principal officer who is mainly responsible for the activit ies as a
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portfolio manager, shall appear before SEBI to make a personal representation, if
required.
Let us discuss the regulation in the following sections.
1. Short title and commencement
1. These rules may be called the Securities and Exchange Board of India (Portfolio
Managers) Rules, 1993.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions
1. In these rules, unless the context otherwise requires:-
(a) " Act" means the Securities and Exchange Board of India, Act 1992 (15 of 1992);
(b) " body corporate" shall have the meaning assigned to it in or under clause (7) of
section 2 of the Companies Act, 1956 (1 of 1956);
(c) "Certificate" means a certificate of registration issued by the Board;
(d) " Portfolio‖ means the total holdings of securities belonging to any person;
(e) " Portfoliomanager‖ means any person who pursuant to a contract or
arrangement with a client, advises or directs or undertakes on behalf of the client
(whether as a discretionary portfolio manager or otherwise) the management or
administration of a portfolio of securities or the funds of the client, as the case may
be;
(f) "discretionary portfolio manager" means a portfolio manager who exercises or
may, under a contract relating to portfolio management, exercises any degree of
discretion as to the investments or management of the portfolio of securities or the
funds of the client, as the case may be;
(g) "Regulations" means the Securities and Exchange Board of India (Portfolio
Managers) Regulations, 1993.
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3. Registration as portfolio manager
No person shall act as portfolio manager unless he holds a certificate granted by
the Board under these regulations:
Provided that a merchant banker acting as a portfolio manager immediately
before commencement of the Securities and Exchange Board of India (Portfolio
Managers) (Second Amendment) Regulations, 2006 may continue to do so for a pe riod
of six months from such commencement or, if he has made an application for
registration under these regulations within the said period of six months, till the disposal
of such application.
3A. Application for grant of certificate
1. An application by a portfolio manager for the grant of a certificate shall be made to
the Board in Form A and shall be accompanied by a non-refundable application fee,
as specified in clause (1) of Schedule II, to be paid in the manner specified in Part B
thereof.
2. Notwithstanding anything contained in sub-regulation (1), any application made by a
portfolio manager prior to coming into force of these regulations containing such
particulars or as near thereto as mentioned in Form A shall be treated as an
application made in pursuance of sub-regulation (1) and dealt with accordingly.
Application to conform to the requirements
Subject to the provisions of sub-regulation (2) of regulation 3, any application, which is
not complete in all respects and does not conform to the instruct ions specified in the
form, shall be rejected:
Provided that, before rejecting any such application, the applicant shall be given an
opportunity to remove within the time specified such objections as may be indicated by
the Board.
4. Furnishing of further information, clarification and personal representation
1. The Board may require the applicant to furnish further information or clarification
regarding matters relevant to his activity of a portfolio manager for the purposes of
disposal of the application.
2. The applicant or, its principal officer shall, if so required, appear the Board for
personal representation.
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6. Consideration of application
1. For considering the grant of certificate of registration to the applicant, the Board shall
take into account all matters which it deems relevant to the activities relating to portfolio
management.
2. Without prejudice to the generality of the foregoing provisions, the Board shall
consider whether-
a. the applicant is a body corporate;
b. the applicant has the necessary infrastructure like adequate office space,
equipment and the manpower to effectively discharge the activit ies of a portfolio
manager;
c. the principal officer of the applicant has either–
i. a professional qualification in finance, law, accountancy or business
management from a university or an institution
1. the applicant has the necessary infrastructure like adequate office
space, equipment, and manpower to effectively discharge his
activities;
2. the applicant has in his employment minimum of two persons who
have the experience to conduct the business of portfolio manager;
3. a person, directly or indirectly connected with the applicant has not
been granted registration by the Board in case of the applicant
being a body corporate;
Explanation.─For the purposes of this clause the expression "directly or
indirectly connected" means any person being an associate,
subsidiary, inter-connected or group company of the applicant in
case of the applicant being a body corporate;
4. the applicant fulfils the capital adequacy requirements specified in
regulation 7;
5. the applicant, his partner, director or principal officer is not involved
in any litigation connected with the securities market and which has
an adverse bearing on the business of the applicant;
6. the applicant, his director, partner or principal officer has not at any
time been convicted for any offence involving moral turpitude or has
been found guilty of any economic offence;
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7. the applicant has the professional qualification from an institution
recognized by the Government in finance, law, accountancy or
business management;
a. the applicant is a fit and proper person; [Clause (gg) inserted by the
SEBI (Portfolio Mangers) (Amendment) Regulations, 1998 w.e.f. 05-
01-1998.]
8. grant of certificate to the applicant is in the interest of in vestors.
recognized by the Central Government or any State Government or
a foreign university; or
II. An experience of at least ten years in related activities in the securities market
including in a portfolio manager, stock broker or as a fund manager.
a. the applicant has in its employment minimum of two persons who, between
them, have at least five years experience in related activities in portfolio
management or stock broking or investment management] or in the areas related
to fund management;
b. any previous application for grant of certificate made by any person directly or
indirectly connected with the applicant has been rejected by the Board
c. any disciplinary action has been taken by the Board against a person directly or
indirectly connected with the applicant under the Act or the Rules or the
Regulations made thereunder.
Explanation.─For the purposes of sub-clauses (e) and (f), the expression "person
directly or indirectly connected" means any person being an associate, subsidiary, inter -
connected company or a company under the same management within the meaning of
section 370(1B) of the Companies Act,1956 or in the same group;
a. the applicant fulfills the capital adequacy requirements specified in regulation 7;
b. the applicant, its director, principal officer or the employee as specified in clause
(d) is involved in any litigation connected with the securities market which has an
adverse bearing on the business of the applicant;
c. the applicant, its director, principal officer or the employee as specified in clause
(d) has at any time been convicted for any offence involving moral turpitude or
has been found guilty of any economic offence;
d. the applicant is a fit and proper person;
e. grant of certificate to the applicant is in the interest of investors.
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6A. Criteria for fit and proper person
For the purposes of determining whether an applicant or the portfolio manager is a fit
and proper person the Board may take into account the criteria specified in Schedule II
of the Securities and Exchange Board of India ( Intermediaries) Regulations, 2008.
7. Capital Adequacy Requirement
1. The capital adequacy requirement referred to in clause (g) of regulation 6
shall not be less than the networth of two crore rupees:
Provided that a portfolio manager, who was granted a certificate under these
regulations prior to the commencement of the Securities and Exchange Board
of India (Portfolio Managers) (Amendment) Regulations, 2008, shall raise its
networth to not less than one crore rupees within six months from such
commencement and to not less than two crore rupees within six months
thereafter:
Provided further that the portfolio manager shall fulfill capital adequacy
requirement under these regulations, separately and independently, of capital
adequacy requirements, if any, for each activity undertaken by it under the
relevant regulations.
Explanation.─For the purposes of this regulation, "networth" means the
aggregate value of paid up equity capital plus free reserves (excluding reserves
created out of revaluation) reduced by the aggregate value of accumulated
losses and deferred expenditure not written off, including miscellaneous
expenses not written off.
8. Procedure for registration
The Board on being satisfied that the applicant fulfils the requirements specified in
regulation 6 shall send intimation to the applicant and on receipt of the payment of
registration fees as specified in clause (1A) of Schedule II then grant a certificate in
Form B.
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9. Renewal of certificate
1. A portfolio manager may, three months before the expiry of the validity of the
certificate, make an application for renewal in Form A 3[along with fees specified in
clause 1 of Schedule II.
2. The application for renewal, under sub-regulation (1) shall be dealt with in the same
manner as if it were an application for grant of a certificate made under regulation 3.
3. The Board, on being satisfied that the applicant fulfills the requirements specified in
regulation 6, shall send an intimation to the applicant and on receipt of payment of
renewal fees as specified in paragraph 2 of Schedule II, grant a renewal of the
certificate.
9A. Conditions of registration
1. Any registration granted under regulation 8 or any renewal granted under regulation
9 shall be subject to the following conditions, namely:-
a. where the portfolio manager proposes to change its status or constitution, it
shall obtain prior approval of the Board for continuing to act as such after the
change;
b. it shall pay the fees for registration or renewal, as the case may be, in the
manner provided in these regulations;
c. it shall take adequate steps for redressal of grievances of the investors within
one month of the date of the receipt of the complaint and keep the Board
informed about the number, nature and other particulars of the complaints
received;
d. it shall maintain capital adequacy requirements specified in regulation 7 at all
times during the period of the certif icate or renewal thereof;
e. it shall abide by the regulations made under the Act in respect of the activities
carried on by it as portfolio manager.
2. Nothing contained in clause (a) of sub-regulation (1) shall affect the obligation to
obtain a fresh registration under section 12 of the Act in cases where it is applicable.
9B. Period of validity of certificate
The certificate of registration granted under regulation 8 and its renewal granted under
regulation 9, shall be valid for a period of three years from the date of its issue to the
applicant.
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10. Procedure where registration is not granted
1. Where an application for grant of a certificate under regulation 3 or of renewal under
regulation 9 does not satisfy the requirements set out in regulation 6, the Board may
reject the application, after giving an opportunity of being heard.
2. The refusal to grant registration shall be communicated by the Board within thirty
days of such refusal to the applicant stating therein the grounds on whi ch the
application has been rejected.
3. Any applicant may, being aggrieved by the decision of the Board under sub -
regulation (1), apply within a period of thirty days from the date of receipt of such
intimation, to the Board for reconsideration of its decision.
4. The Board shall reconsider an application made under subregulation (3) and
communicate its decision as soon as possible in writing to the applicant.
11. Effect of refusal to grant certificate
Any portfolio manager whose application for a certificate has been refused by the Board
shall on and from the date of the receipt of the communication under subregulation (2) of
regulation 10 cease to carry on any activity as portfolio manager.
12. Payment of fees, and the consequences of failure to pay fees
1. Every applicant eligible for grant of a certificate shall pay fees in such manner and
within the period specified in Schedule II.
2. Where a portfolio manager fails to pay the fees as provided in Schedule II, the Board
may suspend the certificate, whereupon the portfolio manager shall forthwith cease
to carry on the activity as a portfolio manager for the period during which the
suspension subsists.
GENERAL OBLIGATIONS AND RESPONSIBILITIES
13. Code of Conduct
Every portfolio manager shall abide by the Code of Conduct as specified in Schedule III.
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14. Contract with clients and disclosures
1.
a. The portfolio manager shall, before taking up an assignment of
management of funds or portfolio of securities on behalf of a client, enter
into an agreement in writing with such client clearly defining the inter se
relationship, and setting out their mutual rights, liabilities and obligations
relating to management of funds or portfolio of securities containing the
details as specified in Schedule IV.
b. The agreement between the portfolio manager and the client shall, inter
alia, contain:
i. the investment objectives and the services to be provided;
ii. areas of investment and restrictions, if any, imposed by the client
with regard to the investment in a particular company or industry;
iii. type of instruments and proportion of exposure;
iv. tenure of portfolio investments;
v. terms for early withdrawal of funds or securities by the clients;
vi. attendant risks involved in the management of the portfolio ;
vii. period of the contract and provision of early termination, if any;
viii. amount to be invested subject to the restrictions provided under
these regulations;
ix. procedure of settling client's account including form of repayment
on maturity or early termination of contract;
x. fees payable to the portfolio manager;
xi. the quantum and manner of fees payable by the client for each
activity for which service is rendered by the portfolio manager
directly or indirectly (where such service is out sourced);
xii. custody of securities;
xiii. in case of a discretionary portfolio manager a condition that the
liability of a client shall not exceed his investment with the portfolio
manager;
xiv. the terms of accounts and audit and furnishing of the reports to the
clients as per the provisions of these regulations; and
xv. other terms of portfolio investment subject to these regulations.
2.
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a. The portfolio manager shall provide to the client, the Disclosure Document
as specified in Schedule V, along with a certificate in Form C as specified
in Schedule I, at least two days prior to entering into an agreement with
the client as referred to in sub-regulation (1).
b. The Disclosure Document, shall inter alia contain the following─
i. the quantum and manner of payment of fees payable by the client
for each activity for which service is rendered by the portfolio
manager directly or indirectly (where such service is out sourced);
ii. portfolio risks;
iii. complete disclosures in respect of transactions with related parties
as per the accounting standards specified by the Institute of
Chartered Accountants of India in this regard;
iv. the performance of the portfolio manager: Provided that the
performance of a discretionary portfolio manager shall be
calculated using weighted average method taking each individual
category of investments for the immediately preceding three years
and in such cases performance indicators shall also be disclosed;
v. the audited financial statements of the portfolio manager for the
immediately preceding three years.
c. The contents of the Disclosure Document shall be certified by an
independent chartered accountant.
d. The portfolio manager shall file with the Board, a copy of the Disclosure
Document before it is circulated or issued to any person and every six
months thereafter or whenever any material change is effected therein
whichever is earlier, along with the certificate in Form C as specified in
Schedule I.
3.
a. The portfolio manager shall charge an agreed fee from the clients for
rendering portfolio management services without guaranteeing or
assuring, either directly or indirectly, any return and the fee so charged
may be a fixed fee or a return based fee or a combination of both.
b. The portfolio manager may, subject to the disclosure in terms of the
Disclosure Document and specific permission from the client, charge such
fees from the client for each activity for which service is rendered by the
portfolio manager directly or indirectly (where such service is out sourced).
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15. General responsibilities of a Portfolio Manager
1. The discretionary portfolio manager shall individually and independently manage the
funds of each client in accordance with the needs of the client in a manner which
does not partake character of a Mutual Fund, whereas the non-discretionary portfolio
manager shall manage the funds in accordance with the directions of the client.
(1A) The portfolio manager shall not accept from the client, funds or securities worth
less than five lacs rupees.
2. The portfolio manager shall act in a fiduciary capacity with regard to the client's
funds.
(2A) The portfolio manager shall keep the funds of all clients in a separate account to
be maintained by it in a Scheduled Commercial Bank.
Explanation.─For the purposes of this sub-regulation, the expression ‗Scheduled
Commercial Bank‘ means any bank included in the Second Schedule to the Reserve
Bank of India Act, 1934 (2 of 1934).]
3. The portfolio manager shall transact in securities within the limitation placed by the
client himself with regard to dealing in securities under the provisions of the Reserve
Bank of India Act, 1934 (2 of 1934).
4. The portfolio manager shall not derive any direct or indirect benefit out of the client's
funds or securities.
(4A) The portfolio manager shall not borrow funds or securities on behalf of the
client.
5. The portfolio manager shall not lend securities held on behalf of clients to a third
person except as provided under these regulations.
6. The portfolio manager shall ensure proper and timely handling of complaints from his
clients and take appropriate action immediately.
16. Investment of clients' moneys and management of clients' portfolio of
securities─
1.
a. The money or securities accepted by the portfolio manager shall not be
invested or managed by the portfolio manager except in terms of the
agreement between the portfolio manager and the client.
b. Any renewal of portfolio fund on maturity of the initial period shall be deemed
as a fresh placement.
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2. Notwithstanding anything contained in the agreement referred to in regulation 14,
the funds or securities can be withdrawn or taken back by the client before the
maturity of the contract under the following circumstances, namely-
a. voluntary or compulsory termination of portfolio management services by the
portfolio manager or the client.
b. suspension or cancellation of the certificate of registration of the portfolio
manager by the Board.
c. bankruptcy or liquidation of the portfolio manager.
3. (3) The portfolio manager shall invest funds of his clients in money market
instruments 1[or derivatives] or as specified in the contract:
Provided that leveraging of portfolio shall not be permitted in respect
of investment in derivatives
Provided 3[further] that the portfolio manager shall not deplo y the clients' funds in bill
discounting, badla financing or for the purpose of lending or placement with
corporate or non-corporate bodies.
Explanation.─ For the purposes of this sub-regulation: "money market instruments"
includes commercial paper, trade bill, treasury bills, certificate of deposit and usance
bills.
4. The portfolio manager shall not while dealing with clients‘ funds indulge in
speculative transactions that is, he shall not enter into any transaction for
purchase or sale of any security which is periodically or ultimately settled
otherwise than by actual delivery or transfer of security except the transactions in
derivatives.]
5. The portfolio manager shall, ordinarily purchase or sell securities separately for
each client. However, in the event of aggregation of purchases or sales for
economy of scale, inter se allocation shall be done on a pro rata basis and at
weighted average price of the day's transactions. The portfolio manager shall not
keep any open position in respect of allocation of sales or purchases effected in a
day.
6. Any transaction of purchase or sale including that between the portfolio
manager's own accounts and client's accounts or between two clients' accounts
shall be at the prevailing market price.
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7. The portfolio manager shall segregate each clients' funds and portfolio of
securities and keep them separately from his own funds and securities and be
responsible for safekeeping of clients' funds and securities.
8. The portfolio manager shall not hold the listed securities, belonging to the
portfolio account, in its own name on behalf of its clients either by virtue of
contract with clients or otherwise:
Provided that any portfolio manager holding the listed securities belonging to the
portfolio account in its own name on behalf of its clients on the date of
commencement of the Securities and Exchange Board of India (Portfolio
Managers) (Amendment) Regulations, 2008 shall segregate each clients‘ listed
securities and keep them separately within six months from such
commencement:
Provided further that the Board may in the interest of investors or for the
development of securities market, on an application made in this behalf by a
portfolio manager with respect to any specific investment existing on the date of
commencement of the Securities and Exchange Board of India (Portfolio
Managers) (Amendment) Regulations, 2008, relax the strict enforcement of this
regulation.
9. The portfolio manager may, subject to authorization by the clientin writing,
participate in securities lending.
16A. Foreign Institutional Investor and sub-accounts availing portfolio
management services
Foreign institutional investors and subaccounts registered with the Board may avail of
the services of a portfolio manager.
16B. Appointment of custodian
1. Every portfolio manager shall appoint a custodian in respect of securities managed
or administered by it.
2. Nothing contained in this regulation shall apply to a portfolio manager–
a. who has total assets under management of value less than five hundred crore
rupees; or
b. who performs purely advisory functions.
17. Maintenance of books of accounts, records, etc .─
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1. Every portfolio manager shall keep and maintain the following books of accounts,
records and documents namely:-
a. a copy of balance sheet at the end of each accounting period;
b. a copy of the profit and loss account for each accounting period;
c. a copy of the auditors report on the accounts for each accounting period;
d. a statement of financial position and;
e. records in support of every investment transaction or recommendation which
will indicate the data, facts and opinion leading to that investment decision.
2. Every portfolio manager shall intimate to the Board the place where the books of
accounts, records and documents are maintained.
3. Without prejudice to sub-regulation (1), every portfolio manager shall, after the end of
each accounting period, furnish to the Board copies of the balance sheet, profit and
loss account and such other documents as are mentioned in any of the regulations
under this chapter for any other preceding five accounting years when required by
the Board.
18. Submission of half-yearly results.─
Every portfolio manager shall furnish to the Board half-yearly-unaudited financial results
when required by the Board with a view to monitor the capital adequacy of the portfolio
manager.
19. Maintenance of books of accounts, records and other documents.─
The portfolio manager shall preserve the books of account and other records and
documents mentioned in any of the regulations mentioned under this chapter for a
minimum period of five years.
20. Accounts and audit.
1.
a. The portfolio manager shall maintain separate client-wise accounts.
b. The funds received from the clients, investments or disinvestments and all
the credits to the account of the client like interest, dividend, bonus, or any
other beneficial interest received on the investment and debits, for
expenses, if any, shall be properly accounted for and details thereof shall
be properly reflected in the client's account.
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c. The tax deducted at source as required under the provisions of the
Income-Tax Act, 1961, (43 of 1961) shall be recorded in the portfolio
account.
2. The books of account will be audited yearly by qualified auditor to ensure that the
portfolio manager has followed proper accounting methods and procedures and
that the portfolio manager has performed his duties in accordance with the law. A
certificate to this effect shall, if so specified, be submitted to the Board within six
months of close of portfolio manager's accounting period.
3. The portfolio accounts of the portfolio manager shall be audited annually by an
independent chartered accountant and a copy of the certificate issued by the
chartered accountant shall be given to the client.
4. The client may appoint a chartered accountant to audit the books and accounts of
the portfolio manager relating to his transactions and the portfolio manager shall
co-operate with such chartered accountant in course of the audit.
21. Reports to be furnished to the client.─
1. The portfolio manager shall furnish periodically a report to the client, as agreed in
the contract, but not exceeding a period of six months and as and when required
by the client and such report shall contain the following details, namely: -
a. the composition and the value of the portfolio, description of security,
number of securities, value of each security held in the portfolio, cash
balance and aggregate value of the portfolio as on the date of report;
b. transactions undertaken during the period of report including date of
transaction and details of purchases and sales;
c. beneficial interest received during that period in respect of interest,
dividend, bonus shares, rights shares and debentures;
d. expenses incurred in managing the portfolio of the client;
e. details of risk foreseen by the portfolio manager and the risk relating to the
securities recommended by the portfolio manager for investment or
disinvestment.
1A. The report referred to in sub-regulation (1) may be made available on the
website of the portfolio manager with restricted access to each client.
2. The portfolio manager shall in terms of the agreement with the client also furnish
to the client documents and information relating only to the management of a
portfolio.
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3. On termination of the contract, the portfolio manager shall give a detailed
statement of accounts to the client and settle the account with the client as
agreed in the contract.
4. The client shall have the right to obtain details of his portfolio from the portfolio
managers.
22. Report on steps taken on Auditor's report.─
Every portfolio manager shall within two months from the date of the auditors ‘ report take
steps to rectify the deficiencies, made out in the auditors ‘ report.
23. Disclosures to the Board.─
A portfolio manager shall disclose to the Board as and when required the following
information namely:-
I. particulars regarding the management of a portfolio;
II. any change in the information or particulars previously furnished, which have a
bearing on the certificate granted to him;
III. the names of the clients whose portfol io he has managed;
IV. particulars relating to the capital adequacy requirement as specified in regulation 7.
23A. Appointment of compliance officer .─
1. Every portfolio manager shall appoint a compliance officer who shall be responsible
for monitoring the compliance of the Act, rules and regulations, notifications,
guidelines, instructions etc., issued by the Board or the Central Government and for
redressal of investors' grievances.
2. The compliance officer shall immediately and independently report to the Board any
non-compliance observed by him.
INSPECTION AND DISCIPLINARY PROCEEDINGS
24. Right of inspection by the Board
1. The Board may appoint one or more persons as inspecting authority to undertake the
inspection of the books of account, records and documents of the portfolio manager
for any of the purposes specified in sub-regulation
2. The purposes referred to in sub-regulation (1) may be as follows, namely:-
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a. to ensure that the books of account are being maintained in the manner
required;
b. that the provisions of the Act, rules and regulations are being complied with;
c. to investigate into the complaints received from investors, other portfolio
managers or any other person on any matter having a bearing on the
activities of the portfolio manager; and
d. to investigate suomotuin the interest of securities business or investors'
interest into the affairs of the portfolio manager.
25. Notice before inspection
1. Before undertaking an inspection under regulation 24, the Board shall give a
reasonable notice to the portfolio manager, for that purpose.
2. Notwithstanding anything contained in sub-regulation (1), where the Board is
satisfied that in the interest of the investors no such notice should be given, it may by
an order in writing direct that the inspection of the affairs of the portfolio manager be
taken up without such notice.
3. During the course of inspection the portfolio manager against whom an inspection is
being carried out shall be bound to discharge his obligations as provided under
regulation 26.
26. Obligations of Portfolio Manager on inspection
1. It shall be the duty of every director, proprietor, partner, officer and employee of the
portfolio manager who is being inspected to produce to the inspecting authority such
books, accounts and other documents in his custody or control and furnish him with
the statements and information relating to his activities as a portfolio manager within
such time as the inspecting authority may require.
2. The portfolio manager shall allow the inspecting authority to have a reasonable
access to the premises occupied by such portfolio manager or by any other person,
on his behalf and also extend reasonable facility for examining any books, records,
documents and computer data in the possession of the portfolio manager or any
such other person and also provide copies of documents or other material which in
the opinion of the inspecting authority are relevant for the purposes of the insp ection.
3. The inspecting authority shall in the course of inspection, be entitled to examine or
record statements of any principal officer, director, partner, proprietor and employee
of the portfolio manager.
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4. It shall be the duty of every director, proprietor, partner, officer or employee of the
portfolio manager to give to the inspecting authority all assistance in connection with
the inspection which the portfolio manager may reasonably be expected to give.
27. Submission of report to the Board
The inspecting authority shall, as soon as may be possible, submit an inspection report
to the Board.
28. Action on inspection or investigation report
The Board or the Chairman shall after consideration of the inspection or investigation
report take such action as the Board or Chairman may deem fit and appropriate
including action under 2[Chapter V of the Securities and Exchange Board of India
(Intermediaries) Regulations, 2002.
29. Appointment of Auditor
The Board may appoint a qualified auditor to investigate into the books of account or the
affairs of the portfolio manager:
Provided that the auditor so appointed shall have the same powers of the inspecting
authority as are mentioned in regulation 24 and the obligation of the portfolio manager
and his employees in regulation 26 shall be applicable to the investigation under this
regulation.
Explanation.─For the purposes of sub-regulation (2) of regulation 20 and under this
regulation, the expression "qualified auditor" shall have the same meaning as given to it
in section 226 of the Companies Act, 1956 (1of 1956).
PROCEDURE FOR ACTION IN CASE OF DEFAULT
30. Liability for action in case of default .
─A portfolio manager who contravenes any of the provisions of the Act, Rules or
Regulations framed thereunder shall be liable for one or more action specified therein
including the action under Chapter V of the Securities and Exchange Board of India
(Intermediaries) Regulations, 2008.]
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31. to 38 - Omitted by the Securities (Procedure for Holding Enquiry by Enquiry Officer
andImposing Penalty) Regulations, 2002 w.e.f. 27-09-2002. Prior to their omission,
Regulations 31 to 38 read as under:
"31. Suspension of registration.─(1) A penalty of suspension of registration of a portfolio
manager may be imposed where -
I. the portfolio manager violates the provisions of the Act, rules or regulations;
II. the portfolio manager -
a. fails to furnish any information relating to his activity as portfolio manager
as required by the Board;
b. furnishes wrong or false information;
c. does not submit periodical returns as required by the Board;
d. does not co-operate in any enquiry conducted by the Board;
III. the portfolio manager fails to resolve the complaints of the investors or fails to
give a satisfactory reply to the Board in this behalf;
IV. the portfolio manager indulges in manipulating or price rigging or cornering
activities;
V. the portfolio manager is guilty of misconduct or improper or unbusiness-like or
unprofessional conduct which is not in accordance with the Code of Conduct
specified in Schedule III;
VI. the portfolio manager fails to maintain the capital adequacy requirement in
accordance with the provisions of regulation 7;
VII. the portfolio manager fails to pay the fees;
VIII. the portfolio manager violates the conditions of registration;
IX. the portfolio manager does not carry out his obligations as specified in the
regulation.
32. Cancellation of registration.─
A penalty of cancellation of registration of a portfolio manager may be imposed where: -
I. the portfolio manager indulges in deliberate manipulation or price rigging or
cornering activities affecting the securities market and the investors interest;
II. the financial position of the portfolio manager deteriorates to such an extent that
the Board is of the opinion that his continuance as portfolio manager is not in the
interest of investors;
III. the portfolio manager is guilty of fraud, or is convicted of a criminal offence;
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IV. the portfolio manager is guilty of repeated defaults of the nature mentioned in
regulation 31 provided that the Board furnishes the reasons for cancellation in
writing.
33. Manner of making order of suspension and cancellation .─No order of penalty of
suspension or cancellation, as the case may be, shall be imposed except after holding
an enquiry in accordance with the procedure specified in regulation 34.
34. Manner of holding enquiry before suspension or cancellation .─
1. For the purpose of holding an enquiry under regulation 33, the Board may appoint an
enquiry officer.
2. The enquiry officer shall issue to the portfolio manager a notice at the registered
office or the principal place of business of the portfolio manager.
3. The portfolio manager may, within thirty days from the date of receipt of such notice,
furnish to the enquiry officer a reply together with copies of documentary or other
evidence relied on by him or sought by the Board from the portfolio manager.
4. The enquiry officer shall, give a reasonable opportunity of hearing to the portfolio
manager to enable him to make submissions in support of his reply made under sub -
regulation (3).
5. Before the enquiry officer, the portfolio manager may either appear in person or
through any person duly authorised by the portfolio manager:
Provided that no lawyer or advocate shall be permitted to represent the portfolio
manager at the enquiry:
Provided further that where a lawyer or an advocate has been appointed by the
Board as a presenting officer under sub- regulation (6), it shall be lawful for the
portfolio manager to present its case through a lawyer or advocate.
6. If it is considered necessary, the enquiry officer may ask the Board to appoint a
presenting officer to present its case.
7. The enquiry officer shall, after taking into account all relevant facts and submissions
made by the portfolio manager, submit a report to the Board and recommend the
penalty to be imposed as also the grounds on the basis of which the proposed
penalty is justified.
35. Show-cause notice and order.─
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1. On receipt of the report from the enquiry officer, the Board shall consider the same
and issue a show-cause notice as to why the penalty as proposed by the enquiry
officer should not be imposed.
2. The portfolio manager shall within twenty-one days of the date of the receipt of the
show- cause notice send a reply to the Board.
(3) The Board after considering the reply to the show-cause notice, if received, shall as
soon as possible but not later than thirty days from the receipt of the reply, if any, pass
such order as it deems fit.
(4) Every order passed under sub-regulation (3) shall be self-contained and give
reasons for the conclusions stated therein including justification of the penalty imposed
by that order.
(5) The Board shall send a copy of the order under sub- regulation (3) to the portfolio
manager.
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Chapter 11
SEBI (Underwriters) Regulations, 1993
Learning objectives
After reading this chapter, the reader will understand
5. The role of underwriters managers in securities market
6. Regulatory framework under which they have to perform their role
7. Code of conduct of underwriters
Introduction
Underwriting is an arrangement whereby certain parties (underwirters) assure the
issuing company to take up shares, debentures or any other securities to a specified
extent in case the public subscription does not yield to the expected levels. For this
purpose, an arrangement (agreement) will be entered into between the issuing company
and the assuring party such as a financial institution, banks, merchant banker, broker or
other person. It is necessary for a public company which invites public subscription for its
securities to ensure that its issue is fully subscribed. The company cannot depend on its
advertisements to bring in the full subscription. In case of any short-fall, it has to be
made good by underwriting arrangements made in advance of the opening of the public
issue. The lead managers are required to satisfy themselves about the net worth of the
underwriters and their outstanding commitments and disclose the same to SEBI. In this
connection each underwriter should furnish an undertaking to the lead manager about
their net worth and outstanding commitments. Both the lead managers and the directors
are required to give a statement in the prospectus that in their opinion the underwriters
have the necessary resources to discharge their liabilit ies, if any, in full. Penal action will
be taken against underwriters for not taking up the assured amount of security in case of
development and to debar them from the underwriting public issues in future. Special
responsibilities are placed on the merchant bankers in this regard. Underwriters
represent one of the key elements among the capital market intermediaries. They
facilitate raising of capital by assuring to take up the unsubscribed portion up to a
specified limit.
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SEBI (Underwriters) Regulations, 1993
1. Short title and commencement
1. These regulations may be called the Securities and Exchange Board of India
(Underwriters) Regulations, 1993.
2. They shall come into force on the date of their publication in the Official Gazette.
3. Definitions
In these regulations, unless the context otherwise requires—
a. ―Act‖ means the Securities and Exchange Board of India Act, 1992 (15 of 1992 );
aa. ―body corporate‖ shall have the meaning assigned to it in or under clause (7)
of section 2 of the Companies Act, 1956 (1 of 1956);
ab. ―certificate‖ means a certificate of 2[initial or permanent] registration issued by
the Board;
ac. Deleted
ad. change in control‖ –
i. in case of a body corporate –
A. if its shares are listed on any recognised stock exchange, shall
be construed with reference to the definition of control in terms of
regulations framed under clause (h) of sub-section (2) of section 11
of the Act;
B. in any other case, shall be construed as change in the
controlling interest in the body corporate;
Explanation: For the purpose of para (B) of this sub-clause, the
expression ―controlling interest‖ means an interest, whether direc t
or indirect, to the extent of at least fifty-one percent of voting rights
in the body corporate;
.ii. in a case other than that of a body corporate, shall be construed as any
change in its legal formation or ownership.]
(ca) ‗issue‘ means an offer of sale of securities by any body corporate or by any
other person or group of persons on its or his or their behalf, as the case may be,
to the public, or, the holders of securities of such body corporate or person or
group of persons
(d) ―principal officer‖ means,—
(i) in relation to a proprietary concern, the proprietor himself;
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(ii) in relation to a firm or an association of persons or anybody of individuals or a body
corporate, a secretary, treasurer, partner, manager or director of the firm, association or
body corporate;
(iii) any person connected with the management or administration of the firm, association
or the body corporate upon whom the Board has served a notice of its intention of
treating him as the principal officer thereof;
(e) ―regulations‖ means the Securities and Exchange Board of India (Underwriters)
Regulations, 1993;
(f) ―underwriter‖ means a person who engages in the business of underwriting of an
issue of securities of a body corporate;
(fa) ―underwriting‖ means an agreement with or without conditions to subscribe to
the securities of a body corporate when the existing shareholders of such body
corporate or the public do not subscribe to the securities offered to them;
(g) all other words and expressions used in these regulations but not defined, and
defined in the Act shall have the same meanings respectively assigned to them in the
Act.
4. Registration as underwriter
(1) No person shall act as underwriter unless he holds a certificate granted by the
Board under these regulations.
(2) Notwithstanding anything contained in sub-regulation (1), every stock broker or
merchant banker holding a valid certificate of registration under section 12 of the
Act, shall be entitled to act as an underwriter without obtaining a separate certificate
under these regulations.
(3) A stock broker or merchant banker acting as an underwriter under sub-regulation (2)
shall be governed by these regulations in other respects.
3A. Application for grant of certificate 10[of initial registration
1. An application by an underwriter for grant of a certificate [of initial registration] shall
be made to the Board in Form A.1A An application for registration made under sub -
regulation (1) shall be accompanied by a non-refundable application fee as specified
in Schedule II.
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2. Notwithstanding anything contained in sub-regulation (1), any application made by
an underwriter prior to the coming into force of these regulations containing such
particulars or as near thereto as mentioned in Form A shall be treated as an
application made in pursuance of sub-regulation (1) and dealt with accordingly.
4. Furnishing of further information, clarification, etc
1. The Board may require the applicant to furnish further information or clarification
regarding matters relevant to underwriting to consider the appl ication for grant of a
certificate.
2. If the Board, on receipt of further information, is of the opinion that the information so
furnished is not sufficient to decide on the application and seeking further information
through correspondence is likely to delay the matter, it may require the applicant or
its principal officer to appear before the Board in order to give an opportunity to the
applicant to give further clarifications on the application made under regulation 3A
5. Application to conform to the requirements
Subject to the provisions of sub-regulation (2) of regulation 3A, any application, which is
not complete in all respects and does not conform to the instructions specified in the
form, shall be rejected:
Provided that before rejecting any such application, the applicant shall be given an
opportunity to remove within one monthsuch objections as may be indicated by the
Board:
Provided further that the Board may, on sufficient reasons being shown, extend
the time by another one month in order to enable the applicant to comply with the
requirements of the Board.
6. Consideration of application
The Board shall take into account for considering the grant of a certificate, all matters
which are relevant to or relating to underwriting and in particular the following, namely,
whether the applicant—
a. has the necessary infrastructure, like adequate office space, equipment‘s and
manpower to effectively discharge his activit ies;
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b. has any past experience in the underwriting or has in his employment minimum two
persons who had the experience in underwriting;
c. or any person, directly or indirectly connected with the applicant has not been
granted registration by the Board under the Act.
Explanation.—For the purposes of this clause the Board shall take into account whether
a previous application for a certificate of any person directly or indirectly connected with
the applicant has been rejected by the Board or any disciplinary action has been taken
against such person under the Act or any of the rules or any of the regulations made
under the Act
d. fulfils the capital adequacy requirements specified in regulation 7;
e. or any of its director, partner or principal officer is or has at any time been convicted
for any offence involving moral turpitude or has been found guilty of any economic
offence;
f. is a fit and proper person.
6A. Criteria for fit and proper person
For the purpose of determining whether an applicant or the underwriter is a fit and
proper person the Board may take into account the criteria specified in Schedule II of the
Securities and Exchange Board of India (Intermediaries) Regulations, 2008 .
7. Capital adequacy requirement
1. The capital adequacy requirement referred to in sub-regulation (d) of regulation 6
shall not be less than the net worth of rupees twenty lakhs.
2. Notwithstanding anything contained in sub-regulation (1), every stock-broker,
who acts as an underwriter shall fulfil the capital adequacy requirements
specified by the stock exchange of which he is a member.
Explanation: For the purposes of this regulation, ―net worth‖ means,—
a. in the case of an applicant being a proprietary concern or a firm or an association of
persons or anybody of individuals, the value of capital contributed to such business
by the applicant and the free reserves of any kind belonging to the business of the
applicant; and
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b. in the case of a body corporate, the value of the paid-up capital and the free reserves
as disclosed in the books of account of the applicant at the time of making the
application under sub-regulation (1) of regulation 3.
8. Grant of certificate of initial registration.
1. The Board, on being satisfied that the applicant is eligible, shall send intimation to
the applicant, within one month of such satisfaction, mentioning that it has been
found eligible for grant of certificate of initial registration and grant a certificate in
Form B.
2. The certificate of initial registration granted under sub-regulation (1) shall be valid
for a period of five years from the date of its issue to the applicant.
3. The underwriter who has already been granted a certificate of registration by the
Board, prior to the commencement of the Securities and Exchange Board of India
(Underwriters) (Amendment) Regulations 2011, and has not completed a period
of three years, shall be deemed to have been granted a certificate of initial
registration for a period of five years from the date of its certificate of registration,
subject to payment of fee for the remaining period of two years, as prescribed
under Schedule II of these regulations.
4. The grant of certificate of initial registration shall be subject to payment of fees
specified in regulation 12
8A. Grant of certificate of permanent registration
1. The underwriter who has been granted or deemed to have been granted a
certificate of initial registration under regulation 8, may, three months before the
expiry of the period of certificate of initial registration, make an application for
grant of certificate of permanent registration in Form A.
2. The underwriter who has already been granted a certificate of registration by the
Board and has completed a period of five years, on the date of commencement
of the Securities and Exchange Board of India (Underwriters) (Amendment)
Regulations, 2011, may, three months before the expiry of validity of certificate of
registration or before, make an application for grant of a certificate of permanent
registration in Form A.
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3. An application under sub-regulation (1) or sub-regulation (2) shall be
accompanied by a non-refundable application fee as specified in Schedule II of
these regulations.
4. The application for grant of a certificate of permanent registration shall be
accompanied by details of the changes that have taken place in the information
that was submitted to the Board while seeking initial registration or renewal, as
the case may be, and a declaration stating that no changes other than those as
mentioned in such details have taken place.
5. The application for permanent registration made under sub-regulation (1) or (2)
shall be dealt with in the same manner as if it were a fresh application for grant of
a certificate of initial registration.
6. The Board, on being satisfied that the applicant is eligible, shall grant a certificate
of permanent registration in Form B and shall send intimation to the applicant.
7. The grant of certificate of permanent registration shall be subject to payment of
fee specified in Schedule II of these regulations.
9A Conditions of registration
1. Any initial registration granted under regulation 8 or any permanent registration
granted under regulation 8A shall be subject to the following conditions, namely: —
a. Where the underwriter proposes 29[change in control], it shall obtain prior
approval of the Board for continuing to act as such after the change;
b. it shall enter into a valid agreement with the body corporate on whose
behalf it is acting as underwriter;
c. it shall pay the fees for 30[init ial registration or permanent registration], as
the case may be, in the manner provided in these regulations;
d. it shall maintain capital adequacy requirements specified in regulation 7 at
all times during the period of the 31[initial registration or permanent
registration];
e. it shall abide by the regulations made under the Act in respect of the
activities carried on by it as underwriter.
2. Nothing contained in clause (a) of sub-regulation (1) shall affect the obligation to
obtain a fresh registration under section 12 of the Act in cases where it is applicable.
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9B Procedure where registration is not granted
1. Where an application for grant of a certificate 33[of initial registration under regulation
3A or of permanent registration under regulation 8A] does not fulfil the requirements
set out in regulation 6, the Board may reject the application, after giving an
opportunity of being heard.
2. The decision shall be communicated by the Board within thirty days of such decision
stating therein the grounds on which the application has been rejected.
3. Any applicant may, being aggrieved by the decision of the Board under sub
regulation (2), apply within a period of thirty days from the date of receipt of such
intimation, to the Board for reconsideration of its decision.
4. On receipt of the application made under sub-regulation (3), the Board shall
reconsider its decision and communicate its findings thereon as soon as possible in
writing to the applicant.
10. Effect of refusal to grant certificate of permanent registration
The underwriter whose application for grant of certificate of permanent registration has
been refused by the Board, on and from the date of receipt of the communication, shall
not carry on any activity as an underwriter:
Provided that the Board may, in the interest of the investors of the securities market,
permit to carry on activities undertaken prior to the receipt of the intimation of refusal
subject to such condition as the Board may specify
11. Payment of fees, and the consequences of failure to pay fees
1. Every applicant eligible for grant 36[of initial or permanent registration, as the case
may be,shall pay fees in such manner and within the period specified in Schedule
II:
Providedthat a stock broker who has been granted a certificate under section 12
of the Act and pays fees under the Securities and Exchange Board of India
(Stock Brokers and Sub-brokers) Regulations, 1992, shall not be required to pay
fees under sub-regulation (1).
2. Where an underwriter fails to pay the fees as provided in sub-regulation (1), the
Board may suspend the certificate, whereupon the underwriter shall forthwith
cease to act as an underwriter.
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GENERAL OBLIGATIONS AND RESPONSIBILITIES
To abide by the Code of Conduct
13. Every underwriter shall at all t imes abide by the Code of Conduct as specified in
Schedule III.
Agreement with clients
14. Every underwriter shall enter into an agreement referred to in clause (b) of sub -
regulation (1) of regulation 9Awith each body corporate on whose behalf he is acting as
underwriter and the said agreement shall, amongst other things, provide for the
following, namely :—
I. the period for which the agreement shall be in force;
Ia. the allocation of duties and responsibilities between the underwriter and the
client
II. the amount of underwriting obligations;
III. the period, within which the underwriter has to subscribe to the issue after being
intimated by or on behalf of such body corporate;
IV. the amount of commission or brokerage payable to the underwriter;
V. details of arrangements, if any, made by the underwriter for fulfilling the
underwriting obligations.
15. General responsibilities of an underwriter
1. The underwriter shall not derive any direct or indirect benefit from underwriting the
issue other than the commission or brokerage payable under an agreement for
underwriting.
2. The total underwriting obligations under all the agreements referred to in clause (b)
of rule 4 shall not exceed twenty times the net worth referred to in regulation 7.
3. Every underwriter, in the event of being called upon to subscribe for securities of a
body corporate pursuant to an agreement referred to in clause (b) of sub regulation
(1) of regulation 9Ashall subscribe to such securities within 45 days of the receipt of
such intimation from such body corporate.
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16. To maintain proper books of account and records, etc
1. Subject to the provisions of any other law, every underwriter shall keep and
maintain the following books of account and documents, namely:—
(a) in relation to underwriter being a body corporate—
(i) a copy of the balance sheet and profit and loss account as
specified in sections 211 and 212 of the Companies Act, 1956 (1
of 1956);
(ii) a copy of the auditor‘s report referred to in section 227 of the
Companies Act, 1956 (1 of 1956);
(b) in relation to an underwriter not being a body corporate—
(i) records in respect of all sums of money received and expended by them
and the matters in respect of which the receipt and expenditure take
place; and
(ii) their assets and liabilit ies.
2. Without prejudice to sub-regulation (1), every underwriter shall, after the close of
each financial year as soon as possible but not later than six months from the
close of the said period furnish to the Board, if so required, copies of the balance
sheet, profit and loss account, statement of capital adequacy requirement and
such other documents as may be required by the Board under regulation 16.
3. Every underwriter shall also maintain the following records with respect to —
(i) details of all agreements referred to in clause (b) of sub-regulation (1) of
regulation 9A
(ii) total amount of securities of each body corporate subscribed to in
pursuance of an agreement referred to in 45[clause (b) of sub-
regulation (1) of regulation 9A
(iii) statement of capital adequacy requirements as specified in regulation 7;
(iv) such other records as may be specified by the Board for underwriting.
4. Every underwriter shall intimate to the Board, the place where the books of
account, records and documents are maintained.
17. Period of maintenance of books of account, records and other documents
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Every underwriter shall preserve the books of account and other records and documents
mentioned under this chapter for a minimum period of five years.
17A. Appointment of compliance officer
1. Every underwriter shall appoint a compliance officer who shall be responsible for
monitoring the compliance of the Act, rules and regulations, notifications, guidelines,
instructions, etc., issued by the Board or the Central Government and for redressal of
investors‘ grievances.
2. The compliance officer shall immediately and independently report to the Board any
non-compliance observed by him.
18. Power to call for information
1. The Board may at any time call for any information from an underwriter with respect
to any matter relating to underwriting business.
2. Where any information is called for under sub-regulation (1) it shall be the duty of the
underwriter to furnish such information.
19. Board‟s right to inspect
1. Where it appears to the Board so to do, it may appoint one or more persons as
inspecting authority to undertake the inspection of the books of account, other
records and documents of the underwriter for any of the purposes specified in
sub regulation (2).
2. The purposes referred to in sub-regulation (1) shall be as follows, namely :—
a. to ensure that the books of account and other records and documents are
being maintained in the manner required;
b. that the provisions of the Act, rules and regulations are being complied with;
c. to investigate into the complaints received from investors, other underwriters
or any other person or any matter having a bearing on the activities of the
underwriter; and
d. to investigate suomotu in the interest of securities business or investors‘
interest into the affairs of the underwriter.
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20. Procedure for inspection
1. Before undertaking an inspection under regulation 19, the Board shall give a
reasonable notice to the underwriter, for that purpose.
2. Notwithstanding anything contained in sub-regulation (1), where the Board is
satisfied that in the interest of the investors or in the public interest no such notice
should be given, it may by an order in writing direct that the inspection of the affairs
of the underwriter be taken up without such notice.
3. On being empowered by the Board, the inspecting authority shall undertake the
inspection and the underwriter against whom an inspection is being carried out shall
be bound to discharge his obligations as provided under regulation 21.
21. Obligations of underwriter on inspection by the Board
1. It shall be the duty of every director, proprietor, partner, officer and employee of the
underwriter who is being inspected to produce to the inspecting authority such
books, accounts and other documents in his custody or control and furnish him with
the statements and information relating to an underwriter within such time as the
inspecting authority may require.
2. The underwriter shall allow the inspecting authority to have a reasonable access to
the premises occupied by such underwriter or by any other person, on his behalf and
also extend reasonable facility for examining any books, records, documents and
computer data in the possession of the underwriter or any such other person on their
behalf and also provide copies of documents or other materials which in the opinion
of the inspecting authority are relevant for the purposes of the inspection.
3. The inspecting authority shall in the course of inspection, be entitled to examine or
record statements of any principal officer, director, partner, proprietor and employee.
4. It shall be the duty of every director, proprietor, partner, officer or employee of the
underwriter to give to the inspecting authority all assistance in connection with the
inspection which the underwriter may reasonably be expected to give.
22. Submission of report to the Board
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The inspecting authority shall, as soon as may be possible, submit an inspection report
to the Board.
23. Action on inspection or investigation report
The Board or the Chairman shall after consideration of inspection or investigation report
take such action as the Board or Chairman may deem fit and appropriate including
action under 48[Chapter V of the Securities and Exchange Board of India ( Intermediaries)
Regulations, 2008.
24. Appointment of Auditor
Notwithstanding anything contained above the Board may appoint a qualifiedauditor to
investigate into the books of account or the affairs of the underwriter:
Providedthat the auditor so appointed shall have the same powers of the inspecting
authority as stated in regulation 19 and the obligation of the underwriter and his
employees in regulation 21 shall be applicable to the investigation under this regulation.
Explanation.—For the purposes of this regulation, the expression ―qualified auditor‖ shall
have the same meaning as given to it in section 226 of the Companies Act, 1956 (1 of
1956).
PROCEDURE FOR ACTION IN CASE OF DEFAULT
25. Liability for action in case of default
An underwriter who contravenes any of the provisions of the Act, Ru les or
regulations framed thereunder shall be liable for one or more actions specified therein
including the action under Chapter V of the Securities and Exchange Board of India
(Intermediaries) Regulations, 2008
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Chapter 12
SEBI (Ombudsman) Regulations, 2003
Learning objectives
After reading this chapter, the reader will understand
8. The role ofombudsman in redressing the grievances of Investors in securities market
9. Regulatory framework under which they have to perform their role
Introduction
An ombudsman is someone whoinvestigates complaints made by investors
orgovernment or any public organisationagainst the securities market or related parties.
Ombudsman means ―the grievance man‖ or a ―commissioner of theadministration‖. This is
not the precise definition of Ombudsman; it is very difficult to define about the ‗Ombudsman‘.
Soon after the Indian economy began the liberalisation process during 1991-92, there is no
free-for all in market economy, in turn, securities market. The operation of a free market
economy in a smoothmanner, and without hurting consumer interests, issimply not possible
or feasible without an effectiveregulator. In order to protect the interest of the investors and
other parties related to securities market, the government establish SEBI as a statutory body
toprotect the interests of investorsin securities and to promote the development of, and to
regulate the securities market. SEBI, in turn, established a cell to redress the grievances of
investors in the securities and capital market. Let us discuss the regulations in the following
sections.
SHORT TITLE AND COMMENCEMENT
1. (1) These regulations may be called the Securities and Exchange Board of India
(Ombudsman) Regulations, 2003.
(2) They shall come into force on the date of their publication in the Official Gazette.
Definitions
2. (1) In these regulations, unless the context otherwise requires,-
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(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of
1992 );
(b) "award" means a finding in the form of direction or an order of an
Ombudsman given in accordance with these regulations;
(c) "authorised representative" means a person duly appointed and
authorised by a complainant or any other party to the complaint to act on his
behalf and represent him in the proceedings before the Ombudsman;
(d) "Board" means the Securities and Exchange Board of India established
under section 3 of the Act;
(e) "Chairman" means Chairman of the Board;
(f) "complaint" means a representation in writing containing a grievance as
specified in regulation 13 of these regulations;
(g) "complainant" means any investor who lodges complaint with the
Ombudsman and includes an investors association recognised by the Board.
(h) "intermediary" means and includes a person referred to in section 12 of
the Act;
(i) "investor" means a person who invests or buys or sells or deals in
securities;
(j) "listed company" means a company whose securities are listed on a
recognised stock exchange and includes a public company which intends to
get its securities listed on a recognised stock exchange;
(k) "member" means a member of the Board and includes the Chairman;
(l) "Ombudsman" means any person appointed under regulation 3 of these
regulations and unless the context otherwise requires, includes Stipendiary
Ombudsman;
(m) "securities" means Securities as defined in clause (h) of section 2 of the
Securities Contracts ( Regulation ) Act,1956 ( 42 of 1956 );
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(n) "Stipendiary Ombudsman" means a person appointed under regulation 9
for the purpose of acting as ombudsman in respect of a specific matter or
matters in a specific territorial jurisdiction and for which he may be paid such
expenses, honorarium or sitting fees as may be determined by the Board
from time to time.
(2) Words and expressions used and not defined in these regulations but
defined in the Act or in the rules or regulations made under the Act shall have
the meanings respectively assigned to them in the Act or in the rules or
regulations made under the Act.
ESTABLISHMENT AND APPOINTMENT
3. (1) With effect from such date as the Board may, by an order fix, there shall be
established an office of Ombudsman for the purposes of these regulations.
(2)The Board may, on recommendation of a Selection Committee, appoint one or
more Ombudsmen for such territorial jurisdiction as may be specified from time to
time by an order.
(3)The Selection Committee referred in sub-regulation (2) shall consist of the
following members, namely:-
(i) a retired judge of a High Court, to be nominated by the Chairman;
(ii) an expert in the area relating to financial market operations or having
special knowledge and experience of law, finance or economics, to be
nominated by the Chairman.
(iii) a representative of the Board not below the rank of Executive Director
who shall be Secretary of the Selection Committee, to be nominated by
the Chairman.
(4) At the request of the Board, the Selection Committee may also prepare a
panel of persons out of which a person may be appointed as Stipendiary
Ombudsman.
(5)The panel under sub-regulation (4) shall remain in force for a maximum period
of two years and shall be reconstituted from time to time.
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Provided that any person in the existing panel shall be eligible to be included in
the reconstituted panel.
LOCATION OF OFFICE
4. (1)Office of the Ombudsman shall be located at the Head Office of the Board and
if more than one Ombudsman are appointed then the office of any such
Ombudsman may be located at any other office of the Board or any other place
as may be specified by the Board from time to time.
Provided that the Stipendiary Ombudsman when appointed for any specific
complaint or complaints shall be located at such place as may be specified.
(2) In order to expedite disposal of complaints, the Ombudsman or Stipendiary
Ombudsman, as the case may be, may hold sittings at such places within his
area of jurisdiction as may be considered necessary and proper by him.
(3) The Board may provide the premises and other infrastructures including staff
or secretarial assistance for the office of Ombudsman or Stipendiary
Ombudsman, as the case may be.
QUALIFICATION
5. In order to be appointed as an Ombudsman a person shall be -
i. a citizen of India;
ii. of high moral integrity ;
iii. not below the age of forty five years of age; and
iv. either
a. a retired District Judge or qualified to be appointed a District Judge or
b. having at least ten years of experience of service in any regulatory body or
c. having special knowledge and experience in law, finance, corporate matters,
economics, management or administration for a period not less than ten years, or
d. an office bearer of investors‘ association recognised by the Board having
experience in dealing with matters relating to investor protection for a period not
less than 10 years.
DISQUALIFICATION
6. (1) A person shall not be qualified to hold the office of the Ombudsman if he -
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(i) is an un-discharged insolvent ;
(ii) has been convicted of an offence involving moral turpitude;
(iii) has been found to be of unsound mind and stands so declared by a
competent court;
(iv) has been charge sheeted for any offence including economic offences ; or
(v) has been a whole-time director in the office of an intermediary or a listed
company and a period of at least 3 years has not elapsed.
TENURE
7. (1) A person appointed as an Ombudsman shall hold office for a term not
exceeding five years and shall be eligible for reappointment.
Provided that no person shall hold the office of Ombudsman after attaining the
age of seventy years.
(2)The Board, at any time, before the expiry of the period specified under sub-
regulation (1) may terminate the services of the Ombudsman by giving him notice
of not less than three months in writing or three months salary and allowances in
lieu thereof, and the Ombudsman shall also have the right to relinquish his office,
at any time, before the expiry of period specified under sub-regulation (1), by
giving to the Board notice of not less than three months in writing.
REMUNERATION
8. The salary, allowances, honorarium or fee payable to, and other terms and conditions of
service of, an Ombudsman shall be determined by the Board from time to time.
STIPENDIARY OMBUDSMAN -
9. (1) Notwithstanding the appointment of Ombudsman under sub -regulation (2)
of regulation 3, the Board may appoint a person as a Stipendiary Ombudsman
out of the panel prepared under sub-regulation (4) of regulation 3, for the purpose
of acting as an Ombudsman in respect of a specific matter or matters in a specific
territorial jurisdiction, as may be specified in the order of appointment.
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(2) A person shall be eligible to be appointed as Stipendiary Ombudsman who:-
(i) has held a judicial post or an executive office under the Central or State
Government for atleast ten years or
(ii) is having experience of at least ten years in matters relating to consumer or
investor protection or
(iii) has been a legal practitioner in corporate matters for atleast 10 years or
(iv) has served for a minimum period of ten years in any public financial institution
within the meaning of section 4A of the Companies Act, 1956 (1 of 1956) or a
regulatory body.
(3) Save as otherwise specified by the Board, the Stipendiary Ombudsman shall
exercise all powers and functions as are vested in a Ombudsman under these
regulations.
(4) The Stipendiary Ombudsman shall be paid such fees or honorarium and
allowances for the services rendered by him, as may be determined by the Board
from time to time.
TERRITORIAL JURISDICTION –
10. Every Ombudsman or Stipendiary Ombudsman shall exercise jurisdiction in
relation to an area as may be specified by the Board by an order.
POWERS AND FUNCTIONS OF OMBUDSMAN
GENERAL
11. The Ombudsman shall have the following powers and functions : -
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(a) to receive complaints specified in regulation 13 against any intermediary or a
listed company or both;
(b) to consider such complaints and facilitate resolution thereof by amicable
settlement;
(c) to approve a friendly or amicable settlement of the dispute between the
parties;
(d) to adjudicate such complaints in the event of failure of settlement thereof by
friendly or amicable settlement.
OTHER POWERS AND FUNCTIONS
12. (1) The Ombudsman shall -
a. draw up an annual budget for his office in consultation with the Board and shall incur
expenditure within and in accordance with the provisions of the approved budget;
b. submit an annual report to the Board within three months of the close of each financial
year containing general review of activities of his office; and
c. furnish from time to time such information to the Board as may be required by the Board.
(2) Every financial year of the Ombudsman shall end on 31st March of each year and the
annual report shall be given in such form and manner as may be specified by the Board.
PROCEDURE FOR REDRESSAL OF GRIEVANCE
GROUNDS OF COMPLAINT
13. A person may lodge a complaint on any one or more of the following grounds either to the
Board or to the Ombudsman concerned :-
i. Non-receipt of refund orders, allotment letters in respect of a public issue of securities of
companies or units of mutual funds or collective investments schemes;
ii. Non-receipt of share certificates, unit certificates, debenture certificates, bonus shares;
iii. Non-receipt of dividend by shareholders or unit-holders;
iv. Non-receipt of interest on debentures, redemption amount of debentures or interest on
delayed payment of interest on debentures ;
v. Non-receipt of interest on delayed refund of application monies;
vi. Non-receipt of annual reports or statements pertaining to the portfolios;
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vii. Non-receipt of redemption amount from a mutual fund or returns from collective
investment scheme;
viii. Non-transfer of securities by an issuer company, mutual fund, Collective Investment
Management Company or depository within the stipulated time;
ix. Non-receipt of letter of offer or consideration in takeover or buy-back offer or delisting;
x. Non-receipt of statement of holding corporate benefits or any grievances in respect of
corporate benefits, etc;
xi. Any grievance in respect of public, rights or bonus issue of a listed company ;
xii. Any of the matters covered under section 55A of the Companies Act, 1956;
xiii. Any grievance in respect of issue or dealing in securities against an intermediary or a
listed company.
PROCEDURE OF FILING COMPLAINT –
14(1) Any person who has a grievance against a listed company or an
intermediary relating to any of the matters specified in regulation 13 m ay himself
or through his authorised representative or any investors association recognised
by the Board, make a complaint against a listed company or an intermediary to
the Ombudsman within whose jurisdiction the registered or corporate office of
such listed company or intermediary is located.
Provided that i f the Board has not notified any Ombudsman for a particular
locality or territorial jurisdiction, the complainant may request the Ombudsman
located at the Head Office of the Board for forwarding his complaint to the
Ombudsman of competent jurisdiction.
(2) The complaint shall be in writing duly signed by the complainant or his
authorised representative (not being a legal practitioner) in the Form specified in
the Schedule to these regulations and supported by documents, if any.
(3) No complaint to the Ombudsman shall lie -
(a) unless the complainant had, before making a complaint to the Board or the
Ombudsman concerned, made a written representation to the listed company or the
intermediary named in the complaint and the listed company or the intermediary, as the
case may be, had rejected the complaint or the complainant had not received any reply
within a period of one month after the listed company or intermediary concerned received
his representation or the complainant is not satisfied with the reply given to him by the
listed company or an intermediary;
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(b) unless the complaint is made within six months from the date of the receipt of
communication of rejection of his complaint by the complainant or within seven months
after the receipt of complaint by the listed company or intermediary under clause (a)
above.
(c) if the complaint is in respect of the same subject matter which was settled through the
Office of the Board or Ombudsman concerned in any previous proceedings, whether or
not received from the same complainant or along with any one or more or other
complainants or any one or more of the parties concerned with the subject matter;
(d) i f the complaint pertains to the same subject matter for which any proceedings before
the Board or any court, tribunal or arbitrator or any other forum is pending or a decree or
award or a final order has already been passed by any such competent authority, court,
tribunal, arbitrator or forum.
(e) i f the complaint is in respect of or pertaining to a matter for which action has been
taken by the Board under Section 11(4) of the Act or Chapter VI A of the Act or under
sub-section (3) of section 12 of the Act or under any other regulations made under the
Act.
4. The Ombudsman may dismiss in limine a complaint on any of the grounds specified
under sub-regulation (3) or when such complaint is frivolous in his opinion.
POWER TO CALL FOR INFORMATION
15(1)For the purpose of carrying out his duties under these regulations, an Omb udsman
may require the listed company or the intermediary named in the complaint or any other
person, institution or authority to provide any information or furnish certified copy of any
document relating to the subject matter of the complaint which is or is alleged to be in its
or his possession:
Provided that in the event of the failure of a listed company or the intermediary to comply
with the requisition made under sub-regulation (1) without any sufficient cause, the
Ombudsman may, if he deems fit, draw the inference that the information, if provided or
copies if furnished, would be unfavourable to the listed company or intermediary.
(2)The Ombudsman shall maintain confidentiality of any information or document coming to his
knowledge or possession in the course of discharging his duties and shall not disclose such
information or document to any person except and as otherwise required by law or with the
consent of the person furnishing such information or document:
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Provided that nothing in sub-regulation (2) shall prevent the Ombudsman from disclosing
information or document furnished by a party in a complaint to the other party or parties, to the
extent considered by him to be reasonably required to comply with the principles of natural
justice and fair play in the proceedings.
Provided further that provisions of sub-regulation (2) shall not apply in relation to the disclosures
made or information furnished by the Ombudsman to the Board or to the publication of
Ombudsman‘s award in any journal or newspaper or filing thereof before any Court, Forum or
authority.
SETTLEMENT BY MUTUAL AGREEMENT
16(1) As soon as it may be practicable so to do, the Ombudsman shall cause a notice of the
receipt of any complaint along with a copy of the complaint sent to the registered or corporate
office of the listed company or office of the intermediary named in the complaint and endeavour
to promote a settlement of the complaint by agreement or mediation between the complainant
and the listed company or intermediary named in the complaint.
(2) If any amicable settlement or friendly agreement is arrived at between the parties, the
Ombudsman shall pass an award in terms of such settlement or agreement within one month
from the date thereof and direct the parties to perform their obligations in accordance with the
terms recorded in the award.
(3) For the purpose of promoting a settlement of the complaint, the Ombudsman may follow such
procedure and take such actions as he may consider appropriate.
AWARD ON ADJUDICATION
17 (1) In the event the matter is not resolved by mutually acceptable agreement within a period of
one month of the receipt of the complaint or such extended period as may be permitted by the
Ombudsman, he shall, based upon the material placed before him and after gi ving opportunity of
being heard to the parties, give his award in writing or pass any other directions or orders as he
may consider appropriate.
(2) The award on adjudication shall be made by Ombudsman within a period of three months
from the date of the filing of the complaint.
Provided that no award shall be invalidated by reason alone of the fact that the award was made
beyond the said period of three months.
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(3) The Ombudsman shall send his award to the parties to the adjudication to perform their
obligations under the award.
CORRECTION OF AWARD
18 (1) Within fifteen days from the receipt of the award a party, with notice to the other party, may
request the Ombudsman to correct any computation errors, any clerical or typographical errors or
any other errors of a similar nature occurring in the award.
(2) If the Ombudsman considers the request made under sub-regulation (1) to be justified, he
shall make the correction within fifteen days from the receipt of the request which shall form part
of the award.
(3) The Ombudsman may also rectify any error of the type referred to in sub-regulation (1), on his
own initiative, within fi fteen days from the date of the award.
EVIDENCE ACT NOT TO APPLY IN THE PROCEEDINGS BEFORE OMBUDSMAN
19(1) In proceedings before the Ombudsman strict rules of evidence under the Evidence Act
shall not apply and the Ombudsman may determine his own procedure consistent with the
principles of natural justice.
(2) Ombudsman shall decide whether to hold oral hearings for the presentation of evidence or for
oral argument or whether the proceeding shall be conducted on the basis of documents and
other materials.
Provided that it shall not be necessary for an investor to be present at the oral hearing of
proceedings under these regulations and the Ombudsman may proceed on the basis of the
documentary evidence submitted before him.
(3) No legal practitioner shall be permitted to represent the defendants or respondents at the
proceedings before the Ombudsman except where a legal practitioner has been permitted to
represent the complainants by the Ombudsman.
FINALITY OF AWARD AND CIRCUMSTANCES OF REVIEW
20.(1) Subject to the provisions of this regulation, an award shall be final and binding on the
parties and persons claiming under them respectively.
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(2) Any party aggrieved by the award on adjudication may within one month from the receipt of
the award under Regulation 17 or corrected award under Regulation 18 may file a petition before
the Board setting out the grounds for review of the award.
(3) An award may be reviewed by the Board only if –
(a) there is substantial mis-carriage of justice, or
(b) there is an error apparent on the face of the award.
(4) Where a petition for review of the award under sub-regulation (2) is filed by a party from
whom the amount mentioned in the award is to be paid to the other party in terms of the award,
such petition shall not be entertained by the Board unless the party filing the petition has
deposited with the Board seventy-five percent of the amount mentioned in the award.
Provided that the Board may, for reasons to be recorded in writing, waive or reduce the amount
to be deposited under this sub-regulation.
(5) The Board may review the award and pass such order as it may deem appropriate.
(6) The Board shall endeavour to dispose of the matter within a period of forty five days of the
filing of the petition for review.
(7) The award passed by the Ombudsman shall remain suspended till the expiry of period of one
month for filing review petition under sub-regulation (2) or till the review petition is disposed off by
the Board.
(8) The party so directed shall implement the award within 30 days of receipt of the order of the
Board on review or within such period as may be specified by the Board in the order disposing of f
the review petition.
(9) The Board may determine its own procedure consistent with principles of natural justice in the
matter of disposing of review petition and may dismiss the petition in limine if it does not satisfy
any of the grounds specified in sub-regulation (3).
COST AND INTEREST
21.(1)The Ombudsman or the Board, as the case may be, shall be entitled to award reasonable
compensation along with interest including future interest till date of satisfaction of the award at a
rate which may not exceed one percent per mensem.
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(2) The Ombudsman in the case of an award, or the Board in the case of order passed in petition
for review of the award, as the case may be, may determine the cost of the proceedings in the
award and include the same in the award or as the case may be, in the order.
(3) The Ombudsman or the Board may impose cost on the complainant for filing complaint or any
petition for review, which is frivolous.
CONSEQUENCES OF NON-IMPLEMENTATION OF THE AWARD
22. (1) The award shall be implemented by the party so directed within one month of receipt of
the award from the Ombudsman or an order of the Board passed in review petition or within such
period as specified in the award or order of the Board.
(2) If any person fails to implement the award or order of the Board passed in the review petition,
without reasonable cause -
(a) he shall be deemed to have failed to redress investors‘ grievances and shall
be liable to a penalty under section 15C of the Act;
(b) he shall also be liable for -
i. an action under section 11 (4) of the Act ; or
ii. suspension or delisting of securities; or
iii. being debarred from accessing the securities market; or
iv. being debarred from dealing in securities; or
v. an action for suspension or cancellation of certificate of registration; or
vi. such other action permissible which may be deemed appropriate in the facts and
circumstances of the case.
Provided that no such order shall be passed without following the procedure laid
down under the relevant rules or regulations.
DISPLAY OF THE PARTICULARS OF THE OMBUDSMAN IN OFFICE PREMISES AND
DOCUMENTS
23(1) Every listed company or intermediary shall display the name and address of the
Ombudsman as specified by the Board to whom the complaints are to be made by any aggrieved
person in its office premises in such manner and at such place, so that it is put to notice of the
shareholders or investors or unit holders visiting the office premises of the listed company or
intermediary.
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(2) The listed company or intermediary in its offer document or clients agreement shall give full
disclosure about the grievance redressal mechanism through Ombudsman under these
regulations.
(3) Any failure to disclose the grievance redressal mechanism through Ombudsman under sub-
regulation (2) or any failure to display the particulars as per sub-regulation (1) shall attract the
penal provisions contained in Section 15A of the Act.
SECURITIES AND EXCHANGE BOARD OF INDIA
(OMBUDSMAN) (AMENDMENT) REGULATIONS, 2006
In the Securities and Exchange Board of India (Ombudsman) Regulations, 2006, in
regulation 6, in sub-regulation (1), after clause (v) the following shall be inserted, namely:-
―Provided that the disqualification provided in clause (v) shall not be applicable in case of a
person who has been the whole time director of a public sector bank or a public sector
undertaking.
Explanation: - For the purposes of this clause –
(a). ‗public sector bank‘ means –
(i) a corresponding new bank specified in the First Schedule to the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970);
(ii) a corresponding new bank specified in the First Schedule to the Banking
Companies (Acquisition and Transfer of Undertaking) Act, 1980 (40 of 1980);
(iii) the State Bank of India constituted under the State Bank of India Act, 1955 (23 of
1955);
(iv) a subsidiary bank as defined in the State Bank of India(Subsidiary Banks) Act,
1959 (38 of 1959);
(b). ‗public sector undertaking‘ means any corporation established by or under any
Central, State or Provincial Act or a Government company as defined in section 617
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of the Companies Act, 1956 (1 of 1956) which is owned, controlled or managed by
the Central Government.‖
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Chapter 13
Compliances of Listing Agreement
Learning objectives
After reading this chapter, the reader will understand
10. The legal provisions of listing agreement
11. Time based and event based listing compliances
Introduction
As discussed in chapter 6, recognised stock exchanges have power to list the securities and
to make necessary bye-laws (U/S 9 of Securities Contracts (Regulation) Act, 1956). The
listing of securities is guaranteed by way of an agreement called listingagreement. This
agreement is entered into between a stock exchange and the issuingcompany. Listing of
securities at stock exchanges provides for free transferability andready marketability (sell)
securities of the Company. The listing rules and regulations havebeen designed to
safeguard the interests of investors and to ensure transparencythrough relevant disclosures,
proper supervision and control over the dealings in the conductof listed companies in India . It
enables to trade freely through SEBI.Listing agreement is of great importance as it provides
all the terms andconditions to be followed by the company whose securities are listed on the
stockexchange. Listing agreement is executed under the common seal of a company.The
Listed companies are required to make continuous disclosures to stock exchanges as
prescribed by the Stock exchange. In case of defaulting, stock would be delisted from the
stock exchange.
IMPORTANT COMPLIANCES UNDER LISTING AGREEMENT
1. In-principle approval before further issue of shares: The Company is required to
obtain ‗in-principle‘ approval for listing fromthe recognised exchanges having
nationwide trading terminals where it is listed,before issuing further shares or
securities. Note that this approval is required for each and every further isues of
shares.
2. Annual General Meeting & Book Closure: The Company is required to close its
Transfer Books for the following purposes:
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(a) declaration of dividend or
(b) issue of right or bonus shares or
(c) issue of shares for conversion of debentures or of shares arising out
of rights attached to debentures or
(d) for such other purposes as the Exchange may agree to or require.
Every listed company has to close its Transfer Books at least once a year at thetime
of the Annual General Meeting if they have not been otherwiseclosed at any time during the
year.Once it is closed, the same must be communicated to the stock exchange within 7 days
(update the number days as it may vary). However, the minimum time gap between the two
book closures and/or recorddates has to be atleast 30 days.
3. Intimation/submissions to Stock Exchange: The company is required to intimate
to the stock exchange about the orders of restraining from transferring securities
within 15 minutesof closure of Board meeting, by Letter/fax/telegram the following for
(a) all dividends and/or cash bonuses recommended or declared or
thedecision to pass any dividend or interest payment;
(b) the total turnover, gross profit/loss, provision for depreciation,
taxprovisions and net profits for the year (with comparison with the
previousyear) and the profit appropriation account thatsuch information is
provisional or subject to audit.
(c) the decision on Buyback of Securities.
(d) short particulars of any increase of capital through bonus or right issue to
be offered to the shareholders or debenture holders, or in any other way;
(e) short particulars of the reissue of forfeited shares or securities, or the
issue of shares or securities held in reserve for future issue or the creation in
any form or manner of new shares or securities or any other rights, privileges
or benefits to subscribe to;
4. Minimum Holdings: The Company is required to comply with the requirements
specified in Rule19(2) and Rule 19A of the Securities Contracts (Regulation) Rules,
1957.Public holding may be enhanced to minimum requirement through public
issue,offer for sale and sale through secondary market. However, such Sale through
secondarymarket requires prior permission of stock exchange.
5. Company Secretary as Compliance Officer: The Company is prerequisite to
appoint the Company Secretary to act asCompliance Officer. Compliance Officer will
be responsible for monitoring the sharetransfer process and report to the Company‘s
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Board in each meeting. He/she will directly liaise with the authorities such asSEBI,
Stock Exchanges, Registrar of Companies, etc., and investorswith respect to
implementation of various clauses, rules, regulations andother directives of such
authorities and investor service and complaintsof related matter.He/she is also
responsible for ensuring the correctness, authenticity andcomprehensiveness of the
information, statements and reports filedunder clause 52 pertaining to Corporate
Filing and DisseminationSystem (CFDS) inconformity with the applicable laws and
the listing agreement.
6. Financial results/Publications: The clause 41 of the Act states that the company
agrees to comply with the following provisions:
I) Preparation and Submission of Financial Results
1. The financial results filed and published in compliance with this clause shall be
prepared on the basis of accrual accounting policy and in accordance with uniform
accounting practices adopted for all the periods.
2. The company shall submit its quarterly, year to date and annual financial results to
the stock exchange in the manner prescribed in this clause.
3. The company has an option either to submit audited or unaudited quarterly and year
to date financial results to the stock exchange within forty-five days of end of each
quarter (other than the last quarter), subject to the following:
(i) In case the company opts to submit unaudited financial results, they shall be
subjected to limited review by the statutory auditors of the company (or in
case of public sector undertakings, by any practicing Chartered
Accountant) and a copy of the limited review report shall be furnished to
the stock exchange within forty-five days from end of the quarter.
(ii) In case the company opts to submit audited financial results, they shall be
accompanied by the audit report.
4. In respect of the last quarter, the company has an option either to submit unaudited
financial results for the quarter within forty-five days of the end of the financial year or
to submit audited financial results for the entire financial year within sixty days of the
end of the financial year, subject to the following:
(i) In case the company opts to submit un-audited financial results for the last
quarter, it shall also submit audited financial results for the entire financial
year, as soon as they are approved by the Board. Such un-audited
financial results for the last quarter shall also be subjected to limited
review by the statutory auditors of the company (or in case of public
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sector undertakings, by any practicing Chartered Accountant) and a copy
of the limited review report shall be furnished to the stock exchange within
forty-five days from end of the quarter
(ii) In case the company opts to submit audited financial results for the entire
financial year, it shall intimate the stock exchange in writing within fortyfive
days of the end of the financial year, about such exercise of option.
5. If the company has subsidiaries, -
(i) it may, in addition to submitting quarterly and year to date standalone
financial results to the stock exchange under item (c) i.e. within forty-five
days of the end of the quarter, also submit quarterly and year to date
consolidated financial results within forty-five days from the end of the
quarter; and
(ii) While submitting annual audited financial results prepared on stand-alone
basis under item (c), it shall also submit annual audited consolidated
financial results to the stock exchange within sixty days from the end of
the financial year.
ea) As a part of its audited or unaudited financial results for the half -year,
thecompany shall also submit by way of a note, a statement of assets and
liabilities as at the end of the half-year.
eaa) However, when a company opts to submit un-audited financial results for
thelast quarter of the financial year, it shall, submit a statement of assets and
liabilities as at the end of the financial year only along with the auditedfinancial
results for the entire financial year, as soon as they are approved bythe Board.‖
6. The financial results covered under this sub-clause shall be submitted to the stock
exchange within fifteen minutes of conclusion of the meeting of the Board or
Committee in which they were approved pursuant to sub-clause (II), through such
mode as may be specified by the stock exchange.
7. In case the company has subsidiaries and it opts to submit consolidated financial
results as mentioned at (e) above, it may submit the consolidated financials as per
the International Financial Reporting Standards (IFRS) notified by the International
Accounting Standards Board.
8. The company shall ensure that the limited review/audit reports submitted to the stock
exchanges on a quarterly/annual basis shall be given only by an auditor who has
subjected himself to the peer review process of Institute of Chartered Accountants of
India (ICAI) and holds a valid certificate issued by the Peer Review Board of the ICAI.
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II) Manner of approval and authentication of the financial results
1. The quarterly financial results submitted under sub-clause (I) shall be approved by
the Board of Directors of the company or by a committee thereof, other than the audit
committee.
Provided that when the quarterly financial results are approved by theCommittee they
shall be placed before the Board at its next meeting:
Provided further than while placing the financial results before the Board, theChief
Executive Officer and Chief Financial Officer of the company, bywhatever name
called, shall certify that the financial results do not contain anyfalse or misleading
statement or figures and do not omit any material factwhich may make the
statements or figures contained therein misleading.
2. The Committee mentioned in item (a) above shall consist of not less than one third of
the directors and shall include the managing director and at least one independent
director.
3. The financial results submitted to the stock exchange shall be signed by the
Chairman or managing director, or a whole time director. In the absence of all of
them, it shall be signed by any other director of the company who is duly authorized
by the Board to sign the financial results.
4. The limited review report mentioned in sub-clause (I) (c)(i) shall be placed before the
Board of directors or the Committee mentioned in item (b) above, before being
submitted to the stock exchange where the variation {as mentioned in Clause 41 (IV)
(a)} between un-audited financials and financials amended pursuant to limited review
for the same period, exceeds 10%.
Provided that when the limited review report is placed before the Committeethey
shall also be placed before the Board at its next meeting.
5. The annual audited financial results shall be approved by the Board of Directors of
the company and shall be signed in the manner specified in item.
III) Intimation of Board Meeting
a) The company shall give prior intimation of the date and purpose of meetings of the
Board or Committee in which the financial results will be considered under sub-
clause (II)(a) or (II)(e), as the case may be, at least seven clear calendar days prior
to the meeting (excluding the date of the intimation and date of the meeting).
b) The company shall also simultaneously issue a public notice in at least in one
English daily newspaper circulating in the whole or substantially the whole of India
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and in one daily newspaper published in the language of the region, where the
registered office of the company is situated.
IV) Other requirements as to financial results
1. Where there is a variation between the unaudited quarterly or year to date financial
results and the results amended pursuant to limited review for the same period, and
a) the variation in net profit or net loss after tax is in excess of 10% or Rs.10
lakhs, whichever is higher; or
b) the variation in exceptional or extraordinary items is in excess of 10% or
Rs.10 lakhs, whichever is higher -
The company shall submit to the stock exchange an explanation of the reasons for
variations, while submitting the limited review report. The explanation of variations so
submitted shall be approved by the Board of Directors: Provided that in case of
results for the last quarter, the above sub-clause shall apply in respect of variation, if
any, between the year to date figures contained in the unaudited results and the
figures contained in the annual audited results.
2. If the auditor has expressed any qualification or other reservation in respect of
audited financial results submitted or published under this clause, the company shall
disclose such qualification or other reservation and impact of the same on the profit
or loss, while publishing or submitting such results.
3. If the auditor has expressed any qualification or other reservation in his audit report
or limited review report in respect of the financial results of any previous financial
year or quarter which has an impact on the profit or loss of the reportable period, the
company shall include as a note to the financial results –
a) how the qualification or other reservation has been resolved; or
b) if it has not been resolved, the reason therefore and the steps which the
company intends to take in the matter.
4. If the company has changed its name suggesting any new line of business, it shall
disclose the net sales or income, expenditure and net profit or loss after tax figures
pertaining to the said new line of business separately in the financial results and shall
continue to make such disclosures for the three years succeeding the date of change
in name.
Provided that tax expense shall be allocated between the said new line of business
and other business of the company in the ratio of the respective figures of net profit
before tax, subject to any exemption, deduction or concession available under the tax
laws.
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5. If the company had not commenced commercial production or commercial operations
during the reportable period, the company shall, instead of submitting financial
results, disclose the details of amount raised, the portions thereof which is utilized
and that remaining unutilized, the details of investment made pending utilisation, brief
description of the project which is pending completion, status of the project and
expected date of commencement of commercial production or commercial
operations.
6. The quarterly and year to date results shall be prepared in accordance with the
recognition and measurement principles laid down in Accounting Standard 25 (AS 25
– Interim Financial Reporting) issued by the Institute of Chartered Accountants of
India (ICAI)/Company (Accounting Standards) Rules, 2006, whichever is applicable.
7. All items of income and expenditure arising out of transactions of exceptional nature
shall be disclosed.
8. Extraordinary items, if any, shall be disclosed in accordance with Accounting
Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies) issued by the Institute of Chartered Accountants of India
(ICAI)/Company (Accounting Standards) Rules, 2006, whichever is applicable.
9. Changes in accounting policies, if any, shall be disclosed in accordance with
Accounting Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies) issued by the Institute of Chartered
Accountants of India (ICAI)/Company (Accounting Standards) Rules, 2006,whichever
is applicable.
10. Companies, whose revenues are subject to material seasonal variations, shall
disclose the seasonal nature of their activities. In addition, they may supplement their
financial results with information for the 12 months period ending on the last day of
the quarter for the current and preceding years on a rolling basis.
11. The company shall disclose any event or transaction which occurred during or before
the quarter that is material to an understanding of the results for the quarter including
but not limited to completion of expansion and diversification programmes, strikes
and lock-outs, change in management and change in capital structure. The company
shall also disclose similar material events or transactions that take place subsequent
to the end of the quarter.
12. The company shall disclose the following in respect of dividends paid or
recommended for the year, including interim dividends:
a) amount of dividend distributed or proposed for distribution per share; the
amounts in respect of different classes of shares shall be distinguished and
the nominal values of shares shall also be indicated;
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b) Where dividend is paid or proposed to be paid pro-rata for shares allotted
during the year, the date of allotment and number of shares allotted, pro-rata
amount of dividend per share and the aggregate amount of dividend paid or
proposed to be paid on pro-rata basis.
13. The company shall disclose the effect on the financial results of material changes in
the composition of the company, if any, including but not limited to business
combinations, acquisitions or disposal of subsidiaries and long term investments, any
other form of restructuring and discontinuance of operations.
14. The company shall also disclose the number of investor complaints pending at the
beginning of the quarter, those received and disposed of during the quarter and
those remaining unresolved at the end of the quarter.
V) Formats
1. The quarterly financial results shall be in the format given in Annexure I for
companies other than banks and that given in Annexure II for banks.
2. Manufacturing, trading and service companies, which have followed functional
(secondary) classification of expenditure in the annual profit and loss account
published in the most recent annual report or which proposed to follow such
classification for the current financial year, may furnish quarterly financial results in
the alternative format given in Annexure III. The alternative format can be used only if
such format is used consistently from the first quarter of the financial year.
3. Consolidated financial results shall be in the same format as is applicable to stand-
alone financial results. Additionally, details relating to minority interest, share of
associates and other related items shall be separately given as additional row items.
4. Annual audited financial results shall be in the format as is applicable to quarterly
financial results. However, columns and figures relating to the last quarter, year to
date results and corresponding three months in previous year need not be given.
5. If the company has more than one reportable primary segment in terms of
Accounting Standard 17 (AS 17 – Segment Reporting) issued by ICAI/Company
(Accounting Standards) Rules, 2006, it shall also submit quarterly or annual segment
information as part of financial results in the format given in Annexure IV.
6. Limited review reports shall be given by auditors in the format given in Annexure V
for companies other than banks (including those using the alternative format of
financial results) and in the format given in Annexure VI for banks.
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7. In case of audited financial reports, the audit report shall be given in the format given
in Annexure VII for companies other than banks (including those using the alternative
format of financial results) and in the format given in Annexure VIII for banks.
8. Disclosure of Balance Sheet items as per items (ea) shall be in the format specified
in Annexure IX drawn from Schedule VI of the Companies Act, or its equivalent
formats in other statutes, as applicable.
VI) Publication of financial results in newspapers
1. The company shall, within 48 hours of conclusion of the Board or Committee meeting
at which the financial results were approved, publish a copy of the financial results
which were submitted to the stock exchange in at least in one English daily
newspaper circulating in the whole or substantially the whole of India and in one daily
newspaper published in the language of the region, where the registered office of the
company is situated: Provided that where the company has opted to submit aud ited
financial results under sub-clause I(c)(ii), it shall also publish the qualifications or
reservations, if any, expressed by the auditor together with the audited results.
2. Where the company has submitted consolidated financial results in addition to stand-
alone financial results under sub-clause (I) (e), it shall publish ―consolidated financial
results alongwith the following items on a stand-alone basis, as a foot note:- (a)
Turnover (b) Profit before tax (c) Profit after tax‖ in the newspapers, subject to the
following:
(i) It shall intimate the stock exchange in the first quarter of the financial year or
within such extended period as may be specified by SEBI in this regard
and shall not change the same during the financial year;
(ii) In case the company changes its option in any subsequent year, it shall
furnish comparable figures for the previous year in accordance with the
option exercised for the current year.
(iii) It shall give a reference in the newspaper publication, to the places, such as
the company‘s website and stock exchanges‘ websites, where the
standalone results of the company are available.
(iv) Companies that are required to prepare consolidated financial results for the
first time at the end of a financial year shall exercise the option mentioned
at (b) above in respect of the quarter during the financial year in which
they first acquire the subsidiary.
VII) Interpretation
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1. For the purposes of this clause, -
a. ‗financial year‘ means the period of twelve months commencing on the first
day of April every year, subject however to items (e) to (h);
b. ‗annual results‘ mean the financial results prepared in accordance with this
clause in respect of a financial year;
c. ‗quarter‘ means the period of three months commencing on the first day of
April, July, October or January of a financial year, subject however to items
(e) to (h);
d. ‗quarterly results‘ mean the financial results prepared in accordance with this
clause in respect of a quarter;
e. if the duration of financial year of the company is more than 12 months but
does not exceed 15 months, there shall be 5 quarters in a financial year;
f. if the duration of financial year of the company is more than 15 months but
does not exceed 18 months, there shall be 6 quarters in a financial year.
g. the company may at its option have a financial year commencing on a date
other than the first day of April;
h. the company may at its option have quarters commencing on dates other
than those mentioned at item (c).
8. Statement of deviations and appointment of monitoring agency: The
Company is required to appoint a monitoring agency to monitor utilisation ofproceeds
of public/rights issue. If the agency finds any deviations in the usage of funds, they
have tointimate to the stock exchange on quarterly basis. These reports should be
submitted along with quarterly/annual financial results filed under clause 41. It should
also be published in newspapers simultaneously with financial results after placingthe
same before audit committee.
9. Shareholding Pattern: Clause 35 of the Act states thatthe Company is required to
file shareholding pattern (each class of equity shares/security) in the formats
specified in this clause with the Exchange:
i. on a quarterly basis, within 21 days from the end of each quarter, in
the specified format
ii. One day prior to listing on its securities on the stock exchange (s)
iii. Within 10 days of any corporate restructuring of the company resulting
ina change exceeding +/- 2% of the total paid-up capital.
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10. Uniform procedure for dealing with unclaimed shares
a. The unclaimed shares to be credited to a demat suspense account openedby the
issuer with any one of the DPs.
b. Any corporate benefit in terms of securities, accruing on unclaimed sharessuch as
bonus shares, split etc., also to be credited to the same account.
c. Details of shareholding of each individual allottee whose shares have beencredited to
such suspense account to be properly maintained by the issuer.
d. The allottee‘s account to be credited as and when he/she approaches theissuer, after
undertaking the proper verification of identity of the allottee.
e. The voting rights of these shares to remain frozen till the rightful ownerclaims the
shares.
f. Details of shares in aggregate in the suspense account including freeze ontheir
voting rights, to be disclosed in the Annual Report as long as there areshares in the
suspense account
g. Where the shares are issued in physical form pursuant to a public issue orany other
issue, which remain unclaimed, the issuer is required totransferred all the shares to
one folio in the name of unclaimed suspenseaccount after sending three reminders to
the applicant.
h. The company is required to disclose the specified details on unclaimedsuspense
account in its annual report.
11. Corporate Governance: Clause 49 of the Listing Agreement contains provisions
relating to GoodCorporate Governance practices. The salient features of clause 49 are as
follows:
I. Board of Directors
(A) Composition of Board
1. The Board of directors of the company shall have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board of
directors comprising of non-executive directors.
2. Where the Chairman of the Board is a non-executive director, at least one-third of the
Board should comprise of independent directors and in case he is an executive
director, at least half of the Board should comprise of independent directors.
Provided that where the non-executive Chairman is a promoter of the company or is
related to any promoter or person occupying management positions at the Boardlevel
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or at one level below the Board, at least one-half of the Board of the companyshall
consist of independent directors.
Explanation-For the purpose of the expression ―related to any promoter‖ referred to in
sub-clause (ii):
a. If the promoter is a listed entity, its directors other than the independent
directors, its employees or its nominees shall be deemed to be related to it;
b. If the promoter is an unlisted entity, its directors, its employees or its
nominees shall be deemed to be related to it.‖
3. For the purpose of the sub-clause (ii), the expression ‗independent director‘ shall
mean a non-executive director of the company who:
a. apart from receiving director‘s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and
associates which may affect independence of the director;
b. is not related to promoters or persons occupying management positions at
theboard level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three
financial years;
d. is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
1. the statutory audit firm or the internal audit firm that is associated with the
company, and
2. the legal firm(s) and consulting firm(s) that have a material association
with the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of
the company, which may affect independence of the director;
f. is not a substantial shareholder of the company i.e. owning two percent or
more of the block of voting shares.
g. is not less than 21 years of age
(B) Non executive directors‟ compensation and disclosures
All fees/compensation, if any paid to non-executive directors, including
independentdirectors, shall be fixed by the Board of Directors and shall require previous
approval of shareholders in general meeting. The shareholders‘ resolution shall specify the
limits for the maximum number of stock options that can be granted to non-executive
directors, including independent directors, in any financial year and in aggregate.
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Provided that the requirement of obtaining prior approval of shareholders in general meeting
shall not apply to payment of sitting fees to non-executive directors, if made within the limits
prescribed under the Companies Act, 1956 for payment of sitting fees without approval of
the Central Government.
(C) Other provisions as to Board and Committees
1. The board shall meet at least four times a year, with a maximum time gap of four
months between any two meetings. The minimum information to be made available
to the board is given in Annexure– I A.
2. A director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director.
Furthermore it should be a mandatory annual requirement for every director to inform
the company about the committee positions he occupies in other companies and
notify changes as and when they take place.
Explanation:
a) For the purpose of considering the limit of the committees on which a director can
serve, all public limited companies, whether listed or not, shall be included and all
other companies including private limited companies, foreign companies and
companies under Section 25 of the Companies Act shall be excluded.
b) For the purpose of reckoning the limit under this sub-clause,
Chairmanship/membership of the Audit Committee and the Shareholders‘
Grievance Committee alone shall be considered.
3. The Board shall periodically review compliance reports of all laws applicable to the
company, prepared by the company as well as steps taken by the company to rectify
instances of non-compliances.
4. An independent director who resigns or is removed from the Board of the
Companyshall be replaced by a new independent director within a period of not more
than180 days from the day of such resignation or removal, as the case may be:
Provided that where the company fulfils the requirement of independent directors in
its Board even without filling the vacancy created by such resignation or removal, as
the case may be, the requirement of replacement by a new independent director
within the period of 180 days shall not apply
(D) Code of Conduct
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1. The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be posted on the website of
the company.
2. ii. All Board members and senior management personnel shall affirm compliance with
the code on an annual basis. The Annual Report of the company shall contain a
declaration to this effect signed by the CEO.
II. Audit Committee
(A) Qualified and Independent Audit Committee : A qualified and independent audit
committee shall be set up, giving the terms of referencesubject to the following:
1. The audit committee shall have minimum three directors as members. Two-thirds of
the members of audit committee shall be independent directors.
2. All members of audit committee shall be financially literate and at least one
membershall have accounting or related financial management expertise.
3. The Chairman of the Audit Committee shall be an independent director;
4. The Chairman of the Audit Committee shall be present at Annual General Meeting
toanswer shareholder queries;
5. The audit committee may invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of the
committee, but on occasions it may also meet without the presence of any executives
of the company. The finance director, head of internal audit and a representative of
the statutory auditor may be present as invitees for the meetings of the audit
committee;
6. The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee: The audit committee should meet at least four times in a
year and not more than four monthsshall elapse between two meetings. The quorum shall
be either two members or one third of the members of the audit committee whichever is
greater, but there should be a minimum of two independent members present.
(C) Powers of Audit Committee: The audit committee shall have powers, which should
include the following:
1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.
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(D) Role of Audit Committee: The role of the audit committee shall include the following:
1. Oversight of the company‘s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient
andcredible.
2. Recommending to the Board, the appointment, re-appointment and, if required,
thereplacement or removal of the statutory auditor and the fixation of audit fees.
3. Approval of payment to statutory auditors for any other services rendered by
thestatutory auditors.
4. Reviewing, with the management, the annual financial statements before submission
tothe board for approval, with particular reference to:
a. Matters required to be included in the Director‘s Responsibility Statement to
be included in the Board‘s report in terms of clause (2AA) of section 217 of
theCompanies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the
same
c. Major accounting entries involving estimates based on the exercise of
judgment by management
d. Significant adjustments made in the financial statements arising out of audit
findings
e. Compliance with listing and other legal requirements relating to financial
statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval
5A. Reviewing, with the management, the statement of uses / application of funds
raisedthrough an issue (public issue, rights issue, preferential issue, etc.), the
statement of fundsutilized for purposes other than those stated in the offer
document/prospectus/notice and thereport submitted by the monitoring agency
monitoring the utilisation of proceeds of apublic or rights issue, and making
appropriate recommendations to the Board to take upsteps in this matter.
6. Reviewing, with the management, performance of statutory and internal
auditors,adequacy of the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the structure of
the internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
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8. Discussion with internal auditors any significant findings and follow up there on.
9. Reviewing the findings of any internal investigations by the internal auditors
intomatters where there is suspected fraud or irregularity or a failure of internal
controlsystems of a material nature and reporting the matter to the board.
10. Discussion with statutory auditors before the audit commences, about the nature
andscope of audit as well as post-audit discussion to ascertain any area of concern.
11. To look into the reasons for substantial defaults in the payment to the
depositors,debenture holders, shareholders (in case of non-payment of declared
dividends) andcreditors.
12. To review the functioning of the Whistle Blower mechanism, in case the same
isexisting.
12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any
other person heading the finance function or discharging that function) after
assessing thequalifications, experience & background, etc. of the candidate.
13. Carrying out any other function as is mentioned in the terms of reference of the
AuditCommittee.
(E) Review of information by Audit Committee : The Audit Committee shall mandatorily
review the following information:
1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the audit
committee),submitted by management;
3. Management letters / letters of internal control weaknesses issued by the statutory
auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee
III. Subsidiary Companies
1. At least one independent director on the Board of Directors of the holding company
shall be a director on the Board of Directors of a material non listed Indian subsidiary
company.
2. The Audit Committee of the listed holding company shall also review the
financialstatements, in particular, the investments made by the unlisted subsidiary
company.
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3. The minutes of the Board meetings of the unlisted subsidiary company shall be
placed at the Board meeting of the listed holding company. The management should
periodically bring to the attention of the Board of Directors of the listed holding
company, a statement of all significant transactions and arrangements entered into
by the unlisted subsidiary company.
IV. Disclosures
(A) Basis of related party transactions
1. A statement in summary form of transactions with related parties in the ordinary
course of business shall be placed periodically before the audit committee.
2. Details of material individual transactions with related parties which are not in
thenormal course of business shall be placed before the audit committee.
3. Details of material individual transactions with related parties or others, which are not
on an arm‘s length basis should be placed before the audit committee, together with
Management‘s justification for the same..
(B) Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that prescribed in
an Accounting Standard has been followed, the fact shall be disclosed in thefinancial
statements, together with the management‘s explanation as to why it believessuch
alternative treatment is more representative of the true and fair view of theunderlying
business transaction in the Corporate Governance Report.
(C) Board Disclosures – Risk management
The company shall lay down procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be periodically reviewed
to ensure that executive management controls risk through means of a properlydefined
framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues, preferential issues
etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis
as a part of their quarterly declaration of financial results. Further, on an annualbasis, the
company shall prepare a statement of funds utilized for purposes other thanthose stated in
the offer document/prospectus/notice and place it before the auditcommittee. Such
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disclosure shall be made only till such time that the full money raisedthrough the issue has
been fully spent. This statement shall be certified by the statutoryauditors of the company.
Furthermore, where the company has appointed a monitoringagency to monitor the
utilisation of proceeds of a public or rights issue, it shall placebefore the Audit Committee the
monitoring report of such agency, upon receipt, withoutany delay. The audit committee shall
make appropriate recommendations to the Board totake up steps in this matter.
(E) Remuneration of Directors
1. All pecuniary relationship or transactions of the non-executive directors vis-à-vis the
company shall be disclosed in the Annual Report.
2. Further the following disclosures on the remuneration of directors shall be made in
the section on the corporate governance of the Annual Report:
a. All elements of remuneration package of individual directors summarized
under major groups, such as salary, benefits, bonuses, stock options, pension
etc.
b. Details of fixed component and performance linked incentives, along with
theperformance criteria.
c. Service contracts, notice period, severance fees.
d. Stock option details, if any – and whether issued at a discount as well as the
period over which accrued and over which exercisable.
3. The company shall publish its criteria of making payments to non-executive directors
in its annual report. Alternatively, this may be put up on the company‘s website and
reference drawn thereto in the annual report.
4. The company shall disclose the number of shares and convertible instruments held
by non-executive directors in the annual report.
5. Non-executive directors shall be required to disclose their shareholding (both own or
held by / for other persons on a beneficial basis) in the listed company in which they
are proposed to be appointed as directors, prior to their appointment. These details
should be disclosed in the notice to the general meeting called for appointment of
such director.
(F) Management
a. As part of the directors‘ report or as an addition thereto, a Management
Discussion and Analysis report should form part of the Annual Report to the
shareholders. This Management Discussion & Analysis should include
discussion on the following matters within the limits set by the company‘s
competitive position:
1. Industry structure and developments.
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2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational
performance.
8. Material developments in Human Resources / Industrial Relations
front,including number of people employed.
b. Senior management shall make disclosures to the board relating to all
materialfinancial and commercial transactions, where they have personal
interest, that mayhave a potential conflict with the interest of the company at
large (for e.g. dealing incompany shares, commercial dealings with bodies,
which have shareholding ofmanagement and their relatives etc.)
(G) Shareholders
a. In case of the appointment of a new director or re-appointment of a director
the shareholders must be provided with the following information:
i. A brief resume of the director;
ii. Nature of his expertise in specific functional areas;
iii. Names of companies in which the person also holds the directorship
and the membership of Committees of the Board; and
iv. Shareholding of non-executive directors as stated in Clause 49 (IV)
(E) (v)above
b. Disclosure of relationships between directors inter-se shall be made in the
Annual Report, notice of appointment of a director, prospectus and letter of
offer for issuances and any related filings made to the stock exchanges where
the company is listed.
c. Quarterly results and presentations made by the company to analysts shall be
put on company‘s web-site, or shall be sent in such a form so as to enable the
stock exchange on which the company is listed to put it on its own web-site.
d. A board committee under the chairmanship of a non-executive director shall
be formed to specifically look into the redressal of shareholder and
investorscomplaints like transfer of shares, non-receipt of balance sheet, non-
receipt ofdeclared dividends etc. This Committee shall be designated
as‗Shareholders/Investors Grievance Committee‘.
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e. To expedite the process of share transfers, the Board of the company shall
delegate the power of share transfer to an officer or a committee or to the
registrar and share transfer agents. The delegated authority shall attend to
share transfer formalities at least once in a fortnight.
V. CEO/CFO certification: The CEO, i.e. the Managing Director or Manager appointed in
terms of the Companies Act,1956 and the CFO i.e. the whole-time Finance Director or any
other person heading thefinance function discharging that function shall certify to the Board
that:
a. They have reviewed financial statements and the cash flow statement for the
year and that to the best of their knowledge and belief :
i. these statements do not contain any materially untrue statement or
omit any materialfact or contain statements that might be misleading;
ii. these statements together present a true and fair view of the
company‘s affairs and are in compliance with existing accounting
standards, applicable laws and regulations.
b. There are, to the best of their knowledge and belief, no transactions entered
into by the company during the year which are fraudulent, illegal or violative of
the company‘s code of conduct.
c. They accept responsibility for establishing and maintaining internal controls
for financial reporting and that they have evaluated the effectiveness of
internal control systems of the company pertaining to financial reporting and
they have disclosed to the auditors and the Audit Committee, deficiencies in
the design or operation of such internal controls, if any, of which they are
aware and the steps they have taken or propose to take to rectify these
deficiencies.
d. They have indicated to the auditors and the Audit committee
i. significant changes in internal control over financial reporting during
the year;
i. significant changes in accounting policies during the year and that the
same have been disclosed in the notes to the financial statements;
and
ii. Instances of significant fraud of which they have become aware and
the involvement therein, if any, of the management or an employee
having a significant role in the company‘s internal control system over
financial reporting.
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VI. Report on Corporate Governance
1. There shall be a separate section on Corporate Governance in the Annual Reports of
company, with a detailed compliance report on Corporate Governance.
Noncompliance of any mandatory requirement of this clause with reasons thereof
and the extent to which the non-mandatory requirements have been adopted should
be specifically highlighted. The suggested list of items to be included in this report is
given in Annexure- I C and list of non-mandatory requirements is given inAnnexure
– I D.
2. The companies shall submit a quarterly compliance report to the stock exchanges
within 15 days from the close of quarter as per the format given in Annexure I B. The
report shall be signed either by the Compliance Officer or the Chief Executive Officer
of the company
VII. Compliance
a. The company shall obtain a certificate from either the auditors or practicing
company secretaries regarding compliance of conditions of corporate
governance as stipulated in this clause and annex the certificate with the
directors‘ report, which is sent annually to all the shareholders of the
company. The same certificate shall also be sent to the Stock Exchanges
along with the annual report filed by the company.
b. The non-mandatory requirements given in Annexure – I D may be
implemented as per the discretion of the company. However, the disclosures
of the compliance with mandatory requirements and adoption (and
compliance) / non-adoption of the non-mandatory requirements shall be made
in the section on corporate governance of the Annual Report.
(note that all the annexrue are available at
http://www.nseindia.com/content/corporate/compliance/comp_calendar.htm)
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Penalty for Non-Compliance of Listing Agreement
The penal provisions for non-compliance of the conditions of the ListingAgreement
are governed by Clause 23(2) and 23E of the SCRA 1956.Clause 23(2) states that any
person who fails to comply with the provisions ofSection 21 (conditions for listing) shall
without prejudice to any award of penalty byAdjudicating Officer on conviction be punishable
with imprisonment for a term whichmay extend to ten years or with fine which may extend to
Rs.25 crore rupees orwith both.
Clause 23E of SCRA states that if any company fails to comply with the
listingconditions or delisting conditions or grounds or commits a breach thereof, it shall
beliable to a penalty not exceeding twenty five crore rupees.Apart from the above, a
recognized stock exchange may suspend or withdrawadmission to dealings in the securities
of a company or body corporate either for abreach of or non-compliance with, any of the
conditions of admission to dealings orfor any other reason, to be recorded in writing, which in
the opinion of the stockexchange justifies such action.The Stock Exchanges may delist
companies with have been suspended for aminimum period of six months for non-
compliance with the Listing Agreement.
IV. Certification by practising company secretary
1. Certificate under clause 47(c):A certificate from a practicing company
secretary that all transfers has beencompleted within the stipulated time.
2. Certification under clause 49: A certificate from the auditor of the company
or from a practicing companysecretary regarding compliance of conditions of
corporate governance asstipulated in this clause.
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Chapter 14
SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000
Learning objectives
After reading this chapter, the reader will understand
12. The legal provisions that are related to public issue (IPO/FPO), book building etc.
13. Compliances to be followed by the company while issuing securities to the public
Introduction
We have learnt in what ways shares can be issued in chapter 2. This chapter
dedicates to discuss the provisions that are related to the share issue. In addition, we will
learn how these provisions would help to protect the investors as well.
1.1 Short title, commencement, etc.
(a) These Guidelines have been issued by the SEBI under Section 11 of the
Securities and Exchange Board of India Act, 1992.
(b) These Guidelines may be called the Securities and Exchange Board of India
(Disclosure and Investor Protection) Guidelines, 2000.
(c) These Guidelines shall come into force from the date specified by the Board.
1.2 Definitions
(a) 1.2.1 In these Guidelines, unless the context otherwise requires;
(ia) ―Abridged Letter of Offer‖ in relation to a rights issue means the abridged
form of a letter of offer which satisfies the minimum requirements laid down in
Section IV of Chapter VI of the Guidelines);
(ib) ―Abridged Prospectus‖ means the memorandum as prescribed in Form 2A
under Sub-section (3) of Section 56 of the Companies Act, 1956;
(b) ―Act‖ means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(c) ―Advertisement‖ includes notices, brochures, pamphlets, circulars, show cards,
catalogues, hoardings, placards, posters, insertions in newspaper, pictures,
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films, cover pages of offer documents or any other print medium, radio, television
programmes through any electronic medium;
(d) ―Board‖ means the Securities and Exchange Board of India established under
provisions of Section 3 of the Act;
(e) ―Book Building‖ means a process undertaken by which a demand for the
securities proposed to be issued by a body corporate is elicited and built up and
the price for such securities is assessed for the determination of the quantum of
such securities to be issued by means of a notice, circular, advertisement,
document or information memoranda or offer document;
(f) ―Collection Centre‖ means a place where the application for subscribing to the
public or rights issue is collected by the Banker to an Issue on behalf of the
issuer company; vii) ―Company‖ means the Company defined in Section 3 of the
Companies Act, 1956;
(g) ―Composite Issues‖ means an issue of securities by a listed company on a public
cum rights basis offered through a single offer document wherein the allotment
for both public and rights components of the issue is proposed to be made
simultaneously;
(h) ―Credit Rating Agency‖ means a body corporate registered under Securities and
Exchange Board of India (Credit Rating Agencies) Regulations, 1999;
(i) ―Designated Financial Institution‖ means the public financial institution included
in or notified under Section 4A of the Companies Act, Industrial Development
Corporation established by State Governments and financial institutions
approved under Section 36(1)(viii) of Income Tax Act, 1961;
(j) ―Debt-Instrument‖ means an instrument which creates or acknowledges
indebtedness, and includes debenture, stock, bonds and such other securities of
a body corporate, whether constituting a charge on the assets of the body
corporate or not;
(k) ―Depository‖ means a body corporate registered under Securities and Exchange
Board of India (Depositories and Participants) Regulations, 1996;
(l) ―Designated Stock Exchange‖ means a stock exchange in which securities of the
company are listed or proposed to be listed and which is chosen by the company
for purposes of a particular issue under these guidelines.
Provided that where any of such stock exchanges have nationwide trading
terminals, the company shall choose one of them as the designated stock
exchange.
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Provided further that the company may choose a different exchange as a
designated stock exchange for any subsequent issue, subject to the above
clause.)
xiib ―Employee‖ means
a permanent employee of the company working in India or out of India; or
b) a director of the company, whether a whole time director, part time director or
otherwise;
c) an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or
out of India, or of a holding company of the company.
(m) ―Firm Allotment‖ means allotment on a firm basis in public issues by an issuing
company made to Indian and Multilateral Development Financial Institutions,
Indian Mutual Funds, Foreign Institutional Investors including non-resident
Indians and overseas corporate bodies and permanent/ regular employees of the
issuer company.
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 Stabilising
Agent.
(n) ―Guidelines‖ means Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 1999 and includes instructions issued by the
Board.
(o) ―Infrastructure Company‖ means, a company wholly engaged in the business of
developing, maintaining and operating infrastructure facility.
(p) ―Infrastructure Facility‖ means the ―infrastructure facility‖ within the meaning of
Section 10(23G)(c) of Income Tax Act, 1961.
(q) ―Issuer Company‖ means a company which has filed offer documents with the
Board for making issue of securities in terms of these guidelines.
(r) ―Listed Company‖ means a company which has any of its securities offered
through an offer document listed on a recognised stock exchange and also
includes Public Sector Undertakings whose securities are listed on a recognised
stock exchange.
(s) ―Merchant Banker‖ means an entity registered under Securities and Exchange
Board of India (Merchant Bankers) Regulations, 1992;
a) ―Mutual fund‖ means a mutual fund registered with the Board under the SEBI
(Mutual Funds) Regulations, 1996.)
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b)) (―Networth‖ means aggregate of value of the paid up equity capital and free
reserves (excluding reserves created out of revaluation) reduced by the
aggregate value of accumulated losses and deferred expenditure not written off
(including miscellaneous expenses not written off) as per the audited balance
sheet.)
(t) ―Offer Document‖ means Prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a rights issue.
(u) ―Offer for Sale‖ means offer of securities by existing shareholder (s) of a company
to the public for subscription, through an offer document.
(v) ―Preferential Allotment‖ means an issue of capital made by a body corporate in
pursuance of a resolution passed under Sub-section (1A) of Section 81 of the
Companies Act, 1956.
(w) ―Public Issue‖ means an invitation by a company to public to subscribe to the
securities offered through a prospectus;
(x) ―Public Financial Institutions‖ means institutions included in or notified for the
purposes of Section 4A of the Companies Act, 1956.
a) ―Retail Individual Investor‖ means an investor who applies or bids for
securities of or for a value of not more than 11(Rs.1,00,000/-).)
(y) ―Rights Issue‖ means an issue of capital under Sub-section (1) of Section 81 of
the Companies Act, 1956, to be offered to the existing shareholders of the
company through a Letter of Offer.
(z) ―Schedule‖ means schedule annexed to these Guidelines.
(aa) ―Shelf Prospectus‖ means a shelf prospectus within the meaning of clause (b) of
the Explanation to Section 60A of the Companies Act, 1956.
(bb) ―Stock Exchange‖ means a stock exchange which is for the time being
recognised under Section 4 of the Securities Contracts (Regulation) Act, 1956.
(cc) xxviii) ―Underwriting‖ means an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of
such body corporate or the public do not subscribe to the securities offered to
them.
(dd) ―Unlisted Company‖ means a company which is not a listed company.
1.3 All other words and expressions used but not defined in these Guidelines, but defined in
the Act or in the Companies Act, 1956 or in Securities Contracts (Regulation) Act, 1956
and/ or the Rules and the Regulations made thereunder, shall have the meanings
respectively assigned to them in such Acts or the Rules or the Regulations made
thereunder or any statutory modification or re-enactment thereto, as the case may be.
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1.4 Applicability of the Guidelines:
1. These Guidelines shall be applicable to all public issues by listed and unlisted
companies, all offers for sale and rights issues by listed companies whose equity
share capital is listed, except in case of rights issues where the aggregate value of
securities offered does not exceed Rs.50 lacs.
(Provided that in case of the rights issue where the aggregate value of the securities
offered is less than Rs.50 Lakhs, the company shall prepare the letter of offer in
accordance with the disclosure requirements specified in these guidelines and file the
same with the Board for its information and for being put on the SEBI website.)
2. Unless otherwise stated, all provisions in these guidelines applicable to public issues
by unlisted companies shall also apply to offers for sale to the public by unlisted
companies.
ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES
2.0 Conditions for issue of securities: (The companies issuing securities offered through an
offer document shall satisfy the following at the time of filing the draft offer document with
SEBI16(, unless specified otherwise in the Chapter) and also at the time of filing the final
offer document with the Registrar of Companies/ Designated Stock Exchange:)
2.1 Filing of offer document
3. 2.1.1 (No issuer company shall make any public issue of securities, unless a draft
Prospectus has been filed with the Board through a Merchant Banker, at least 30
days prior to the filing of the Prospectus with the Registrar of Companies (ROC):
Provided that if the Board specifies changes or issues observations on the
draft Prospectus (without being under any obligation to do so), the issuer
company or the Lead Manager to the Issue shall carry out such changes in
the draft Prospectus or comply with the observations issued by the Board
before filing the Prospectus with ROC.
Provided further that the period within which the Board may specify changes
or issue observations, if any, on the draft Prospectus shall be 30 days from
the date of receipt of the draft Prospectus by the Board. Provided further that
where the Board has sought any clarification or additional information from
the Lead Manager/s to the Issue, the periodwithin which the Board may
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specify changes or issue observations, if any, on the draft Prospectus shall be
15 days from the date of receipt of satisfactory reply from the Lead Manager/s
to the Issue.
Provided further that where the Board has made any reference to or sought
any clarification or additional information from any regulator or such other
agencies, the Board may specify changes or issue observations, if any, on
the draft Prospectus after receipt of comments or reply from such regulator or
other agencies.
Provided further that the Board may specify changes or issue observations, if
any, on the draft Prospectus only after receipt of copy of in-principle approval
from all the stock exchanges on which the issuer company intends to list the
securities proposed to be offered through the Prospectus.)
3.1.2 No listed issuer company shall make any rights issue of securities, 19(where the
aggregate value of such securities, including premium, if any, exceeds Rs. 50
lacs,) unless a draft letter of offer has been filed with the Board, through a
Merchant Banker, at least 30 days prior to the filing of the letter of offer with the
Designated Stock Exchange (DSE).
3.1.3 Companies barred not to issue security 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.
3.1.4 Application for listing No company shall make any public issue of securities
unless it has made an application for listing of those securities in the stock
exchange (s).
3.1.5 Issue of securities in dematerialised form
3.1.5.1 No company shall make public or rights issue or an offer for sale of securities,
unless:
(a) the company enters into an agreement with a depository for dematerial isation of
securities already issued or proposed to be issued to the public or existing
shareholders; and
(b) the company gives an option to subscribers/ shareholders/ investors to receive the
security certificates or hold securities in dematerialised form with a depository.
Explanation: A ―depository‖ shall mean a depository registered with the Board under
the Securities and Exchange Board of India (Depositories and Participants)
Regulations, 1996.
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2.2 (Initial Public Offerings by Unlisted Companies)
2.2.1 (An unlisted company may make an initial public offering (IPO) of equity shares or any
other security which may be converted into or exchanged with equity shares at a later date,
only if it meets all the following conditions:
(a) The company has net tangible assets of at least Rs. 3 crores in each of the
preceding 3 full years (of 12 months each), of which not more than 50% is held in
monetary assets: Provided that if more than 50% of the net tangible assets are held
in monetary assets, the company has made firm commitments to deploy such excess
monetary assets in its business/project;
(b) The company has a track record of distributable profits in terms of Section 205 of the
Companies Act, 1956, for at least three (3) out of immediately preceding five (5)
years; Provided further that extraordinary items shall not be considered for
calculating distributable profits in terms of Section 205 of Companies Act, 1956;
(c) The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full
years (of 12 months each);
(d) In case the company has changed its name within the last one year, atleast 50% of
the revenue for the preceding 1 full year is earned by the company from the activity
suggested by the new name; and
(e) The aggregate of the proposed issue and all previous issues made in the same
financial year in terms of size (i.e., offer through offer document + firm allotment +
promoters‘ contribution through the offer document), does not exceed five (5) times
its pre-issue networth as per the audited balance sheet of the last financial year.)
2.2.2 (An unlisted company not complying with any of the conditions specified in Clause
1. may make an initial public offering (IPO) of equity shares or any other security which
may be converted into or exchanged with equity shares at a later date, only if it
meets both the conditions (a) and (b) given below:
(a)(i) The issue is made through the book-building process, with at least 23(50% of
net offer to public) being allotted to the Qualified Institutional Buyers (QIBs), fai ling
which the full subscription monies shall be refunded. OR
(a)(ii) The ―project‖ has at least 15% participation by Financial Institutions/ Scheduled
Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to
this, at least 10% of the issue size shall be allotted to QIBs, failing which the full
subscription monies shall be refunded AND
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(c) (i) The minimum post-issue face value capital of the company shall be Rs. 10 crores.
OR
(b) (ii) There shall be a compulsory market-making for at least 2 years from the date
of listing of the shares, subject to the following:
(a) Market makers undertake to offer buy and sell quotes for a minimum depth of 300
shares;
(b) Market makers undertake to ensure that the bid-ask spread (difference between
quotations for sale and purchase) for their quotes shall not at any time exceed 10%:
(c) The inventory of the market makers on each of such stock exchanges, as on the date
of allotment of securities, shall be at least 5% of the proposed issue of the company.)
2. (2.2.2A An unlisted public company shall not make an allotment pursuant to a public
issue or offer for sale of equity shares or any security convertible into equity shares
unless, in addition to satisfying the conditions mentioned in Clause 2.2.1 or 2.2.2 as
the case may be, the prospective allottees are not less than one thousand (1000) in
number.)
3. (2.2.2B For the purposes of clauses 2.2.1 and 2.2.2 above:
(i) ‖Net Tangible Assets‖ shall mean the sum of all net assets of the company, excluding
‗intangible assets‘, as defined in Accounting Standard 26 (AS 26) issued by the
Institute of Chartered Accountants of India.
(ii) ―Project‖ means the object for which the monies proposed to be raised to cover the
objects of the issue.
(iii) In case of partnership firms which have since been converted into companies, the
track record of distributable profits of the firm shall be considered only if the
financial statements of the partnership business for the said years conform to and
are revised in the format prescribed for companies under the Companies Act,
1956 and also comply with the following:
a. adequate disclosures are made in the financial statements as required to be
made by the companies as per Schedule VI of the Companies Act, 1956;
b. the financial statements shall be duly certified by a Chartered Accountant
stating that:
I. the accounts as revised or otherwise and the disclosures made are in
accordance with the provisions of Schedule VI of the Companies
Act, 1956; and
II. the accounting standards of the Institute of Chartered
Accountants of India (ICAI) have been followed and that the
financial statements present a true and fair picture of the firm‘s
accounts.
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(iv) In case of an unlisted company formed out of a division of an existing company, the
track record of distributable profits of the division spun off shall be considered
only if the requirements regarding financial statements as specified for
partnership firms in sub-clause (iv) above are complied with.
(v) ―Qualified Institutional Buyer‖ shall mean:
a. public financial institution as defined in section 4A of the Companies Act,
1956;
b. scheduled commercial banks;
c. mutual funds;
d. foreign institutional investor registered with SEBI;
e. multilateral and bilateral development financial institutions;
f. venture capital funds registered with SEBI;
g. foreign venture capital investors registered with SEBI;
h. state industrial development corporations;
i. insurance companies registered with the Insurance Regulatory and
Development Authority (IRDA);
j. provident funds with minimum corpus of Rs. 25 crores;
k. pension funds with minimum corpus of Rs. 25 crores).
2.2.3 Offer for sale
(An offer for sale shall not be made of equity shares of a company or any other security
which may be converted into or exchanged with equity shares of the company at a later
date, unless the conditions laid down in clause 2.2.1 or 2.2.2, as the case may be and in
clause 2.2.2A, are satisfied.)
2.2.4 Offer for sale can also be made if provisions of clause 2.2.2 are compiled at the time of
submission of offer document with Board.
2.3 Public Issue by Listed Companies
2.3.1 (A listed company shall be eligible to make a public issue of equity shares or any other
security which may be converted into or exchanged with equity shares at a later date:
Provided that the aggregate of the proposed issue and all previous issues made in the same
financial year in terms of size (i.e., offer through offer document + firm allotment + promoters‘
contribution through the offer document), issue size does not exceed 5 times its pre-issue
networth as per the audited balance sheet of the last financial year.
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Provided (further) that in case there is a change in the name of the issuer company within
the last 1 year (reckoned from the date of filing of the offer document), the revenue
accounted for by the activity suggested by the new name is not less than 50% of its total
revenue in the preceding 1 full-year period.)
2.3.2 (A listed company which does not fulfill the conditions given in the provisos to Clause
2.3.1 above shall be eligible to make a public issue, subject to complying with the conditions
specified in clause 2.2.2.)
2.4 Exemption from Eligibility Norms 2.4.1 The provisions of clauses (2.2 and 2.3) shall not
be applicable in case of:
i) a banking company including a Local Area Bank (hereinafter referred to as Private
Sector Banks) set up under sub-section (c) of Section 5 of the Banking Regulation
Act, 1949 and which has received license from the Reserve Bank of India; or
ii) a corresponding new bank set up under the Banking Companies (Acquisition and
Transfer of Undertaking) Act, 1970 Banking Companies (Acquisition and Transfer of
Undertaking) Act, 1980, State Bank of India Act 1955 and State Bank of India
(Subsidiary Banks) Act, 1959 (hereinafter referred to as ―public sector banks‖);
iii) an infrastructure company:
a) 35(whose project has been appraised by a Public Financial Institution (PFI) or
Infrastructure Development Finance Corporation (IDFC) or Infrastructure Leasing and
Financing Services Ltd. (IL&FS) or a bank which was earlier a PFI; and)
b) not less than 5% of the project cost is financed by any of the institutions referred to
in sub-clause (a), jointly or severally, irrespective of whether they appraise the project
or not, by way of loan or subscription to equity or a combination of both;
iv) rights issue by a listed company. Explanation: (Deleted) 2.5 Credit Rating for Debt
Instruments (2.5.1A No issuer company shall make a public issue or rights issue of debt
instruments (whether convertible or not), unless the following conditions are also satisfied,
as on date of filing of draft offer document with SEBI and also on the date of filing a final
offer document with ROC/ Designated Stock Exchange:
(i) credit rating of not less than investment grade is obtained from not less than two credit
rating agencies registered with SEBI and disclosed in the offer document;
(ii) The company is not in the list of willful defaulters of RBI;
(iii) The company is not in default of payment of interest or repayment of principal in respect
of debentures issued to the public, if any, for a period of more than 6 months. 2.5.1B An
issuer company shall not make an allotment of non-convertible debt instrument pursuant to a
public issue if the proposed allottees are less than fifty (50) in number. In such a case the
company shall forthwith refund the entire subscription amount received. If there is a delay
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beyond 8 days after the company becomes liable to pay the amount, the company shall pay
interest @15% p.a. to the investors.)
2.5.2 (Where credit ratings are obtained from more than two credit rating agencies, all the
credit rating/s, including the unaccepted credit ratings, shall be disclosed.)
2.5.3 (Deleted.)
2.5.4 All the credit ratings obtained during the three (3) years preceding the pubic or rights
issue of debt instrument (including convertible instruments) for any listed security of the
issuer company shall be disclosed in the offer document.
(2.5A IPO Grading
2.5A.1 No unlisted company shall make an IPO of equity shares or any other security which
may be converted into or exchanged with equity shares at a later date, unless the following
conditions are satisfied as on the date of filing of Prospectus (in case of fixed price issue) or
Red Herring Prospectus (in case of book built issue) with ROC:
(i) the unlisted company has obtained grading for the IPO from at least one credit rating
agency;
(ii) disclosures of all the grades obtained, along with the rationale/ description furnished by
the credit rating agency(ies) for each of the grades obtained, have been made in the
Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of book built
issue); and
(iii) the expenses incurred for grading IPO have been borne by the unlisted company
obtaining grading for IPO.)
2.6 Outstanding Warrants or Financial Instruments
2.6.1 No unlisted company shall make a public issue of equity share or any security
convertible at later date into equity share, if there are any outstanding financial instruments
or any other right which would entitle the existing promoters or shareholders any option to
receive equity share capital after the initial public offering.
2.7 Partly Paid-up Shares: No company shall make a public or rights issue of equity share or
any security convertible at later date into equity share, unless all the existing partly paid -up
shares have been fully paid or forfeited in a manner specified in clause 8.6.2. 41(2.8 Means
of Finance No company shall make a public or rights issue of securities unless firm
arrangements of finance through verifiable means towards 75% of the stated means of
finance, excluding the amount to be raised through proposed Public/ Rights issue, have
been made.)
Pricing By Companies Issuing Securities
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3.0 The companies eligible to make public issue can freely price their equity shares or any
security convertible at later date into equity shares in the following cases:
3.1 Public/ Rights Issue by Listed Companies
3.1.1 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.
3.2 Public Issue by Unlisted Companies
3.2.1 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.
(3.2A) Infrastructure company
(3.2A.1) An eligible infrastructure company shall be free to price its equity shares, subject to
the compliance with the disclosure norms as specified by SEBI from time to time.
3.3 Initial public Issue by Banks
3.3.1 The banks (whether public sector or private sector) may freely price their issue of
equity shares or any securities convertible at a later date into equity share, subject to
approval by the Reserve Bank of India.
3.4 Differential Pricing
3.4.1 Any unlisted company or a listed company making a public issue of equity shares or
securities convertible at a later date into equity shares, may issue such securities to
applicants in the firm allotment category at a price different from the price at which the net
offer to the public is made, provided that the price at which the security is being offered to
the applicants in firm allotment category is higher than the price at which securities are
offered to public. Explanation: The net offer to the public means the offer made to the Indian
public and does not include firm allotments or reservations or promoters‘ contributions.
3.4.2 A listed company making a composite issue of capital may issue securities at
differential prices in its public and rights issue.
3.4.3 In the public issue which is a part of a composite issue, dif ferential pricing as per sub-
clause
3.4.1 above is also permissible.
3.4.4 Justification for the price difference shall be given in the offer document for sub-
clauses 3.4.1 and 3.4.2. 3.5 Price Band
3.5.1 Issuer company can mention a price band of 20% (cap in the price band should not be
more than 20% of the floor price) in the offer documents filed with the Board and actual price
can be determined at a later date before filing of the offer document with ROCs.
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3.5.2 If the Board of Directors has been authorised to determine the offer price within a
specified price band such price shall be determined by a Resolution to be passed by the
Board of Directors.
3.5.3 (The Lead Merchant Bankers shall ensure that in case of the listed companies, a 48
hours notice of the meeting of the Board of Directors for passing resolution for determination
of price is given to the Designated Stock Exchange.)
(3.5.4 In case of public issue by listed issuer company, issue price or price band may not be
disclosed in the draft prospectus filed with the Board.)
(3.5.5 In case of a rights issue, issue price or price band may not be disclosed in the draft
letter of offer filed with the Board. The issue price may be determined anytime before fixation
of the record date, in consultation with the Designated Stock Exchange.)
(3.5.6) The final offer document shall contain only one price and one set of financial
projections, if applicable. 3.6 Payment of Discounts/ Commissions, etc.
3.6.1 No payment, direct or indirect in the nature of a discount, commission, allowance or
otherwise shall be made either by the issuer company or the promoters in any public issue,
to the persons who have received firm allotment in such public issue.
3.7 Freedom to determine the denomination of shares for public / rights issues and to
change the standard denomination
3.7.1 (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:
i. In case of initial public offer by an unlisted company,
a. 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;
b. if issue price is less than Rs. 500 per share, the face value shall be Rs. 10/- per
share;
ii. 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.)
3.7.2 The companies which have already issued shares in the denomination of Rs.10/- or
Rs.100/- may change the standard denomination of the shares by splitting or consolidating
the existing shares.
3.7.3 The companies proposing to issue shares in any denominat ion or changing the
standard denomination in terms of clause 3.7.1 or 3.7.2 above shall comply with the
following:
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(a) the shares shall not be issued in the denomination of decimal of a rupee;
(b) the denomination of the existing shares shall not be altered to a denomination of decimal
of a rupee;
(c) at any given time there shall be only one denomination for the shares of the company;
(d) the companies seeking to change the standard denomination may do so after amending
the Memorandum and Articles of Association, if required;
(e) the company shall adhere to the disclosure and accounting norms specified by SEBI from
time to time.
Promoters‟ Contribution and Lock-In Requirements
I – PROMOTERS‘ CONTRIBUTION
4.0 Promoters‘ contribution in any public issue shall be in accordance with the following
provisions (as on the date of filing of draft offer document with SEBI, unless specified
otherwise in this Part):
4.1 Promoters‘ Contribution in a Public Issue by Unlisted Companies
4.1.1 In a public issue by an unlisted company, the promoters shall contribute not less than
20% of the post issue capital.
4.1.2 (Deleted)
4.2 Promoters‘ Shareholding in Case of Offers for Sale
4.2.1 The promoters‘ shareholding after offer for sale shall not be less than 20% o f the post
issue capital.
4.3 Promoters‘ Contribution in Case of Public Issues by Listed Companies
4.3.1 In case of public issues by listed companies, the promoters shall participate either to
the extent of 20% of the proposed issue or ensure post-issue share holding to the extent of
20% of the post-issue capital.
4.4 Promoters‘ Contribution in Case of Composite Issues
4.4.1 In case of composite issues of a listed company, the promoters‘ contribution shall at
the option of the promoter(s) be either 20% of the proposed public issue or 20% of the post-
issue capital.
4.4.2 Rights issue component of the composite issue shall be excluded while calculating the
post-issue capital.
4.5 (Deleted)
4.6 Securities Ineligible for Computation of Promoters‘ Contribu tion
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4.6.1 Where the promoters of any company making an issue of securities have acquired
equity during the preceding three years, before filing the offer documents with the Board,
such equity shall not be considered for computation of promoters contribut ion if it is;
(i) acquired for consideration other than cash and revaluation of assets or
capitalisation of intangible assets is involved in such transaction(s); or
(ii) resulting from a bonus issue, out of revaluation reserves or reserves created
without accrual of cash resources 52(or against shares which are otherwise ineligible
for computation of promoters‘ contribution);
4.6.2 In case of public issue by unlisted companies, securities which have been (acquired
by) the promoters during the preceding one year, at a price lower than the price at which
equity is being offered to public shall not be eligible for computation of promoters‘
contribution.
Provided that the shares for which the difference between the offer price and the issue price
for these shares is brought in by the promoters shall be considered eligible subject to issuer
company complying with the applicable provisions of the Companies Act, 1956 (such as
passing of revised resolution by shareholders or issuer‘s Board, filing of revised return of
allotment with ROC, etc.) (Provided further that nothing contained in clause 4.6.2 shall apply
to shares acquired by promoters interse, if such shares had been acquired by the transferor
promoter during the preceding one year at a price equal or higher than the price at which
equity is being offered to public or had been acquired by the transferor promoter prior to the
preceding one year.)
4.6.3 In respect of companies formed by conversion of partnership firms, where the partners
of the erstwhile partnership firm and the promoters of the converted company are the same
and there is no change in management, the shares allotted to the promoters during previous
one year out of the funds brought in during that period shall not be considered eligible for
computation of promoters contribution unless such shares have been issued at the same
price at which the public offer is made.
Provided that if the partners‘ capital existed in the firm for a period of more than one year on
a continuous basis, the shares allotted to promoters against such capital shall be considered
eligible.
4.6.4 In respect of Clauses 4.6.1, 4.6.2 and 4.6.3, such ineligible shares acquired in
pursuance to a scheme of merger or amalgamation approved by a High Court shall be
eligible for computation of promoters‘ contribution. 55(4.6.4A Pledged securities held by
promoters shall not be eligible for computation of promoters‘ contribution.)
4.6.5 For the purposes of computing the promoters‘ contribution referred to in Clauses 4.1.1,
4.1.2, 4.2.1, 4.3.1, 4.4.1 & 4.5.1 above, minimum contribution of Rs.25000 per application
from each individual and minimum contribution of Rs.1 lac from firms and companies (not
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being business associates like dealers and distributors), shall be eligible to be considered
towards promoters‘ contribution.
4.6.6 No securities forming part of promoters‘ contribution shall consist of any private
placement made by solicitation of subscription from unrelated persons either directly or
through any intermediary.
4.6.7 The securities for which a specific written consent has not been obtained from the
respective shareholders for inclusion of their subscription in the minimum promoters‘
contribution subject to lock-in shall not be eligible for promoters‘ contribution.
4.7 Computation of Promoters‘ Contribution in Case of Issue of Convertible Security
4.7.1 In case of any issue of convertible security by a company, the promoters shall have an
option to bring in their subscription by way of equity or by way of subscription to the
convertible security being offered through the proposed issue so that the total promoters‘
contribution shall not be less than the required minimum contribution referred to in Clauses
4.1.1, 4.1.2, 4.2.1, 4.3.1, 4.4.1 & 4.5.1 above.
Provided that, if the conversion price of emerging equity is not predetermined and the same
has not been specified in the offer document (instead a formula for conversion price is
indicated), the promoters shall not have the said option and shall contribute by subscribing to
the same instrument.
4.7.2 In case of any issue of security convertible in stages either at par or premium
(conversion price being predetermined), the promoters‘ contribution in terms of equity share
capital shall not be at a price lower than the weighted average price of the share capital
arising out of conversion.
Explanation: For the purposes of clause 4.7.2,
(a) ‖weights‖ means the number of equity shares arising out of conversion of security
into equity at various stages.
(b) ‖price‖ means the price of equity shares on conversion arrived at after taking into
account predetermined conversion price at various stages.
4.7.3 The promoters‘ contribution shall be computed on the basis of postissue capital
assuming full proposed conversion of such convertible security into equity.
Provided that where the promoter is contributing through the same optional convertible
security as is being offered to the public, such contribution shall be eligible as promoters‘
contribution only if the promoter(s) undertakes in writing to accept full conversion.
4.8 Promoters‘ Participation in Excess of the Required Minimum Contribution to be Treated
as Preferential Allotment
4.8.1 In case of a listed company, participation by promoters in the proposed public issue in
excess of the required minimum percentage referred in Clauses 4.3.1 and 4.4.1 shall attract
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the pricing provisions of Guidelines on preferential allotment, if the issue price is lower than
the price as determined on the basis of said preferential allotment guidelines.
4.9 Promoters‘ Contribution to be brought in before Public Issue Opens
4.9.1 Promoters shall bring in the full amount of the promoters‘ contribution including
premium at least one day prior to the issue opening date (which shall be kept in an escrow
account with a Scheduled Commercial Bank and the said contribution/ amount shall be
released to the company along with the public issue proceeds.)
(Provided that, where the promoters‘ contribution has been brought prior to the public issue
and has already been deployed by the company, the company shall give the cash flow
statement in the offer document disclosing the use of such funds received as promoters‘
contribution.)
Provided (further) that where the promoters‘ minimum contribution exceeds Rs.100 crores,
the promoters shall bring in Rs.100 crores before the opening of the issue and the remaining
contribution shall be brought in by the promoters in advance on pro-rata 59(basis) before the
calls are made on public.
4.9.2 The company‘s board shall pass a resolution allotting the shares or convertible
instruments to promoters against the moneys received.
4.9.3 A copy of the resolution along with a Chartered Accountants‘ Certificate certifying that
the promoters‘ contribution has been brought in shall be filed with the Board before opening
of the issue.
4.9.4 The certificate of the Chartered Accountants shall also be accompanied by a list of
names and addresses of friends, relatives and associates who have contributed to the
promoters‘ quota along with the amount of subscription made by each of them.
4.10 Exemption from Requirement of Promoters‘ Contribution
4.10.1 The requirement of promoters‘ contribution shall not be applicable:
(a) in case of public issue of securities by a company which has been listed on a stock
exchange for at least 3 years and has a track record of dividend payment for at least 3
immediately preceding years.
Provided that if the promoters participate in the proposed issue to the extent greater than
higher of the two options available as per Clauses 4.3.1 and 4.4.1 above, the subscription in
excess of such percentage shall attract pricing guidelines on preferential issue, if the issue
price is lower than the price as determined on the basis of said guidelines on preferential
issue.
(b) in case of companies where no identifiable promoter or promoter group exists.
(c) in case of rights issues. Provided 60(that) in case of (a) and (c) above, the promoters
shall disclose their existing shareholding and the extent to which they are participating in the
proposed issue, in the offer document.
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Part Ii - Lock-In Requirements
4.11 Lock in of Minimum Specified Promoters‘ Contribution in Public Issues
4.11.1 In case of any issue of capital to the public the minimum promoters‘ contribution (as
per clause 4.1, 4.2, 4.3, 4.4 & 4.5) shall be locked in for a period of 3 years.
4.11.2 The lock-in shall start from the date of allotment in the proposed public issue and the
last date of the lock-in shall be reckoned as three years from the date of commencement of
commercial production or the date of allotment in the public issue whichever is later.
Explanation: The expression "Date of commencement of commercial production" means the
last date of the month in which commercial production in a manufacturing company is
expected to commence as stated in the offer document.
4.12 Lock-in of Excess Promoters‘ Contribution
4.12.1 In case of a public issue by unlisted company, if the promoters‘ contribution in the
proposed issue exceeds the required minimum contribution, such excess contribution shall
also be locked in for a period of (one year).
4.12.2 In case of a public issue by a listed company, participation by promoters in the
proposed public issue in excess of the required minimum percentage shall also be locked-in
for a period of 62(one year) as per the lock-in provisions as specified in Guidelines on
Preferential issue. Provided that excess promoters‘ contribution as per Clause 4.10.1(a) of
Part I of this Chapter shall not be subject to lock-in.
4.12.3 In case shortfall in the firm allotment category is met by the promoter as specified in
clause 8.5(e), such subscription shall be locked in for a period of 63(one year).
4.13 Securities Issued Last to be Locked-in First
4.13.1 The securities forming part of promoters‘ contribution as specified in Clauses 4.1.1,
4.1.2, 4.2.1, 4.3.1, 4.4.1 & 4.5.1 of Part I of this Chapter and issued last to the promoters
shall be locked in first for the specified period.
Provided that the securities issued to the financial institutions appearing as promoters, if
issued last, shall not be locked-in before the shares allotted to the other promoters.
4.14 Lock-in of pre-issue share capital of an unlisted company
4.14.1 (The entire pre-issue capital, other than that locked-in as minimum promoters‘
contribution, shall be locked-in for a period of one year from the date of allotment 65(in the
proposed public issue).
Provided that where shares held by promoter(s) are lent to the SA under clause 8A.7, they
shall be exempted from the lock in requirements specified above for the period starting from
the date of such lending and ending on the date on which they are returned to the same
lender(s) under clause 8A.13 or under clause 8A.15, as the case may be.)
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4.14.2 (Clause 4.14.1 shall not be applicable to:
(i) (pre-issue shares held by a Venture Capital Fund or a Foreign Venture Capital Investor,
subject to the following conditions:
(a) the shares have been held by the Venture Capital Fund or the Foreign Venture
Capital Investor, as the case may be, for a period of at least one year as on the date
of filing draft prospectus with the Board;
Explanation:
(I) If the shares being held by the Venture Capital Fund or Foreign Venture
Capital Investor have been acquired on conversion of convertible
instruments at any time before the date of filing draft prospectus with the
Board, then the period during which the convertible instruments were held
by the Venture Capital Fund or the Foreign Venture Capital Investor as
fully paid up, shall be included for purpose of calculation of the period
mentioned in item (a).
(II) Convertible Instruments shall be deemed to be fully paid up for the purpose
of clause (I), if the entire amount payable thereon has been paid and no
further payment is envisaged to be made at the time of their conversion.
(b) shares shall be locked in as per the provisions, if any, in SEBI (Venture Capital
Funds) Regulations, 1996 or SEBI (Foreign Venture Capital Investors) Regulations,
2000, as the case may be.)
(ii) pre-issue share capital held for a period of at least one year at the time of filing draft offer
document with the Board and being offered to the public through offer for sale;
(iii) pre-IPO shares held by employees other than promoters, which were issued under
employee stock option or employee stock purchase scheme of the issuer company before
the IPO. However the same is subject to the issuer company complying with the
requirements laid down in Clause 22.4 of SEBI (Employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines, 1999.) (4.14A Lock-in of securities issued
on firm allotment basis Securities issued on firm allotment basis shall be locked-in for a
period of one year from the date of commencement of commercial production or the date of
allotment in the public issue, whichever is later.)
Part III - Other Requirements In Respect Of Lock-In
4.15 Pledge of Securities Forming Part of Promoters Contribution
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4.15.1 Locked-in Securities held by promoters may be pledged only with banks or financial
institutions as collateral security for loans granted by such banks or financial institutions,
provided the pledge of shares is one of the terms of sanction of loan.
(Provided that if securities are locked in as minimum promoters‘ contribution unde r clause
4.11.1, the same may be pledged, only if, in addition to fulfilling the requirements of this
clause, the loan has been granted by such banks or financial institutions for the purpose of
financing one or more of the objects of the issue.)
4.16 Inter-se Transfer of Securities Amongst Promoters
4.16.1 (Inter-se Transfer of Locked- in Securities
a) Shares held by the person other than the promoters, prior to Initial Public Offering (IPO),
which are locked in as per Clause 4.14 of these Guidelines, may be transferred to any other
person holding shares which are locked in as per clause 4.14 of these Guidelines subject to
continuation of lock-in in the hands of transferees for the remaining period and compliance of
Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers)
Regulations, 1997, as applicable.
b) Shares held by promoter(s) which are locked in as per the relevant provisions of this
chapter, may be transferred to and amongst promoter/ promoter group or to a new p romoter
or persons in control of the company, subject to continuation of lock-in in the hands of
transferees for the remaining period and compliance of Securities and Exchange Board of
India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, as applicable.‘)
4.17 Inscription of Non-Transferability
4.17.1 The securities which are subject to lock-in shall carry inscription `non-transferable‘
along with duration of specified non-transferable period mentioned in the face of the security
certificate.
PRE- ISSUE OBLIGATIONS
5.0 The pre-issue obligations are detailed below:
5.1 The lead merchant banker shall exercise due diligence.
5.1.1 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.
5.1.2 The liability of the merchant banker as referred to clause 5.1.1 shall continue even
after the completion of issue process.
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5.2 The lead merchant banker shall pay requisite fee in accordance with regulation 24A of
Securities and Exchange Board of India (Merchant Bankers) Rules and Regulations, 1992
along with draft offer document filed with the Board.
5.3 Documents to be submitted along with the Offer Document by the Lead Manager
5.3.1 Memorandum of Understanding (MOU)
5.3.1.1 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.
5.3.1.2 The MOU shall contain such clauses as are specified at Schedule I and such other
clauses as considered necessary by the lead merchant banker and the issuer company.
Provided that the MOU shall not contain any clause whereby the liabilities and obligations of
the lead merchant banker and issuer company under the Companies Act, 1956 and
Securities and Exchange Board of India (Merchant Bankers) Rules and Regulations, 1992
are diminished in any way.
5.3.1.3 The Lead Merchant Banker responsible for drafting of the offer documents shall
ensure that a copy of the MOU entered into with the issuer company is submitted to the
Board along with the draft offer document.
5.3.2 Inter-se Allocation of Responsibilities
5.3.2.1 In case a public or rights issue is managed by more than one Merchant Banker the
rights, obligations and responsibilities of each merchant banker shall be demarcated as
specified in Schedule II.
5.3.2.2 In case of under subscription at an issue, the Lead Merchant Banker responsible for
underwriting arrangements shall invoke underwriting obligations and ensure that the
underwriters pay the amount of devolvement and the same shall be incorporated in the inter-
se allocation of responsibilities (Schedule II) accompanying the due diligence certificate
submitted by the Lead Merchant Banker to the Board .
5.3.3 Due Diligence Certificate
5.3.3.1 The lead merchant banker, shall furnish to the Board a due diligence certif icate as
specified in Schedule III along with the draft prospectus.
5.3.3.1A In case of a debenture issue, the lead merchant banker shall also furnish to the
Board a due diligence certificate given by the debenture trustee in the format specified in
Schedule IIIA along with the draft offer document.)
5.3.3.2 In addition to the due diligence certificate furnished along with the draft offer
document, the Lead Merchant Banker shall also:
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((ia) where provisos to clause 6.3 or clause 6.39 are applicable, cert ify that the issuer
company is complying with conditions (a) and (b) laid down in 1st proviso to clause 6.3 or
with conditions (a) and (b) laid down in 1st proviso to clause 6.39, as the case may be);
((ib)) certify that all amendments suggestion or observations made by Board have been
incorporated in the offer document;
(ii) furnish a fresh "due diligence" certificate at the time of filing the prospectus with the
Registrar of Companies as per the format specified at Schedule IV.
(iii) furnish a fresh certificate immediately before the opening of the issue that no corrective
action on its part is needed as per the format specified at Schedule V.
(iv) furnish a fresh certificate after the issue has opened but before it closes for subscription
as per the format specified at Schedule VI.
5.3.3.3 The Lead Managers who are responsible for conducting due diligence exercise with
respect to contents of the offer document, as per inter-se allocation of responsibilities shall
sign due diligence certificate
5.3.4 Certificates Signed by the Company Secretary or Chartered Accountant, in Case of
Listed Companies Making Further Issue of Capital
5.3.4.1 The Lead Merchant Banker shall furnish the following certificates duly signed by
75(Company Secretary) or Chartered Accountants along with the draft offer documents:
(a) all refund orders of the previous issues were despatched within the prescribed time and
in the prescribed manner;
(b) all security certificates were despatched to the allottees within the prescribed time and in
the prescribed manner;
(c) the securities were listed on the Stock Exchanges as specified in the offer documents.
5.3.5 Undertaking
5.3.5.1 The issuer shall submit an undertaking to the Board to the effect that transactions in
securities by the `promoter' the 'promoter group' and the immediate relatives of the
`promoters during the period between the date of filing the offer documents with the
Registrar of Companies or Stock Exchange as the case may be and the date of closure of
the issue shall be reported to the Stock exchanges concerned within 24 hours of the
transaction(s).
5.3.6 (List of Promoters‘ Group and other Details
5.3.6.1 The issuer company shall submit to the Board the list of the persons who constitute
the Promoters‘ Group and their individual shareholding.
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5.3.6.2 The issuer company shall submit to the Stock Exchanges on which securities are
proposed to be listed, the Permanent Account Number, Bank Account Number and Passport
Number of the promoters at the time of filing the draft offer document to them.)
5.4 Appointment of Intermediaries
5.4.1 Appointment of Merchant Bankers
5.4.1.1 A Merchant Banker shall not lead manage the issue if he is a promoter or a director
or associate of the issuer company. Provided that a merchant banker holding the securities
of the issuer company may lead manage the issue if;
a. the securities of the issuer company are listed or proposed to be listed on the Over the
Counter Exchange of India (OTCEI) and;
b. the Market Makers have either been appointed or are proposed to be appointed as per the
offer document.
Explanation: For the purposes of this clause, a merchant banker shall be deemed to be an
associate of the issuer if:
(i) either of them controls directly or indirectly, through itself, its subsidiary or holding
company, not less than 15 percent of the voting power of the other; or
(ii) either of them, directly or indirectly, by itself or in combination with other persons,
exercises control over the other; or
(iii) There is a common director, excluding nominee director, amongst the body
corporate/ its subsidiary or holding company and the Merchant Banker. Provided
that the expression ‖control‖ shall have the same meaning as defined under
clause(c) of Regulation 2 of SEBI (Substantial Acquisitions of Shares and
Takeovers) Regulations, 1997.)
5.4.2 (Deleted)
5.4.3 Appointment of Other Intermediaries
5.4.3.1 Lead Merchant Banker shall ensure that the other intermediaries being appointed are
duly registered with the Board, wherever applicable.
5.4.3.1.1 Before advising the issuer on the appointment of other intermediaries, the Lead
Merchant Banker shall independently assess the capability and the capacity of the various
intermediaries to carry out assignment.
5.4.3.1.2 The Lead Merchant Banker shall ensure that issuer companies enters into a
Memorandum of Understanding with the intermediary (ies) concerned whenever required.
5.4.3.2 The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in
all the mandatory collection centres as specified in clause 5.9.
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5.4.3.3 The Lead Merchant Banker shall not act as a Registrar to an issue in which it is also
handling the post issue responsibilities.
5.4.3.4 The Lead Merchant Bankers shall ensure that;
a the Registrars to Issue registered with the Board are appointed in all public issues and
rights issues;
b in case where the issuer company is a registered Registrar to an Issue, the issuer shall
appoint an independent outside Registrar to process its issue;
c Registrar to an issue which is associated with the issuer company as a promoter or a
director shall not act as Registrar for the issuer company.
d Where the number of applications in a public issue is expected to be large, the issuer
company in consultation with the lead merchant banker may associate one or more
Registrars registered with the Board for the limited purpose of collecting the application
forms at different centres and forward the same to the designated Registrar to the Issue as
mentioned the offer document. The designated Registrar to the Issue shall, be primarily and
solely responsible for all the activities as assigned to them for the issue management.
5.5 Underwriting
5.5.1 The lead merchant banker shall satisfy themselves about the ability of the underwriters
to discharge their underwriting obligations.
5.5.2 The lead merchant banker shall:
a incorporate a statement in the offer document to the effect that in the opinion of the lead
merchant banker, the underwriters' assets are adequate to meet their underwriting
obligations;
b obtain Underwriters‘ written consent before including their names as underwriters in the
final offer document.
5.5.3 In respect of every underwritten issue, the lead merchant banker(s) shall undertake a
minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lacs
whichever is less.
5.5.4 The outstanding underwriting commitments of a merchant banker shall not exceed 20
times its networth at any point of time.
5.5.5 In respect of an underwritten issue, the lead merchant banker shall ensure that the
relevant details of underwriters are included in the offer document.
5.6 Offer Document to be Made Public
5.6.1 The draft offer document filed with the Board shall be made public for a period of (30
days) from the date of filing the offer document with the Board.
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5.6.2 (The lead merchant banker shall,
i. while filing the draft offer document with the Board in terms of Clause 2.1, also file the draft
offer document with the stock exchanges where the securities are proposed to be listed;
ii. (make copies of the draft offer document available to the public, host the draft and final
offer documents on the websites of the all the lead managers / syndicate members
associated with the issue and also ensure that the contents of documents hosted on the
websites are the same as that of their printed versions.) (Further, where the issuer company
is complying with provisos to clause 6.3 or clause 6.39, as the case may be, the offer
document of the immediately preceding public or rights issue shall also be displayed on the
websites in a similar manner);
iii. obtain and furnish to the Board, an in-principle approval of the stock exchanges for listing
of the securities within 15 days of filing of the draft offer document with the stock
exchanges.)
5.6.3 Lead merchant banker or stock exchanges may charge an appropriate sum to the
person requesting for the copy of offer document. (5.6A Pre – Issue Advertisement 5.6A.1
Subject to section 66 of the Companies Act, 1956, the issuer company shall soon after
receiving final observations, if any, on the draft prospectus or draft Red Herring Prospectus
from the Board, make an advertisement in an English national Daily with wide circulation,
one Hindi National newspaper and a regional language newspaper with wide circulation at
the place where the registered office of the issuer is situated, which shall be in the format
and contain the minimum disclosures as given in Part A of Schedule XX – A both in case of
fixed price issues as well as book built issues.) 5.6B (IPO Grading 5.6B.1 Every unlisted
company obtaining grading for IPO under clause 2.5A.1 shall disclose all the grades
obtained, along with the rationale/ description furnished by the credit rating agency(ies) for
each of the grades obtained, in the Prospectus, Abridged Prospectus, issue advertisements
and at all other places where the issuer company is advertising for the IPO.)
5.7 Despatch of Issue Material
5.7.1 The lead merchant banker shall ensure that for public issues offer documents and
other issue materials are dispatched to the various stock exchanges, brokers, underwriters,
bankers to the issue, investors associations, etc. in advance as agreed upon.
5.7.2 In the case of rights issues, lead merchant banker shall ensure that the (abridged
letters of offer) are dispatched to all shareholders at least one week before the date of
opening of the issue. (Provided that where a specific request for letter of offer is received
from any shareholder, the Lead Merchant Banker shall ensure that the letter of offer is made
available to such shareholder.)
5.7.3 (Deleted) 5.8 No Complaints Certificate
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5.8.1 After a period of (30 days) from the date the draft offer document was made public, the
Lead Merchant Banker shall file a statement with the Board:
i) giving a list of complaints received by it;
ii) a statement by it whether it is proposed to amend the draft offer document or not, and;
iii) highlight those amendments.
5.9 Mandatory Collection Centres
5.9.1 The minimum number of collection centres for an issue of capital shall be:
a) the four metropolitan centres situated at Mumbai, Delhi, Calcutta and Chennai
b) all such centres where the stock exchanges are located in the region in which the
registered office of the company is situated.
c) the regional division of collection centres is indicated in Schedule VII.
5.9.2 The issuer company shall be free to appoint as many collection centres as it may deem
fit in addition to the above minimum requirement.
5.10 Authorised Collection Agents
5.10.1 The issuer company can also appoint authorised collection agents in consultation with
the Lead Merchant Banker subject to necessary disclosures including the names and
addresses of such agents made in the offer document.
5.10.2 The modalities of selection and appointment of collection agents can be made at the
discretion of the Lead Merchant Banker.
5.10.3 The lead merchant banker shall ensure that the collection agents so selected are
properly equipped for the purpose, both in terms of infrastructure and manpower
requirements.
5.10.4 The collection agents may collect such applications as are accompanied by payment
of application moneys paid by cheques, drafts and stock invests.
5.10.5 The authorised collection agent shall not collect application moneys in cash.
5.10.6 The applications collected by the collection agents shall be deposited in the special
share application account with designated scheduled bank either on the same date or latest
by the next working day.
5.10.7 The application forms along with duly reconciled schedules shall be forwarded by the
collection agent to the Registrars to the Issue after realisation of cheques and after weeding
out the applications in respect of cheques return cases, within a period of 2 weeks from the
date of closure of the public issue.
5.10.8 (Deleted)
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5.10.9 The offer documents and application forms shall specifically indicate that the
acknowledgement of receipt of application moneys given by the collection agents shall be
valid and binding on the issuer company and other persons connected with the issue.
5.10.10 The investors from the places other than from the places where the mandatory
collection centres and authorised collection agents are located, can forward their
applications along with stockinvests to the Registrars to the Issue directly by Registered Post
with Acknowledgement Due.
5.10.11 The applications received through the registered post shall be dealt with by the
Registrars to the Issue in the normal course.
5.11 Advertisement for Rights Post Issues
5.11.1 The Lead Merchant Banker shall ensure that in case of a rights issue, an
advertisement giving the date of completion of despatch of letters of offer, shall be released
in at least in an English National Daily with wide circulation, one Hindi National Paper and a
Regional language daily circulated at the place where registered office of the issuer
company is situated at least 7 days before the date of opening of the issue.
5.11.2 The advertisement referred to in clause 5.11.1 shall indicate the centres other than
registered office of the company where the shareholders or the persons entitled to rights
may obtain duplicate copies of composite application forms in case they do not receive the
original application form within a reasonable time even after opening of the rights issue.
5.11.3 Where the shareholders have neither received the original composite application
forms nor are they in a position to obtain the duplicate forms, they may make applications to
subscribe to the rights on a plain paper.
5.11.4 The advertisement shall also contain a format to enable the shareholders to make the
application on a plain paper containing necessary particulars like name, address, ratio of
right issue, issue price, number of shares held, ledger folio numbers, number of shares
entitled and applied for, additional shares if any, amount to be paid along with application,
particulars of cheque, etc. to be drawn in favour of the company Account - Rights issues.
5.11.5 The advertisement shall further mention that applications can be directly sent by the
shareholder through Registered Post together with the application moneys to the company's
designated official at the address given in the advertisement.
5.11.6 The advertisement may also invite attention of the shareholders to the fact that the
shareholders making the applications otherwise than on the standard form shall not be
entitled to renounce their rights and shall not utilise the standard form for any purpose
including renunciation even if it is received subsequently.
5.11.7 If the shareholder makes an application on plain paper and also in standard form, he
may face the risk of rejection of both the applications.
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5.12 Appointment of Compliance Officer
5.12.1 An issuer company shall appoint a compliance officer who shall directly liaise with the
Board with regard to compliance with various laws, rules, regulations and other directives
issued by the Board and investors complaints related matter.
5.12.2 The name of the compliance officer so appointed shall be intimated to the Board. 5.13
Abridged Prospectus
5.13.1 The Lead Merchant Banker shall ensure the following:
i) Every application form distributed by the issuer Company or anyone else is accompanied
by a copy of the Abridged Prospectus.
ii) The application form may be stapled to form part of the Abridged Prospectus.
Alternatively, it may be a perforated part of the Abridged Prospectus.
iii) The Abridged Prospectus shall not contain matters which are extraneous to the contents
of the prospectus.
iv) (The Abridged prospectus shall be printed in a font size as specified in clause 6.16.1.)
v) Enough space shall be provided in the application form to enable the investors to file in
various details like name, address, etc.
5.14 Agreements with depositories
5.14.1 The lead manager shall ensure that the issuer company has entered into agreements
with all the depositories for dematerialisation of securities. He shall also ensure that an
option be given to the investors to receive allotment of securities in dematerialised form
through any of the depositories.
5.15 Branding of securities
5.15.1 Securities may be branded describing their nature but not the quality.
POST- ISSUE OBLIGATIONS
7.0 The post issue obligations shall be as follows:
7.1 (Deleted)
7.2 Post - Issue Monitoring Reports
7.2.1 Irrespective of the level of subscription, the post-issue Lead Merchant Banker shall
ensure the submission of the post-issue monitoring reports as per formats specified in
Schedule XVI.
7.2.2 These reports shall be submitted within 3 working days from the due dates.
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7.2.2.1 (The due date for submitting Post Issue Monitoring report in case of public issues by
listed and unlisted companies:
a) 3 day monitoring report in case of issue through book building route, for book built portion:
The due date of the report shall be 3rd day from the date of allocation in the book built
portion or one day prior to the opening of the fixed price portion whichever is earlier.
b) 3 day monitoring report in other cases, including fixed price portion of book built issue:
The due date for the report shall be the 3rd day from the date of closure of the issue.
c) Final post issue monitoring report for all issues: The due date for this report shall be the
3rd day from the date of listing or 78 days from the date of closure of the subscription of the
issue, whichever is earlier.)
7.2.2.2 The due dates for submitting post issue monitoring report in case of Rights issues:
(a) 3-Day Post-Issue Monitoring Report: The due date for this report shall be the 3rd day
from the date of closure of subscription of the issue.
(b) 50-Day Post - Issue Monitoring Report: The due date for this report shall be the 50th day
from the date of closure of subscription of the issue.
7.3 Redressal of Investor Grievances
7.3.1 The Post - Issue Lead Merchant Banker shall actively associate himself with post-issue
activities namely, allotment, refund and despatch and shall regularly monitor redressal of
investor grievances arising therefrom.
7.4 Co-ordination with Intermediaries
7.4.1
(i) The Post-issue lead merchant banker shall maintain close coordination with the
Registrars to the Issue and arrange to depute its officers to the offices of various
intermediaries at regular intervals after the closure of the issue to monitor the flow of
applications from collecting bank branches, processing of the applications including those
accompanied by stockinvest and other matters till the basis of allotment is finalised,
despatch security certificates and refund orders completed and securities listed.
(ii) Any act of omission or commission on the part of any of the intermediaries noticed during
such visits shall be duly reported to the Board.
7.4.1.1 (Deleted).
7.4.1.2 Underwriters
a) i) If the issue is proposed to be closed at the earliest closing date, the lead Merchant
Banker shall satisfy himself that the issue is fully subscribed before announcing closure of
the issue.
ii) In case, there is no definite information about subscription figures, the issue shall be kept
open for the required number of days to take care of the underwriters' interests and to avoid
any dispute, at a later date, by the underwriters in respect of their liability.
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b) In case there is a devolvement on underwriters, the lead Merchant Banker shall ensure
that the underwriters honour their commitments within 60 days from the date of closure of
the issue.
c) In case of undersubscribed issues, the lead merchant banker shall furnish information in
respect of underwriters who have failed to meet their underwriting devolvements to the
Board in the format specified at Schedule - XVII.
7.4.1.3 Bankers to an issue The post-issue Lead Merchant Banker shall ensure that moneys
received pursuant to the issue and kept in a separate bank (i.e. Bankers to an Issue), as per
the provisions of section 73(3) of the Companies Act 1956, is released by the said bank only
after the listing permission under the said Section has been obtained from all the stock
exchanges where the securities was proposed to be listed as per the offer document.
7.5 Post-issue Advertisements
7.5.1 Post-issue Lead Merchant Banker shall ensure that in all issues, advertisement giving
details relating to oversubscription, basis of allotment, number, value and percentage of
applications 126(), number, value and percentage of successful allottees (), date of
completion of despatch of refund orders, date of despatch of certificates and date of filing of
listing application is released within 10 days from the date of completion of the various
activities at least in an English National Daily with wide circulation, one Hindi National Paper
and a Regional language daily circulated at the place where registered office of the issuer
company is situated.
7.5.2 Post-issue Lead Merchant Banker shall ensure that issuer company/ advisors/ brokers
or any other agencies connected with the issue do not publish any advertisement stating that
issue has been oversubscribed or indicating investors‘ response to the issue, during the
period when the public issue is still open for subscription by the public.
7.5.3 Advertisement stating that "the subscription to the issue has been closed" may be
issued after the actual closure of the issue.
7.6 Basis of Allotment
7.6.1 In a public issue of securities, the Executive Director/Managing Director of the
Designated Stock Exchange along with the post issue Lead Merchant Banker and the
Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalised
in a fair and proper manner in accordance with the following guidelines: Provided (that) in
the book building portion of a book built public issue notwithstanding the above clause,
Clause 11.3.5 of Chapter XI of these Guidelines shall be applicable.
7.6.1.1 Proportionate Allotment Procedure Allotment shall be on proportionate basis within
the specified categories, rounded off to the nearest integer subject to a minimum allotment
being equal to the minimum application size as fixed and disclosed by the issuer.
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Explanation: For the purposes of the aforesaid clause, the illustration given in schedule XVIII
may be referred.
7.6.1.2 Reservation for Retail Individual Investor
7.6.1.2.1 The above proportionate allotments of securities in an issue that is oversubscribed
shall be subject to the reservation for Retail individual investors as described below:
a) A minimum 50% of the net offer of securities to the public shall initially be made available
for allotment to retail individual investors, as the case may be.
b) The balance net offer of securities to the public shall be made available for allotment to:
i) individual applicants other than retail individual investors, and;
ii) other investors including Corporate bodies/ institutions irrespective of the number
of shares, debentures, etc. applied for.
c) The unsubscribed portion of the net offer to any one of the categories specified in (a) or
(b) shall / may be made available for allotment to applicants in the other category, if so
required. Explanation: It is clarified that the words "a minimum of 50% of the public offer"
used in sub-clause (a) above means that if the category of retail individual investors was to
be entitled to get 70% of the public offer in accordance with proportionate formula, the
category should get 70%. If the category is entitled to get only 30% of the public offer in
accordance with the proportionate allotment formula, there should be a reservation of a
minimum of 50% of the net public offer.)
7.6.2 The drawal of lots (where required) to finalise the basis of allotment, shall be done in
the presence of a public representative on the Governing Board of the Designated Stock
Exchange.
7.6.3 The basis of allotment shall be signed as correct by the Executive Director/Managing
Director of the designated stock exchange and the public representative (where applicable)
in addition to the lead merchant banker responsible for post issue activities and the Registrar
to the Issue. The designated stock exchange shall invite the public representative on a
rotation basis from out of the various public representatives on its governing board.
7.7 Other Responsibilities
7.7.1 The lead merchant banker shall ensure that the despatch of share certificates/ refund
orders/ and demat credit is completed and the allotment and listing documents submitted to
the stock exchanges within 2 working days of finalisation of the basis of allotment.
7.7.2 The post issue lead manager shall ensure that all steps for completion of the
necessary formalities for listing and commencement of trading at all stock exchanges where
the securities are to be listed are taken within 7 working days of finalisation of basis of
allotment.
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7.7.3 Lead Merchant Banker shall ensure payment of interest to the applicants for delayed
dispatch of allotment letters, refund orders, etc. as prescribed in the offer document.
7.7.4 The Post-issue Lead Merchant Banker shall ensure that the despatch of refund orders
/ allotment letters /share certificates is done by way of registered post / certificate of posting
as may be applicable.
7.7.5 In case of all issues, advertisement giving details relating to oversubscription, basis of
allotment, number, value and percentage of applications received , number, value and
percentage of successful allottees, date of completion of despatch of refund orders, date of
despatch of certificates and date of filing of listing application.
7.7.6 Such advertisement shall be released within 10 days from the date of completion of the
various activities.
7.7.7 Post-issue Lead merchant banker shall continue to be responsible for post issue
activities till the subscribers have received the shares/ debenture certificates or refund of
application moneys and the listing agreement is entered into by the issuer company with the
stock exchange and listing/ trading permission is obtained.
7.8 (Deleted)
OTHER ISSUE REQUIREMENTS
8.0 The Lead Merchant Banker shall ensure compliance with the following:
8.1 (Omitted)
8.2 Public issue and listing of non-convertible debt securities (hereinafter referred to as
NCDS) and Debt Securities convertible into equity after allotment (hereinafter referred to as
DSCE.
8.2.1 An unlisted company making a public issue of NCDS may, subject to other applicable
provisions of these guidelines, make a public issue and make an application for listing its
NCDS in the Stock Exchange/s without making a prior public issue of equity and listing
thereof, if the following conditions are fulfilled:
a) The NCDS shall carry a credit rating not below investment grade atleast from one
Credit Rating Agency registered with the Board. Where the issue size of the NCDS is
Rs. 100 crores or more, such rating shall be obtained from at least two Credit Rating
Agencies.
b) A contribution of atleast 20% of the project cost i.e., objects proposed to be inter
alia, financed through the issue, shall be brought in the form of equity. Such equity
participation may be brought by the promoter from his own funds or from other
sources, subject to the condition that at least 20% of the issue size is brought by way
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of equity by the promoter from his own funds. In case, the project is to be
implemented in stages, the promoters contribution as per these requirements shall
be with respect to total equity participation till the respective stage vis a vis the debt
raised or proposed to be raised through the issue
c) The issuer company shall agree to comply with the requirements of continuing
disclosures as specified under the listing agreement to be entered into with
concerned stock exchanges as is applicable for listing of equity shares.
d) The issuer company shall agree to obtain prior consent of the holders of the NCDS
through special resolution to be passed at the general meeting of the NCDS holders
for change in terms of issue, change in capital structure and change in shareholding
pattern.
e) There shall be no partly paid up shares/other securities at the time of filing of draft
offer document with the Board.
f) The issuer company may come out with a public issue of equity/security convertible
into equity after allotment during the currency of the NCDS or thereafter, only after
complying with the guidelines applicable for an initial public offering of such
securities.
g) The equity held by the promoters or others at the time of issue of NCDS may be
listed only when an initial public offer of equity/securities convertible into equity after
allotment is made after complying with the applicable provisions of these Guidelines.
8.2.2 A Municipal Corporation which has no share capital may be subject to the provisions of
sub-clauses (a), (b) and (c) of Clause 8.2.1, make a public issue of NCDS and list the same
on the stock exchange/s.
8.2.3 An unlisted company making a public issue of DSCE may, subject to other applicable
provisions of these guidelines make a public issue and make an application for listing on the
stock exchanges without making a prior public issue of its equity and listing thereof, if the
following conditions are fulfilled:
a) The provisions of clauses (a) to (e) of clause 8.2.1 shall be mutatis mutandis
complied with.
b) An issuer company making an initial public offer of DSCE may come out with a
subsequent public issue of equity/ security convertible into equity after allotment
during the currency of the DSCE only after complying with the guidelines applicable
for an initial public offering of such securities. Provided that the provisions of Clause
2.6 shall not be applicable for an Initial Public Offer of such securities if the floor price
for conversion of DSCE is determined and disclosed in the offer document for issue
of DSCE.
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c) The equity held by the promoters and others may be listed along with the listing of
equity in initial public offering of equity/security convertible into equity after allotment
or at the time of listing if equity arising on conversion of the DSCE .
d) If the equity shares held by the promoters is proposed to be listed on conversion of
DSCE, it shall be ensured that the number of equity shares allotted to the public
(after excluding the allotment of equity shares to holders of DSCE issued on firm
allotment/reservation basis) as a percentage of the total paid up equity capital after
conversion and listing of the promoters equity, is not less than the percentage
specified in clause (b) of sub-rule (2) of Rule 19 of Securities Contracts (Regulations)
Rules, 1957.
8.2.4 The lead merchant banker can mention a price band of 20% (cap in the coupon rate/
price band should not be more than 20% of the floor coupon rate/price) in the offer document
filed with the Board and the specific coupon rate/price can be determined by an issuer in
consultation with the lead manager at a later date before filing of the offer document with the
RoC/s.
8.2.5 The issuer may subject to the provisions of Chapter XI of these guidelines, make the
issue through book building process to ascertain and determine the coupon rate and price/
conversion price of the NCDS/ DSCE).) 8.2.2.1 (Deleted)
8.3 Rule 19(2)(b) of SC (R) Rules, 1957
8.3.1 In case of a public issue by an unlisted company, the net offer to public shall be at
least 10% or 25% as the case may be, of the postissue capital.
8.3.2 In case of a public issue by a listed company, the net offer to public shall be at least
10% or 25%, as the case may be, of the issue size.
8.3.3 An infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter
II, inviting subscription from public shall not attract the provisions of Clauses 8.3.1and 8.3.2
above.
8.3.4 The issuer company is free to make reservations and/or firm allotments to various
categories of persons mentioned hereafter for the remaining of the issue size subject to
other relevant provisions of these guidelines.
Explanation: 1. The expression "reservation‖ shall mean reservation on Competitive Basis
wherein allotment of shares is made in proportion to the shares applied for by the concerned
reserved categories.
2. Reservation on competitive basis can be made in a public issue to the following
categories: Sr. No. Category of Persons
(i) Employees of the company
(ii) Shareholders of the promoting companies in the case of a new company and
shareholders of group companies in the case of an existing company
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(iii) Indian Mutual Funds
(iv) Foreign Institutional Investors (including non resident Indians and overseas
corporate bodies)
(v) Indian and Multilateral development Institutions
(vi) Scheduled Banks 2A. In a public issue (not being a composite issue) by a listed
company, the reservation on competitive basis can be made for the shareholders
who, on the record date ( date fixed for the purpose of determining the eligible
shareholders) , are holding shares worth up to Rs. 50,000/- determined on the basis
of closing price as on the previous day.
Provided that the allotment to such shareholders shall be on proportionate basis as in
case of allotment in public category.
3. Specified Categories for ―Firm allotment‖ in public issues can be made to the following :
Sr. No. Category of Persons
(i) Indian and Multilateral Development Financial Institutions
(ii) Indian Mutual Funds
(iii) Foreign Institutional Investors (including non resident Indians and overseas corporate
bodies)
(iv) Permanent / regular employees of the issuer company (v) Scheduled Banks
4. The Lead Merchant Banker(s) can be included in the category of persons entitled to firm
allotments subject, to an aggregate maximum ceiling of 5% of the proposed issue of
securities.
5. The aggregate of reservations and firm allotments for employees in an issue, shall not
exceed 10% of the total proposed issue amount.
6. For shareholders, the reservation, shall not exceed 10% of the total proposed issue
amount.
7. In case of promoting companies are Designated Financial Institutions/ State and central
financial Institutions, the employees and the shareholders of such promoting companies,
shall not be eligible for the said reservations.
8. The allotment of securities to the specified categories for firm allotment/ reservation shall
be subject to such conditions as may be specified by the Government and regulatory
authorities.
8.3.5 Application to the Board for Relaxation from applicability of Clause (b) to sub-rule (2) of
Rule 19 of the Securities Contracts (Regulation) Rules, 1957 by an unlisted company:
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8.3.5.1 An unlisted company may make an application to the Board for relaxation from
applicability of clause (b) to sub-rule (2) of Rule 19 of the Securities Contracts (Regulation)
Rules, 1957 for listing of its shares without making an initial public offer if it satisfies the
following conditions:
i. Shares have been allotted by the unlisted company (transferee company) to the holders of
securities of a listed company (transferor company) pursuant to a scheme of reconstruction
or amalgamation under the provision of the Companies Act, 1956 and such scheme has
been sanctioned by the High Court/s of the Judicature.
ii. The listing of the shares of the unlisted transferee company is in terms of scheme of
arrangement sanctioned by the High Court/s of the Judicature.
iii. Atleast 25% of the paid up share capital, post scheme, of the unlisted transferee company
seeking listing comprises shares allotted to the public holders of shares in the listed
transferor company.
iv. The unlisted company has not issued/reissued any shares, not covered under the
scheme.
v. There are no outstanding warrants/instruments/agreements which gives right to any
person to take the shares in the unlisted transferee company at any future date. If there are
such instruments in the scheme sanctioned by the Court, the percentage referred to in point
(iii) above, shall be computed after giving effect to the consequent increase of capital on
account of compulsory conversions outstanding as well as on the assumption that the
options outstanding, if any, to subscribe for additional capital will be exercised.
vi. The share certificates have been despatched to the allottees pursuant to the scheme of
arrangement or their names have been entered as beneficial owner in the records of the
depositaries.
vii. That the shares of the transferee company issued in lieu of the lockedin shares of the
transferor company are subjected to the lock-in for the remaining period. viii. In addition to
the requirements of Clause
vii above, the following conditions are also to be complied with:
a) in case of a hiving off of a division of a listed company (say 'A') and its merger with a
newly formed company or existing company (say 'B') there would not be any additional lock-
in, if the paid up share capital of company 'B' is only to the extent of requirement for
incorporation purposes.
b) in case of merger where the paid-up share capital of the company seeking listing
(company 'B') is more than the requirement for incorporation; the promoters' shares shall be
locked in to the extent 20% of the post merger paid-up capital of the unlisted company, for a
period of 3 years from the date of listing of the shares of the unlisted company. The balance
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of the entire pre-merger capital of the unlisted company shall also be locked-in for a period
of 3 years from the date of listing of the shares of the unlisted company.
8.3.5.2 An application to the Board under Clause 8.3.5.1 shall be made through the
designated stock exchange of the listed company and the designated stock exchange may
recommend the application giving the reason therefore.
8.3.5.3 The unlisted company shall take steps for listing, simultaneously on all stock
exchanges where the shares of the (transferor) listed company are/were listed, within 30
days of the date of the final order of the High Court/s approving the scheme. The formalities
for commencing of trading shall be completed within 45 days of the date of final order of the
High Court/s.
8.3.5.4 Before commencement of trading, the company shall give an advertisement in one
English and one Hindi newspaper with nationwide circulation and one regional newspaper
with wide circulation at the place where the registered office of the company is situated,
giving details as specified in Schedule XXVIII.)
8.4 Capital Structure
8.4.1 For the purposes of presentation of the capital structure in the specified format, the
lead merchant banker shall take into account the following:
a) Proposed issue amount = (Promoters‘ contribution in the proposed issue) + (firm
allotment) + (offer through the offer document).
b) Offer through the offer document shall include net offer to the public and reservations to
the permitted reserved categories and shall not include the promoters‘ contribution in the
proposed issue and firm allotment.
c) Net offer to the public shall mean the offer made to Indian public and does not include
reservations/ firm allotments/ promoters‘ contribution.
8.5 Firm Allotments and Reservations
a) i) If any firm allotment has been made to any person(s) in the specified categories, no
further application for subscription to the public issue from such person(s) [excepting
application from employee's category] shall be entertained. ii) where reservation has been
made to specified category(ies), person(s) belonging to category(ies) [except employees and
shareholders categories] shall not make an application in the ̀net public offer' category.
b) i) An applicant in the net public category cannot make an application for that number of
securities exceeding the number of securities offered to the public. ii) In the case of reserved
categories, a single applicant in the reserved category can make an application for a number
of security which exceeds the reservation.
c) i) Any unsubscribed portion in any reserved category may be added to any other reserved
category. ii) The unsubscribed portion, if any, after such inter se adjustments amongst the
reserved categories shall be added back to the net offer to the public.
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d) In case of undersubscription in the net offer to the public portion, spillover to the extent of
undersubscription shall be permitted from the reserved category to the net public offer
portion.
e) If any person to whom firm allotment is proposed to be made withdraws partially or fully
from the offer made to him after filing of the prospectus with the Registrar of Companies, the
extent of shares proposed to be allotted to such person, shall be taken up by the promoters
and the subscription amount shall be brought in at least one day prior to the issue opening
date.
f) The shares so acquired by promoters under sub-clause (e) above shall also be subject to
a lock-in for a period of 3 years.
g) No buy-back or stand-by or similar arrangements shall be allowed with the persons for
whom securities are reserved for allotment on a firm basis.
8.6 Terms of the Issue
8.6.1 Minimum Application Value
i) The minimum application value shall be within the range of Rs. 5,000 to Rs, 7,000. The
issuer company, in consultation with the merchant banker, shall stipulate the minimum
application size (in terms of number of shares) falling within the aforesaid range of minimum
application value and make upfront disclosures in this regard, in the offer document.
Explanation: For the purpose of this clause, the minimum application value shall be with
reference to the issue price of the shares and not with reference to the amount payable on
application. Illustration: For the purpose of sub clause (i), the following may be taken as
illustration: The issue price of shares is Rs.500. Out of the same, Rs.100/- is payable on
application and the balance on allotment and calls. In this instance, the application value of
Rs.5000-7000 shall be arrived at with reference to the issue price of Rs.500/-. As such, the
minimum application size, to be stipulated in the offer document, would range from 10
shares to 14 shares and not 50 shares to 70 shares.)
ii) Applications can be made in multiples of the minimum size /value so stipulated in the offer
document by the issuer and merchant banker as at (i) and within the range of Rs.5000-7000,
as stipulated at (i).
iii) Schedule XVIIIA may be referred for illustration on sub clause (ii) above.
iv) The minimum application moneys to be paid by an applicant along with the application
money shall not be less than 25% of the issue price.
v) In case of an offer for sale, the entire amount payable on each instrument shall be brought
in at the time of application.
8.6.2 Securities Issued to be Made Fully Paid Up
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a) If the subscription money is proposed to be received in calls, the calls shall be structured
in such a manner that the entire subscription money is called within 12 months from the date
of allotment.
b) If the investor fails to pay call money within 12 months the subscription money already
paid may be forfeited.
c) If the issue size is above Rs.500 crores and is subject to monitoring requirement as per
Clause 8.17.1 of this Chapter, it shall not be necessary to call the entire subscription money
within 12 months.
8.7 Restriction on further Capital Issues
8.7.1 No company shall make any further issue of capital in any manner whether by way of
issue of bonus shares, preferential allotment, rights issue or public issue or otherwise, during
the period commencing from the submission of offer document to the Board on behalf of the
company for public or rights issues, till the securities referred to in the said offer document
have been listed or application moneys refunded on account of non-listing or
undersubscription, etc. unless full disclosures regarding the total capital to be raised from
such further issues are made in the draft offer document.
8.7.2 (a) No company shall, pending conversion of Fully Convertible Debentures (FCDs) or
Partly Convertible Debentures (PCDs), issue any shares by way of bonus or rights unless
similar benefit is extended to the holders of such FCDs or PCDs, through reservation of
shares in proportion to such convertible part of FCDs/ PCDs.
(b) The share so reserved may be issued at the time of conversion(s) of such debentures on
the same terms on which the bonus or rights issue was made.
8.7.3 (a) An issuer company shall not withdraw rights issue after announcement of record
date in relation to such issue.
(b) In cases where the issuer has withdrawn the rights issue after announcing the record
date, the issuer company shall not make an application for listing of any securities of the
company for a minimum period of 12 months from the record date. Provided that shares
resulting from the conversion of PCDs/ FCDs/ Warrants issued prior to the announcing of the
record date in relation to rights issue may be granted listing by the concerned Stock
exchange(s).
8.8 Period of Subscription
8.8.1 Public Issues
(a) Subscription list for public issues shall be kept open for at least 3 working days and not
more than 10 working days.
(b) The public issue made by an infrastructure company, satisfying the requirements in
Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days.
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(c) The period of operation of subscription list of public issue shall be disclosed in the
prospectus.
8.8.2 Rights Issues
8.8.2.1 Rights issues shall be kept open for at least 30 days and not more than 60 days.
8.9 Price Band
8.9.1 If in a draft offer document submitted to the Board, a price band as per the provisions
of clause 3.5.1 of Chapter III of these Guidelines is mentioned, suitable explanatory notes
indicating the financial implications, if the price were to be fixed at different ranges within the
price band approved by the company Board / General Body, shall be disclosed in the offer
document.
8.10 Retention of Oversubscription
8.10.1 The quantum of issue whether through a rights or a public issue, shall not exceed the
amount specified in the prospectus/ letter of offer. Provided that an oversubscription to the
extent of 10% of the net offer to public is permissible for the purpose of rounding off to the
nearer multiple of 100 while finalising the allotment.
8.11 Underwriting
8.11.1 The issuers have the option to have a public issue underwritten by the underwriter.
8.11.2 In respect of every underwritten issue, the lead merchant banker(s) shall accept a
minimum underwriting obligation of 5% of the total underwriting commitment or Rs.25 lacs
whichever is less.
8.12 Updation of Offer Document
8.12.1 The Lead Merchant Banker shall ensure that the particulars as per audited
statements contained in the offer document are not more than 6 months old from issue
opening date.
8.12.2 In respect of a Government company making a public issue, the auditors report in the
prospectus shall not be more than six months old as on the date of filing of the prospectus
with the Registrar of Companies or the Stock Exchange as the case may be.
8.13 Compliance Officer to be Appointed by Lead Merchant Banker
8.13.1 The merchant bankers shall appoint a senior officer as Compliance Officer to ensure
that all Rules, Regulations, Guidelines, Notifications etc. issued by the Board, the
Government of India, and other regulatory organizations are complied with.
8.13.2 The Compliance Officer shall co-ordinate with regulatory authorities in various matters
and provide necessary guidance as also ensure compliance internally.
8.13.3 The Compliance Officer shall also ensure that observations made/ deficiencies
pointed out by the Board do not recur.
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8.14 Incentives to Prospective Shareholders
8.14.1 The issuer shall not offer any incentives to the prospective investors by way of
medical insurance scheme, lucky draw, prizes, etc.
8.15 New Financial Instruments
8.15.1 The lead manager shall ensure adequate disclosures in the offer document, more
particularly relating to the terms and conditions, redemption, security, conversion and any
other relevant features of any new financial instruments such as Deep Discount Bonds,
Debentures with Warrants, Secured Premium Notes etc.
8.16 Issue of Debentures Bearing Interest Less Than Bank Rate
8.16.1 Whenever FCDs are issued bearing interest at a rate less than the Bank Rate, the
offer document shall contain disclosures about the price that would work out to the investor,
taking into account the notional interest loss on the investment from the date of allotment of
FCDs to the date(s) of conversions).
8.17 Requirement of Monitoring Agency
8.17.1 In case of issues exceeding Rs.500 crores, the issuer shall make arrangements for
the use of proceeds of the issue to be monitored by one of the financial institutions.
8.17.2 A copy of the monitoring report as per the format specified at Schedule XIX, shall be
filed with the Board by the said monitoring agency, on a half year ly basis, till the completion
of project, for the purposes of record.
8.18 Safety Net or Buy Back Arrangement
8.18.1 Any safety net scheme or buy-back arrangements of the shares proposed in any
public issue shall be finalised by issuer company with the lead merchant banker in advance
and disclosed in the prospectus.
8.18.2 Such buy back or safety net arrangements shall be made available only to all original
resident individual allottees.
8.18.3 Such buy back or safety net facility shall be limited upto a maximum of 1000 shares
per allottee and the offer shall be valid at least for a period of 6 months from the last date of
despatch of securities.
8.18.4 The financial capacity of the person making available buy back or safety net facility
shall be disclosed in the draft prospectus.
8.19 Utilisation of funds in case of Rights Issues
8.19.1 The issuer company may utilise funds collected against rights issues after satisfying
designated stock exchange that minimum 90% subscription has been received.
8.20 Option to Receive Securities in Dematerialised Form
8.20.1 The Lead merchant Banker shall incorporate a statement in the offer document and in
the application form to the effect that the investors have an option to either receive securities
in the form of physical certificates or hold them in a dematerialised form.
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8.21 Issue Opening Date
8.21.1 An issue shall open within 3 months from the date of issuance of the observation
letter by the Board, if any or within 3 months from the 22nd day from the date o f filing of the
draft offer document with the Board, if no observation letter is issued. Provided that nothing
in this clause shall apply to shelf prospectus.
8.21.2 Presentation of financials in case of change of denomination In case of change in
standard denomination of equity shares, the compliance with the following shall be ensured
while making disclosure in the offer document:
(i) all the financial data affected by the change in denomination of shares shall be clearly and
unambiguously presented in the offer document.
(ii) comparison of financial ratios representing value per share and comparison of stock
market data in respect of price and volume of securities shall be clearly and unambiguously
presented in the offer document.
(iii) the capital structure incorporated in the offer document shall be clearly presented giving
all the relevant details pertaining to the change in denomination of the shares.
CHAPTER VIII-A GREEN SHOE OPTION
8A.1 (a) An issuer company making a public offer of equity shares can avail of the Green
Shoe Option (GSO) for stabilizing the post listing price of its shares, subject to the provisions
of this Chapter.
(b) A company desirous of availing the option granted by this Chapter, shall in the resolution
of the general meeting authorizing the public issue, seek authorization also for the possibility
of allotment of further shares to the ‗stabilizing agent‘ (SA) at the end of the stabilization
period in terms of clause 8A.15.
8A.2 The company shall appoint one of the 164(merchant bankers or Book Runners, as the
case may be, from amongst) the issue management team, as the ―stabilizing agent‖ (SA),
who will be responsible for the price stabilization process, if required. The SA shall enter into
an agreement with the issuer company, prior to filing of offer document with SEBI, clearly
stating all the terms and conditions relating to this option including fees charged / expenses
to be incurred by SA for this purpose.
8A.3 (a) The SA shall also enter into an agreement with the promoter(s) or preissue
shareholders who will lend their shares under the provisions of this Chapter, specifying the
maximum number of shares that may be borrowed from the promoters or the shareholders,
which shall not be in excess of 15% of the total issue size.
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8A.4 The details of the agreements mentioned in clause 8A.2 and 8A.3 shall be disclosed in
the draft prospectus, the draft Red Herring prospectus, Red Herring prospectus and the final
prospectus. The agreements shall also be included as material documents for public
inspection in terms of clause 6.15.1.
8A.5 Lead merchant banker or the Lead Book Runner, in consultation with the SA, shall
determine the amount of shares to be overallotted with the public issue, subject to the
maximum number specified in clause 8A.3.
8A.6 The draft prospectus, draft Red Herring prospectus, the Red Herring prospectus and
the final prospectus shall contain the following additional disclosures:
a. Name of the SA
b. The maximum number of shares (as also the percentage vis a vis the proposed issue
size) proposed to be over-allotted by the company.
c. The period, for which the company proposes to avail of the stabilization mechanism,
d. The maximum increase in the capital of the company and the shareholding pattern post
issue, in case the company is required to allot further shares to the extent of over-allotment
in the issue.
e. The maximum amount of funds to be received by the company in case of further allotment
and the use of these additional funds, in final document to be filed with RoC
f. Details of the agreement/ arrangement entered in to by SA with the promoters to borrow
shares from the latter which inter-alia shall include name of the promoters, their existing
shareholding, number & percentage of shares to be lent by them and other important terms
and conditions including the rights and obligations of each party.
g. The final prospectus shall additionally disclose the exact number of shares to be allotted
pursuant to the public issue, stating separately therein the number of shares to be borrowed
from the promoters and over-allotted by the SA, and the percentage of such shares in
relation to the total issue size.
8A.7 (a) In case of an initial public offer by a unlisted company, the promoters and pre -issue
shareholders and in case of public issue by a listed company, the promoters and pre- issue
shareholders holding more than 5% shares, may lend the shares subject to the provisions of
this Chapter.
(b) The SA shall borrow shares from the promoters or the pre-issue shareholders of the
issuer company or both, to the extent of the proposed over-allotment. Provided that the
shares referred to in this clause shall be in dematerialized form only.
8A.8 The allocation of these shares shall be pro-rata to all the applicants.
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8A.9 The stabilization mechanism shall be available for the period disclosed by the company
in the prospectus, which shall not exceed 30 days from the date when trading permission
was given by the exchange(s).
8A.10 The SA shall open a special account with a bank to be called the ―Special Account for
GSO proceeds of _____ company‖ (hereinafter referred to as the GSO Bank account) and a
special account for securities with a depository participant to be called the ―Special Account
for GSO shares of company‖ (hereinafter referred to as the GSO Demat Account).
8A.11 The money received from the applicants against the overallotment in the green shoe
option shall be kept in the GSO Bank Account, distinct from the issue account and shall be
used for the purpose of buying shares from the market, during the stabilization period.
8A.12 The shares bought from the market by the SA, if any during the stabilization period,
shall be credited to the GSO Demat Account.
8A.13 The shares bought from the market and lying in the GSO Demat Account shall be
returned to the promoters immediately, in any case not later than 2 working days after the
close of the stabilization period.
8A.14 The prime responsibility of the SA shall be to stabilize post listing price of the shares.
To this end, the SA shall determine the timing of buying the shares, the quantity to be
bought, the price at which the shares are to be bought etc.
8A.15 On expiry of the stabilization period, in case the SA does not buy shares to the extent
of shares over-allotted by the company from the market, the issuer company shall allot
shares to the extent of the shortfall in dematerialized form to the GSO Demat Account, within
five days of the closure of the stabilization period. These shares shall be returned to the
promoters by the SA in lieu of the shares borrowed from them and the GSO Demat Account
shall be closed thereafter. The company shall make a final listing application in respect of
these shares to all the Exchanges where the shares allotted in the public issue are listed.
The provisions of Chapter XIII shall not be applicable to such allotment.
8A.16 The shares returned to the promoters under clause 8A.13 or 8A.15, as the case may
be, shall be subject to the remaining lock in period as provided in the proviso the clause
4.14.1.
8A.17 The SA shall remit an amount equal to (further shares allotted by the issuer company
to the GSO Demat Account) * (issue price) to the issuer company from the GSO Bank
Account. The amount left in this account, if any, after this remittance and deduction of
expenses incurred by the SA for the stabilization mechanism, shall be transferred to the
investor protection fund(s) of the stock exchange(s) where the shares of issuer company are
listed, in equal parts if the shares are listed in more than one exchanges. The GSO Bank
Account shall be closed soon thereafter.
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8A.18 The SA shall submit a report to the stock exchange(s) on a daily basis during the
stabilization period. The SA shall also submit a final report to SEBI in the format specified in
Schedule XXIX. (Flag B)This report shall be signed by the SA and the company. This report
shall be accompanied with a depository statement for the ―GSO Demat Account‖ for the
stabilization period, indicating the flow of the shares into and from the account. The report
shall also be accompanied by an undertaking given by the SA and countersigned by the
depository(ies) regarding confirmation of lock-in on the shares returned to the promoters in
lieu of the shares borrowed from them for the purpose of the stabilization, as per the
requirement specified in 8A.16.
8A.19 The SA shall maintain a register in respect of each issue having the green shoe option
in which he acts as a SA. The register shall contain the following details of:
a) in respect of each transaction effected in the course of the stabilizing action, the price,
date and time
b) the details of the promoters from whom the shares are borrowed and the number of
shares borrowed from each; and
c) details of allotments made under clause 8A.15. 8A.20 The register must be retained for a
period of at least three years from the date of the end of the stabilizing period.‖
8A.21 For the purpose of the Chapter VIII-A,
(a) promoter means a promoter as defined in Explanation I to clause 6.4.2.1of these
guidelines.‖
(b) Over allotment shall mean as an allotment or allocation of shares in excess of the size of
a public issue, made by the SA out of shares borrowed from the promoters or the pre -issue
shareholders or both, in pursuance of a green shoe option exercised by the company in
accordance with the provisions of this Chapter.
GUIDELINES ON BOOK BUILDING
11.1 An issuer company proposing to issue capital through book building shall comply with
the following:
A) 75% Book Building Process 11.2 In an issue of securities to the public through a
prospectus the option for 75% book building shall be available to the issuer company subject
to the following:
(i) The option of book-building shall be available to all body corporate which are otherwise
eligible to make an issue of capital to the public.
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(a) The book-building facility shall be available as an alternative to, and to the extent
of the percentage of the issue which can be reserved for firm allotment, as per these
Guidelines.
(b) The issuer company shall have an option of either reserving the securities for firm
allotment or issuing the securities through bookbuilding process.
(iii) The issue of securities through book-building process shall be separately identified /
indicated as 'placement portion category', in the prospectus.
(iv)
(a) The securities available to the public shall be separately identified as 'net offer to
the public'.
(b) The requirement of minimum 25% of the securities to be offered to the public shall
also be applicable.
(v) In case the book-building option is availed of, underwriting shall be mandatory to the
extent of the net offer to the public.
(vi) The draft prospectus containing all the information except the information regarding the
price at which the securities are offered shall be filed with the Board.
(vii) One of the lead merchant banker to the issue shall be nominated by the issuer company
as a Book Runner and his name shall be mentioned in the prospectus.
(viii)
(a) The copy of the draft prospectus filed with the Board may be circulated by the
Book Runner to the institutional buyers who are eligible for firm allotment and to the
intermediaries eligible to act as underwriters inviting offers for subscribing to the
securities.
(b) The draft prospectus to be circulated shall indicate the price band within which the
securities are being offered for subscription.
(ix) The Book Runner on receipt of the offers shall maintain a record of the names and
number of securities ordered and the price at which the institutional buyer or underwriter is
willing to subscribe to securities under the placement portion.
(x) The underwriter(s) shall maintain a record of the orders received by him for subscribing to
the issue out of the placement portion.
(xi)
(a) The underwriter(s) shall aggregate the offers so received for subscribing to the
issue and intimate to the Book Runner the aggregate amount of the orders received
by him.
b) The institutional investor shall also forward its orders, if any, to the book runner.
(xii) On receipt of the information, the Book Runner and the issuer company shall determine
the price at which the securities shall be offered to the public.
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(xiii) The issue price for the placement portion and offer to the public shall be the same.
(xiv) On determination of the price, the underwriter shall enter into an underwriting
agreement with the issuer indicating the number of securities as well as the price at which
the underwriter shall subscribe to the securities. Provided that the Book Runner shall have
an option of requiring the underwriters to the net offer to the public to pay in advance all
monies required to be paid in respect of their underwriting commitment.
(xv) On determination of the issue price within two day, thereafter the prospectus shall be
filed with the Registrar of Company.
(xvi) The issuer company shall open two different accounts for collection of application
moneys, one for the private placement portion and the other for the public subscription.
(xvii) One day prior to the opening of the issue to the public, Book Runner shall collect from
the institutional buyers and the underwriters the application forms along with the application
moneys to the extent of the securities proposed to be allotted to them / subscribed by them.
(xviii)
(a) Allotments for the private placement portion shall be made on the second day
from the closure of the issue.
(b) However, to ensure that the securities allotted under placement portion and public
portion are pari passu in all respects, the issuer company may have one date of
allotment which shall be the deemed date of allotment for the issue of securities
through book building process.
(xix) In case the Book Runner has exercised the option of requiring the underwriter to the net
offer to the public to pay in advance all moneys required to be paid in respect of their
underwriting commitment by the eleventh day of the closure of the issue the shares allotted
as per the private placement category shall be eligible to be listed.
(xx)
(a) Allotment of securities under the pubic category shall be made as per the Guidelines.
(b) Allotment of securities under the public category shall be eligible to be listed.
(xxi)
(a) In case of undersubscription in the net offer to the public spillover to the extent of under
subscription shall be permitted from the placement portion to the net offer to the public
portion subject to the condition that preference shall be given to the individual investors.
(b) In case of under subscription in the placement portion spillover shall be permitted from
the net offer to the public to the placement portion.
(xxii) The issuer company may pay interest on the application moneys till the date of
allotment or the deemed date of allotment provided that payment of interest is uniformly
given to all the applicants.
(xxiii)
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(a) The Book Runner and other intermediaries associated with the book building process
shall maintain records of the book building process.
(b) The Board shall have the right to inspect such records.
B) Offer to Public through Book Building Process
11.3 An issuer company may, subject to the requirements specified in this chapter, make an
issue of securities to the public through a prospectus in the following manner: a. 100% of the
net offer to the public through book building process, or b. 75% of the net offer to the public
through book building process and 25% at the price determined through book building.
11.3.1
(i) (Deleted)
(ii) Reservation or firm allotment to the extent of percentage specified in these Guidelines
shall not be made to categories other than the categories mentioned in sub-clause (iii)
below.
(iii) Book Building shall be for the portion other than the promoters contribution and the
allocation made to:
(a) ‗permanent employees of the issuer company and in the case of a new company
the permanent employees of the promoting companies';
(b) ‗shareholders of the promoting companies in the case of a new company and
shareholders of group companies in the case of an existing company‘ either on a
‗competitive basis‘ or on a ‗firm allotment basis‘.
(c) persons who, on the date of filing of the draft offer document with the Board, have
business association, as depositors, bondholders and subscribers to services, with
the issuer making an initial public offering, provided that allotment to such persons
shall not exceed 5% of the issue size. Provided further that no reservation shall be
made for the issue management team, syndicate members, their promoters, directors
and employees and for the group/associate companies of issue management team
and syndicate members and their promoters, directors and employees.
(iv) The issuer company shall appoint an eligible Merchant Banker(s) as book runner(s) and
their name(s) shall be mentioned in the draft prospectus.
(iv) (a) The issuer company shall enter into an agreement with one or more of the
Stock Exchange(s) which have the requisite system of on-line offer of securities. The
agreement shall specify inter-alia, the rights, duties, responsibilities and obligations of
the company and stock exchange (s) inter se. The agreement may also provide for a
dispute resolution mechanism between the company and the stock exchange.
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(iv) (b) The company may apply for listing of its securities on an exchange other than
the exchange through which it offers its securities to public through the on-line
system.
(v) The Lead Merchant Banker shall act as the Lead Book Runner.
(v) (a) In case the issuer company appoints more than one merchant banker(s), the
names of all such (merchant bankers(s)) who have submitted the due diligence
certificate to SEBI, may be mentioned on the front cover page of the prospectus. A
disclosure to the effect that " the investors may contact any of such (merchant
bankers(s)), for any complaint pertaining to the issue" shall be made in the
prospectus, after the "risk factors‖.
(v) (b) The lead book runner/issuer may designate, in any manner, the other
Merchant Banker(s), subject to the following:
1. the inter-se allocation of responsibilities amongst the merchant bankers
shall be disclosed in the prospectus on the page giving the details of the issue
management team;
2. a co-ordinator shall be appointed amongst the lead book runners, for the
purpose of co-ordination with SEBI.
3. the names of only those merchant bankers who have signed the interse
allocation of responsibilities shall be mentioned in the offer document on the
page where the details of the issue management team is given.
(vi) The primary responsibility of building the book shall be that of the Lead Book Runner.
(vii) The Book Runner(s) may appoint those intermediaries who are registered with the
Board and who are permitted to carry on activity as an ‗Underwriter‘ as syndicate members.
(vii)(a) The Book Runner(s)/syndicate members shall appoint brokers of the
exchange, who are registered with SEBI, for the purpose of accepting bids,
applications and placing orders with the company and ensure that the brokers so
appointed are financially capable of honouring their commitments arising out of
defaults of their clients/investors, if any.
(vii)(b) For the purposes of this Chapter, the brokers, so appointed accepting
applications and application monies, shall be considered as ‗bidding/collection
centres‘.
(vii)(c) The broker/s so appointed, shall collect the money from his/their client for
every order placed by him/them and in case the client/investors fails to pay for shares
allocated as per the Guidelines, the broker shall pay such amount.
(vii)(d) The company shall pay to the broker/s a commission/fee for the services
rendered by him/them. The exchange shall ensure that the broker does not levy a
service fee on his clients/investors in lieu of his services.
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(viii) The draft prospectus containing all the disclosures as laid down in Chapter VI except
that of price and the number of securities to be offered to the public shall be filed by the Lead
Merchant Banker with the Board. Provided that the total size of the issue shall be mentioned
in the draft prospectus.
(viii) (a) The red herring prospectus shall disclose, either the floor price of the securities
offered through it or a price band along with the range within which the price can move, if
any. Provided that in case of a further public issue of a class of securities which is already
listed on a recognised stock exchange, it shall not be necessary to disclose the floor price or
price band in the red-herring prospectus if the same is disclosed by way of an
announcement made by the issuer or the merchant banker at least one day before the
opening of the bid in all those newspapers where preissue advertisement was released.
Provided further that where the issuer opts not to make the disclosure of the price band or
floor price in the red-herring prospectus in terms of the foregoing proviso, the following shall
be additionally disclosed in the red-herring prospectus:
(a) a statement that the floor price or price band, as the case may be, shall be
disclosed one before the opening of the bid;
(b) a statement that the investors may be guided in the meantime by the secondary
market prices;
(c) names and editions of the newspapers where the announcement of the floor price
or price band would be made;
(d) names of websites (with address), journals or other media in which the said
announcement will be made.
(viii)(b) In case the red herring prospectus discloses the price band, the lead book runner
shall ensure compliance with the following conditions:
(a) The cap of the price band should not be more than 20% of the floor of the band;
i.e cap of the price band shall be less than or equal to 120% of the floor of the price
band
(b) The price band can be revised during the bidding period in which case the
maximum revision on either side shall not exceed 20% i.e floor of price band can
move up or down to the extent of 20% of floor of the price band disclosed in the red
herring prospectus and the cap of the revised price band will be fixed in accordance
with Clause (a) above;
(c) Any revision in the price band shall be widely disseminated by informing the stock
exchanges, by issuing press release and also indicating the change on the relevant
website and the terminals of the syndicate members.
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(d) In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not exceeding thirteen
days.
(e) The manner in which the shortfall, if any, in the project financing, arising on
account of lowering of price band to the extent of 20% will be met shall be disclosed
in the red herring prospectus. It shall also be disclosed that the allotment shall not be
made unless the financing is tied up.
(ix)
(a) In case of appointment of more than one Lead Merchant Banker or Book Runner
for book building, the rights, obligations and responsibilities of each should be
delineated.
(b) In case of an under subscription in an issue, the shortfall shall have to be made
good by the Book Runner(s) to the issue and the same shall be incorporated in the
interse allocation of responsibility given in Schedule II.
(x) (Deleted)
(xi)
(a) (Deleted)
(b) The issuer company shall circulate the application forms to the Brokers
(xii) (Deleted)
(xiii) The pre-issue obligations and disclosure requirements as specified in Chapter V and VI
respectively of these Guidelines, shall be applicable to issue of securities through book
building unless stated otherwise in this Chapter.
(xiv) The Book Runner(s) and the issuer company shall determine the issue price based on
the bids received through the ‗syndicate members‘.
(xiv)(a) Retail individual investors may bid at "cut off" price instead of their writing the
specific bid prices in the bid forms.
(xv) On determination of the price, the number of securities to be offered shall be determined
(issue size divided by the price which has been determined).
(xvi) Once the final price (cut-off price) is determined all those bidders whose bids have been
found to be successful (i.e. at and above the final price or cut-off price) shall become entitle
for allotment of securities.
(xvii) No incentive, whether in cash or kind, shall be paid to the investors who have become
entitled for allotment of securities.
(xvii) (a) The broker may collect an amount to the extent of 100% of the application
money as margin money from the clients/investors before he places an order on their
behalf. The margin collected from categories other than Qualified Institutional Buyers
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shall be uniform across the book runner(s)/syndicate members, for each such
category. xvii)(aa) The broker/syndicate member shall collect an amount of not less
than ten percent of the application money as margin money in respect of bids placed
by qualified institutional buyers.
(xvii) (b) Bids for securities beyond the investment limit prescribed under relevant
laws shall not be accepted by the syndicate members/brokers from any category of
clients/ investors.
(xvii)(c) The lead book runner may reject a bid placed by a qualified institutional
buyer for reasons to be recorded in writing provided that such rejection shall be made
at the time of acceptance of the bid and the reasons therefor shall be disclosed to the
bidders. Necessary disclosures in this regard shall also be made in the offer
document.
(xviii) On determination of the entitlement under sub-clause (xvi), the information regarding
the same (i.e. the number of securities which the investor becomes entitled) shall be
intimated immediately to the investors.
(xviii) (a) (Renumbered)
(xix) The final prospectus containing all disclosures as per these Guidelines including the
price and the number of securities proposed to be issued shall be filed with the Registrar of
Companies.
(xx) Arrangement shall be made by the issuer for collection of the applications by appointing
mandatory collection centres as per these Guidelines.
(xx)(a) The online, real time graphical display of demand and bid prices at the bidding
terminals, shall be made. The book running lead manager shall ensure the availability of
adequate infrastructure for data entry of the bids on a real t ime basis.
(xxi) The investors who had not participated in the bidding process or have not received
intimation of entitlement of securities may also make an application.
11.3.2 Additional Disclosures Apart from meeting the disclosure requirements as specified in
these Guidelines, the following disclosures shall be suitably made:
(i) The particulars of syndicate members, brokers, registrars, bankers to the issue, etc. \
(ii) The following statement shall be given under the 'basis for issue price':- "The issue price
has been determined by the Issuer in consultation with the Book Runner(s), on the basis of
assessment of market demand for the offered securities by way of Book-building."
(iii) The following accounting ratios shall be given under the basis for issue price for each of
the accounting periods for which the financial information is given:
1. EPS, pre-issue, for the last three years (as adjusted for changes in Capital).
2. P/E pre-issue.
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3. Average return on net-worth in the last three years.
4. Net-Asset value per share based on last balance sheet.
5. Comparison of all the accounting ratios of the issuer company as mentioned above
with the industry average and with the accounting ratios of the peer group (i.e.
companies of comparable size in the same industry. (Indicate the source from which
industry average and accounting ratios of the peer group has been taken).
6. The accounting ratios disclosed in the offer document shall be calculated after
giving effect to the consequent increase of capital on account of compulsory
conversions outstanding, as well as on the assumption that the options outstanding,
if any, to subscribe for additional capital shall be exercised).
(iv) (Deleted)
(v) the proposed manner of allocation among respective categor ies of investors, in the event
of under subscription.
11.3.3 Underwriting
(i) (In case the issuer company is making an issue of securities:
a. under sub clause(a) of clause 11.3, 100% of the net offer to the public;
b. under sub clause (b) of clause 11.3, the book built portion - 75% of the net offer to the
public, shall be compulsorily underwritten by the syndicate members/book runner(s).
Provided that nothing contained in sub-clause
(i) shall apply to 50% of the net offer to the public, mandatorily to be allotted to the
Qualified Institutional Buyers under proviso to clause 2.2.2 or clause 2.3.2 of these
guidelines, in case the company is making an issue of securities under clause 2.2.2
or clause 2.3.2, as the case may be.)
(ii)
(a) The ‗syndicate members‘ shall enter into an underwriting agreement with
the Book Runner(s) indicating the number of securities which they would
subscribe at the predetermined price.
(b) The Book Runner(s) shall in turn enter into an underwriting agreement
with the Issuer company.
(iii) In the event of the syndicate members not fulfilling their underwriting obligations
the Book Runner(s) shall be responsible for bringing in the amount devolved.
(iv) (Deleted)
11.3.4 Procedure for bidding:
11.3.4.1 The method and process of bidding shall be subject to the following:
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(i) Bid shall be open for atleast 245(three working days) and not more than (seven working
days), which may be extended to a maximum of (ten working days) in case the price band is
revised in accordance with clause 11.3.1.
(ii) The advertisement mentioned at clause 11.3.1 (xi) shall also contain the following:
(a) the date of opening and closing of the bidding(not less than 5 days).
(b) the names and addresses of the syndicate members as well as the bidding
terminals for accepting the bids.
(c) the method and process of bidding.
(iii) Bidding shall be permitted only if an electronically linked transparent facility is used.
(iv) The ‗syndicate members‘ shall be present at the bidding centres so that at least one
electronically linked computer terminal at all the bidding centres is available for the purpose
of bidding.
(v)
(a) The number of bidding centres, in case 75% of the net offer to the public is
offered through the book building, process shall not be less than the number of
mandatory collection centres as specified in these regulations. In case 100% of the
net offer to the public is made through book building process, the bidding centres
shall be at all the places, where the recognised stock exchanges are situated.
(b) The same norms as applicable for collection centres shall be applicable for the
bidding centres also.
(vi) Individual as well as qualified institutional buyers shall place their bids only through the
‗brokers‘ who shall have the right to vet the bids. The applicant shall enclose the proof of DP
ID and Client ID along with the application, while making bid
(vi) (a) During the period the issue is open to the public for bidding, the applicants
may approach the brokers of the stock exchange/s through which the securities are
offered under on-line system, to place an order for bidding to the securities. Every
broker shall accept orders from all clients/investors who place orders through him.
(vi) (b)
(vi) (c)
(vi) (d)
(vii) The investors shall have the right to revise their bids provided that Qualified Institutional
Buyers shall not be allowed to withdraw their bids after the closure of the bidding.
(viii) Bidding Form
(a) There shall be a standard bidding form to ensure uniformity in bidding and
accuracy.
(b) The bidding form shall contain information about the investor, the price and the
number of securities that the investor wishes to bid.
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(c) The bidding form before being issued to the bidder shall be serially numbered at
the bidding centres and date and time stamped.
(d) The serial number may be system generated or stamped with an automatic
numbering machine.
(e) The bidding form shall be issued in duplicate signed by the investor and
countersigned by the syndicate member, with one form for the investor and the other
for the syndicate member(s)/Book Runner(s).
(ix) At the end of each day of the bidding period the demand shall be shown graphically on
the terminals for information of the syndicate members as well as the investors.
(x) The identities of the Qualified Institutional Buyers making the bidding, shall not be made
public
(xi)
(xii) The stock exchanges shall display data pertaining to book built issues in a uniform
format, interalia giving category wise details of bids received Indicative format is given in
Schedule XXX. The data pertaining to an issue shall be displayed on the site for a period of
atleast three days after closure of bids. 11.3.5 Allocation / Allotment Procedure (i) In case an
issuer company makes an issue of 100% of the net offer to public through 100% book
building process:
a) not less than 35% of the net offer to the public shall be available for allocation to
retail individual investors;
b) not less than 15% of the net offer to the public shall be available for allocation to
non institutional investors i.e. investors other than retail individual investors and
Qualified Institutional Buyers;
c) not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers. Provided that, 50% of net offer to public shall be
mandatorily allotted to the Qualified Institutional Buyers, in case the issuer company
is making a public issue under Clause 2.2.2 and 2.3.2 of these guidelines)
Provided further that, in respect of issues made under Rule 19(2)(b) of Securities
Contract (Regulation) Rules 1957, with 60% mandatory allocation to Qualified
Institutional Buyers, the percentage allocation to retail individual investors and non
institutional investors in terms of clause
11.3.5
(i)(a) shall be 30% and 10% respectively.
(ii) In case an issuer company makes an issue of 75% of the net offer to public through book
building process and 25% at the price determined through book building – a. in the book
built portion, not less than 25% of the net offer to the public, shall be available for allocation
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to non-Qualified Institutional Buyers and not more than 50% of the net offer to the public
shall be available for allocation to Qualified Institutional Buyers. b. the balance 25% of the
net offer to the public, offered at a price determined through book building, shall be available
only to retail individual investors who have either not participated or have not received any
allocation, in the book built portion. Provided that, 50% of net offer to public shall be
mandatorily allotted to the Qualified Institutional Buyers, in case the issuer company is
making a public issue under Clause 2.2.2 and 2.3.2 of these guidelines (ii-a) Out of the
portion available for allocation to qualified institutional buyers under sub clause (i) or (ii) or
any proviso thereof, as the case may be, 5% shall be allocated proportionately to mutual
funds. Mutual fund applicants shall also be eligible for proportionate allocation under the
balance available for Qualified Institutional Buyers as illustrated in Schedule XIX-A.
(iii) Allotment to retail individual investors, non-institutional investors and qualified
institutional buyers shall be made proportionately as illustrated in Schedule XVIII.
(iv) In the event of under subscription in any category, the undersubscribed portion shall be
allocated to the bidders as per disclosures made in terms of clause 11.3.2(v).
Provided that, the unsubscribed portion in the "Qualified Institutional Buyer" category, shall
not be available for subscription to other categories, in case the issuer company has made
an issue of securities under clause 2.2.2 or clause 2.3.2 of these guidelines.
(v)
(a) (Deleted)
(b) (Deleted)
(vi) Allotment shall be made not later than 15 days from the closure of the issue failing which
interest at the rate of 15% shall be paid to the investors.
(vii) Schedule XX may be referred to for Clarificatory Examples for issue size and allocation
has been specified in Schedule XX.
(viii) Model Time Frame for Book Building is specified in Schedule XXI.
(ix) The broker shall refund the margin money collected earlier, within 3 days of receipt of
basis of allocation, to the applicants who did not receive allocation
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv) On payment and receipt of the sum payable on application for the amount towards
minimum subscription, the company shall allot the shares to the applicants as per these
Guidelines.
(xvi)
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(xvii)
(xviii)
(xix)
(xx)
(xxi)
(xxii)
(xxiii) In case the issuer company has made an issue of 75% of the net offer to public
through book building process and 25% at the price determined through book building:
a) the offer of 25% of the net offer to the public, made at a price determined through
book building, shall open within 15 days from the date of closure of bidding;
b) the offer for subscription to the public, shall remain open for a period of atleast 3
working days after completing all the requirements of advertisement and despatch of
issue material to all the stock exchanges;
c) during the time when the offer is open, the investors who have received an
intimation of entitlement of securities under sub clause
(xviii) of clause 11.3.1, shall submit the application forms along with the application moneys;
d) the other retail individual investors who had not participated in the bidding process or
have not received intimation of entitlement of securities under sub clause (xviii) of clause
11.3.1 may also make an application.‖
11.3.6 Maintenance of Books and Records
(i) A final book of demand showing the result of the allocation process shall be maintained by
the book runner/s.
(ii) The Book Runner/s and other intermediaries in the book building process associated
shall maintain records of the book building prices.
(iii) The Board shall have the right to inspect the records, books and documents relating to
the Book building process and such person shall extend full co-operation.
Chapter Xi A Guidelines On Initial Public Offers Through The Stock Exchange On-Line
System (E-IPO)
11A.1 A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities shall comply with the requirements as contained in this
Chapter in addition to other requirements for public issues as given in these Guidelines,
wherever applicable.
11A.2 Agreement with the Stock exchange.
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11A.2.1 The company shall enter into an agreement with the Stock Exchange(s)
which have the requisite system of on-line offer of securities. (Deleted)
11A.2.2 The agreement mentioned in the above clause shall specify inter -alia, the
rights, duties, responsibilities and obligations of the company and stock exchange (s)
inter se. The agreement may also provide for a dispute resolution mechanism
between the company and the stock exchange.
11A.3 Appointment of Brokers
11A.3.1 The stock exchange, shall appoint brokers of the exchange, who are
registered with SEBI, for the purpose of accepting applications and placing orders
with the company.
11A.3.2 For the purposes of this Chapter, the brokers, so appointed accepting
applications and application monies, shall be considered as ‗collection centres‘.
11A.3.3 The broker/s so appointed, shall collect the money from his/their client for
every order placed by him/them and in case the client fails to pay for shares allocated
as per the Guidelines, the broker shall pay such amount.
11A.3.4 The company/lead manager shall ensure that the brokers having terminals
are appointed in compliance with the requirement of mandatory collection centres, as
specified in clause 5.9 of Chapter V of the Guidelines.
11A.3.5 The company/lead manager shall ensure that the brokers so appointed are
financially capable of honouring their commitments arising out of defaults of their
clients, if any.
11A.3.6 The company shall pay to the broker/s a commission/fee for the services rendered
by him/them. The exchange shall ensure that the broker does not levy a service fee on his
clients in lieu of his services.
11A.4 Appointment of Registrar to the Issue
11A.4.1 The company shall appoint a Registrar to the Issue having electronic connectivity
with the Stock Exchange/s through which the securities are offered under the system.
11A.5 Listing
11A.5.1 The company may apply for listing of its securities on an exchange other than the
exchange through which it offers its securities to public through the on-line system.
11A.6 Responsibility of the Lead Manager
11A.6.1 The Lead Manger shall be responsible for co-ordination of all the activities amongst
various intermediaries connected in the issue / system.
11A.6.2 The names of brokers appointed for the issue alongwith the names of the other
intermediaries, namely, Lead managers to the issue and Registrars to the Issue shall be
disclosed in the prospectus and application form.
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11A.7 Mode of operation
11A.7.1 The company shall, after filing the offer document with ROC and before opening of
the issue, make an issue advertisement in one English and one Hindi daily with nation wide
circulation, and one regional daily with wide circulation at the place where the registered
office of the issuer company is situated.
11A.7.2 The advertisement shall contain the salient features of the offer document as
specified in Form 2A of the Companies (Central Government‘s) General Rules and Forms,
1956. The advertisement in addition to other required information, shall also contain the
following: i. the date of opening and closing of the issue ii. the method and process of
application and allotment iii. the names, addresses and the telephone numbers of the stock
brokers and centres for accepting the applications.
11A.7.3 During the period the issue is open to the public for subscription, the applicants may
a) approach the brokers of the stock exchange/s through which the securities are offered
under on-line system, to place an order for subscribing to the securities. Every broker shall
accept orders from all clients who place orders through him; b) directly send the application
form alongwith the cheque/Demand Draft for the sum payable towards application money to
the Registrar to the Issue or place the order to subscribe through a stock- broker under the
on-line system.
11A.7.4 In case of issue of capital of Rs. 10 crores or above the Registrar to the Issue shall
open centres for collection of direct applications at the four metropolitan centres situated at
Delhi, Chennai, Calcutta and Mumbai.
11A.7.5 The broker shall collect the client registration form duly filled up and signed from the
applicants before placing the order in the system as per "Know your client rule" as specified
by SEBI and as may be modified from time to time.
11A.7.6 The broker shall, thereafter, enter the buy order in the system, on behalf of the
clients and enter details including the name, address, telephone number and category of the
applicant, the number of shares applied for, beneficiary ID, DP code etc. and give an order
number/order confirmation slip to the applicant.
11A.7.7 The applicant may withdraw applications in terms of the Companies Act, 1956.
11A.7.8 The broker may collect an amount to the extent of 100% of the application money as
margin money from the clients before he places an order on their behalf. 11A.7.9 The broker
shall open a separate bank account [Escrow Account] with the clearing house bank for
primary market issues and the amount collected by the broker from his clients as margin
money shall be deposited in this account.
11A.7.10 The broker shall, at the end of each day while the issue is open for subscription,
download/forward the order data to the Registrar to the Issue on a daily basis. This data
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shall consist of only valid orders (excluding those that are cancelled). On the date of closure
of the issue, the final status of orders received shall be sent to the Reg istrar to the
issue/company.
11A.7.11 On the closure of the issue, the Designated Stock Exchange, alongwith the Lead
merchant banker and Registrars to the Issue shall ensure that the basis of allocation is
finalised in fair and proper manner on the lines of the norms with respect to basis of
allotment as specified in Chapter VII of the Guidelines, as may be modified from time to time.
11A.7.12 After finalisation of basis of allocation, the Registrar to the Issue/company shall
send the computer file containing the allocation details i.e. the allocation numbers, allocated
quantity etc., of successful applicants to the Exchange. The Exchange shall process and
generate the broker-wise funds pay-in obligation and shall send the file containing the
allocation details to member brokers.
11A.7.13 On receipt of the basis of allocation data, the brokers shall immediately intimate
the fact of allocation to their client /applicant. The broker shall ensure that each successful
client/applicant submits the duly filled-in and signed application form to him along with the
amount payable towards the application money. Amount already paid by the applicant as
margin money shall be adjusted towards the total allocation money payable. The broker
shall, thereafter, hand over the application forms of the successful applicants who have paid
the application money, to the exchange, which shall submit the same to the Registrar to
Issue/company for their records.
11A.7.14 The broker shall refund the margin money collected earlier, within 3 days of receipt
of basis of allocation, to the applicants who did not receive allocation.
11A.7.15 The brokers shall give details of the amount received from each client and the
names of clients who have not paid the application money to the exchange. The brokers
shall also give soft copy of this data to the exchange.
11A.7.16 On the pay- in day, the broker shall deposit the amount collected from the clients in
the separate bank account opened for primary issues with the clearing house/bank. The
clearing house shall debit the primary issue account of each broker and credit the amount so
collected from each broker to the "Issue Account"
11A.7.17 In the event of the successful applicants failing to pay the application money, the
broker through whom such client placed orders, shall bring in the funds to the extent of the
client‘s default. If the broker does not bring in the funds, he shall be declared as a defaulter
by the exchange and action as prescribed under the Bye-Laws of the Stock Exchange shall
be initiated against him. In such a case, if the minimum subscription as disclosed in the
prospectus is not received, the issue proceeds shall be refunded to the applicants.
11A.7.18 The subscriber shall have an option to receive the security certificates or hold the
securities in dematerialised form as specified in the Guidelines
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11A.7.19 The concerned Exchange shall not use the Settlement/Trade Guarantee Fund of
the Exchange for honoring brokers commitments in case of failure of broker to bring in the
funds.
11A.7.20 On payment and receipt of the sum payable on application for the amount towards
minimum subscription, the company shall allot the shares to the applicants as per these
Guidelines. The Registrar to the issue shall post the share certificates to the investors or,
instruct the depository to credit the depository account of each investor, as the case may be.
11A.7.21 Allotment of securities shall be made not later than 15 days from the closure of the
issue failing which interest at the rate of 15% shall be paid to the investors.
11A.7.22 In cases of applicants who have applied directly or by post to the Registrar to the
issue, and have not received allocation, the Registrar to the issue shall arrange to refund the
application monies paid by them within the time prescribed.
11A.7.23 The brokers and other intermediaries engaged in the process of offering shares
through the on-line system shall maintain the following records for a period of 5 years : i.
orders received ii. applications received iii. details of allocation and allotment iv. details of
margin collected and refunded v. details of refund of application money
11A.7.24 SEBI shall have the right to carry out an inspection of the records, books and
documents relating to the above, of any intermediary connected with this system and every
intermediary in the system shall at all times co-operate with the inspection by SEBI. In
addition the stock exchanges have the right of supervision and inspection of the activities of
its member brokers connected with the system.)
GUIDELINES FOR PREFERENTIAL ISSUES
13.0 The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly
Convertible Debentures (PCDs) or any other financial instruments which would be converted
into or exchanged with equity shares at a later date, by listed companies whose equity share
capital is listed on any stock exchange, to any select group of persons under Section 81(1A)
of the Companies Act 1956 on private placement basis shall be governed by these
guidelines.
13.1 Such preferential issues by listed companies by way of equity shares/ Fully Convertible
Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial
instruments which would be converted into / exchanged with equity shares at a later date,
shall be made in accordance with the pricing provisions mentioned below:
13.1.1 Pricing of the issue
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13.1.1.1 Where the equity shares of a company have been listed on a stock exchange for a
period of six months or more as on the relevant date, the issue of shares on preferential
basis shall be made at a price not less than higher of the following:
i) The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date; OR
ii) The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.
13.1.1.2 Where the equity shares of a company have been listed on a stock exchange for a
period of less than six months as on the relevant date, the issue of shares on preferential
basis can be made at a price not less than the higher of the following:
i)
The price at which shares were issued by the company in its IPO or the value per
share arrived at in a scheme of arrangement under sections 391 to 394 of the
Companies Act, 1956, pursuant to which the shares of the company were listed, as
the case may be; OR
a. The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the period shares have been listed preceding
the relevant date; OR
b. The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.‖
Provided that on completing a period of six months of being listed on a stock
exchange, the company shall recompute the price of the shares in accordance with
the provisions mentioned in sub-clause (i) of clause
13.1.1.1 and if the price at which shares were allotted on a preferential basis under clause
13.1.1.2 was lower than the price so recomputed, the difference shall be paid by the
allottees to the company.)
Explanation:
a) "relevant date" 299(for the purpose of clauses 13.1.1.1 and 13.1.1.2) means the
date thirty days prior to the date on which the meeting of general body of
shareholders is held, in terms of Section 81(1A) of the Companies Act, 1956 to
consider the proposed issue; provided however that in respect of shares issued on
preferential basis pursuant to a scheme approved under the Corporate Debt
Restructuring framework of Reserve Bank of India, the date of approval of the
Corporate Debt Restructuring package shall be the relevant date.
b) "stock exchange" 301(for the purpose of clauses 13.1.1.1 and 13.1.1.2) means
any of the recognised stock exchanges in which the shares are listed and in which
the highest trading volume in respect of the shares of the company has been
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recorded during the preceding six months prior to the relevant date. 13.1.2 Pricing of
shares arising out of warrants, etc.
13.1.2.1
(a) Where warrants are issued on a preferential basis with an option to apply for and
be allotted shares, the issuer company shall determine the price of the resultant
shares in accordance with Clause 13.1.1.1 above.
(b) The relevant date for the above purpose may, at the option of the issuer be either
the one referred in explanation (a) to Clause 13.1.1.1 above or a date 30 days prior
to the date on which the holder of the warrants becomes entitled to apply for the said
shares.
13.1.2.2 The resolution to be passed in terms of Section 81(1A) shall clearly specify the
relevant date on the basis of which price of the resultant shares shall be calculated.
13.1.2.3
(a) An amount equivalent to atleast ten percent of the price fixed in terms of Clause
13.1.1.1 above shall become payable for the warrants on the date of their allotment.
(b) The amount referred to in sub-clause (a), shall be adjusted against the price
payable subsequently for acquiring the shares by exercising an option for the
purpose.
(c) The amount referred to in sub-clause (a) shall be forfeited if the option to acquire
shares is not exercised.
13.1.3 Pricing of shares on conversion
13.1.3.1 Where PCDs/ FCDs/ other convertible instruments, are issued on a preferential
basis, providing for the issuer to allot shares at a future date, the issuer shall determine the
price at which the shares could be allotted in the same manner as specified for pricing of
shares allotted in lieu of warrants as indicated in Paras 13.1.2.1& 13.1.2.2 above. 302(13.1A
The explanatory statement to the notice for the general meeting in terms of Section 173 of
the Companies Act, 1956 shall contain:
i. the object/s of the issue through preferential offer,
ii. intention of promoters/ directors/ key management persons to subscribe to the
offer,
iii. shareholding pattern before and after the offer,
iv. proposed time within which the allotment shall be complete
v. the identity of the proposed allottees and the percentage of post preferential issue
capital that may be held by them.)
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vi. in case of a preferential allotment to which clause 13.1.1.2 is applicable,
requirements specified in proviso to clause 13.1.1.2 and proviso mentioned after sub-
clause (e) of clause 13.3.1. (13.1B) A listed company shall not make any preferential
issue of equity shares, Fully Convertible Debentures, Partly Convertible Debentures
or any other instrument which may be converted into or exchanged with equity
shares at a latter date if the same is not in compliance with the conditions for
continuous listing.
13.2 Currency of financial instruments
13.2.1 In case of Warrants/ PCDs/ FCDs/ or any other financial instruments with a provision
for the allotment of equity shares at a future date, either through conversion or otherwise, the
currency of the instruments shall not exceed beyond 18 months from the date of issue of the
relevant instrument.
13.3 Non-transferability of financial instruments
13.3.1
(a) The instruments allotted on a preferential basis to the promoter / promoter group
as defined in Chapter VI in Explanation I, II and III to clause 6.8.3.2 of these
guidelines, shall be subject to lock-in of 3 years from the date of their allotment.
(b) In any case, not more than 20% of the total capital of the company, including
capital brought in by way of preferential issue, shall be subject to lock-in of three
years from the date of allotment.
(c) In addition to the requirements for lock in of instruments allotted on preferential
basis to promoters/ promoter group as per clause 13.3.1 (a) and (b), the instruments
allotted on preferential basis to any person including promoters/ promoters group
shall be locked-in for a period of one year from the date of their allotment (Deleted).)
(d) The lock-in on shares acquired by conversion of the convertible
instrument/exercise of warrants, shall be reduced to the extent the convertible
instrument warrants have already been locked-in.
(e) the lock-in period in respect of the shares issued on preferential basis pursuant to
a scheme approved under Corporate Debt Restructuring framework of Reserve Bank
of India, shall commence from the date of allotment and shall continue for a period of
one year and in case of allotment of partly paid up shares the lock-in period shall
commence from the date of allotment and continue for a period of one year from the
date when shares become fully paid up. Provided that where any amount payable by
the allottee of shares under the proviso to clause13.1.1.2 is not paid till the expiry of
lock-in period mentioned in sub-clauses (a) to (e) above, lock-in period in respect of
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the shares issued to such allottee shall continue till the time the company receives
such amount from such allottee.
(f) no listed company shall make preferential issue of equity shares / warrants /
convertible instruments to any person unless the entire shareholding of such persons
in the company, if any, is held by him in dematerialized form.
(g) where the shares / warrants/ convertible instruments are issued on preferential
basis, the entire pre preferential allotment shareholding of such allottees shall be
under lock – in from the relevant date upto a period of six months from the date of
preferential allotment.
(h) where the shares / warrants / convertible instruments are issued on preferential
basis, the shareholders who have sold their shares during the six months period prior
to the relevant date shall not be eligible for allotment of shares on preferential basis.)
Explanation:
(a) For the purpose of this clause ―total capital‖ of the company shall mean -
(i) equity share capital issued by way of public/ rights issue including equity
shares emerging at a later date out of any convertible securities/ exercise of
warrants and
(ii) equity shares or any other security convertible at a later date into equity
issued on a preferential basis in favour of promoter/ promoter groups.
(b)
(i) For computation of 20% of the total capital of the company, the amount of
minimum promoters‘ contribution held and locked-in, in the past as per
guidelines shall be taken into account.
(ii) The minimum promoters‘ contribution shall not again be put under fresh
lock-in, even though it is considered for computing the requirement of 20% of
the total capital of the company, in case the said minimum promoters‘
contribution is free of lock-in at the time of the preferential issue.
13.3.2 These locked in shares/instruments may be transferred to and amongst promoter/
promoter group or to a new promoter(s) or person(s) in control of the company, subject to
continuation of lock-in in the hands of transferee(s) for the remaining period and compliance
of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers)
Regulations, 1997, as applicable.)
13.4 Currency of shareholders resolutions
13.4.1 Allotment pursuant to any resolution passed at a meeting of shareholders of a
(company) granting consent for preferential issues of any financial instrument, shall be
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completed within a period of fifteen days from the date of passing of the resolution. Provided
that where the allotment on preferential basis is pending on account of pendency of any
approval of such allotment by any regulatory authority or the Central Government, the
allotment shall be completed within 15 days from the date of such approval.
13.4.2 The equity shares and securities convertible into equity shares at a later date, allotted
in terms of the above said resolution shall be made fully paid up at the time of their
allotment. Provided that payment in case of warrants shall be made in terms of clause
13.1.2.3 above.)
13.4.2A Nothing contained in clauses 13.4.1 and 13.4.2 shall apply in case of
allotment of shares and securities convertible into equity shares at a later date on
preferential basis pursuant to a scheme of corporate debt restructuring as per the
Corporate Debt Restructuring framework specified by the Reserve Bank of India.
13.4.3 If allotment of instruments and dispatch of certificates is not completed within fifteen
days from the date of such resolution, a fresh consent of the shareholders shall be obtained
and the relevant date referred to in explanation (a) in paragraph 13.1.1.1 above will relate to
the new resolution.)
13.5 (Other Requirements)
13.5.1
(a) In case of every issue of shares/ warrants/ FCDs/ PCDs/ or other financial
instruments having conversion option, the statutory auditors of the issuer company
shall certify that the issue of said instruments is being made in accordance with the
requirements contained in these guidelines.
(b) Copies of the auditors certificate shall also be laid before the meeting of the
shareholders convened to consider the proposed issue.
(c) In case of preferential allotment of shares to promoters, their relatives, associates
and related entities, for consideration other than cash, valuation of the assets in
consideration for which the shares are proposed to be issued shall be done by an
independent qualified valuer and the valuation report shall be submitted to the
exchanges on which shares of the issuer company are listed. Explanation: For the
purpose of this clause the word valuer shall have the same meaning as assigned to
the term under clause (r) of sub-regulation (1) of Regulation 2 of the SEBI (Issue of
Sweat Equity) Regulations, 2002.)
13.5A The details of all monies utilised out of the preferential issue proceeds shall be
disclosed under an appropriate head in the balance sheet of the company indicating the
purpose for which such monies have been utilised. The details of unutilised monies shall
also be disclosed under a separate head in the balance sheet of the company indicating the
form in which such unutilised monies have been invested.
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13.6 Preferential allotments to FIIs
13.6.1 Preferential allotments, if any to be made in case of Foreign Institutional Investors,
shall also be governed by the guidelines issued by the Government of India/ Board/ Reserve
Bank of India on the subject.
13.7 Non-Applicability of the guidelines
13.7.1 Clauses 13.1 to 13.5 shall not be applicable in the following cases:
(i) where the further shares are allotted in pursuance to the merger and
amalgamation scheme approved by the High court.
(ii)
(a) where further shares are allotted to a person / group of persons in
accordance with the provisions of rehabilitation packages approved by BIFR.
(b) In case, such persons are promoters or belong to promoter group as
defined in Explanation I and II 325(to clause 6.8.3.2) of Chapter VI of these
guidelines, the lock-in provisions shall continue to apply unless otherwise
stated in the BIFR order.
(iii) where further shares are allotted to All India public financial institutions in
accordance with the provision of the loan agreements signed prior to August 4, 1994.
13.7.2 Clauses 13.1 and 13.3 shall not be applicable to shares allotted to any
financial institution within the meaning of sub-clauses (ia) and (ii) of clause (h) of
section 2 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993
(51 of 1993).