INDEX

Sr. No Topic Page No.

Part A
1 Securities Contracts (Regulations) Act, 1956 2-11
2 Securities and Exchange Board of India Act, 1992 12-26
3 Depositories Act, 1996 27-37
4 An Overview of SEBI (Issue of Capital and Disclosure 38-63
Requirements) Regulations, 2018
5 An Overview of SEBI (Listing Obligations and Disclosure 64-88
Requirements) Regulations, 2015
6 An Overview of SEBI (Substantial Acquisition of Shares and 89-112
Takeovers) regulations, 2011
7 SEBI (Buy-Back of Securities) Regulations, 1998 113-125
8 SEBI (Delisting of Equity Shares) Regulations, 2009 126-139
9 SEBI (Share Based Employee Benefits) Regulations, 2014 – An 140-153
Overview
10 SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview 154-159
11 SEBI (Prohibition of Insider Trading) Regulations, 2015 160-176
12 Mutual Funds 177-195
13 Collective Investment Schemes 196-202
14 SEBI (Ombudsman) Regulations, 2003 203-223
Part B
15 Structure of Capital Market 224-271
16 Securities Market Intermediaries 272-292
Practical Questions 393-300
Sums 301-304
Yeshas Academy Securities Law & Capital Market

Chapter 1
Securities Contracts (Regulation) Act, 1956

Definition
Section 2 of this Act contains definitions of various terms used in the Act. Some of the
important definitions are given below:
Securities
Securities include
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or body corporate.
(ii) derivative.
(iii) units or any other instrument issued by any collective investment scheme to the
Investors in such schemes.
(iv) security receipt
(v) units or any other such instrument issued to the investors under any mutual fund
scheme.
(vi) any certificate or instrument (by whatever name called)issued to an investor by any
issuer being a special purpose distinct entity which possess any debt or receivable,
including mortgage debt
(vii) government securities.
(viii) such other instruments as may be declared by the Central Government to be
securities and,
(ix) rights or interests in securities.
Spot delivery contract
Spot delivery contract means a contract which provides for
(i) actual delivery of securities and the payment of a price therefore either on the same
day as the date of the contract or on the next day, the actual period taken for the
dispatch of the securities or the remittance of money therefore 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;
(ii) 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.
Past Paper Question
Write notes on the following:
Spot delivery contract (4 marks) (Dec 2014)

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Corporatisation
“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.
Demutualisation
“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.
Stock Exchange
Stock Exchange means:-
(i) any body of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under Sections 4A and 4B, or
(ii) a body corporate incorporated under the Companies Act, 2013 whether under a
scheme of corporatization or otherwise,
for the purpose of assisting, regulating or controlling the business of buying, selling or
dealing in securities.
Recognised Stock Exchange
Recognised Stock Exchange means a stock exchange which is for the time being recognised
by the Central Government.
Government security
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

Recognition of Stock Exchanges

Section 3 lays down that any stock exchange, desirous of being recognized for the purposes
of this Act may make an application in the prescribed manner to the Central Government.
Every application shall contain such particulars as may be prescribed, and shall be
accompanied by a copy of the bye-laws of the stock exchange for the regulation and
control of contracts and also a copy of the rules relating in general to the constitution of
the stock exchange and in particular to
(a) the governing body of such stock exchange, its constitution and powers of
management and the manner in which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock exchange of various classes of members, the
qualifications, for membership, and the exclusion, suspension, expulsion and re-

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admission of members there from or there into;

(d) the procedure for the registration of partnerships as members of the stock exchange
in cases where the rules provide for such membership; and the nomination and
appointment of authorized representatives and clerks.

Grant of Recognition to Stock Exchanges

Section 4 lays down that if the Central Government is satisfied (powers are exercisable by
SEBI also) after making such inquiry as may be necessary in this behalf and after obtaining
such further information, if any, as it may require;
(a) that the rules and bye-laws of a stock exchange applying for registration are in
conformity with such conditions as may be prescribed with a view to ensure fair
dealing and to protect investors;
(b) that the stock exchange is willing to comply with any other conditions (including
conditions as to the number of members) which the Central Government, after
consultation with the governing body of the stock exchange and having regard to
the area served by the stock exchange and its standing and the nature of the
securities dealt with by it, may impose for the purpose of carrying out the objects of
this Act; and
(c) that it would be in the interest of the trade and also in the public interest to grant
recognition to the stock exchange;
It may grant recognition to the stock exchange subject to the conditions imposed upon it as
aforesaid and in such form as may be prescribed.

Withdrawal of Recognition
Section 5 lays down that if the Central Government is of opinion that the recognition
granted to a stock exchange should in the interest of the trade or in the public interest, be
withdrawn, the Central Government may serve on the governing body of the stock
exchange a written notice that the Central Government is considering the withdrawal of
the recognition for the reasons stated in the notice and after giving an opportunity to the
governing body to be heard in the matter, the Central Government may withdraw, by
notification in the Official Gazette, the recognition granted to the stock exchange;
However, the withdrawal shall not affect the validity of any contract entered into or made
before the date of the notification, and the Central Government may, after consultation
with the stock exchange, make such provision as it deems fit in the notification of
withdrawal or in any subsequent notification similarly published for the due performance
of any contracts outstanding on that date.

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Power of Central Government

To Call for Periodical Returns
Every such stock exchange and every member thereof shall maintain and preserve for not
exceeding 5 years such books of accounts, and other documents as the Central
Government, may prescribe
Every stock exchange shall furnish to the Central Government and to SEBI a copy of its
annual report which shall contain such particulars as may be prescribed by Central
Government/SEBI.
To direct Rules or Make Rules
Section 8 deals with the power of Central Government to make rules or direct rules to be
made in respect of recognised stock exchange. Where after consultation with the
governing bodies of stock exchanges the Central Government by order in writing direct the
recognised stock exchanges to make any rules or to amend any rules already made. Such
rules shall be amended within 2 months from the date of the order.
To Supersede Companies of Stock Exchanges or Suspend Business Thereof
Where the Central Government is of opinion that the governing body of any recognised
stock exchange should be superseded, then, the Central Government may serve on the
governing body a written notice that the Central Government is considering the super
session of the governing body for the reasons specified in the notice and after giving an
opportunity to the governing body to be heard it may, by notification in the Official
Gazette, declare the governing body of such stock exchange to be superseded,
On the publication of a notification in the Official Gazette, the following consequences
shall ensure, namely–
(a) the members of the governing body which has been superseded shall, as from the
date of the notification of super session, cease to hold office as such members;
(b) the person or persons appointed may exercise and perform all the powers and duties
of the governing body which has been superseded;
(c) all such property of the recognised stock exchange shall vest in such person or
persons.
To Suspend Business of Recognised Stock Exchange
If in the opinion of the Central Government, an emergency has arisen, for the purpose of
meeting the emergency, the Central Government by notification in the Official Gazette,
direct a recognised stock exchange to suspend such of its business for such period not
exceeding 7 days and subject to such conditions as may be specified in the notification,
To Issue Directions
Section 12A provides that if, after making an inquiry, SEBI 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

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(c) to secure the proper management of any such stock exchange or clearing
corporation it may issue such directions as it may be considered necessary
To Prohibit Contracts in Certain Cases
If the Central Government is of opinion that it is necessary to prevent undesirable
speculation in specified securities in any State or area, it may, by notification in the
Official Gazette, declare that no person in the State or area specified in the notification
shall, enter into any contract for the sale or purchase of any security specified in the
notification.
Power to Grant Immunity
(Refer to SEBI Act, 1992)

Power of Recognised Stock Exchange

To make Rules Restricting Voting Rights Etc.
Section 7A of the Act stipulates that a recognised stock exchange may 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 placed
before the stock Exchange at any meeting;
(b) the regulation of voting rights in respect of any matter placed before the stock
exchange at any meeting so that each member may be entitled to have one vote
only, 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 to
attend and vote at a meeting of the stock exchange; and
(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).
To Make Bye-Laws
Any recognised stock exchange may, subject to the previous approval of SEBI, make bye-
laws for the regulation and control of contracts.

Past Paper Question

Comment on the following:
The recognised stock exchange has powers to make rules for restricting voting
rights. (4 marks) (June 2016)

Clearing Corporation
Role of clearing corporation
Clearing Corporation is responsible:-
 for clearing and settlement of all trades executed on Stock Exchange and deposit

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and collateral management and risk management functions;

 to bring and sustain confidence in clearing and settlement of securities;
 to promote and maintain, short and consistent settlement cycles;
 to provide counter-party risk guarantee, and
 to operate a tight risk containment system
Section 8A(1) provides that a recognised stock exchange may, with the prior approval of
SEBI, transfer the duties and functions of a clearing house to a clearing corporation, being
a company incorporated under the Companies Act, 2013, 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.

Delisting of Securities
Section 21A provides that a recognised stock exchange may delist the securities, after
recording the reasons therefor, from any recognised stock exchange on any of the ground
or grounds as may be prescribed under this Act.
The securities of a company shall not be delisted unless the company concerned has been
given a reasonable opportunity of being heard.
A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal against the decision of the recognised stock exchange delisting the
securities within 15 days from the date of the decision of the recognized stock exchange
delisting the securities
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 1 month.
A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal (SAT) against the decision of the recognised stock exchange as per the
procedure laid down under the Securities Contracts (Regulation) (Appeal to Securities
Appellate Tribunal) Rules, 2000.
Question:-
The shares of Runfast Ltd. were listed in Delhi Stock Exchange. The stock exchange delisted
the shares of the company. The aggrieved company approaches you as a Company
Secretary in Practice to know the remedy available to the company. Give your suggestions
to the company keeping in view the provisions of the Securities Contracts (Regulation) Act,
1956.
Answer:-
Section 21 A of Securities Contracts (Regulation) Act, 1956 contains the provision relating
to delisting of the securities. As per this section:-

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1. A recognized stock exchange may delist the securities after recording reasons
therefore from any recognized stock exchange on any ground or grounds as may
be prescribed under this act.
2. The securities of the company shall not be delisted unless the company concerned
has been given a reasonable opportunity of being heard.
3. A listed company may file an appeal before the Securities Appellate Tribunal (SAT)
against the decision of the recognized stock exchange delisting the securities within
15 days from the date of the decision of recognized stock exchange delisting of
securities.
4. Securities Appellate Tribunal (SAT) may, if it is satisfied that the company was
prevented by the sufficient cause from filing the appeal within the said period,
allow it to be filed within a further period of not exceeding one month.
Therefore first thing it will be important to know the ground of delisting and whether or
not the company was given an opportunity of being heard. So if there is a good ground to
make an appeal. Runfast may make an appeal to days or the extended period not
exceeding one month after showing sufficient cause of not filing within 15 days.

Right of Appeal to SAT Against Refusal to List Securities of Public Companies by Stock
Exchanges
Where a recognised stock exchange, acting in pursuance of any power given to it by its
bye-laws, refuses to list the securities of any company, the company shall be entitled to be
furnished with reasons for such refusal, and may, –
 within 15 days from the date on which the reasons for such refusal are furnished to
it, or
 where the stock exchange has omitted or failed to dispose of, within the time
specified in sub-section (1A) of section 40 of the Companies Act, 2013, within 15 days
from the date of expiry of the specified time or within such further period, not
exceeding one month, as the Securities Appellate Tribunal may, on sufficient cause
being shown, allow appeal and thereupon the Securities Appellate Tribunal may,
after giving the stock exchange, an opportunity of being heard, vary or set aside
the decision of the stock exchange;
Every appeal under sub-section (1) shall be in such form and be accompanied by such fee
as may be prescribed. The Securities Appellate Tribunal shall send a copy of every order
made by it to SEBI and parties to the appeal.
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

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Past Paper Question

ST Ltd. applied for listing of instruments in recognized stock exchange. However,
permission was refused by the stock exchange. Can a company appeal to SAT
against such refusal? (5 marks) (Dec 2019)

Rights of Investors
Entitlement of the Investors to Dividend declared by the Company (sec 27)
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 the
company in respect thereof for any year, notwithstanding that the said security has
already been transferred by him for consideration, unless the transferee who claims the
dividend from the transferor has lodged the security and all other documents relating to
the transfer which may be required by the company with the company for being registered
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 –
(i) in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the dividend;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of
the transferee, by the actual period taken for the replacement thereof; and
(iii) in case of delay in the lodging of any security and other documents relating to the
transfer due to causes connected with the post, by the actual period of the delay
Right to Receive Income from Collective Investment Scheme (sec 27A) and Right to receive
Income from Mutual Fund (sec 27B) are mutatis mutandis to sec 27

Continuous Listing Requirement

Rule 19A (1) stipulates that every listed company other than public sector company shall
maintain public shareholding of at least 25%. However, any listed company which has
public shareholding below 25%, shall increase its public shareholding to at least twenty
five per cent, within a period of four years from the date of commencement of amendment
to the said rules in 2014, in the manner specified by SEBI.
Sub-rule (2) provides that where the public shareholding in a listed company falls below
25 % at any time, such company shall bring the public shareholding to 25% within a
maximum period of 12 months from the date of such fall in the manner specified by SEBI.
Where the public shareholding in a listed company falls below 25% in consequence to
SCRR Amendment Rules, 2015, such company shall increase its shareholding to atleast
25%, in the manner specified by SEBI within a period of three years, as the case may be,
from the date of notification.

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Methods for achieving minimum public shareholding

1 Issuance of shares to public through prospectus
2 Offer for sale of shares held by the promoters to public through prospectus
3 Sale of the shares by promoters through the secondary market
4 Right Issue to public shareholders, with promoter/promoter group shareholders
forgoing their entitlement to equity shares
5 Bonus Issue to public shareholders, with promoter/promoter group shareholders
forgoing their entitlement to equity shares
6 Allotment of eligible securities through QIP in terms of Chapter VIII of SEBI (ICDR)
Regulation, 2018

Past Paper Question

What are the provisions for continuous listing requirement under Securities
Contracts (Regulation) Rules, 1957? List any six methods for achieving minimum
public shareholding by a listed company. (4 marks) (Dec 2018)

Delisting of Securities
Rule 21 deals with delisting of Securities. A recognized stock exchange may, without
prejudice to any other action that may be taken under the Act or under any other law for
the time being in force, delist any securities listed thereon on any of the following grounds
in accordance with the regulations made by SEBI, namely:—
(1)
(a) the company has incurred losses during the preceding three consecutive years and it
has negative networth;
(b) trading in the securities of the company has remained suspended for a period of
more than six months;
(c) the securities of the company have remained infrequently traded during the
preceding three years;
(d) the company or any of its promoters or any of its director has been convicted for
failure to comply with any of the provisions of the Act or SEBI Act, 1992 or the
Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the
case may be and awarded a penalty of not less than rupees one crore or
imprisonment of not less than three years;
(e) the addresses of the company or any of its promoter or any of its directors, are not
known or false addresses have been furnished or the company has changed its
registered office in contravention of the provisions of the Companies Act, 2013, or;
(f) shareholding of the company held by the public has come below the minimum level
applicable to the company as per the listing agreement under the Act and the

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company has failed to raise public holding to the required level within the time
specified by the recognized stock exchange.
However, no securities shall be delisted unless the company concerned has been given a
reasonable opportunity of being heard.
(2) If the securities is delisted under clause (1),
(a) the company, promoter and director of the company shall be jointly and severally
liable to purchase the outstanding securities from those holders who wish to sell
them at a fair price determined in accordance with regulations made by SEBI, under
the Act; and
(b) the said securities shall be delisted from all recognized stock exchanges.
(3) A recognized stock exchange may, on the request of the company, delist any securities
listed thereon in accordance with the regulations made under the Act by SEBI, subject to
the following conditions, namely :
(a) the securities of the company have been listed for a minimum period of three years
on the recognized stock exchange;
(b) the delisting of such securities has been approved by the two-third of public
shareholders; and
(c) the company, promoter and/or the director of the company purchase the
outstanding securities from those holders who wish to sell them at a price
determined in accordance with regulations made by SEBI under the Act.
However, the condition at (c) may be dispensed with by SEBI if the securities remain listed
at least on the National Stock Exchange of India Limited or the Bombay Stock Exchange
Limited.

Past Paper Question

Critically comment on the following statements :
"A company cannot get itself delisted without giving sufficient opportunity to
shareholders to exit” (5 marks) (June 2014)
‘A stock exchange on its own can delist any security thereon’. Explain how
Recognized Stock Exchange delists any securities listed thereon under Securities
Contracts (Regulations) Rules, 1957. (4 marks) (June 2019)

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Chapter 2
Securities and Exchange Board of India Act, 1992

Objective Of SEBI
 To protect the interests of investors in securities
 To promote the development of, and
 To regulate, the securities market and for matters connected therewith or incidental
thereto.

SEBI Act, 1992

In terms of section 3 of the Act, SEBI is a body corporate having perpetual succession and a
common seal with power to acquire, hold and dispose of property, both movable and
immovable and to contract, sue and be sued in its own name. SEBI has its Head Office at
Mumbai and has powers to establish its offices at other places in India.

Composition Of SEBI
Section 4(1) of SEBI Act provides that the SEBI Board shall consist of the following
members, namely:
(a) a Chairman;
(b) two members from amongst the officials of the Ministry of the Central Government
dealing with Finance and administration of the Companies Act, 2013;
(c) one member from amongst the officials of the Reserve Bank;
(d) five other members of whom at least three shall be the whole time members, to be
appointed by the Central Government.
The Chairman and the other members shall be persons of ability, integrity and standing
who have shown capacity in dealing with problems relating to securities market or have
special knowledge or experience of law, finance, economics, accountancy or
administration

Powers And Functions Of SEBI

Section 11 of the Act lays down that it shall be the duty of SEBI to protect the interests of
the investors in securities and to promote the development of, and to regulate the
securities markets
Measures:- [Sec 11(2)]
(a) regulating the business in stock exchanges and any other securities markets;
(b) registering and regulating the working of stock brokers, sub-brokers, share transfer

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agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant

bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in any manner;
(c) registering and regulating the working of the depositories, participants, custodians
of securities, foreign institutional investors, credit rating agencies and such other
intermediaries as SEBI may, by notification, specify in this behalf;
(d) registering and regulating the working of venture capital funds and collective
investment schemes, including mutual funds;
(e) promoting and regulating self-regulatory organisations;
(f) prohibiting fraudulent and unfair trade practices relating to securities markets;
(g) promoting investors’ education and training of intermediaries of securities markets;
(h) prohibiting insider trading in securities;
(i) calling for information from, undertaking inspection, conducting inquiries and audits
of the persons associated with the securities market
(j) levying fees or other charges for carrying out the purposes of this section;
(k) performing such other functions as may be prescribed.
As per Section 11(4), the SEBI, may, by an order or for reasons to be recorded in writing, in
the interest of investors or securities market take any of the following measures either
pending investigation or inquiry or on completion of such investigation or enquiry namely:
(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) impound and retain the proceeds or securities in respect of any transaction which is
under investigation.
(e) attach, for a period not exceeding ninety days, bank accounts or other property of
any intermediary or any person associated with the securities market in any manner
involved in violation of any of the provisions of this Act, or the rules or the
regulations made thereunder;
However, the SEBI shall, within ninety days of the said attachment, obtain confirmation of
the said attachment from the Special Court, established under section 26A, having
jurisdiction and on such confirmation, such attachment shall continue during the pendency
of the aforesaid proceedings and on conclusion of the said proceedings, the provisions of
section 28A shall apply;
(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.

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Past Paper Question

“SEBI may take any of the measures either pending investigation or inquiry or
on completion of such investigation.” Enumerate such measures in the light of
the provisions of the SEBI Act. (4 marks) (Dec 2020)

Investigations (Section 11C)

(1) Grounds for Investigation
Section 11C of the Act provides that where the SEBI has reasonable ground to believe
that:
 the transactions in securities are being dealt with in a manner detrimental to
the investors or the securities market; or
 any intermediary or any person associated with the securities market has
violated any of the provisions of this Act or the rules or the regulations made or
directions issued by SEBI thereunder;
it may, at any time by order in writing, direct any person specified in the order to
investigate the affairs of such intermediary or persons associated with the securities
market and to report thereon to the SEBI.
(2) Duty of officers to produce Accounts and records
It is the duty of every manager, managing director, officer and other employee of the
company and every intermediary or every person associated with the securities market
to preserve and to produce to the Investigating Authority, all the books, registers,
other documents and record of, , which are in their custody or power.
(3) Powers of Investigating Authority
The Investigating Authority may 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 as it may consider necessary
The Investigating Authority may keep in its custody any books, registers, other
documents and record produced for 6 months and thereafter shall return the same to
any intermediary or any person associated with securities market
(4) To examine on oath
Any person, directed to make an investigation may, examine on oath, any manager,
managing director, officer and other employee of any intermediary or any person
associated with securities market
If any person fails without reasonable cause or refuses:
 to produce to the Investigating Authority or any person authorised by it in this
behalf any book, register, other document and record which is his duty to
produce; or

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 to appear before the Investigating Authority personally when required to do so

or to answer any question which is put to him by the Investigating Authority;
he shall be punishable with imprisonment for a term which may extend to 1 year, or with
fine, which may extend to 1 crore rupees, or with both, and also with a further fine which
may extend to 5 lakh rupees for every day after the first during which the failure or
refusal continues.

Prohibition Of Manipulative And Deceptive Devices And Insider Trading

Section 12A of the Act provides that no person shall directly or indirectly:
(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 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.

Past Paper Question

Comment on the following statements :
The Securities and Exchange Board of India Act, 1992 provides for prohibition of
manipulative and deceptive devices, and insider trading. (5 marks) (Dec 2015)

Penalties For Failures

Section Offence Penalties
15A Fails to:-
Any Person who is  to furnish any document, return shall not be less than 1 lakh
associated with or report to SEBI rupees but which may extend
securities market  to file any return to 1 lakh rupees for each day

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 to maintain books of accounts during which such failure

or records continues subject to a
15B maximum of 1 crore rupees
An intermediary Fails to enter into an agreement
with his client
15C
Any Person who is Fails to redress the grievances of
associated with Investor within the time specified
securities market by SEBI
15D Fails to:-
CIS and Mutual  obtain a certificate of
funds registration from SEBI and
carries on any collective
investment scheme, including
mutual funds
 comply with the terms and
conditions of certificate of
registration
 make an application for listing
of its schemes
 dispatch unit certificates of any
scheme
 refund the application monies
paid by the investors within the
period specified
 invest money in the manner or
within the period specified in the
regulations
15E
AMC Fails to comply with any of the
regulation providing for restrictions
on the activities of such company
15EA

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Alternative Fails to comply with the regulations shall not be less than 1 lakh
investment funds, made by the SEBI in respect of rupees but which may extend
infrastructure alternative investment funds, to 1 lakh rupees for each day
investment trusts infrastructure investment trusts during which such failure
and real estate and real estate investment trusts or continues subject to a
investment trusts fails to comply with the directions maximum of 1 crore rupees or
issued by the SEBI three times the amount of
gains made out of such
failure, whichever is higher.
15EB
investment adviser fails to comply with the regulations shall not be less than 1 lakh
or a research made by the SEBI or directions rupees but which may extend
analyst issued by the SEBI, such investment to 1 lakh rupees for each day
adviser or research analyst during which such failure
continues subject to a
maximum of 1 crore rupees.
15F Fails to:-
Stock Brokers issue contract notes shall not be less than 1 lakh
rupees but which may extend
1 crore rupees for which the
contract note was required to
be issued by that broker;
deliver any security or fails to make shall not be less than 1 lakh
payment of the amount due to the rupees but which may extend
investor within the period specified to 1 lakh rupees for each day
during which such failure
continues subject to a
maximum of 1 crore rupees
charges excess amount of the shall not be less than 1 lakh
brokerage specified in the rupees but which may extend
regulations to 5 times the amount of
brokerage charged in excess
of the specified brokerage,
charged in excess whichever
is higher
15G
Insider Trading Insider Trading 7
Any Person  either on his own behalf or on Min – 10 Lacs

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behalf of any other person, deals May extend to

in securities of a body corporate Rs 25 crore or
listed on any stock exchange on 3 times the amount of profits
the basis of any unpublished
price sensitive information; Or Whichever is higher
 communicates any unpublished
price sensitive information to
any person, with or without his
request for such information
except as required in the
ordinary course of business or
under any law; or
 counsels, or procures for any
other person to deal in any
securities of any body corporate
on the basis of unpublished price
sensitive information
15H Fails to:-
Any Person  disclose the aggregate of his
shareholding make a public
announcement to acquire shares
make a public offer by sending
letter of offer to the
shareholders
 make payment of consideration
to the shareholders
15HA
Any Person Indulges in fraudulent and unfair Min – 5 Lacs
trade practices May extend to
Rs 25 crore or
3 times the amount of profits

Whichever is higher

15HAA
Any person  knowingly alters, destroys, shall not be less than 1 lakh
mutilates, conceals, falsifies, or rupees but which may extend
makes a false entry in any to 10 crore rupees or 3 times

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information, record, document the amount of profits made

(including electronic records), out of such act, whichever is
which is required under this Act higher
or any rules or regulations made
thereunder, so as to impede,
obstruct, or influence the
investigation, inquiry, audit,
inspection or proper
administration of any matter
within the jurisdiction of the
SEBI.
 without being authorised to do
so, access or tries to access, or
denies of access or modifies
access parameters, to the
regulatory data in the database;
 without being authorised to do
so, downloads, extracts, copies,
or reproduces in any form the
regulatory data maintained in
the system database;
 knowingly introduces any
computer virus or other
computer contaminant into the
system database and brings out
a trading halt;
 without authorisation disrupts
the functioning of system
database;
 knowingly damages, destroys,
deletes, alters, diminishes in
value or utility, or affects by any
means, the regulatory data in
the system database; or
 knowingly provides any
assistance to or causes any other
person to do any of the acts
specified in clauses (a) to (f)

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15HB
Any Person fails to comply with any provision Min- 1 lakh
of this Act, the rules or regulations Max- 1 crore
for which no separate penalty has
been provided

Past Paper Question

Critically comment on the following statements :
A 'stock broker' or a 'sub-broker' shall not be liable for prosecution under the
SEBI Act, 1992 for any violation. (4 marks) (Dec 2014)

Adjudications
Factors to be taken into account by the adjudicating officer
Section 15J lays down that while adjudging the amount of penalty, the adjudicating officer
shall have due regard to the following factors viz.,
(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.
Section 15JA provides that all sums realised by way of penalties under this Act shall be
credited to the consolidated fund of India.

Securities Appellate Tribunal (SAT)

Composition Of SAT
According to Section 15 L, the Securities Appellate Tribunal shall consist of a Presiding
Officer and such number of Judicial Members and Technical Members as the Central
Government may determine, by notification, to exercise the powers and discharge the
functions conferred on the Securities Appellate Tribunal under this Act or any other law for
the time being in force.

Notes:-

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Qualification for Appointment as Presiding Officer or Member

Qualification

Judicial Technical
Presiding Officer
Member Member

is, or has (ii) is a person of proven

is, or has been, a Judge been, a Judge (i) is, or has been, a ability, integrity and
of the Supreme Court of High Court Secretary or an standing having special
or a Chief Justice of a for at least Additional Secretary knowledge and
High Court or a Judge five years, in in the Ministry or professional experience,
of High Court for at the case of a Department of the of not less than fifteen
least seven years, in
Judicial Central Government years, in financial sector
the case of the or any equivalent post
Member; or including securities
Presiding Officer; and in the Central market or pension funds
Government or a or commodity derivatives
State Government; or or insurance.

The Presiding Officer and Judicial Members of the Securities Appellate Tribunal shall be
appointed by the Central Government in consultation with the Chief Justice of India or his
nominee
The Technical Members of the Securities Appellate Tribunal shall be appointed by the
Central Government on the recommendation of a Search-cum-Selection Committee
consisting of the following, namely:––
(a) Presiding Officer, Securities Appellate Tribunal – Chairperson;
(b) Secretary, Department of Economic Affairs – Member;
(c) Secretary, Department of Financial Services – Member; and
(d) Secretary, Legislative Department or Secretary, Department of Legal Affairs –
Member.
The Secretary, Department of Economic Affairs shall be the Convener of the Search-cum-
Selection Committee.
The Search-cum-Selection Committee shall determine its procedure for recommending the
names of persons to be appointed under sub-section (1).
Validity of appointment
As per Section 15MC, no appointment of the Presiding Officer, a Judicial Member or a
Technical Member of the Securities Appellate Tribunal shall be invalid merely by reason of
any vacancy or any defect in the constitution of the Search cum- Selection Committee.
A member or part time member of the SEBI or the Insurance Regulatory and Development
Authority or the Pension Fund Regulatory and Development Authority, or any person at
senior management level equivalent to the Executive Director in the SEBI or in such

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Authorities, shall not be appointed as Presiding Officer or Member of the Securities

Appellate Tribunal, during his service or tenure as such with the SEBI or with such
Authorities, as the case may be, or within two years from the date on which he ceases to
hold office as such in the SEBI or in such Authorities.
Tenure of Officer of Presiding Officer and Other Members
Section 15N lays down that the Presiding Officer or every Judicial or Technical Member of
the Securities Appellate Tribunal shall hold office for a term of five years from the date on
which he enters upon his office, and shall be eligible for reappointment for another term
of maximum five years; However, no Presiding Officer or the Judicial or Technical Member
shall hold office after he has attained the age of 70 years.

Past Paper Question

Hon’ble Justice A, a retired Chief Justice of a High Court, attained the age 62
years on December 31, 2017. The Central Government had appointed him as the
Presiding Officer of the Securities Appellate Tribunal (SAT) with effect from
January 1, 2018. You are required to state with reference to SEBI Act, 1992.
(a) the term for which he may be appointed as Presiding Officer of the SAT
(b) Whether he can be re-appointed as such and remains as Presiding Officer
of the Securities Appellate Tribunal? (4 marks) (Dec 2018)

Powers Of Securities Appellate Tribunal

The Securities Appellate Tribunals shall have, for the purposes of discharging their
functions under this Act, the same powers as are vested in a civil court under the Code of
Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:
(i) summoning and enforcing the attendance of any person and examining him on
oath;
(ii) requiring the discovery and production of documents;
(iii) receiving evidence on affidavits;
(iv) issuing commissions for the examination of witnesses or documents;
(v) reviewing its decisions;
(vi) dismissing an application for default or deciding it ex parte;
(vii) setting aside any order of dismissal of any application for default or any order
passed by it ex parte;
(viii) any other matter which may be prescribed

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Past Paper Question

Write notes on the following:
Powers of Securities Appellate Tribunal (SAT) (4 marks) (Dec 2013)
"Securities Appellate Tribunal (SAT) shall have the same power as are vested in
a civil court, for the purpose of discharging its functions." In the light of this
statement, state the powers vested in SAT as a civil court. (5 marks) (Dec 2014)

Points to remember
What is the time period for filling an appeal with SAT and Supreme Court?
 In case of filing appeal with SAT: Within 45 days from the date of order of the copy
made by SEBI or adjudicating officer.
 In case of filing appeal with Supreme Court: Within 60 days from the date of
communication of the decision or order of SAT

Requirements for Appeal to the Tribunal

Section 15T and 15U deal with the appeal procedure and power of Securities Appellate
Tribunals.
1. Section 15T lays down that any person aggrieved by:
 an order of the SEBI or
 by an order made by an adjudicating officer under this Act or
 by an order of the IRDA or
 the PFRDA
may prefer an appeal to a SAT having jurisdiction in the matter.
2. Every appeal shall be filed within a period of 45 days from the date on which a copy of
the order made by SEBI or the Adjudicating Officer, as the case may be, is received by
him and it shall be in such form and be accompanied by prescribed fee.
However, the Securities Appellate Tribunal may entertain an appeal after the expiry of
the said period of 45 days if it is satisfied that there was sufficient cause for not filing
it within that period.
3. On receipt of an appeal, the Securities Appellate Tribunal may, after giving the parties
to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit,
confirming, modifying or setting aside the order appealed against.
4. The Securities Appellate Tribunal shall send a copy of every order made by it to the
SEBI or the IRDA or the PFRDA, as the case may be, the parties to the appeal and to the
concerned Adjudicating Officer.
5. The appeal filed before the Securities Appellate Tribunal shall be dealt with by it
within 6 months from the date of receipt of the appeal.

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Past Paper Question

What do you mean by Securities Appellate Tribunal (SAT)? What is its
composition? As a Company Secretary, advise the aggrieved party about the
appeal procedure and powers of SAT. (6 marks) (June 2016)
Fortune Ltd. is a registered stock broker of the Bombay Stock Exchange. SEBI
levied a penalty of 2 crore on the company for violation of the provisions of
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the
Securities Market) Regulations, 2003. Fortune Ltd. is contemplating to
challenge the SEBI's order before the Securities Appellate Tribunal (SAT) in an
appeal. Explain the procedure for making an appeal before the SAT.
(8 marks) (Dec 2016)
Lalji aggrieved by an order passed by SEBI is desirous of making an appeal
before SAT. He requested you as a consultant to prepare a note to know the
appeal procedure (4 marks) (Dec 2019)

Powers Of Central Government

To Supercede SEBI
Section 17 lays down that if at any time the Central Government is of opinion that:
(a) on account of grave emergency, SEBI is unable to discharge the functions and duties
imposed on it by or under the provisions of this Act; or
(b) SEBI has persistently made default in complying with any direction issued by the
Central Government under this Act or in the discharge of the functions and duties
imposed on it by or under the provisions of this Act and as a result of such default
the financial position of SEBI or the administration of SEBI has deteriorated; or
(c) circumstances exist which render it necessary in the public interest so to do, it may,
by notification, supersede SEBI for such period, not exceeding six months, as may be
specified in the notification.
Upon the publication of the notification, it will have the following effects:
(a) all the members shall, as from the date of supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this
Act, be exercised or discharged by or on behalf of SEBI, shall until SEBI is
reconstituted under sub-section (3), be exercised and discharged by such person or
persons as the Central Government may direct; and
(c) all property owned or controlled by SEBI shall, until SEBI is reconstituted, vest in the
Central Government.
On the expiration of the period of supersession specified in the notification, the Central
Government may reconstitute SEBI by a fresh appointment and in such case any person or

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persons who vacated their offices because of supersession shall not be deemed
disqualified for appointment.
Power to grant Immunity
As per Section 24B of the Act, the Central Government may on the recommendations by
SEBI, if satisfied that any person who is alleged to have violated any of the provisions of
this Act or the rules or regulations made thereunder has made a full and true disclosures in
respect of alleged violations, grant to such persons, subject to conditions as it may think
fit, immunity from prosecution for any offence under this Act with respect to the alleged
violation.
However 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. It has also been provided that
recommendations of SEBI shall not be binding upon the Central Government. However, an
immunity granted to a person can be withdrawn by the Central Government, if it is
satisfied 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.

Past Paper Question

Explain the powers of the Central Government to grant immunity under the
Depositories Act, 1996. (6 marks) (June 2014)
*Note:- Same for SEBI Act,1992 and SCRA, 1956

Recovery of Amounts
Section 28A(1) provides that if a person
Fails to pay the Fails to comply with Fails to comply with a Fails to pay any
penalty imposed any direction of the direction of disgorgement fees due to the
under this Act SEBI for refund of order issued under section SEBI
monies or 11B or
The Recovery Officer may draw up under his signature a statement in the specified form
specifying the amount due from the person (such statement being hereafter in this Chapter
referred to as certificate).
SEBI for refund of monies or Fails to comply with a direction of disgorgement order issued
under section 11B or The Recovery Officer shall proceed to recover amount specified in the
certificate by one or more of the following modes, namely:-
The Recovery Officer shall proceed to recover amount specified in the certificate by one or
more of the following modes, namely:-
(a) attachment and sale of the person’s movable property;

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(b) attachment of the person’s bank accounts;

(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable
properties, and for this purpose, the provisions of section 220 to 227, 228A, 229,
232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-
tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as
may be, apply with necessary modifications as if the said provisions and the rules
made thereunder were the provisions of this Act and referred to the amount due
under this Act instead of to income-tax under the Income-tax Act, 1961.

Past Paper Question

Under what circumstances and how the recovery officer will proceed to recover
the amount of penalty etc. imposed by adjudicating officer under the SEBI Act,
1992? (4 marks) (Aug 2021)

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Chapter 3
Depositories Act, 1996
Introduction
According to Section 2(e) of the Depositories Act, 1996.
“Depository means a company formed and registered under
the Companies Act, 2013 and which has been granted a
certificate of registration under Section 12(1A) of the SEBI Act,
1992”.
A depository cannot act as a depository unless it obtains a
certificate of commencement of business from SEBI.
There are two Depositories functioning in India, namely the
National Securities Depository Limited (NSDL) and the Central
Depository Services (India) Limited (CDSL).

Benefits of Depository System

Elimination of bad In the depository environment, once holdings of an investor
deliveries are dematerialised, the question of bad delivery does not arise
i.e. they cannot be held "under objection".
Elimination of all risks Dealing in physical securities have associated security risks of
associated with physical theft of stocks, mutilation of certificates, loss of certificates
certificates during movements through and from the registrars thus
exposing the investor to the cost of obtaining duplicate
certificates and advertisements, etc. This problem does not
arise in the depository environment.
Immediate transfer and In the depository environment, once the securities are credited
registration of securities to the investors account on pay out, he becomes the legal
owner of the securities. There is no further need to send it to
the company's registrar for registration.
Faster disbursement of Depository system provides for direct credit of non cash
non cash corporate corporate entitlements to an investors account, thereby
benefits like rights, ensuring faster disbursement and avoiding risk of loss of
bonus, etc certificates in transit.
Reduction in brokerage Brokers provide this benefit to investors as dealing in
by many brokers for dematerialized securities reduces their back office cost of
trading in dematerialized handling paper and also eliminates the risk of being the
securities introducing broker.

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Elimination of problems In case of change of address or transmission of demat shares,

related to change of investors are saved from undergoing the entire change
address of investor, procedure with each company or registrar. Investors have to
transmission, etc only inform their DP with all relevant documents and the
required changes are effected in the database of all the
companies, where the investor is a registered holder of
securities.

Past Paper Question

Critically comment on the following statements :
"Depository system is a boon both to capital market and investors."
(5 marks) (June 2014)

Depository System - An Overview

The Depository System functions very much like the banking
system. A bank holds funds in accounts whereas a Depository
holds securities in accounts for its clients. A Bank transfers
funds between accounts whereas a Depository transfers
securities between accounts. In both systems, the transfer of
funds or securities happens without the actual handling of
funds or securities. Both the Banks and the Depository are
accountable for the safe keeping of funds and securities
respectively.

Past Paper Question

Comment on the following statements :
"The depository system functions very much like the banking system."
(4 marks) (Dec 2014)

Models Of Depository
Immobilisation – Where physical share certificates are kept in vaults
with the depository for safe custody. All subsequent transactions in
these securities take place in book entry form. The actual owner has
the right to withdraw his physical securities as and when desired.

Dematerialisation – No Physical scrip in existence, only electronic

records maintained by depository. This type of system is cost effective
and simple and has been adopted in India.

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Past Paper Question

Comment on the following statements :
Dematerialisation and Immobilisation are distinct activities.
(4 marks) (June 2015)
Write notes on the following :
Immobilisation and Dematerialisation (4 marks) (Dec 2015)

Depository Participant
Just as a brokers act an agent of the investor at the Stock Exchange; a Depository
Participant (DP) is the representative (agent) of the investor in the depository system
providing the link between the Company and investor through the Depository. The
Depository Participant maintains securities account balances and intimate the status of
holding to the account holder from time to time.
According to SEBI guidelines, Financial Institutions like banks,
custodians, stockbrokers etc. can become participants in the
depository. A DP is one with whom an investor needs to open an
account to deal in shares in electronic form. While the Depository
can be compared to a Bank, DP is like a branch of that bank with
which an account can be opened.
The main characteristics of a depository participant are as under:
 Acts as an Agent of Depository
 Customer interface of Depository
 Functions like Securities Bank
 Account opening
 Facilitates dematerialisation
 Instant transfer on pay-out
 Credits to investor in IPO, rights, bonus
 Settles trades in electronic segment

Past Paper Question

Comment on the following statements :
Depository participant provides link between the company and investors.
(4 marks) (June 2016)

Dematerialisation

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Investor opens account with DP

Fills Dematerialisation Request Form (DRF) for registered shares

Investor lodges DRF and certificates with DP

DP intimates the Depository

Depository intimates Registrar/Issuer

DP sends certificates and DRF to Registrar/Issuer

Registrar / Issuer confirms demat to Depository

Depository credits investor a/c

Rematerialisation
Client submits Rematerialisation Request Form (RRF) to DP

DP intimates Depository

DP sends RRF to the Registar/Issuer

Registrar / Issuer prints certificates and sends to Investor

Registrar / Issuer confirms remat to Depository

Investor’s account with DP debited

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 –
 The Depositories Act, 1996
 The SEBI (Depositories and Participants) Regulations, 2018
 Bye-laws of Depository
 Business Rules of Depository.
Apart from the above, Depositories are also governed by certain provisions of:
 The Companies Act, 2013
 The Indian Stamp Act, 1899

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 Securities and Exchange Board of India Act, 1992

 Securities Contracts (Regulation) Act, 1956
 Benami Transaction (Prohibition) Act, 1988
 Income Tax Act, 1961
 Bankers’ Books Evidence Act, 1891

The Depositories Act, 1996

Objectives
The depositories legislation as per the Statement of Objects and Reasons appended to the
Depositories Act, 1996 aims at providing for:
 A legal basis for establishment of depositories to conduct the task of maintenance of
ownership records of securities and effect changes in ownership records through
book entry;
 Dematerilisation of securities in the depositories mode as well as giving option to an
investor to choose between holding securities in physical mode and holding
securities in a dematerialized form in a depository;
 Making the securities fungible;
 Making the shares, debentures and any interest thereon of a public limited company
freely transferable;
 Exempting all transfers of shares within a depository from stamp duty.
Eligibility Condition For Depository Services
Any company or other institution to be eligible to provide depository services must:
 be formed and registered as a company under the Companies Act, 2013.
 be registered with SEBI as a depository under SEBI Act, 1992.
 has framed bye-laws with the previous approval of SEBI.
 has one or more participants to render depository services on its behalf.
 has adequate systems and safeguards to prevent manipulation of records and
transactions to the satisfaction of SEBI.
 complies with Depositories Act, 1996 and SEBI (Depositories and Participants)
Regulations, 2018.
Point to be Remember:-
Is dematerialization of securities compulsory?
According to the Depositories Act, 1996, an investor has the option to hold securities either
in physical or electronic form. Part of holding can be in physical form and part in demat
form. However, SEBI has notified that settlement of market trades in listed securities
should take place only in the demat mode.

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Past Paper Question

“The holding of securities in dematerialise form is not mandatory”. Explain the
relevant provisions with reference to the Depositories Act. (4 marks)(Dec 2020)
Rights Of Depositories And Beneficial Owner
A depository should be deemed to be the registered owner for the purposes of effecting
transfer of ownership of security on behalf of a beneficial owner. The depository as a
registered owner should not have any voting rights or any other rights in respect of
securities held by it. The beneficial owner is entitled to all the rights and benefits and be
subjected to all the liabilities in respect of his securities held by a depository.
Register Of Beneficial Owner
Every depository is required to maintain a register and an index of beneficial owners in the
manner provided in the Companies Act, 2013.
Depositories To Indemnify Loss In Certain Cases
Any loss caused to the beneficial owner due to the negligence of the depository or the
participant, would be indemnified by the depository to such beneficial owner. Where the
loss due to the negligence of the participant is indemnified by the depository, the
depository has the right to recover the same from such participant.
Membership Rights In Respect Of Securities Held By A Depository
The depository as a registered owner shall not have any voting rights or any other rights in
respect of securities held by it on behalf of the beneficial owners. The beneficial owner
shall be entitled to all the rights and benefits (including the right to vote) and be subjected
to all the liabilities in respect of securities held by a depository.

Fungibility
Section 9 states that securities in depositories shall be
in fungible form.
The Act envisages that all securities held in depository
shall be fungible i.e. all certificates of the same
security shall become interchangeable in the sense that
investor loses the right to obtain the exact certificate
he surrenders at the time of entry into depository. It is
like withdrawing money from the bank without
bothering about the distinctive numbers of the
currencies.

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Past Paper Question

Comment on the following:
All securities in the same class are identical and interchangeable.
(3 marks) (June 2015)
All securities in depositories shall be in fungible form. (4 marks) (June 2016)

Penalties For Failures

Sec Offence Penalties
19A Fails to:-
 to furnish any document, return or report to
SEBI
 to file any return
 to maintain books of accounts or records
19B Fails to enter into an agreement with his client
shall not be less than 1 lakh
19C Fails to redress the grievances of Investor within
rupees but which may extend
the time specified by SEBI
to 1 lakh rupees for each day
19D Fails to dematerialise or issue the certificate of
during which such failure
securities on opting out of a depository by the
continues subject to a
investors, within the time specified under this
maximum of 1 crore rupees’’
Act
19E Fails to comply with any of the regulation
providing for restrictions on the activities of such
company
19F Fails to comply with the directions issued by
SEBI
19FA Fails to conduct business in a fair manner. it shall be liable to penalty
which shall not be less than 5
crore rupees but which may
extend to 25 crore rupees or 3
times the amount of gains
made out of such failure,
whichever is higher.
19G Fails to comply with any provision of this Act, liable to a penalty which
the rules or regulations for which no separate shall not be less than 1 lakh
penalty has been provided rupees but which may extend
to 1 crore rupees’’

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Audit Under SEBI (Depositories and Participants) Regulations, 2018

Regulation 76 of SEBI (Depositories and Participants) Regulations,
2018 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
(Regulation 76)
its issued, listed, and the capital held by depositories in dematerialized
form.

Past Paper Question

Write notes on the following:
Reconciliation of share capital under Regulation 76 of the SEBI (Depositories and
Participants) Regulations, 2018 (4 marks) (June 2015)

Internal Audit Of Operations Of Depository Participants

Every Participant shall ensure that an internal audit in respect of the
operations of the Depository is conducted at intervals of not more
than three months by a qualified Chartered Accountant or a
Company Secretary holding a certificate of Practice and a copy of the
internal audit report shall be furnished to the Depository.

Checklist of Internal Audit of Operations of Depository Participants:

 Account opening
 Reporting to BOs
 Dematerialisation of Securities
 Rematerialisation of Securities

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 Market Trades
 Transmission
 Returns to Depository
 Grievance Redressal Mechanism
 Collateral Security
 Freezing of Account
 Closure of Account
 Pledge and Hypothecation
 Invocation of Pledge/Hypothecation by Pledgee
 Lending and Borrowing of Securities
 Records to be Maintained by DPs
 Disclosure and Publication of Information
 Code of Ethics for DPs
 Branch of Depository Participants

Concurrent Audit
The process of demat account opening, control and verification of Delivery Instruction Slips
(DIS) is subject to Concurrent Audit. Depository Participants have been advised to appoint
a firm of qualified Chartered Accountant(s) or Company Secretary(ies) holding a certificate
of practice for conducting the concurrent audit. However, the participants in case they so
desire, may entrust the concurrent audit to their Internal Auditors.
In respect of account opening, the auditor should verify all the documents including KYC
documents furnished by the Clients and verified by the officials of the Participants.
The scope of concurrent audit with respect to control and verification of DIS cover the areas
given below:
(I) Issuance of DIS
The procedure followed by the Participants with respect to:
(a) Issuance of DIS booklets including loose slips.
(b) Existence of controls on DIS issued to Clients including pre-stamping of Client ID and
unique preprinted serial numbers.
(c) Record maintenance for issuance of DIS booklets (including loose slips) in the back
office.
(II) Verification of DIS
The procedure followed by the Participants with respect to:
(a) Date and time stamping (including late stamping) on instruction slips.
(b) Blocking of used/reported lost/stolen instruction slips in back office system/
manual record.
(c) Two step verification for a transaction for more than Rs. 5 lakh.

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(d) Instructions received from dormant accounts.

The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS
issued and controls on DIS as mentioned above, during the day, by the next working day.
In case the audit could not be completed within the next working day due to large volume,
the auditor should ensure that the audit is completed within a week’s time.
The Concurrent Audit Report should be submitted to NSDL, on a quarterly basis, in a hard
copy form.

Performa of Delivery Instruction Slip (DIS)

Past Paper Question

Write notes on the following:
Concurrent audit of depository participants (4 marks) (Dec 2013)
Briefly explain the role of a Practising Company Secretary in concurrent audit of
depository participants. (5 marks) (June 2015)
Briefly explain the procedures followed by the Depository Participants with
regard to issuance of Delivery Instruction Slips (DIS) and verification of the
same. (4 marks) (Aug 2021)

Role Of Company Secretary

Right to Legal In case of any decision of SEBI, the aggrieved entity/ company
Representation (the appellant) may either appear in person or authorise one or
(Section 23C of the Act) more chartered accountants or company secretaries (PCS) or cost

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accountants or legal practitioners or any of its officers to present

his or its case before the Securities Appellate Tribunal (SAT).
Internal Audit of The 2 (two) Depository services providers in India, viz., National
Depository Securities Depository Ltd. (NSDL) and Central Depository Services
Participants (India) Limited (CDSL) have allowed Company Secretaries in
Whole-time Practice to undertake internal audit of the operations
of Depository Participants (DPs).
Reconciliation of Company Secretary is authorised to issue quarterly certificate
Share Capital with regard to reconciliation of the total issued capital, listed
Audit capital and capital held by depositories in dematerialized form,
details of changes in share capital during the quarter, and in
principle approval obtained by the issuer from all the stock
exchanges where it is listed in respect of such further issued
capital under SEBI (Depositories and Participants) Regulations,
2018.[Regulation 76 of SEBI (Depositories and Participants)
Regulations, 2018]
Concurrent Audit Practising Company Secretary is authorized to carry out
of Depository concurrent audit of Depository Participants which covers audit of
Participants the process of demat account opening, control and verification of
Delivery Instruction Slips (DIS).

SEBI Circular
SEBI, vide its circular dated April 23, 2010, issued Guidelines for execution of PoA by the
client favouring Stock Broker / Stock Broker and Depository Participant. The guidelines
stands modified which, inter alia, provides that PoA is optional and should not be insisted
upon by the stock broker / stock broker depository participant for opening of the client
account. Further, Stock Exchanges and Depositories shall ensure that PoA is not used by
TM/CM/DPs for any purpose other than as specified

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Chapter 4
An Overview of SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018

Types of Issue

Initial
Offer
Further
Public Offer
Types of Issues
Preferential
Rights Issue of
Allotment

Private

Types of Issue
 Initial public offer means an offer of specified securities by an unlisted issuer to the
public for subscription and includes an offer for sale of specified securities to the public
by any existing holder of such securities in an unlisted issuer. In order to qualify as an
Initial public offer, the offer of securities must be by an unlisted issuer company and
such an issue shall be made to the public and not to the existing shareholders of the
unlisted issuer company.
 Further public offer means an offer of specified securities by a listed issuer company to
the public for subscription. In other words, another issue to the public other than its
existing shareholders or to a select group of persons by the listed persons is referred to
as a Further Public offer.
 Rights Issue of Securities is an issue of specified securities by a company to its existing
shareholders as on a record date in a predetermined ratio.
 Private placement refers to an issue where an issuer makes an issue of securities to a
select group of persons not exceeding 200, and which is neither a rights issue nor a
public issue.
 Preferential allotment refers to an issue, where a listed issuer issues shares or
convertible securities, to a select group of persons in terms of provisions of Chapter V
of SEBI (ICDR) Regulations, 2018 it is called a preferential allotment. The issuer is
required to comply with various provisions which inter alia include pricing, disclosures
in the notice, lock in etc., in addition to the requirements specified in the Companies
Act.

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 Qualified Institutional Placement refers to an issue by a listed entity to only qualified

institutional buyers in accordance of Chapter VI of SEBI (ICDR) Regulations, 2018.

Eligibility Requirements to be complied with for IPO

Entities not eligible to make an Initial Public Offer [Regulation 5(1) & (2)]
(a) If the issuer, any of its promoters, promoter group, selling shareholders are debarred
from accessing the capital market by the SEBI.
(b) If any of the promoters or directors of the issuer is a promoter or a director of any
other company which is debarred from accessing the capital market by the SEBI.
(c) If the issuer or any of its promoters or directors is a willful defaulter.
(d) If any of the promoters or directors of the issuer is a fugitive offender.
Eligibility requirements for an Initial Public Offer (Regulation 6)
An issuer shall be eligible to make an IPO only if:
(a) the issuer has net tangible assets of atleast Rs. 3 crores on a restated and
consolidated basis, in each of the preceding three full years of (12 months each) of
which not more than 50% is held in monetary assets;
(b) the issuer has an average operating profit of at least Rs.15 crores, calculated on a
restated and consolidated basis, during the three preceding years with operating
profit in each of the three preceding years;
(c) the issuer has a networth of atleast Rs.1 crore in each of the preceding three full
years, calculated on a restated and consolidated basis.
(d) in case the issuer has changed its name within the last one year, atleast 50% of the
revenue calculated on a restated and consolidated basis, for the preceding one full
year has been earned by it from the activity indicated by the new name.
If an issuer has issued SR equity shares to its promoters/ founders, the said issuer shall be
allowed to do an initial public offer of only ordinary shares for listing on the Main Board
subject to compliance with the provisions of these regulations and these clauses –
(1) the issuer shall be intensive in the use of technology, information technology,
intellectual property, data analytics, bio-technology or nano-technology to provide
products, services or business platforms with substantial value addition.
(2) the SR shareholder shall not be part of the promoter group whose collective net
worth is more than rupees 500 crores:
Explanation: While determining the collective net worth, the investment of SR
shareholder in the shares of the issuer company shall not be considered
(3) The SR shares were issued only to the promoters/ founders who hold an executive
position in the issuer company;
(4) The issue of SR equity shares had been authorized by a special resolution passed at a
general meeting of the shareholders of the issuer, where the notice calling for such

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general meeting specifically provided for –

a. the size of issue of SR equity shares,
b. ratio of voting rights of SR equity shares vis-à-vis the ordinary shares,
c. rights as to differential dividends, if any
d. sunset provisions, which provide for a time frame for the validity of such SR
equity shares,
e. matters in respect of which the SR equity shares would have the same voting
right as that of the ordinary shares.
(5) The SR equity shares have been held for a period of atleast 6 months prior to the
filing of the red herring prospectus;
(6) The SR equity shares shall have voting rights in the ratio of a minimum of 2:1 upto a
maximum of 10:1 compared to ordinary shares and such ratio shall be in whole
numbers only;
(7) The SR equity shares shall have the same face value as the ordinary shares;
(8) The issuer shall only have one class of SR equity shares;
(9) The SR equity shares shall be equivalent to ordinary equity shares in all respects,
except for having superior voting rights.
The above eligibility conditions are explained by the following example:
Eligibility Condition No: 1
In case the issuer is proposing to file its draft offer document with SEBI in August 2018,
then the net tangible assets for the last 3 full years of 12 months each shall be atleast
Rs.3 crores and not more than 50% of the same shall be held in monetary assets. In the
following table, it is seen that the net tangible assets is more than Rs. 3 crores. Further
monetary assets constitute less than 50% of the net tangible assets in each of the three
previous financial years:
(Rs. in cr)
Year Ended March 31 2016 2017 2018
Net Tangible Assets 25.32 35.10 46.57
Monetary Assets 1.08 3.02 2.88
Monetary Assets as a 4.27% 8.61% 6.19%
percentage of Net (1.08x100)/25.32 (3.02x100)/35.10 (2.88x100)/4.57
Tangible Assets
Eligibility Condition No: 2
In case the issuer proposes to file its draft offer document with SEBI in August 2018, then the
average operating profit for three preceding years shall be atleast Rs 15 crores. Further, the
company shall have operating profit in each of the three years.
(Rs. In cr)

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Year Ended March 31 2016 2017 2018

Operating Profit 16.3 12.32 18.64
The average of the profits for the 3 preceding years is Rs.15.75 crores which is more than the
prescribed average of Rs.15 crores.
Eligibility Condition No: 3
In case the issuer proposes to file its draft offer document with SEBI in August 2018 then the
networth shall be atleast Rs. 1 crore in each of the last 3 financial years. In the following
table, it is seen that the company has a networth of Rs. 1 crore in each of the last three
financial years prior to the date of the filing of the draft offer document with SEBI.
(Rs. in cr)
Year Ending March 31 2016 2017 2018
Equity Share Capital 20.00 20.00 20.22
Share Application Money 0.00 0.00 1.65
Reserves & Surplus 5.90 14.30 27.42
Total 25.90 35.95 47.64
Less : Misc Expenses not written off 0.00 0.00 0.00
Less: Deferred Tax Assets 1.3 0.00 6.1
Networth 25.76 35.95 47.03
Since the all the above eligibility conditions are satisfied in the example and there is no
change in the name of the company, this company is eligible to make an Initial Public
Offering.
However, in case an issuer does not satisfy the eligibility conditions stipulated above, it
may make an Initial Public Offer through the book building process and further undertake
to allot atleast 75% of the net offer to the public to qualified institutional buyers and to
refund full subscription money if it fails to do so. [Regulation 6(2)]
General Conditions (Regulation 7)
An issuer making an initial public offer shall ensure that:
(a) It has made an application to one or more stock exchanges to seek an in-principle
approval for listing of its specified securities on such stock exchanges and has chosen
one of them as the designated stock exchange;
(b) it has entered into an agreement with a depository for dematerialisation of the
specified securities already issued and proposed to be issued;
(c) all its specified securities held by the promoters are in dematerialised form prior to
filing of the offer document;
(d) all its existing partly paid-up equity shares have either been fully paid-up or have
been forfeited;
(e) it has made firm arrangements of finance through verifiable means towards seventy

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five per cent of the stated means of finance for the specific project proposed to be
funded from issue proceeds, excluding the amount to be raised through the proposed
public issue.
Issue of Warrants (Regulation 13)
An issuer shall be eligible to issue warrants in an initial public offer (Regulation 13) and
further public offer (Regulation 111) subject to the following:
(a) the tenure of such warrants shall not exceed eighteen months from the date of their
allotment in the initial public offer;
(b) a specified security may have one or more warrants attached to it;
(c) the price or formula for determination of exercise price of the warrants shall be
determined upfront and disclosed in the offer document and at least 25% of the
consideration amount based on the exercise price shall also be received upfront;
(d) in case the warrant holder does not exercise the option to take equity shares against
any of the warrants held by the warrant holder, such consideration made in respect
of such warrants shall be forfeited by the issuer.

Eligibility Requirements to be complied with for FPO

Entities not eligible to make an Further Public Offer (Regulation 102)
----------------------------SAME AS IPO----------------------------------------
Eligibility requirements for an Further Public Offer (Regulation 103)
An issuer may make a FPO if it has changed its name within the last one year and atleast
50% of the revenue in the preceding one full year has been earned from the activity
suggested by the new name.
If an issuer does not satisfy the above mentioned conditions, it may make a FPO only, if,
the issue is made through the book-building process and the issuer undertakes to allot at
least 75% of the net offer, to qualified institutional buyers and to refund full subscription
money if it fails to make the said minimum allotment to qualified institutional buyers.
General Conditions (Regulation 104)
----------------------------SAME AS IPO----------------------------------------
Issue of Warrants (Regulation 13)
----------------------------SAME AS IPO----------------------------------------

Draft Offer Documents Offer Document RHP (Red Herring Prospectus)

“Draft Offer document” “Offer document” means “Red Herring Prospectus” is a
means the offer document Prospectus in case of a prospectus, which does not have
in draft stage. The draft public issue or offer for details of either price or number
offer documents are filed sale and Letter of Offer in of shares being offered, or the
with SEBI, atleast 30 days case of a right issue, which amount of issue. This means that

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prior to the filing of the is filed with Registrar of in case price is not disclosed, the
Offer Document with Companies (ROC) and number of shares and the upper
ROC/SEs. SEBI may Stock Exchanges. and lower price bands are
specifies changes, if any, An offer document covers disclosed. On the other hand, an
in the Draft Offer all the relevant issuer can state the issue size and
Document and the Issuer information to help an the number of shares are
or the Lead Merchant investor to make his/ her determined later. An RHP for an
banker shall carry out investment decision. FPO can be filed with the ROC
such changes in the draft without the price band and the
offer document before issuer, in such a case will notify
filing the Offer Document the floor price or a price band by
with ROC/SEs. The Draft way of an advertisement one day
Offer document is prior to the opening of the issue.
available on the SEBI In the case of book-built issues, it
website for public is a process of price discovery
comments for a period of and the price cannot be
21 days from the filing of determined until the bidding
the Draft Offer Document process is completed. Hence, such
with SEBI. details are not shown in the Red
Herring prospectus filed with ROC
in terms of the provisions of the
Companies Act. Only on
completion of the bidding
process, the details of the final
price are included in the offer
document. The offer document
filed thereafter with ROC is called
a prospectus.

Question
Aishwarya Ltd. proposes to issue 10,00,000 share warrants to its promoters. The share
warrants give an option to buy shares at a predetermined price. From the following share
price data, identify the price at which share warrants should be issued and the amount
payable by the promoters at the time of allotment:
(i) Closing price in the market on the relevant date : Rs 340
(ii) 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 : Rs
354

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(iii) 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 : Rs
350.
Answer
The given question is based upon preferential issue, which is regulated by SEBI (ICDR)
Regulations, 2018. The relevant answers are:
(i) Pricing of the issue: As per data given it is clear that the equity shares of the
Aishwarya Ltd. (i.e. the company) is listed for 26 weeks or more. So the price of
shares warrants on preferential issue shall not be less than the higher of the
following
(a) The average of weekly high and low of the closing prices of the related shares
quoted on the stock exchanges during the twenty six weeks preceding the
relevant date i.e Rs. 354.
(b) The average of the weekly high and low of the closing prices of the related
shares quoted on the stock exchange during the two weeks preceding the
relevant date i.e Rs. 350. So, the price of warrants shall not be less than Rs.
354 per share warrant.
(ii) Upfront Payment on Warrants: The promoters are liable to pay at least 25% of the
price of Share warrants i.e Rs. 88.50 (354x25%) per share warrant. This amount
should be paid on the date of allotment of share warrant.
Note: It is presumed that 6 months = 26 weeks

Past Paper Question

Govind Ltd. proposes to issue 20 lakh share warrants to its promoters. The
share warrant gives an option to buy shares at a predetermined price. The price
trend of the Company’s share in the stock market is given below :
 Closing price on the relevant date: Rs 250.
 The average weekly high and low of the closing price during the 26
weeks preceding to the relevant date: Rs 275.
 The average weekly high and low of the closing price during the 2 weeks
preceding to the relevant date : Rs 280.
You are required to:
(a) Identify the minimum price at which share warrants should be issued;
and
(b) Calculate the amount payable by the promoters at the time of allotment
of the warrants. (4 marks)(Dec 2020)

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Period of Subscription (Regulation 46 & 142)

 An IPO/FPO shall be kept open for at least three working days and not more than ten
working days.
 In case of a revision in the price band, the issuer shall extend the bidding (issue) period
disclosed in the red herring prospectus, for a minimum period of three working days.
 In case of force majeure, banking strike or similar circumstances, the issuer may, for
reasons to be recorded in writing, extend the bidding (issue) period disclosed in the red
herring prospectus (in case of a book built issue) or the issue period disclosed in the
prospectus (in case of a fixed price issue), for a minimum period of three working days.

Allotment Procedure and Basis of Allotment (Regulation 45 & 145)

 The issuer shall not make an allotment pursuant to a public issue if the number of
prospective allottees is less than 1000.
 The issuer shall not make any allotment in excess of the specified securities offered
through the offer document. except in case of oversubscription for the purpose of
rounding off to make allotment, in consultation with the designated stock exchange.
 The allotment of specified securities to applicants other than to the retail individual
investors and anchor investors shall be on a proportionate basis
 The allotment of specified securities to each retail individual investor shall not be less
than the minimum bid lot, subject to the availability of shares in retail individual
investor category, and the remaining available shares, if any, shall be allotted on a
proportionate basis.
 The authorised employees of the designated stock exchange, along with the lead
manager(s) and registrars to the issue, shall ensure that the basis of allotment is
finalised in a fair and proper manner in accordance with the procedure as specified in
Part A of Schedule XIV.
Illustration explaining the procedure of allotment
Example A
(1) Total number of specified securities on offer@ Rs. 600 per share: 1 crore specified
securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified
securities.
(3) The issue is over-all subscribed by 2.5 times, whereas the retail individual investors’
category is oversubscribed 4 times.
(4) The issuer has fixed the minimum application/bid size as 20 specified securities (falling
within the range of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of one lakh retail individual investors have applied in the issue, in varying number
of bid lots i.e. between 1 – 16 bid lots, based on the maximum application size of up to two

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lakh rupees.
(6) Out of the one lakh investors, there are five retail individual investors A, B, C, D and E who
have applied as follows: A has applied for 320 specified securities. B has applied for 220
specified securities. C has applied for 120 specified securities. D has applied for 60 specified
securities and E has applied for 20 specified securities.
(7) As the allotment to a retail individual investor cannot be less than the minimum bid lot,
subject to availability of shares, the remaining available shares, if any, shall be allotted
on a proportionate basis.

The actual entitlement shall be as follows:

1. A 320 20 specified securities (i.e. the minimum bid lot) + 38 specified
securities
[{35,00,000 - (1,00,000 * 20)} / {140,00,000 - (1,00,000 * 20)}] * 300
(i.e. 320-20)
2. B 220 20 specified securities (i.e. the minimum bid lot) + 25 specified securities
[{35,00,000 - (1,00,000 * 20) / {140,00,000 - (1,00,000 * 20)}] * 200
(i.e. 220-20)
3. C 120 20 specified securities (i.e. the minimum bid lot) + 13 specified securities
[{35,00,000 - (1,00,000 * 20)} / {(140,00,000 - (1,00,000 * 20)}] *
100 (i.e. 120-20)
4. D 60 20 specified securities (i.e. the minimum bid lot) + 5 specified
securities
[{(35,00,000 - 1,00,000 * 20)} / {(140,00,000 - (1,00,000 * 20)}] * 40
(i.e. 60-20)
5. E 20 20 specified securities (i.e. the minimum bid lot)
Example B
(1) Total number of specified securities on offer @ Rs. 600 per share: 1 crore specified
securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified
securities.
(3) The issue is overall subscribed by 7 times, whereas the retail individual investors’ category
is over- subscribed 9.37 times.
(4) The issuer has decided the minimum application/bid size as 20 specified securities (falling
within the range of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of two lakh retail individual investors have applied in the issue, in varying number
of bid lots i.e. between 1-16 bid lots, based on the maximum application size of up to two
lakh rupees.
(6) As per the allotment procedure, the allotment to retail individual investors shall not be

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less than the minimum bid lot, subject to availability of shares.

(7) Since the total number of shares on offer to the retail individual investors is 35,00,000 and
the minimum bid lot is 20 shares, the maximum number of investors who can be allotted
this minimum bid lot should be 1,75,000. In other words, 1,75,000 retail applicants shall
get the minimum bid lot and the remaining 25,000 retail applicants will not get any
allotment.

The details of the allotment shall be as follows:

No. of No. of No. of retail investors applying No. of investors who shall receive
lots shares at at each lot minimum bid-lot (to be selected
each lot by a lottery)
A B C E
1. 20 10,000 8,750=(1,75,000/2,00,000)*10,000
2. 40 10,000 8,750
3. 60 10,000 8,750
4. 80 10,000 8,750
5. 100 20,000 17,500
6. 120 20,000 17,500
7. 140 15,000 13,125
8. 160 20,000 17,500
9. 180 10,000 8,750
10. 200 15,000 13,125
11. 220 10,000 8,750
12. 240 10,000 8,750
13. 260 10,000 8,750
14. 280 5,000 4,375
15. 300 15,000 13,125
16. 320 10,000 8,750
Total 2,00,000 1,75,000

Notes:-

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Past Paper Question

Actnow Edge Limited, an unlisted company, is in the process of expanding its
business. For expansion, it needs funds of 200 crore. For raising 200 crore.
company has decided to bring an initial public offer through book building
mechanism. It has fixed a price band 500-600. Referring to provisions of SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018, advise the
company on the following matters:
(i) What should be minimum application value and minimum number of
equity shares in one application?
(ii) What will be minimum sum payable on application?
(iii) What should be minimum time period for which issue should remain open
for subscription? (5 marks) (Aug 2021)

Restriction on Further Capital Issues (Regulation 56 & 152)

The issuer shall not make any further issue of specified securities in any manner whether
by way of a public issue, rights issue, bonus issue, preferential issue, qualified institutions
placement or otherwise except pursuant to an employee stock option scheme
In case of a fast track issue, during the In case of other issues, during the period
period between between
the date of registering the red herring the date of filing the draft offer document
prospectus (in case of a book built issue) or with SEBI and
prospectus (in case of a fixed price issue)
with the ROC or filing the letter of offer
with the designated stock exchange
AND AND
the listing of the specified securities offered the listing of the specified securities offered
through the offer document or refund of through the offer document or refund of
application moneys. application moneys.

Unless full disclosures regarding the total number of specified securities and amount
proposed to be raised from such further issue are made in such draft offer document or
offer document

Differential Pricing (Regulation 30 & 128)

An issuer may offer specified securities at different prices, subject to the following:
(a) retail individual investors or retail individual shareholders or employees, may be

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offered specified securities at a price not lower than by more than 10% of the price at
which net offer is made to other categories of applicants, other than anchor
investors;
In other words, if the issue price to the other categories of applicants is Rs.100 the
price at which the securities can be offered to the reserved categories shall not be less
than Rs.90.
(b) in case of a book built issue, the price of the specified securities offered to an anchor
investor shall not be lower than the price offered to other applicants;
(c) In case of FPO, an additional condition is that in case of a composite issue, the price
of the specified securities offered in the public issue may be different from the price
offered in rights issue and justification for such price difference shall be given in the
offer document; and discount, if any shall be expressed in rupee terms in the offer
document

Past Paper Question

A company is planning for Initial Public Offer of its equity shares. It
has decided differential pricing for retail individual investors (RII) and
Q!Bs and Non-Institutional Investors (NIIs). The proposed price for RII is Rs
250 and for QIB and NII is Rs 300. Examine the validity of proposal of the
company in light of SEBI regulations. What will be your answer if company is
proposing Rs 280 to anchor investors in book building issue? Explain
(4 marks) (Dec 2019)

Price and Price Band (Regulation 29 & 127)

 The issuer may mention a price or price band in the draft prospectus (in case of a fixed
price issue) and floor price or price band in the red herring prospectus (in case of a
book built issue) and determine the price at a later date before registering the
prospectus with the Registrar of Companies.
 The cap on the price band, shall be less than or equal to 120% of the floor price.
 The floor price or the final price shall not be less than the face value of the specified
securities.
 Where the issuer opt not to make disclosure of the floor price or price band in the red
herring prospectus, the issuer shall be announce the floor price or price band at least
two working days before the opening of the bid (in case of an initial public offer) and
at least one working day before the opening of the bid (in case of a further public
offer), in all the newspapers in which the pre issue advertisement was released.
 The announcement referred above shall also contain all the relevant financial ratios
computed for both the upper and lower end of the price band and also a statement

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drawing attention of the investors to the section titled “basis of issue price” of the
offer document.
 The announcement and the relevant financial ratios shall be disclosed on the websites
of those stock exchanges where the securities are proposed to be listed and shall also
be pre-filled in the application forms available on the websites of the stock exchanges.

Face Value of Equity Shares

An eligible company shall be free to make public or rights issue of equity shares in any
denomination determined by it in accordance with the provisions of the Companies Act,
2013 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 Re. 1 per share.
b. if issue price is less than Rs.500 per share, the face value shall be Rs. 10/- per
share.
It may be noted that this condition is not applicable to IPO made by Government company,
statutory authority, or corporation or any special purpose vehicle set up by any of them
which is in infrastructure sector.
The disclosure about the face value of equity shares shall be made in the advertisement,
offer documents and in application forms in identical font size as that of issue price or price
band

Past Paper Question

Technopoly Ltd., an unlisted public company, having a paid up equity share
capital of Rs 3.00 crore consisting of 30,00,000 equity shares of Rs 10 each fully
paid up, proposes to reduce the denomination of equity shares to less than Rs
10 per share and make the initial public offer of equity shares at a premium.
Whether it is possible for the company to issue shares at a denomination of less
than Rs 10 ? Based on the above facts, you are required to state the minimum
issue price, with reference to the provisions of SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018. (5 marks) (Dec 2018)

Promoters’ Contribution
Unlisted Company In Not less than 20% of the post-issue capital
case of Public Issue
Listed Company To the extent of 20% of the proposed issue or 20% of the post-

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In case of Public Issue issue capital

Listed Company 20% of the proposed public issue or 20% of the post-issue capital
Composite Issue**
**Rights issue component of the composite issue shall be excluded while calculating the
post-issue capital.
However, in case the post-issue shareholding of the promoters is less than 20%,
alternative investment funds or foreign venture capital investors or scheduled commercial
banks or public financial institutions or insurance companies registered with IRDA may
contribute to meet the shortfall in minimum contribution as specified for the promoters,
subject to a maximum of 10% of the post-issue capital without being identified as
promoter(s)
Promoters’ Contribution to be Brought in Before Public Issue Opens
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.
Exemption from requirement of promoters’ Contribution

Securities ineligible for minimum promoters’ contribution [Regulation 114]

For the computation of minimum promoters’ contribution, the following specified securities
shall not be eligible:
(a) specified securities acquired during the preceding three years, if these are:
(i) acquired for consideration other than cash and revaluation of assets; or
(ii) resulting from a bonus issue by utilisation of revaluation reserves or unrealised
profits of the issuer; or
(b) specified securities acquired by promoters and AIFs/ FVCIs / scheduled commercial
banks/ PFIs/ insurance companies during the preceding 1 year at a price lower than the
price at which specified securities are being offered to public in the initial public offer
(c) specified securities pledged with any creditor other than those for borrowings by the
issuer or its subsidiaries
However, Clause (b) shall not apply:-

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 if the promoters and AIFs, as applicable pay to the issuer, the difference between the
price at which specified securities are offered in the initial public offer and the price
at which the specified securities had been acquired;
 if such specified securities are acquired in terms of the scheme under section 391 to
394 of the Companies Act, 1956 or sections 230-240 of the Companies Act, 2013, as
approved by a High Court or a tribunal or the Central Government
Lock-in-Requirement
(a) The promoters contribution including contribution made by AIFs or FVCIs or scheduled
commercial bankes or PFIs or insurance companies registered with IRDA, shall be
locked-in for a period of three years from the date of commencement of commercial
production or from the date of allotment in the IPO/FPO, whichever is later;
(b) promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for
a period of one year from the date of allotment in the initial public offer.
Further, the SR equity shares shall be under lock-in until conversion into equity shares
having voting rights same as that of ordinary shares or shall be locked-in for a period
specified above, whichever is later.
In case of FPO, the excess promoters’ contribution as provides in clause (b) shall not be
subject to lock-in.
“Date of commencement of commercial production” means the last date of the month in
which commercial production of the project in respect of which the funds raised are
proposed to be utilised as stated in the offer document, is expected to commence.

Past Paper Question

After the Initial Public Offer, the equity capital of promoters group holding in a
listed company is Rs. 140 crore. The post equity capital of the company is Rs
600 crore. The promoters group holding includes (acquired during previous
year) :
(i) Rs. 20 crore equity capital allotted in consideration of transfer of Technical
know-how by the promoters.
(ii) Rs. 10 crore equity capital pledged with bank.
Whether the promoters group is satisfying minimum promoters’ contribution
requirement as per SEBI regulation? Explain. (5 marks) (Dec 2019)

Fast Track Issue - FPO / Right Issue

Listed companies are now able to proceed with follow-on public offering/rights issue by
filing a copy of the Red Herring Prospectus (in case of book built issue)/Prospectus (in case
of fixed price issue) registered with the Registrar of Companies or the letter of offer filed
with Designated Stock Exchange, as the case may be, with SEBI and stock exchanges. Such

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companies are not required to file draft offer document with SEBI and stock exchanges.
Eligibility
An Issuer Company need not file the draft offer document with SEBI and obtain
observations from SEBI, or make a security Deposit with the Stock Exchanges if it satisfies
the following conditions:
(a) the equity shares of the issuer have been listed on any stock exchange for a period
of at least 3 years immediately preceding the reference date;
(b) entire shareholding of the promoter group of the issuer is held in dematerialised
form on the reference date;
(c) the average market capitalisation of public shareholding of the issuer is at least
1000 crore rupees in case of public issue and 250 crore rupees in case of rights issue;
(d) the annualised trading turnover of the equity shares of the issuer during six
calendar months immediately preceding the month of the reference date has been
at least 2% of the weighted average number of equity shares listed during such six
months’ period.
(e) annualized delivery-based trading turnover of the equity shares during six calendar
months immediately preceding the month of the reference date has been at least
10% of the annualised trading turnover of the equity shares during such six months‘
period
(f) The issuer has been in compliance with the equity listing agreement or SEBI Listing
Regulations, 2015, as applicable, for a period of at least 3 years immediately
preceding the reference date.
(g) the issuer has redressed at least 95% of the complaints received from the investors
till the end of the quarter immediately preceding the month of the reference date;
(h) no show-cause notices have been issued or prosecution proceedings have been
initiated by the Board and pending against the issuer or its promoters or whole-time
directors as on the reference date;
(i) issuer or promoter or promoter group or director of the issuer has not settled any
alleged violation of securities laws through the consent or settlement mechanism
with the Board during three years immediately preceding the reference date;
(j) equity shares of the issuer have not been suspended from trading as a disciplinary
measure during last three years immediately preceding the reference date;
(k) impact of audit qualifications, if any and where quantifiable, on the audited
accounts of the issuer in respect of those financial years for which such accounts are
disclosed in the letter of offer does not exceed five per cent of the net profit or loss
after tax of the issuer for the respective years.

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Exit Opportunity to Dissenting Shareholders

The provisions of this Chapter shall apply to an exit offer made by the promoters or
shareholders in control of an issuer to the dissenting shareholders in terms of section 13(8)
and section 27(2) of the Companies Act, 2013, in case of change in objects or variation in the
terms of contract referred to in the offer document.
However, the provisions of this Chapter shall not apply where there are neither identifiable
promoters nor shareholders in control of the listed issuer.
What is Dissenting Shareholders?
“Dissenting Shareholders” mean those shareholders who have voted against the resolution
for change in objects or variation in terms of a contract, referred to in the offer document
of the issuer;
Condition for Exit Offer
The promoters or shareholders in control shall make the exit offer in accordance with the
provisions of this Chapter, to the dissenting shareholders, in cases only if a public issue has
opened after April 1, 2014; if:
 the proposal for change in objects or variation in terms of a contract, referred to in
the offer document is dissented by at least 10 per cent of the shareholders who voted
in the general meeting; and
 the amount to be utilized for the objects for which the offer document was issued is
less than 75% of the amount raised.
Eligibility of Shareholders for Availing the Exit Offer
Only those dissenting shareholders of the issuer who are holding shares as on the relevant
date shall be eligible to avail the exit offer
Exit Offer Price
The ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:
a) the volume-weighted average price paid or payable for acquisitions, whether by the
promoters or shareholders having control or by any person acting in concert with them,
during the 52 weeks immediately preceding the relevant date;
b) the highest price paid or payable for any acquisition, whether by the promoters or
shareholders having control or by any person acting in concert with them, during the 26
weeks immediately preceding the relevant date;
c) the volume-weighted average market price of such shares for a period of 60 trading
days immediately preceding the relevant date as traded on the recognised stock exchange
where the maximum volume of trading in the shares of the issuer are recorded during such
period, provided such shares are frequently traded;
d) where the shares are not frequently traded, the price determined by the promoters or
shareholders having control and the merchant banker taking into account valuation

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parameters including book value, comparable trading multiples, and such other
parameters as are customary for valuation of shares of such issuers.
Manner of Providing Exit To Dissenting Shareholders
(1) The notice proposing the passing of special resolution for changing the objects of the issue
and varying the terms of contract, referred to in the prospectus shall also contain
information about the exit offer to the dissenting shareholders.
(2) In addition to the disclosures required under the provisions of section 102 of the Companies
Act, 2013 a statement to the effect that the promoters or the shareholders having control
shall provide an exit opportunity to the dissenting shareholders shall also be included in
the explanatory statement to the notice for passing special resolution.
(3) After passing of the special resolution, the issuer shall submit the voting results to the
recognised stock exchange(s), in terms of the provisions of regulation 44(3) of SEBI
(LODR) Regulations, 2015.
(4) The issuer shall also submit the list of dissenting shareholders, as certified by its
compliance officer, to the recognised stock exchange(s).
(5) The promoters or shareholders in control, shall appoint a merchant banker registered with
SEBI and finalize the exit offer price in accordance with these regulations.
(6) The issuer shall intimate the recognised stock exchange(s) about the exit offer to
dissenting shareholders and the price at which such offer is being given.
(7) The recognised stock exchange(s) shall immediately on receipt of such intimation
disseminate the same to public within one working day.
(8) To ensure security for performance of their obligations, the promoters or shareholders
having control, as applicable, shall create an escrow account which may be interest
bearing and deposit the aggregate consideration in the account at least two working days
prior to opening of the tendering period.
(9) The tendering period shall start not later than 7 working days from the passing of the
special resolution and shall remain open for 10 working days.
(10) The dissenting shareholders who have tendered their shares in acceptance of the exit offer
shall have the option to withdraw such acceptance till the date of closure of the tendering
period.
(11) Within a period of 2 working days from the payment of consideration, the issuer shall
furnish to the recognised stock exchange(s), disclosures giving details of aggregate
number of shares tendered, accepted, payment of consideration and the post-offer
shareholding pattern of the issuer and a report by the merchant banker that the payment
has been duly made to all the dissenting shareholders whose shares have been accepted in
the exit offer.

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Past Paper Question

Define “Dissenting shareholders”. What are the conditions for applicability of
Exit offers by dissenting shareholders according to SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018? (4 marks) (Dec 2018)
M/s Highspeed Ltd. manufacturing car components for leading car
manufacturer. Its public issue of Rs 500 crore was fully subscribed. The public
issue money ought to be utilized for setup an assembly-line for the existing
business. Out of Rs 500 crore, the company spent Rs 400 crore for assembly-
line. The management consultant, hired for Business Process re-engineering has
suggested investing balance amount to setup bike components manufacturing
unit. You, being company secretary of the company, advise on the opinion of
management consultant by referring provisions of SEBI Guidelines.
(4 marks) (June 2019)
Karuna Ltd. made an Initial Public Offer (IPO) of equity shares in March, 2020
and was granted listing on stock exchange. Soon, thereafter, the promoters of
the company started contemplating a change in the objects clause mentioned in
the offer document. To give effect to the same, the company convened an extra-
ordinary general meeting of shareholders in April 2020. Though the requisite
resolution was passed by the company, there were, nevertheless, the dissenting
shareholders too. The promoters decided to provide an exit opportunity to the
dissenting shareholders. In the light of the above answer the following
(i) Who are the dissenting shareholders?
(ii) What is the eligibility of shareholders for availing the exit offer?
(iii) Enumerate the conditions required to be complied with to give effect to
this recourse which was availed by the promoters.
(iv) How the exit offer price will be determined? (7 marks)(Aug 2021)

Preferential Issue
Definition
“Preferential issue” means an issue of specified securities by a listed issuer to any select
person or group of persons on a private placement basis in accordance with Chapter V of
these regulations and does not include an offer of specified securities made through
employee stock option scheme, employee stock purchase scheme or an issue of sweat
equity shares or depository receipts issued in a country outside India or foreign securities.
Conditions for Preferential Issue [Regulation 160]
A listed issuer making a preferential issue of specified securities shall ensure that:
(a) all equity shares allotted by way of preferential issue shall be made fully paid up at

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the time of the allotment;

(b) a special resolution has been passed by its shareholders;
(c) all equity shares held by the proposed allottees in the issuer are in dematerialised
form;
(d) the issuer is in compliance with the conditions for continuous listing of equity shares
(e) the issuer has obtained the Permanent Account Numbers of the proposed allottees,
except those allottees which may be exempt from specifying their Permanent
Account Number for transacting in the securities market by the SEBI

Qualified Institutions Placement

Definition
“Qualified institutions placement” means issue of eligible securities by a listed issuer to
qualified institutional buyers on a private placement basis and includes an offer for sale of
specified securities by the promoters and/ or promoter group on a private placement basis,
in terms of these regulations.
Conditions for Qualified institutions Placement [regulation 172]
A listed issuer may make a qualified institutions placement of eligible securities if it
satisfies the following conditions:
(1) a special resolution approving the qualified institutions placement has been passed
by its shareholders,
 No shareholders’ resolution will be required in case the qualified institutions
placement is through an offer for sale by promoters or promoter group for
compliance with minimum public shareholding requirements specified in the
Securities Contracts (Regulation) Rules, 1957;
 The allotment pursuant to the special resolution referred to in this clause (a) of
regulation 172 shall be completed within a period of 365 days from the date of
passing of the resolution.
(2) the equity shares of the same class, which are proposed to be allotted through
qualified institutions placement, have been listed on a stock exchange for a period of
at least 1 year prior to the date of issuance of notice to its shareholders for convening
the meeting to pass the special resolution
 Where an issuer, being a transferee company in a scheme of compromise,
arrangement and amalgamation sanctioned by a High Court under sections
391-394 of the Companies Act, 1956 or approved by a tribunal or the Central
Government under sections 230 to 234 of the Companies Act, 2013, whichever is
applicable makes qualified institutions placement, the period for which the
equity shares of the same class of the transferor company were listed on a
stock exchange having nation-wide trading terminals shall also be considered

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for the purpose of computation of the period of 1 year.

 This clause shall not be applicable to an issuer proposing to undertake
qualified institutional placement for complying with the minimum public
shareholding requirements specified in the Securities Contracts (Regulation)
1957.
(3) An issuer shall be eligible to make a qualified institutions placement if any of its
promoters or directors is not a fugitive economic offender.
(4) All eligible securities issued through a qualified institutions placement shall be listed
on the recognised stock exchange where the equity shares of the issuer are listed.
(5) The issuer shall not make any subsequent qualified institutions placement until the
expiry of two weeks from the date of the prior qualified institutions placement made
pursuant to one or more special resolutions.
Initial Public Offer of Indian Depository Receipts
The provisions of this Chapter shall apply to an issue of Indian Depository Receipts
(hereinafter referred to as “IDR”) made in terms of the Companies Act, 2013 and Companies
(Registration of Foreign Companies) Rules, 2014
Eligibility conditions (Regulation 183)
An Issuer shall be eligible to make an issue of IDRs only if:
(1) the issuing company is listed in its home country for at least 3 immediately preceding
years;
(2) the issuer is not prohibited to issue securities by any regulatory body;
(3) the issuer has a track record of compliance with the securities market regulations in
its home country;
(4) any of its promoters or directors is not a fugitive economic offender.
Explanation: For the purpose of this regulation, the term “home country” means the
country where the issuer is incorporated and listed.
The Issue shall be subject to the following conditions:
(1) issue size shall not be less than 50 crore rupees;
(2) at any given time, there shall be only one denomination of IDRs of the issuer.
(3) issuer shall ensure that the underlying equity shares against which IDRs are issued
have been or will be listed in its home country before listing of IDRs in stock
exchange(s).
(4) issuer shall ensure that the underlying shares of IDRs shall rank pari passu with the
existing shares of the same class.
The Issuer shall ensure that:
(1) it has made an application to one or more stock exchanges to seek an in-principle
approval for listing of the IDRs on such stock exchanges and has chosen one of them

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as the designated stock exchange,

(2) it has entered into an agreement with a depository for dematerialisation of the IDRs
proposed to be issued;
(3) it has made firm arrangements of finance through verifiable means towards 75% of
the stated means of finance for the project proposed to be funded from issue
proceeds, excluding the amount to be raised through the proposed issue of IDRs

Initial Public Offer by Small and Medium Enterprises

An issuer making an initial public offer of specified securities shall satisfy the conditions of
Chapter IX of SEBI (ICDR) Regulations, 2018 as on the date of filing of the draft offer
document with the SME exchange and also as on the date of filing the offer document with
the Registrar of Companies.
Entities not eligible to make an Initial Public Offer [regulation 228].
----------------------------SAME AS IPO----------------------------------------
Eligibility Requirements for an Initial Public Offer [regulation 229]
(1) An issuer shall be eligible to make an initial public offer only if its post-issue paid-up
capital is less than or equal to 10 crore rupees.
(2) An issuer, whose post issue face value capital is more than 10 crore rupees and upto
25 crore rupees, may also issue specified securities in accordance with provisions of
this Chapter.
(3) An issuer may make an initial public offer, if it satisfies track record and/or other
eligibility conditions of the SME Exchange(s) on which the specified securities are
proposed to be listed.
General conditions [regulation 230]
----------------------------SAME AS IPO----------------------------------------

Innovators Growth Platform

Definition
“Innovators growth platform” means the trading platform for listing and trading of
specified securities of issuers that comply with the eligibility criteria specified in regulation
283 of SEBI (ICDR), 2018
Eligibility [Regulation 283]
An issuer which is intensive in the use of technology, information technology, intellectual
property, data analytics, bio-technology or nano-technology to provide products services
or business platforms with substantial value addition shall be eligible for listing on the
innovators growth platform, provided that as on the date of filing of draft information
document or draft offer document with the SEBI, as the case may be, 25% of the pre-issue

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capital of the Issuer Company for at least a period of 2 years, should have been held by:
(1) Qualified Institutional Buyers;
(2) Family trust with net-worth of more than 500 crore rupees, as per the last audited
financial statements;
(3) Accredited Investors for the purpose of Innovators Growth Platform;
(4) The following regulated entities:
 Foreign Portfolio Investor
 An entity meeting all the following criteria:
 It is a pooled investment fund with minimum assets under management
of 150 million USD;
 It is registered with a financial sector regulator in the jurisdiction of which
it is a resident;
 It is resident of a country whose securities market regulator is a signatory
to the International Organization of Securities Commission’s Multilateral
Memorandum of Understanding or a signatory to Bilateral Memorandum
of Understanding with the Board;
 It is not resident in a country identified in the public statement of
Financial Action Task Force as:
(a) a jurisdiction having a strategic Anti-Money Laundering or
Combating the Financing of Terrorism deficiencies to which counter
measures apply;
or
(b) a jurisdiction that has not made sufficient progress in addressing the
deficiencies or has not committed to an action plan developed with
the Financial Action Task Force to address the deficiencies
Explanation:
 The following entities shall be eligible to be considered as accredited investors for the
purpose of innovators growth platform:
 any individual with total gross income of 50 lakhs rupees annually and who has
minimum liquid net worth of 5 crore rupees; or
 any body corporate with net worth of 25 crore rupees.
 Not more than ten per cent of the pre-issue capital may be held by Accredited Investors.
 For the purpose of accreditation: The persons /corporate bodies who wish to get
accreditation for the purpose of innovators growth platform, shall approach the stock
exchanges or depositories and follow the procedures prescribed by the SEBI and / or
such stock exchange or depository for the purpose of accreditation as an Accredited
Investor, from time to time.
An issuer shall be eligible for listing on the institutional trading platform if none of the

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promoters or directors of the issuer company is a fugitive economic offender.

Listing without a Public Issue [Regulation 284].
(1) An issuer seeking listing of its specified securities without making a public offer, shall
file a draft information document along with the necessary documents with the SEBI
in accordance with these regulations along with the fee
(2) The regulations relating to the following as stated under the Chapter of Initial Public
Offer on Main Board shall not be applicable:
 allotment;
 issue opening or closing;
 advertisements;
 underwriting;
 pricing;
 dispatch of issue material; and
 other such provisions related to offer of specified securities to the public.
(3) The issuer shall obtain an in-principle approval from the stock exchanges on which it
proposes to get its specified securities listed.
(4) The issuer shall list its specified securities on the recognised stock exchange(s) within
30 days from the date of issuance of observations by the SEBI;
(5) Provisions relating to minimum public shareholding shall not be applicable.
(6) The draft and final information document shall be approved by the board of
directors of the issuer and shall be signed by all directors, the Chief Executive Officer,
i.e., the Managing Director or Manager within the meaning of the Companies Act,
2013 and the Chief Financial Officer, i.e., the Whole-time Finance Director or any
other person heading the finance function
(7) The signatories shall also certify that all disclosures made in the information
document are true and correct.
(8) In case of mis-statement in the information document or any omission therein, any
person who has authorized the issue of information document shall be liable in
accordance with the provisions of the Act and regulations made thereunder.

Bonus Issue
Bonus issue of shares means additional shares issued by the Company to its existing
shareholders to reward for their royalty and is an opportunity to enhance the shareholders
wealth. The bonus shares are issued without any cost to the Company by capitalizing the
available reserves.
Conditions for a Bonus Issue [Regulation 293]
Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed
issuer shall be eligible to issue bonus shares to its members if:

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(1) it is authorised by its articles of association for issue of bonus shares, capitalisation
of reserves, etc.
If there is no such provision in the articles of association, the issuer shall pass a
resolution at its general body meeting making provisions in the articles of
associations for capitalisation of reserve;
(2) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(3) it has not defaulted in respect of the payment of statutory dues of the employees
such as contribution to provident fund, gratuity and bonus;
(4) any outstanding partly paid shares on the date of the allotment of the bonus shares,
are made fully paid-up;
(5) any of its promoters or directors is not a fugitive economic offender.
Restrictions on a bonus issue [Regulation 294]
(1) An issuer shall make a bonus issue of equity shares only if it has made reservation of
equity shares of the same class in favour of the holders of outstanding compulsorily
(2) A bonus issue shall be made only out of free reserves, securities premium account or
capital redemption reserve account and reserves created by revaluation of fixed
assets shall not be capitalised for this purpose.
(3) Bonus shares shall not be issued in lieu of dividends.
(4) If an issuer has issued SR equity shares to its promoters or founders, any bonus issue
on the SR equity shares shall carry the same ratio of voting rights compared to
ordinary shares and the SR equity shares issued in a bonus issue shall also be
converted to equity shares having voting rights same as that of ordinary equity
shares along with existing SR equity shares.
Completion of a Bonus Issue (Regulation 295)
(1) An issuer, announcing a bonus issue after approval by its board of directors and not
requiring shareholders’ approval for capitalisation of profits or reserves for making
the bonus issue, shall implement the bonus issue within 15 days from the date of
approval of the issue by its board of directors:
(2) Where the issuer is required to seek shareholders’ approval for capitalization of
profits or reserves for making the bonus issue, the bonus issue shall be implemented
within 2 months from the date of the meeting of its board of directors
(3) A bonus issue, once announced, shall not be withdrawn.

Question
Comment on the following statements:
Book-building process of determining price of a public issue is preferred in case of initial
public offer (IPO) while fixed price process is used for further public offer (FPO).

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Answer
This statement is incorrect
Fixed price process and book building process are the pricing mechanism in the issue of
shares through the public offer. Whenever an issuer at outset decides the issue price and
mention in the offer document is commit known as “Fixed price issue” On the other end if
the price of the issue is discovered on basis of the demand received from the prospective
investors it is called as book building issue.
A company whether issues shares through IPO or FPO has an option to choose the pricing
mechanism under Fixed price issue or book building issue subject to the condition specified
under SEBI (ICDR) Regulation, 2018.

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Chapter 5
An Overview of SEBI (Listing Obligation and Disclosure
Requirements) Regulations, 2015

Introduction
Listing of securities with stock exchange is a matter of great importance for companies
and investors, because this provides the liquidity to the securities in the market. Any
company offering its shares to the public for subscription is required to be listed on the
stock exchange and has to comply with the listing requirements prescribed by the Stock
Exchange. A company seeking listing of their securities on the Stock Exchange is required
to enter into a formal listing agreement with the Stock Exchange
The Listed entity shall comply with the following compliances under the Listing
Regulation
 One Time Compliances
 Quarterly Compliances
 Half yearly Compliances
 Yearly Compliances
 Event based Compliances

One Time Compliances

Regulation Particulars
6(1) A listed entity shall appoint a Company Secretary as the Compliance Officer
7(1) The listed entity shall appoint a share transfer agent or the listed entity
register with SEBI as Category II share transfer agent in case of share
transfer facility in house.
9 The listed entity shall have a policy for preservation of documents,
approved by its Board of Directors.

Constitution of Committees
 Audit Committee (Regulation 18)
 Nomination and Remuneration Committee (Regulation 19)
 Stakeholders Relationship Committee (Regulation 20)
 Risk Management Committee (Regulation 21)
 Vigil Mechanism (Regulation 22)

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Quarterly Compliances
Regulation Particulars Time Limit
13(3) The listed entity shall file with the recognised stock within 21 days from
Investor exchange, a statement giving the number of end of quarter
complaints investor complaints pending at the beginning of the
quarter, those received during the quarter, disposed
of during the quarter and those remaining
unresolved at the end of the quarter
27 The listed entity shall submit a quarterly within 15 days from
Quarterly compliance report on corporate governance in the close of the quarter
Compliance format as specified by SEBI from time to time to the
report recognized stock exchange(s)
31(1))(b) The listed entity shall submit to the stock within 21 days from
Shareholding exchange(s) a statement showing holding of the end of each
pattern securities and shareholding pattern separately for quarter
each class of securities, in the format specified by
SEBI from time to time

32(1) The listed entity shall submit to the stock exchangeQuarterly Basis to
Statement of a statement of deviation or variation (for public the stock exchange
deviation(s) issue, rights issue, preferential issue etc.) till such time the
or issue proceeds have
Variation(s) been fully utilized or
the purpose for
which these proceeds
were raised has been
achieved.
33(3) The listed entity shall submit quarterly and year- within 45 days of
Financial to-date financial results to the stock exchange end of each quarter,
results other than the last
quarter.

Notes:-

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Past Paper Question

You are the Company Secretary of Sunglow Ltd., which being listed on the Stock
Exchange after an IPO is made by the company. The Managing Director desires
to know about quarterly compliance requirements under listing agreement.
Prepare a list of quarterly compliances as per the listing regulations
(4 marks) (Dec 2018)

Half Yearly Compliances

Regulation Particulars Time Limit
7(3) The listed entity shall submit a compliance certificate Within 1 month of
Compliance to the exchange, duly signed by both the compliance end of each half of
Certificate officer of the listed entity and the authorised the financial year.
representative of the share transfer agent
23(9) The listed entity shall submit to the stock exchange, within thirty days
Related disclosures of related party on consolidated basis. from the date of
Party publication of its
disclosures standalone and
consolidated
financial results for
the half year
33(3) The listed entity shall also submit as part of its half-yearly basis
Statement standalone or consolidated financial results for the
of Assets half year a statement of assets and liabilities and a
and statement of cash flows by way of a note.
Liabilities
40(9) The listed entity shall ensure that the share transfer within 1 month of
Certificate agent and/or the in-house share transfer facility, as the end of each half
the case may be, produces a certificate from a of the financial year
Practising Company Secretary

Past Paper Question

An IPO is made by Rakesh Steel Ltd. which is a listed company on the stock
exchange. The Managing Director of the company directs the Company
Secretary to prepare details of half yearly compliance requirements as per
listing agreement. Explain the same. (4 marks) (Dec 2019)

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Yearly Compliances
Regulation Particulars Time Limit
14 The listed entity shall pay all such fees or within 30 days of the
Annual charges, as applicable, to the recognised stock end of financial year
Listing Fees exchange(s), in the manner specified by SEBI or the
recognised stock Exchange (s).
33(3) The listed entity shall submit annual audited within 60 days
Financial standalone financial results with audit report and from the end of the
results Statement on Impact of Audit Qualifications financial year
applicable only for audit report with modified opinion
to the stock exchange
34 The listed entity shall submit the annual report Not later than the
Annual along with the Notice of the Annual General Meeting day of
Report to the stock exchange. Amongst others, the annual commencement of
report shall also consist the following: dispatch to its
 audited financial statements i.e. balance shareholders.
sheets, profit and loss accounts etc., and
Statement on Impact of Audit Qualifications as
stipulated in regulation 33(3)(d), if applicable
 business responsibility report by the top one
thousand listed entities based on market
capitalization (calculated as on March 31 of
every financial year),
34(1)(b) In case any changes to the annual report, the within 48 hours after
Changes to revised copy along with the details of and the annual general
annual explanation for the changes shall be sent meeting
report
36 The listed entity shall submit the annual report to Twenty one days
Annual the holders of securities before AGM (in soft
reports to or hard copy)
securities
holders
Past Paper Question
You are the Company Secretary of Fortune India Limited, a listed company on
the leading Stock Exchange. Your Managing Directors desires a list of yearly
compliances under the listing regulations. Briefly list-out the yearly
compliances. (5 marks) (Aug 2021)

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Event Based Compliances

Regulation Particulars Time Limit
7(5) The listed entity shall intimate the appointment Within 7 days of
Share- of Share Transfer Agent, to the stock exchange(s) Agreement with RTA
transfer
agent
28(1) The listed entity shall obtain In-principle approval Prior to issuance of
In-principle from recognised stock exchange Security
approval
29(1)(a) read Prior Intimations of Board Meeting for financial At least 5 clear days
along with Result viz. quarterly, half yearly or annual, to in advance
proviso to 29 the stock exchange(s) (excluding the date
(2) of the intimation and
Intimations the date of the
meeting)
29(1) (b), Prior Intimations of Board Meeting for Buyback, At least 2 working
(c),(d), (e)Voluntary delisting , Fund raising by way of days in advance
& (f) read FPO, Rights Issue, ADR, GDR, QIP, FCCB, (excluding the date of
along with Preferential issue, debt issue or any other method, the intimation and
29 (2) Declaration/ recommendation of dividend, issue of the date of the
Intimations convertible securities carrying a right to subscribe meeting)
to equity shares or the passing over of dividend,
proposal for declaration of Bonus securities etc., to
the stock exchange(s)
29(3) Prior Intimations of Board Meeting for alteration in At least 11 clear
Intimations nature of Securities, alteration in the date on which working days in
interest on debentures/bonds/redemption amount, Advance
etc. shall be payable to the stock exchange(s)
30(6) Disclosure of all events, as specified in Part A of Not later than 24
Disclosure of Schedule III of listing regulations, to the stock hours
events exchange(s)
31(1)(a) The listed entity shall submit to the stock One day prior to
Holding of exchange(s) a statement showing holding of listing of Securities
Specified securities and shareholding pattern separately for
securities each class of securities prior to listing of securities
31(1)(c) The listed entity shall submit to the stock Within 10 days of any
Shareholding exchange(s) a statement showing holding of change in capital

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pattern securities and shareholding pattern separately for Structure exceeding

each class of securities in case of Capital 2% of the total paid-
Restructuring up share capital.
31 A (8) The listed entity shall disclose to the stock within 24 hours from
Disclosure of exchange the deemed material events i.e., receipt of the occurrence of the
material request for re-classification by the listed entity event
events from the promoter(s) seeking re-classification;
Minutes of the board meeting considering such
request which would include the views of the board
on the request; etc
37(1) The listed entity shall file draft Scheme of Prior approval before
Scheme of Arrangement to the stock exchange(s) filing with Court
arrangement
39(2) The listed entity shall issue certificates or receipts within thirty days
Issue of or advices, as applicable, of subdivision, split, from the date of such
Certificate consolidation, renewal, exchanges, endorsements, lodgment
issuance of duplicates thereof or issuance of new
certificates or receipts or advices, as applicable, in
cases of loss or old decrepit or worn out certificates
or receipts or advices, as applicable
39(3) Loss of share certificates and issue of the duplicate Within 2 days of
Information certificates getting information.
relating loss
of securities
40(3) The listed entity shall register transfers of its within 15 days from
Register the securities in the name of the transferee(s) and issue the date of such
transfer of certificates or receipts or advices, as applicable, of receipt of request for
securities transfers; or issue any valid objection or intimation transfer.
to the transferee or transferor, as the case may be
The listed entity shall proceed the transmission a) In case securities
request for securities held in dematerialization held in
mode and physical mode Dematerialisated
Mode - within 7 days
after receipt of the
documents
b) In case of Physical
Mode – within 21
days after receipt of

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the documents
42(2) The listed entity shall intimate the record date or
Record Date date of closure of transfer books to all the stock
/ Book exchange(s)
Closure a) In case of Right Issue At least 3 working
days in advance
(excluding the date of
intimation and record
date)
b) Other than Right Issue At least 7 clear
working days in
advance (excluding
the date of intimation
and record date)
43A Dividend Distribution Policy by the top five hundred To formulate a
Dividend listed entities based on market capitalization dividend distribution
distribution (calculated as on March 31 of every financial year) policy which shall be
policy disclosed in their
annual reports and
on their websites
44(3) The listed entity shall submit to the stock Within 48 Hours of
Voting exchange details regarding voting results by conclusion of its
results Shareholders General Meeting
45(3) The listed entity shall allowed to change its name Prior approval from
Change in Stock Exchange(s)
name
46 The listed entity shall maintain a functional Within 2 working
Maintenance website containing the basic information about the days from the date of
of website listed entity and update any change in the content change in content.
of its website.
Past Paper Question
Diamond Company Ltd. entered into listing agreement on 21st May, 2018 as per
SEBI (LODR) Regulations, 2015 with Bombay Stock Exchange (BSE). The
Company is planning to conduct a Board Meeting of its Directors on 28th June,
2018 for consideration of its Annual Financial Results. Whether the company
needs to give prior intimation to the BSE? Explain the matters for which prior
intimation of the Board Meeting shall be given to the BSE under SEBI

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Regulations. (4 marks)(Dec 2020)

Key Provisions Pertaining to Corporate Governance

Composition of Board of Directors
Board of Directors shall have optimum combination of executive and non-executive
directors with at least one-woman director. The Composition of board of directors of the
listed entity shall be as follows:
not less than 50% of the board of directors shall comprise of non-executive directors
Chairman Composition
In case chairperson is a non-executive at least 1/3 rd of the board of directors shall
Director comprise of independent directors
In case listed entity does not have a regular at least 1/2 of the board of directors shall
non- executive chairperson comprise of independent directors
In case at least 1/2 of the board of directors shall
 non-executive chairperson is a promoter be independent directors
of the listed entity or
 is related to any promoter or person
occupying management positions at the
level of board of director or
 at one level below the board of directors
 No listed entity shall appoint a person or continue the directorship of any person as a
non-executive director who has attained the age of 75 years unless a special
resolution is passed to that effect, in which case the explanatory statement
annexed to the notice for such motion shall indicate the justification for appointing
such a person.
 With effect from April 1, 2022, the top 500 listed entities shall ensure that the
Chairperson of the board of such listed entity shall –
 be a non-executive director;
 not be related to the Managing Director or the Chief Executive Officer as per the
definition of the term “relative” defined under the Companies Act, 2013.:
 The board of directors of the top 1000 listed entities (with effect from April 1, 2019)
and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not
less than six directors.
 Where the listed company has outstanding SR equity shares, atleast half of the board
of directors shall comprise of independent directors.
Explanation: The top 1000 and 2000 entities shall be determined on the basis of market
capitalisation as at the end of the immediate previous financial year.
Meetings of Board

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Board shall meet at least four times a year, with a maximum time gap of 120 days
between any two meetings.
Quorum of Board Meeting
The quorum for every meeting of the board of directors of the top 1000 listed entities with
effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020
shall be one-third of its total strength or three directors, whichever is higher, including at
least one independent director
Maximum number of directorships
A person shall not be a director in more than eight listed entities with effect from April 1,
2019 and in not more than seven listed entities with effect from April 1, 2020. However a
person shall not serve as an independent director in more than seven listed entities.
Any person who is serving as a whole time director / managing director in any listed entity
shall serve as an independent director in not more than three listed entities.

Past Paper Question

Suzan Limited is in top 1000 listed companies. Referring to provisions of SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015, the Board
of directors seeks your advice as a company secretary regarding the following
two matters:
(v) Quorum in Board meeting
(vi) Maximum number of directorship in a listed entity by a director.
(4 marks) (Aug 2021)

Key Provisions Pertaining to Corporate Governance

Audit committee Nomination & Stakeholders Risk
Remuneration Committee Management
Committee Committee
Composition  The committee  The committee  The committee  The majority of
shall comprise shall comprise shall comprise members shall
of atleast 3 of at least 3 of atleast 3 consist of
directors. directors ; directors members of the
 Two-thirds of  all directors of  The committee board of
the members of the committee shall have at directors
audit shall be non- least 1  in case of a
committee executive independent listed entity
shall be directors; director, having
independent  at least 50% of  in case of a outstanding SR

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directors and the directors listed entity equity shares,

 in case of a shall be having at least 2/3rd of
listed entity independent outstanding SR the Risk
having directors equity shares, Management
rd
outstanding SR  in case of a at least 2/3 Committee
equity shares, listed entity of the shall comprise
the audit having Stakeholders of independent
committee outstanding SR Relationship Directors
shall only equity shares, Committee
rd
comprise of 2/3 of the shall comprise
independent nomination and of independent
directors remuneration directors
 All members of committee shall
audit comprise of
committee independent
shall be directors
financially
literate and at
least 1 member
shall have
accounting or
related
financial
management
expertise
Chairperson  The  The Chairperson  The  The
chairperson shall be an chairperson of Chairperson of
shall be an independent this committee the Risk
independent director. shall be a non- management
director  The Chairperson executive committee
 The of may be director. shall be a
Chairperson present at the  The member of the
shall be annual general Chairperson of board of
present at meeting, answer the directors and
Annual general the shareholders Stakeholders senior
meeting to 'queries; Relationship executives of
answer however, it shall Committee the listed
shareholder be up to the shall be entity may be

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Queries chairperson to present at the members of the

decide who shall annual general committee
answer the meetings
queries answer queries
of the security
holders.
Meetings  The committee  The committee  The committee  The committee
shall meet at shall meet at shall meet at shall meet at
least 4 times in least once in a least once in a least once in a
a year and not year. year. year
more than 120
days shall
elapse between
two meetings
Quorum  The quorum for  The quorum for
audit a meeting of the
committee nomination and
meeting shall remuneration
either be 2 committee shall
members or be either 2
rd rd
1/3 of the members or 1/3
members of the of the members
audit of the
committee, committee,
whichever is whichever is
greater, with greater,
at least 2 including at
independent least 1
directors independent
director in
attendance
Role of  The role of the  The role of the  The role of the  The board of
Committee audit nomination and Stakeholders directors shall
committee and remuneration Relationship define the role
the committee shall Committee and
information to be as specified shall be as responsibility
be reviewed by as in Part D of specified as in of the Risk
the audit the Schedule II Part D of the Management

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committee Schedule II Committee and

shall be as may delegate
specified in monitoring and
Part C of reviewing of
Schedule II. the risk
management
plan to the
committee and
such other
functions as it
may deem fit
(such function
shall
specifically
cover cyber
security)

Past Paper Question

SEBI (LODR) Regulations, 2015 as amended imposes an obligation on every
listed company to constitute Nomination & Remuneration Committee and Risk
Management Committee. Briefly explain the constitution and role of these
committees. (4 marks) (Aug 2021)

Vigil Mechanism (Regulation 22)

 The listed entity shall formulate a vigil mechanism for directors and employees to
report genuine concerns.
 The vigil mechanism shall provide for adequate safeguards against victimization of
director(s) or employee(s) or any other person who avail the mechanism.
 The vigil mechanism shall also provide for direct access to the chairperson of the
audit committee in appropriate or exceptional cases.

Related Party definitions under Different laws

Under Listing Regulations, 2015
Regulation 2(1) (zb) defines “related party” means a related party as defined under sub-
section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting
standards.
Under Companies Act,2013

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According to section 2 (76) “related party”, with reference to a company, means —

(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or
director;
(v) a public company in which a director and manager is a director and holds along with
his relatives, more than 2 % of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act;
However, nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or
instructions given in a professional capacity;
(viii) Any body corporate which is –
a. holding, subsidiary or an associate company of such company;
b. a subsidiary of a holding company to which it is also a subsidiary; or
c. an investing company or the venturer of the company;”
Explanation. – For the purpose of this clause, “the investing company or the venturer
of a company” means a body corporate whose investment in the company would
result in the company becoming an associate company of the body corporate.
(ix) a director other than an independent director or key managerial personnel of the
holding company or his relative with reference to a company, shall be deemed to be
a related party

Policy on materiality of related party transactions

The listed entity shall formulate a policy on materiality of related party transactions and
on dealing with related party transactions.
When will a transaction with a related party be material?
A transaction with a related party shall be considered material if the transaction(s) to be
entered into individually or taken together with previous transactions during a financial
year, exceeds 10% of the annual consolidated turnover of the listed entity as per the last
audited financial statements of the listed entity.
A transaction involving payments made to a related party with respect to brand usage or
royalty shall be considered material if the transaction(s) to be entered into individually or
taken together with previous transactions during a financial year, exceed 5% of the

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annual consolidated turnover of the listed entity as per the last audited financial
statements of the listed entity.
Approval of Audit Committee
All related party transactions shall require prior approval of the audit committee.
Omnibus Approval: Audit committee may grant omnibus approval for related party
transactions proposed to be entered into by the listed entity subject to the following
conditions-
(a) the audit committee shall lay down the criteria for granting the omnibus approval
on related party transactions of the listed entity and such approval shall be
applicable in respect of transactions which are repetitive in nature;
(b) such approval is in the interest of the listed entity;
(c) the omnibus approval shall specify:
(i) the name(s) of the related party, nature of transaction, period of transaction,
maximum amount of transactions that shall be entered into,
(ii) the indicative base price / current contracted price and the formula for
variation in the price if any; and
(iii) such other conditions as the audit committee may deem fit.
(d) the audit committee shall review, at least on a quarterly basis, the details of related
party transactions entered into by the listed entity
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall
require fresh approvals after the expiry of one year.
Approval of the shareholders
All material related party transactions shall require approval of the shareholders through
resolution and no related parties shall vote to approve
Exceptions
The approval of Audit committee and shareholders shall not be required in the following
cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned
subsidiary whose accounts are consolidated with such holding company and placed
before the shareholders at the general meeting for approval.

Notes:-

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Past Paper Question

MCS Ltd. is a listed company with Bombay Stock Exchange Ltd. The Company
enters into related party transactions frequently with MAP Ltd. in which one of
director of MCS Ltd. holds 3% paid up capital of MAP Ltd. MCS Ltd. feels that
getting the approval of Audit Committee for each transaction is time-consuming
and delaying the operational plan. You, being a Company Secretary of MCS
Ltd., advise the management with reference to SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 for approval of the related party
transactions from the Audit Committee for next one year. Will your answer be
different if MAP Ltd. is wholly owned subsidiary of MCS Ltd.
(5 marks) (Dec 2018)
Audit committee may grant omnibus approval for related party transactions."
Elucidate the statement. (5 marks) (Aug 2021)

Compliances under SEBI listing Regulations for the listed Entity which has Listed its Non-
Convertible Debt Securities or Non- Convertible Redeemable Preference Shares or Both
Regulation Title Intimation to Stock exchanges Time Limit
50(1) Intimation to Stock Prior intimation to the stock 11 working days
exchanges exchange(s) before the due date for
the interest on debentures and
bonds, and redemption amount of
redeemable shares or of debentures
and bonds shall be payable.
50(3) Intimation of Board Intimation regarding the meeting of Atleast 2
meetings its board of directors, at which the working days in
recommendation or declaration of advance
issue of non- convertible debt
securities or any other matter
affecting the rights or interests of
holders of nonconvertible debt
securities or non-convertible
redeemable preference shares is
proposed to be considered.
52(1) Half Yearly The listed entity shall prepare and Within 45 days
Financial results submit unaudited or audited from the end of
financial results on a half yearly each of the half
basis in the format as specified by financial year
the Board to the recognized stock

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exchange accompanied by the

Limited Review Report
Proviso to Copy of financial The listed entities which have listed On the same day
52(1) results to their equity shares and debt on which the
Debenture Trustee securities, a copy of the financial information
results submitted to stock submitted to the
exchanges shall be provided to stock exchange
Debenture Trustees
52(2) Annual Financial The listed entity shall prepare and Within 60 days
Results submit audited financial results from the end of
financial year
52(5) Submission of The listed entities shall submit a Within 7 working
certificate signed certificate signed by debenture days from the
by Debenture trustee that is has taken note of the date of
Trustee contents of half yearly/annual submission of
financial results submitted to Stock the information
Exchange as per Regulation 52(4) required under
regulation 52(4)
54(1) Maintenance of Listed companies have been
Asset Cover permitted to maintain asset cover in
respect of its listed non-convertible
debt securities, at 100% asset cover
or asset cover as per the terms of
the offer document/ Information
Memorandum and/ or Debenture
Trust Deed, sufficient to discharge
the principal amount at all times
for the non-convertible debt
securities issued
54(2) Disclosure of Asset The listed entity shall disclose to Quarterly, half
Cover the stock exchange the extent and yearly, year to-
nature of security created and date and annual
maintained with respect to its financial
secured listed non-convertible statements as
debt securities. applicable
55 Ratings Each rating obtained by the listed Yearly
entity with respect to non-
convertible debt securities shall be

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reviewed at least once a year by a

credit rating agency registered by
the Board.
56 Documents and The listed company shall forward
Intimation to the following to the debenture
Debenture Trustee trustee promptly:
 Copy of annual report
 Copy of all notices, resolutions
and circulars
 Intimations regarding revision
in rating, default in payment
of interest
 a half-yearly certificate
regarding maintenance of
100% Asset cover as per the
terms of the offer document/
Information Memorandum
and/or Debenture Trust Deed,
including compliance with all
the covenants in respect of
listed non-convertible debt
securities

Liability of a Listed Entity for Contravention.

The listed entity or any other person thereof who contravenes any of the provisions of
these SEBI (LODR) regulations, shall, in addition to liability for action in terms of the
securities laws, be liable for the following actions by the respective stock exchange(s), in
the manner specified in circulars or guidelines issued by the SEBI:
(a) imposition of fines;
(b) suspension of trading;
(c) freezing of promoter/promoter group holding of designated securities, as may be
applicable, in coordination with depositories.
(d) any other action as may be specified by the SEBI from time to time

Role of Company Secretary

As per SEBI (LODR) Regulation, 2015
 Certificate regarding Transfer of Securities
Certification to the effect that all transfers have been completed within the

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stipulated time.
 Certificate Regarding Compliance of Conditions of Corporate Governance under
SEBI Listing Regulation
SEBI listing regulations authorizes Practising Company Secretary to issue
certificate regarding compliance of conditions of Corporate Governance.
 Secretarial Audit Report
Every listed entity incorporated in India shall undertake Secretarial Audit and shall
annex with its Annual Report, a Secretarial Audit Report, given by a Company
Secretary in Practice, in such form as may be specified with effect from the year
ended March 31, 2019.[ Regulation 24A]
 Certification regarding Director’s Disqualification
A certificate from a Company Secretary in Practice that none of the directors on the
board of the company have been debarred or disqualified from being appointed or
continuing as Directors of Companies by the Board/ Ministry of Corporate Affairs or
any such Statutory Authority. [Schedule V, Part C, Clause 10 (i)

Past Paper Question

What are the recognitions given to Company Secretary in Practice for providing
various certifications/reports as required under SEBI (LODR) Regulations?
Explain briefly. (4 marks) (Aug 2021)

Past Paper Question

Bombay Stock Exchange Ltd. had suspended trading in shares of XYZ Ltd. for
violating conditions of listing agreement. The company has now complied with
the listing regulations requirements. By referring to SEBI circular/regulations,
discuss the criteria for suspension of the trading in the shares of the listed
entities. (4 marks) (Dec 2018)

Answer Regulation 6(1)

Non- compliance with requirement to appoint a qualified company
secretary as the compliance officer
Regulation 7(1)
Non-compliance with requirement to appoint share transfer agent
Regulation 13(1)
Failure to ensure that adequate steps are taken for expeditious redressal of
investor complaints
Non-submission of the statement on shareholder complaints within the period
prescribed under this regulation or under any circular issued in respect of

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redressal of investor grievances

Regulation 29 (2) / 29(3)
Delay in furnishing prior intimation about the meeting of the board of
directors
Regulation 31
Non-submission of shareholding pattern within the period prescribed
Regulation 33
Non-submission of the financial results within the period prescribed under this
regulation
Regulation 34
Non-submission of the Annual Report within the period prescribed under this
regulation
Regulation 39(3)
Non-submission of information regarding loss of share certificates and issue of
the duplicate certificates within the period prescribed under this regulation
Regulation 42(2)/42(3)/ 42(4)/42(5)
Delay in/ non-disclosure of record date / dividend declaration or non-
compliance with ensuring the prescribed time gap between two record
dates/ book closure dates
Regulation 44(3)
Non-submission of the voting results within the period provided under this
regulation
Regulation 46
Non-compliance with norms pertaining to functional website

Case Law
1. 04. 03. 2020 Picture house Media Ltd. vs. Bombay Securities Appellate Tribunal
Stock Exchange Ltd.

Facts of the application

Penalty imposed for non-compliance of SEBI LODR Regulations on delay appointment of
women director
The provisions of the LODR regulations require that every listed company should have a
women director.
The appellant hereby is a public listed company and one women director resigned and
consequently the post became vacant which was require to be filled up by another woman

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under the LODR Regulations. Since there was a delay in appointing a woman director of
the company, the penalty was imposed by BSE under LODR Regulations. The appellant has
filed the appeal against the order passed by BSE imposing a penalty of
Rs.7, 59,920/- for violation of Regulations 17(1) and 19(1) and 19(2) of SEBI LODR
Regulations, 2015. In the light of default committed by the appellant SAT did not find any
error in the impugned order and dismissed the appeal.

Case Studies
Ms. Maya is the promoter director of Mayamruga Limited, who founded the Company
along with her late father many decades ago. Ms. Maya still owns 24% of the share capital
and is a major shareholder. Due to personal issues she resigned from the Board and had
appointed professional directors as part of succession planning for the Company.
Although she is no longer a director, Ms. Maya continues to show considerable interest in
the business affairs of the company. Recently she has been indicating that the board
should consult her on issues of business strategy and dividend policy. She has her own
opinion about executive directors and wants the Board to remove two executive directors
as she believes that they contribute nothing of value to the board. Two other members of
the board agree, and argue that Ms. Maya should be consulted regularly on important
issues, given her success in leading the company in the past. However, the majority of the
board members are hostile and resent Ms. Maya’s continual interference.
After a recent showdown with the chairman, Ms. Maya has threatened to sue members of
the board for gross dereliction of their duties as directors. She believed that one director
has deceived the Company by selling his own property to the Company at an excessive
price. The chairman was unaware of this transaction.
Required:-
As company secretary, prepare a report advising the chairman
(a) the powers of the board under the Companies Act,2013
(b) the appropriate measures for dealing with Ms. Maya and responsibility of the board
towards her.
(c) Whether the purchase of property by the company from one of its director was
compliant with the provisions of SEBI (LODR)
Suggested Solution
(a) Powers of the Board: As per Section 179(3) read with Rule 8 of Companies (Meetings of
Board and its Powers) Rules, 2014, the Board of Directors of a company shall exercise
the following powers on behalf of the company by means of resolutions passed at
meetings of the Board, namely:–
 to make calls on shareholders in respect of money unpaid on their shares;

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 to authorise buy-back of securities under section 68;

 to issue securities, including debenture, whether in or outside India;
 to borrow monies;
 to invest the funds of the company;
 to grant loans or give guarantee or provide security in respect of loans;
 to approve financial statement and the Board’s report;
 to diversify the business of the company;
 to approve amalgamation, merger or reconstruction;
 to take over a company or acquire a controlling or substantial stake in another
company;
 to make political contributions;
 to appoint or remove key managerial personnel (KMP);
 to appoint internal auditors and secretarial auditor.
(b) Ms. Maya was one of the founders and promoter directors of the Company and a major
shareholder of the company holding 24% of the shares. A responsible business acts
with care and loyalty towards its shareholders and in good faith for the best interests
of the corporation. Business therefore has a responsibility to:
 Apply professional and diligent management in order to secure fair, sustainable
and competitive returns on shareholder investments.
 Disclose relevant information to shareholders, subject only to legal requirements
and competitive constraints.
 Conserve, protect, and increase shareholder wealth.
 Respect shareholder views, complaints, and formal resolutions.
(c) According to Section 2(76) of Companies Act 2013, “related party”, with reference to a
company, means–
(i) a director or his relative;
(ii) key managerial personnel or his relative
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or
director;
(v) a public company in which a director or manager is a director and holds along
with his relatives, more than two per cent. (2%) of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,

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directions or instructions given in a professional capacity;

(viii) any body corporate which is—
(a) a holding, subsidiary or an associate company of such company;
(b) a subsidiary of a holding company to which it is also a subsidiary; or
(c) an investing company or the venturer of the company;”;
Explanation. — For the purpose of this clause, “the investing company or the
venturer of a company” means a body corporate whose investment in the
company would result in the company becoming an associate company of the
body corporate.
(ix) a director other than an independent director or key managerial personnel of
the holding company or his relative with reference to a company, shall be
deemed to be a related party.
Section 188 (1) of the Companies Act 2013 deals with the related party transactions with
respect to:
 Sale, purchase or supply of any goods or materials
 Selling or otherwise disposing of, or buying, property of any kind
 Leasing of property of any kind
 Availing or rendering of any services
 Appointment of any agent for purchase or sale of goods, materials, services or
property
 Related party’s appointment to any office or place of profit in the company, its
subsidiary company or associate company, and
 Underwriting the subscription of any securities or derivatives thereof, of the
company.
Also, Section 188(1) of the Companies Act 2013 provides that a company shall enter into
any contract or arrangement with a related party with respect to Related party
transactions only with the consent of the Board of Directors given by a resolution at a
meeting of the Board and subject to certain conditions as prescribed under Rule 15 of the
Companies (Meetings of Board and its Powers) Rules, 2014.
One of the board members had sold his property to Mayamrug Ltd. at a price which Ms
.Maya considers excessive. The board member is related party as per Section 2(76) of
Companies Act 2013 and selling property of any kind is a related party transaction as per
Section188(1) of the Companies Act 2013.
The law in India does not prohibit RPTs. Instead, the law puts into place a system of checks
and balances, such as requirements for approval from the board of directors/shareholders,
timely disclosures and prior statutory approvals, to ensure that the transactions are
conducted within appropriate boundaries. RPTs are required to be managed transparently,

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so as not to impose a heavy burden on a company’s resources, affect the optimum

allocation of resources, distort competition or siphon off public resources.
Therefore, if the related party transaction has taken place with the consent of the Board of
Directors given by a resolution at a meeting of the Board and subject to certain conditions
as prescribed under Rule 15 of the Companies(Meetings of board and its Powers) Rules,
2014, then it is allowed as per the laws and regulations and the allegations will not hold
much significance.

Case Studies
Dr. Mahopatra, is a pathologist with more than 20 years of experience and has recently
been appointed to the post of Chairman of Testocare Ltd., a listed company. He has
previously been employed in the company as Research Director. Dr. Mahopatra had always
been heading technical matters and management was a new avenue for him. He is trying
to spearhead the management of such a vast listed company and uphold the principles of
corporate governance. The Board is also evaluating to appoint another CEO.
Presently, the board of directors comprise of total ten directors (including one women
director), six non-executive directors and five were independent. The board is responsible
for overseeing strategy, approving major corporate initiatives and reviewing performance.
There are three board committees - the Audit Committee, Remuneration Committee and
Investors Grievance Committees. However, there is no Nomination Committee.
As the Company Secretary and Compliance Officer of Testocare Ltd, he is seeking your
assistance to clarify some issues of concern.
You have been asked to prepare a brief report to:
(a) Provide Dr. Mahopatra with a robust definition of corporate governance and a brief
explanation of what you understand corporate governance to be.
(b) Comment on the board composition of Testocare Ltd. with respect to the Companies
Act, 2013 and SEBI LODR Regulations, 2015.
(c) Also comment whether the Board should appoint a CEO when Dr. Mahopatra is already
the Chairman of the Company.
Suggested Solution
(a) Corporate Governance has a broad scope. It includes both social and institutional
aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical
environment. In other words, the heart of corporate governance is transparency,
disclosure, accountability and integrity. It is to be borne in mind that mere legislation does
not ensure good governance. Good governance flows from ethical business practices even
when there is no legislation.
Good corporate governance promotes investor confidence, which is crucial to the ability of

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entities listed to compete for capital. Good corporate governance is essential to develop
added value to the stakeholders as it ensures transparency which ensures strong and
balanced economic development. This also ensures that the interests of all shareholders
(majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes their
rights.
The Institute of Company Secretaries of India defines - “Corporate Governance is concerned
with the way corporate entities are governed, as distinct from the way business within
those companies are managed.
Corporate governance addresses the issues facing Board of Directors, such as the
interaction with top management and relationships with the owners and others interested
in the affairs of the company”.
(b) Board composition: Section 149(1) of the Companies Act 2013 provides that every
company shall have a Board of Directors consisting of individuals as directors and shall
have—
 A minimum number of three directors in the case of a public company,
 Atleast two directors in the case of a private Company, and
 Atleast one director in the case of a One Person Company, and
 A maximum of fifteen directors provided that a company may appoint more than
fifteen directors after passing a special resolution.
Section 149(4) provides that every public listed company shall have at- least one third of
total number of directors as independent directors.
Regulation 17(1)(a) of SEBI LODR Regulations, 2015 provides that Board of directors shall
have an optimum combination of executive and non-executive directors with at least one
woman director and not less than 50% of the board of directors shall comprise of non-
executive directors.
The board of Testocare Ltd. comprises of total ten directors, six non-executive directors and
five were considered independent. The total number of directors is more than the minimum
required directors and at- least 1/3rd of total number of directors are independent directors.
Also, as per SEBI Regulations, more than fifty per cent of the board of directors comprises
of non- executive directors and 1 women director. Therefore, the board composition of
Company. is optimum as per the laws and regulations.
The Company may also consider enhancing the scope of Remuneration Committee and
make it Nomination & Remuneration Committee.
Separation of chairman and CEO: First proviso to Section 203(1) of the Companies Act, 2013
provides for the separation of role of Chairman and Chief Executive Officer subject to
conditions thereunder.
It specifies that an individual shall not be appointed or reappointed as the chairperson of

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the company, in pursuance of the articles of the company, as well as the managing
director or Chief Executive Officer of the company at the same time after the date of
commencement of this Act unless, –
(a) the articles of such a company provide otherwise;
(b) the company does not carry multiple businesses:
Regulation 17(1B) of SEBI (LODR) Regulations, 2015 provides that effect from April 1, 2022,
the top 500 listed entities shall ensure that the Chairperson of the board of such listed
entity shall
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the
definition of the term “relative” defined under the Companies Act, 2013:
Also, it is perceived that separating the roles of chairman and chief executive officer (CEO)
increases the effectiveness of a company’s board. It is the board’s and chairman’s job to
monitor and evaluate a company’s performance. A CEO, on the other hand, represents the
management team. If the two roles are performed by the same person, then there is less
accountability. A clear demarcation of the roles and responsibilities of the Chairman of the
Board and that of the Managing Director/CEO promotes balance of power.
The benefits of separation of roles of Chairman and CEO can be:
Director communication: A separate chairman provides a more effective channel for the
board to express its views on management
Guidance: A separate chairman can provide the CEO with guidance and feedback on his/her
performance
Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO
manages the company
Governance: A separate chairman allows the board to more effectively fulfill its regulatory
requirements
Long-Term Outlook: Separating the position allows the chairman to focus on the long-term
strategy while the CEO focuses on short-term profitability
Succession Planning: A separate chairman can more effectively concentrate on corporate
succession plans.
Therefore, on the basis of abovementioned laws and regulations and the potential benefits
of separating Chairman and CEO, the Company may appoint a CEO for the Company.

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Chapter 6
An Overview of SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011

Important Definition
Acquirer “Acquirer” means any person who, directly or indirectly, acquires or
agrees to acquire whether by himself, or through, or with persons
acting in concert with him, shares or voting rights in, or control over a
target company.
Acquisition “Acquisition” means, directly or indirectly, acquiring or agreeing to
acquire shares or voting rights in, or control over, a target company.
Control “Control” includes the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner.
Enterprise value Enterprise value means the value calculated as market capitalization of
a company plus debt, minority interest and preferred shares, minus
total cash and cash equivalents.
Enterprise Value= Market capitalization + Debt+ Minority Interest and
Preferred Shares - Total Cash and Cash Equivalents
Persons Acting in “Persons acting in concert” means,–
Concert (1) persons who, with a common objective or purpose of acquisition of
shares or voting rights in, or exercising control over a target
company, pursuant to an agreement or understanding, formal or
informal, directly or indirectly co-operate for acquisition of shares
or voting rights in, or exercise of control over the target company.
(2) The persons falling within the following categories shall be
deemed to be persons acting in concert with other persons –
(i) company, its holding company, subsidiary company and
any company under the same management or control;
(ii) a company, its directors, and any person entrusted with the
management of the company;
(iii) immediate relatives;
(iv) a mutual fund, its sponsor, trustees, trustee company, and
asset management company;

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(v) a collective investment scheme and its collective investment

management company, trustees and trustee company;
(vi) a venture capital fund and its sponsor, trustees, trustee
company and asset management company;
(vii) an alternate investment fund and its sponsor, trustees,
trustee company and manager;
(viii) a merchant banker and its client, who is an acquirer;
(ix) a portfolio manager and its client, who is an acquirer;
(x) a broker and its client, who is an acquirer
Target Company Target Company means a company and includes a body corporate or
corporation established under a Central legislation, State legislation or
Provincial legislation for the time being in force, whose shares are listed
on a stock exchange.
Tendering period Tendering period means the period within which shareholders may
tender their shares in acceptance of an open offer to acquire shares
made under these regulations.
Volume Volume weighted average market price means the product of the
weighted number of equity shares traded on a stock exchange and the price of
average market each equity share divided by the total number of equity shares traded
price on the stock exchange.
Number of shares traded on the Stock Exchange on a particular day: X,
Market Price: Y
Volume Weighted Average Market Price = X1*Y1+X2*Y2+X3*Y3……
X1+X2+X3…………
Volume Volume weighted average price means the product of the number of
weighted equity shares bought and price of each such equity share divided by the
average price total number of equity shares bought.
Number of shares bought on a particular day: A, Market Price: B
Volume weighted Average Price = A1*B1+A2*B2+A3*B3………
A1+A2+A3…………….
Offer price Offer price is the price at which the acquirer announces to acquire
shares from the public shareholders under the open offer. The offer
price shall not be less than the price as calculated under regulation 8 of
the SAST Regulations, 2011 for frequently or infrequently traded shares.
If the target company’s shares If the target company’s shares
are frequently traded then the are infrequently traded then the
open offer price for acquisition of open offer price for acquisition of

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shares under the minimum open shares under the minimum open
offer shall be highest of the offer shall be highest of the
following: following:
 Volume weighted average  Volume weighted average
price of shares acquired by the price of shares acquired by
acquirer during 52 weeks the acquirer during 52 weeks
preceding the public preceding the public
announcement (“PA”), announcement (“PA”);
 Highest price paid for any  Highest price paid or payable
acquisition by the acquirer for any acquisition by the
during 26 weeks immediately acquirer during 26 weeks
preceding the PA immediately preceding the PA;
 Volume weighted average  The price determined by the
market price for 60 trading acquirer and the manager to
days preceding the PA. the open offer after taking
into account valuation
parameters

Past Paper Question

From the following information, calculate the Enterprise Value of E Ltd
Balance Sheet of E Ltd. as on 31st March, 2018
Liabilities Amount (Rs) Assets Amount (Rs)
(In Lakh) (In Lakh)
Share Capital 952 Non-Current Assets 2550
(Face Value Rs 2) Current Assets
Reserves & Surplus 48 Cash & Cash 102
Equivalent
Minority Interest 115 Other Current 1323
Assets
Short-term 2860
Borrowings
Total 3975 Total 3975
Current Market Price Per Share is Rs 96. (4 marks)(June 2019)
What do you mean by Enterprise value under SEBI Takeover code? From the
given information, calculate the Enterprise value of KRS Ltd. :
- Outstanding equity share capital 1,600 lakh (par value per share Rs 2)
- Market price per share on closing date (equity share): Rs 125

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- Reserves & Surplus Rs 195 lakh,

- Minority interest Rs 275 lakh,
- Preference share capital Rs 4.200 lakh,
- Cash-in-hand Rs 72 lakh.
- Cash equivalent Rs 63 lakh,
- Other current assets Rs 1,965 lakh. (5 marks) (Aug 2021)

Trigger Point for making an Open Offer By an Acquirer

25% Shares or Voting Rights
An acquirer, along with Persons acting in concert (PAC), if any,
who intends to acquire shares which along with his existing
shareholding would entitle him to exercise 25% or more voting
rights, can acquire such additional shares only after making a
Public Announcement (PA) to acquire minimum 26% shares of
the Target Company from the shareholders through an Open
Offer.
Creeping Acquisition Limit
An acquirer who holds 25% or more but less than 75% of the
Target Company, can acquire such additional shares as would
entitle him to exercise more than 5% of the voting rights in any
financial year ending March 31 only after making a Public
Announcement to acquire minimum 26% shares of Target
Company from the shareholders through an Open Offer.

Past Paper Question

An acquirer, holding 25% or more but less than maximum permissible non-
public shareholding of the Target Company can acquire such additional shares
as would entitle him to exercise more than 5% of the voting rights in any
financial year. Explain the statement indicating the creeping acquisition limit
for making an open offer by an acquirer (4 marks)(June 2019)

Mandatory Open Offer

Regulation 3 of the SEBI Takeover Regulations, 2011 provides that the Acquirer to give an
open offer to the shareholders of Target Company on the acquisition of shares or voting
rights entitling the Acquirer along with the persons acting in concert with him to exercise
25% or more voting rights in the Target Company.
Further any Acquirer who holds shares between 25%-75%, together with PACs can acquire

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further 5% shares as creeping acquisition without giving an Open Offer to the shareholders
of the Target Company upto a maximum of 75%. The quantum of acquisition of additional
voting rights shall be calculated after considering the following:
Explanation:-
(a) No Netting off allowed:
For the purpose of determining the quantum of acquisition of additional voting
rights, the gross acquisitions without considering the disposal of shares shall be
taken into account.
(b) Incremental voting rights in case of fresh issue
In the case of acquisition of shares by way of issue of new shares by the target
company, the difference between the pre-allotment and the post-allotment
percentage voting rights shall be regarded as the quantum of additional acquisition.
[Regulation 3(2)]
Provided that the acquisition beyond 5% but upto 10% of the voting rights in the
target company shall be permitted for the financial year 2020-21 only in respect of
acquisition by a promoter pursuant to preferential issue of equity shares by the
target company.

Voluntary Open Offer

Regulation 6 of the Takeover Regulations provides the threshold and conditions for making
the Voluntary Open Offer which are detailed below:
1. Eligibility-Prior holding of atleast 25% shares
To be eligible for making a Voluntary Open Offer, the regulations mandates the prior
holding of atleast 25% stake in the Target Company by the Acquirer along with the
PACs.
2. Shareholding of the Acquirer and PACs post completion of Open Offer
Post completion of the Open Offer, the shareholding of the Acquirer along with PACs
shall not exceed the – maximum permissible non-public shareholding.
3. Acquisition of shares prior to the Voluntary Open Offer
The Acquirer shall become ineligible to make a Voluntary Open Offer if during the
preceding 52 weeks, the Acquirer or PACs with him has acquired shares of the Target
Company without attracting the obligation to make a Public Announcement of an
Open Offer.
4. Prohibition on the acquisition of shares during the Offer Period
SEBI Takeover Regulations, 2011 prohibits the acquirer who has made a Voluntary
Open Offer from further acquiring the shares during the Offer Period otherwise than
under the Open Offer.

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5. Restriction of the acquisition of shares post completion of Voluntary Open Offer

An acquirer and PACs who have made a Voluntary Open Offer shall not be entitled to
further acquire shares for a period of 6 months after completion of the Open Offer
except giving another Voluntary Open Offer.
6. Offer size
The Voluntary Open Offer shall be made for the acquisition of at least ten per cent
(10%) of the voting rights in the Target Company
Conditional Offer
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a
conditional offer.
Minimum level of acceptance implies minimum number of shares which the acquirer
desires under the said conditional offer. If the number of shares validly tendered in the
conditional offer, are less than the minimum level of acceptance stipulated by the acquirer,
then the acquirer is not bound to accept any shares under the offer. In a conditional offer,
if the minimum level of acceptance is not reached, the acquirer shall not acquire any
shares in the target company under the open offer

Past Paper Question

Write notes on the following:
Conditional offer (4 marks) (Dec 2014)

Public Announcement
Public Announcement
The Public Announcement shall be sent to all the stock exchanges on which the shares of
the target company are listed. Further, a copy of the same shall also be sent to SEBI and to
the target company at its registered office within one working day of the date of the public
announcement.
Detailed Public Announcement
A Detailed Public Statement shall be published by the acquirer through the Manager to the
Open Offer within maximum 5 working days from the date of Public Announcement.
Announcement and Detailed Public Statement which are tabulated below:
Reg Particulars Time To whom
14(1) Public Announcement On the same All the stock exchanges on which the
day shares of the target company are listed.
The stock exchanges shall forthwith
disseminate such information to the
public.

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14(2) Public One working The acquirer shall sent copy of Public
Announcement day of the date announcement to SEBI and to the target
of the company at its registered office.
Public
announcement
14(3) Detailed Public 5 working days Publication in the following newspaper:
Statement from the date (a) One Hindi national language daily
of Public with wide circulation
Announcement. (b) One English national language
daily with wide circulation
(c) One regional national language
daily with wide circulation
language at a place where
registered office of the company is
situated; and
(d) One regional language daily with
wide circulation at the place of the
stock exchange where the maximum
volume of trading in the shares of
the target company is recorded
during the 60 trading days
preceding the date of the
public announcement.
14(4) Detailed Public Immediately A copy of Detailed Public Statement
Statement shall be sent to followings:
(a) SEBI;
(b) All the stock exchanges in which
the shares of the target company
are listed; and
(c) The target company at its
registered office.
Submission of Draft Letter of Offer
The Acquirer shall submit a draft letter of offer to SEBI within 5 working days from the
date of detailed public announcement along with a non-refundable fee as applicable.
[Regulation 16(1)]
Sr. Consideration payable under the Open Fees (Rs.)
No Offer
1 Upto 10 crore rupees Five lakh rupees (Rs. 5,00,000)

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2 More than 10 crore rupees but less 0.5 per cent of the offer size
than or equal to 1000 crore rupees
3 More than 1000 crore rupees Five crore rupees (Rs. 5,00,00,000) plus
0.125 per cent of the portion of the offer
size in excess of one thousand crore rupees
(1000,00,00,000)
Simultaneously, a copy of the draft letter of offer shall be send to the Target Company at
its registered office and to all the Stock Exchanges where the shares of the Company are
listed. [Regulation 18(1)]
Dispatch of Letter of Offer -[Regulation 18(2)]
The Acquirer shall ensure that the letter of offer is dispatched to the shareholders whose
names appear on the register of members of the Target Company as of the identified date,
and to the custodian of shares underlying depository receipts, if any, of the Company,
within maximum 7 working days from the date of receipt of communication of comments
from SEBI or where no comments are offered by SEBI, within 7 working days from the
expiry 15 working days from the date of receipt of draft letter of offer by SEBI.
Opening of the offer-[Regulation 18(8)]
The tendering period shall start within maximum 12 working days from date of receipt of
comments from the Board and shall remain open for 10 working days.
Completion of the requirement -[Regulation 18(10)]
Within 10 working days from the last date of the tendering period, the acquirer shall
complete all requirements as prescribed under these regulations and other applicable law
relating to the Open Offer including payment of consideration to the shareholders who
have accepted the open offer.
Restriction on Acquisition
If the acquirer or persons acting in concert with him acquires shares of the target company
during the period of 26 weeks after the tendering period at a price higher than the offer
price, then the acquirer shall pay the difference between the highest acquisition price and
the offer price, to all the shareholders whose shares were accepted in the open offer,
within 60 days from the date of such acquisition. However, such provisions shall not be
applicable if the acquisition is made through another open offer.

Provision of Escrow
Not later than two working days prior to the date of the detailed public statement of the
open offer for acquiring shares, the acquirer shall create an escrow account towards
security for performance of his obligations under these regulations, and deposit in escrow
account such aggregate amount as per the following scale:
Consideration payable under the Escrow Amount Open Offer

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(a) On the first 500 crore rupees An amount equal to 25% of the consideration
(b) On the balance consideration An additional amount equal to 10% of the balance
consideration
However, where an open offer is made conditional upon minimum level of acceptance,
100% percent of the consideration payable in respect of minimum level of acceptance or
50% per cent of the consideration payable under the open offer, whichever is higher, shall
be deposited in cash in the escrow account.
The escrow account may be in the form of, –
(a) cash deposited with any scheduled commercial bank; or
(b) bank guarantee issued in favour of the manager to the open offer by any scheduled
commercial bank; or
(c) deposit of frequently traded and freely transferable equity shares or other freely
transferable securities with appropriate margin.
Applicable Details
Regulation
17(5) Cash deposit Empower the manager to the open offer to instruct the bank to
issue a bankers cheque or demand draft or to make payment
of the amounts lying to the credit of the escrow account.
17(6) Bank The bank guarantee shall be in the favor of manager to the
Guarantee offer and shall be kept valid throughout the offer period and
additional 30 days after the payment to the shareholders
who have tendered their shares have been made.
17(7) Securities Manager to the Open Offer shall be empowered to realize the
value of escrow account by way of sale.

Mode of Payment
The offer price may be paid, –
(a) in cash;
(b) issue of the equity share capital of the acquirer or of any person acting in concert;
(c) by issue of listed secured debt instruments issued by the acquirer or any person
acting in concert with a rating not inferior to investment grade as rated by a credit
rating agency registered with the Board;
(d) by issue of convertible debt securities entitling the holder thereof to acquire listed
shares in the equity share capital of the acquirer or of any person acting in concert;
or
(e) a combination of the mode of payment of consideration stated in clause (a), clause
(b), clause (c) and clause (d)

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Past Paper Question

Explain the Modes of Payment to the shareholders of the Target Company on
acquisition of shares by the acquirer under SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011. (4 marks)(June 2019)

Withdrawal of Open Offer

(1) An open offer for acquiring shares once made shall not be withdrawn except under
any of the following circumstances, –
a. statutory approvals required for the open offer under these regulations having
been finally refused,
b. the acquirer, being a natural person, has died;
c. any condition stipulated in the agreement for acquisition attracting the
obligation to make the open offer is not met for reasons outside the reasonable
control of the acquirer, then it should be disclosed in the detailed public
statement and the letter of offer; or
d. such circumstances as in the opinion of the SEBI, merit withdrawal.
SEBI shall pass a order permitting withdrawal and such order shall be listed by SEBI on its
official website.
(2) In the event of withdrawal of the open offer, the acquirer shall through the manager
to the open offer, within two working days, –
a. make an announcement in the same newspapers in which the public
announcement of the open offer was published, providing the grounds and
reasons for withdrawal of the open offer; and
b. simultaneously with the announcement, inform in writing to,–
(i) SEBI;
(ii) all the stock exchanges on which the shares of the target company are
listed, and the stock exchanges shall forthwith disseminate such
information to the public; and
(iii) the target company at its registered office.

Past Paper Question

"An open offer for acquiring shares once made shall not be withdrawn."
Comment on the statement. (5 marks) (Aug 2021)

Obligation of the Target Company

(1) Upon a public announcement of an open offer for acquiring shares of a target
company being made, the board of directors of such target company shall ensure that

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during the offer period, the business of the target company is conducted in the
ordinary course consistent with past practice
(2) During the offer period, the board of directors of either the target company or any of
its subsidiaries shall not, –
a. alienate any material assets whether by way of sale or lease
b. effect any material borrowings outside the ordinary course of business;
c. issue or allot any authorised but unissued securities
However, the target company or its subsidiaries may, issue or allot shares as public issue
in respect of which the red herring prospectus has been filed with the Registrar of
Companies prior to the public announcement of the open offer; or
(3) The target company shall furnish to the acquirer within 2 working days from the
identified date, a list of shareholders as per the register of members of the target
company containing names, addresses, shareholding in electronic form, and a list of
persons whose applications, if any, for registration of transfer of shares are pending
with the target company:
However, the acquirer shall reimburse reasonable costs payable by the target
company to external agencies in order to furnish such information.
(4) Upon receipt of the detailed public statement, the board of directors of the target
company shall constitute a committee of independent directors to provide reasoned
recommendations on such open offer, and the target company shall publish such
recommendations.
(5) The committee of independent directors shall provide its written reasoned
recommendations on the open offer to the shareholders of the target company and
such recommendations shall be published at least 2 working days before the
commencement of the tendering period, in the same newspapers where the public
announcement of the open offer was published, and simultaneously, a copy of the
same shall be sent to, –
 SEBI;
 all the stock exchanges; and
 to the manager to the open offer,
Upon fulfillment by the acquirer, of the conditions required under these regulations, the
board of directors of the target company shall without any delay register the transfer of
shares acquired by the acquirer in physical form.

Obligation of the Acquirer

(1) Prior to making the public announcement of an open offer for acquiring shares under
these regulations, the acquirer shall ensure that firm financial arrangements have
been made for fulfilling the payment obligations under the open offer

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(2) In the event the acquirer has not declared an intention in the detailed public
statement and the letter of offer to alienate any material assets of the target
company or of any of its subsidiaries whether by way of sale or lease, the acquirer,
where he has acquired control over the target company, shall be debarred from
causing such alienation for a period of two years after the offer period.
However, to alienate assets despite the intention to alienate not having been
expressed by the acquirer, such alienation shall require a special resolution passed by
shareholders of the target company, by way of a postal ballot
(3) The acquirer shall ensure that the contents of the public announcement, the detailed
public statement, the letter of offer and the post-offer advertisement are true, fair
and adequate in all material aspects and not misleading in any material particular,
and are based on reliable sources, and state the source wherever necessary.
(4) The acquirer and persons acting in concert with him shall not sell shares of the target
company held by them, during the offer period.
(5) The acquirer and persons acting in concert with him shall be jointly and severally
responsible for fulfillment of applicable obligations under these regulations.

Past Paper Question

Kind Enterprises Ltd. has decided to acquire stake upto 25% of the paid-up
share capital of Excel Ltd., which is a listed company and wants to proceed with
a public offer pursuant to the provisions of the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011. Prepare a Board note highlighting the
general obligations of Kind Enterprises Ltd. (10 marks) (June 2015)

Disclosures
Regulation Triggering Point To and by whom Time Period
EVENT BASED DISCLOSURES
29(1) Acquisition of 5% or more To the Target Within 2 working days
shares or voting rights Company and Stock of
Exchange by the (a) Receipt of intimation
Acquirer of allotment of shares;
or
(b) The acquisition of
shares or voting rights.
29(2) Acquirer already holding 5% To the Target Within 2 working days
or more shares or voting Company and Stock of such
rights, on acquisition/ Exchange by the acquisition/disposal.
disposal of 2% or more Acquirer/Seller

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shares or voting rights.

Note :
 Shares taken by way of encumbrance shall be treated as an “acquisition”.
 Share given upon release of encumbrance shall be treated as a “disposal”
 The requirement as listed above shall not apply to a Scheduled Commercial bank or
public financial institution as pledge in connection with a pledge of shares for
securing indebtness in the ordinary course of business.
CONTINUAL DISCLOSURES
30(1) Any person holding 25% or Target Company & Within 7 working days
more shares or voting rights Stock Exchange by from the end of each
such person financial year

30(2) Promoter/Person having Target Company & Within 7 working days

control over the Target Stock Exchange by from the end of each
Company Promoter financial year

DISCLOSURE OF PLEDGED/ENCUMBERED SHARES

31(1) On the encumbrance of Target Company & Within 7 working days
shares by the promoter or Stock Exchange by from the date of
person acting in Concert with the promoter creation of pledge
him
31(2) On the invocation of or Target Company & Within 7 working days
release of such encumbrance Stock Exchange by from the date of
by the promoter the promoter invocation of pledge

Past Paper Question

What disclosures, as prescribed by the SEBI, are to be made by an acquirer
while acquiring the shares of another company? (5 marks) (Dec 2013)
Comment on the following:
The disclosures requirements on the acquisition of shares of a listed target
company beyond certain limits are only on the acquirer and not on the target
company. (4 marks) (June 2015)
Regulation 11 -Exemption by SEBI
Regulation 11 provides that on an application being made by the acquirer in writing giving
the details of the proposed acquisition and grounds on which the exemption is sought
along with duly sworn affidavit, SEBI may grant exemption to the acquirer from the Open

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Offer obligations subject to the compliance with such conditions as it deems fits. For
instance, in case where the exemptions is sought from the Open Offer obligations which
has been triggered pursuant to the issue of shares by way preferential allotment, SEBI may
require that the approval of shareholders should be obtained by way of postal ballot.
Further, along with the application, the acquirer is also required to pay a non refundable
fee of Rs 5,00,000 by way of banker‘s cheque or demand draft in payable in favour of
Mumbai.

Practical Questions
Question
Autoport Limited (“Acquirer”) is an unlisted public company involved in dealing,
distributing, repairing and exporting automobile components, spare parts, car accessories,
and the like. It is also a part of the promoter group of Genesis Limited (“Company”), a
company listed on BSE Limited and National Stock Exchange of India Limited, carrying out
the manufacturing of automobiles. The Company wishes to restructure its group structure
in order to improve its operational efficiency, and hence, the Acquirer has agreed to enter
into a scheme of arrangement where the shares held by the promoter group companies will
be transferred to it. Post-merger, the shareholding of the Acquirer in the Company will
increase from 1.10% to 22.81%. However, the overall promoter shareholding will remain
unchanged and no additional shareholding or management rights will be transferred to
the Acquirer. Assume that you are the legal advisor to the Acquirer, and accordingly
answer the following:
a. Will the transfer of shares trigger an obligation to make an open offer under the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST
Regulations”) on the Acquirer?
b. Even if we assume that the Acquirer does trigger the obligation to make an open
offer, will the Acquirer be permitted to avail of any general exemption
(“Exemption”) under the SAST Regulations that will in effect exempt the Acquirer
from the obligation to make an open offer?
c. Is the Acquirer required to obtain any prior approval from SEBI in order to avail the
Exemption for the same?
d. What are the disclosure requirements under the SAST Regulations, if any, that the
parties to the scheme will have to comply with?
e. Is there any other possible manner in which the transfer of shares can be effected in
favour of the Acquirer without the Acquirer triggering the obligation to make an
open offer in accordance with SAST Regulations?

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Answer
a. Regulations 3, 4 and 5 of the SAST Regulations set out the events that trigger an
obligation to make an open offer on the acquirer (along with persons acting in
concert). The said triggers in brief are as follows:
(i) Acquisition (directly or indirectly) of such shares or voting rights in an Indian
listed company whereby the acquirer becomes entitled to exercise 25% or more
of the voting rights in such Indian listed company;
(ii) Where an acquirer (along with persons acting in concert with him) is
already entitled to exercise 25% or more of the voting rights in an Indian listed
company, and acquires (directly or indirectly) additional shares or voting rights
entitling an acquirer to exercise more than 5% voting rights in an Indian listed
company, in a financial year;
Since the provision under which the Acquirer can avail an exemption from
making an open offer falls under Regulation 10, it is not required to apply to
SEBI for any grant of exemption, which would be the case only if the Acquirer
desires to avail an exemption under Regulation 11 of the SAST Regulations.
Since the Acquirer, in the above facts, does not attract any of the triggers set
out above, the transfer of shares will not impose any obligation on the
Acquirer to make an open offer under SAST Regulations.
b. Even if we assume that the triggers set out above were to be met, still the Acquirer
can avail an exemption from making an open offer under Regulation 10(1)(d)(iii) of
the SAST Regulations. The provision allows an acquirer to acquire shares/ voting
rights/ control in accordance with a scheme of arrangement as per an order of a
court, tribunal or a competent authority. Therefore, the transfer of shares to the
Acquirer pursuant to a merger, being a scheme sanctioned by the National Company
Law Tribunal would be exempted from the obligation to make an open offer
c. Since the provision under which the Acquirer can avail an exemption from making
an open offer falls under Regulation 10, it is not required to apply to SEBI for any
grant of exemption, which would be the case only if the Acquirer desires to avail an
exemption under Regulation 11 of the SAST Regulations.
d. The Acquirer and promoter group companies will be required to make a disclosure
of change in shareholding under Regulation 29 of the SAST Regulations. According
to Regulation 29, the disclosure should be made within 2 working days of such
acquisition to the Company at its registered office and to BSE Limited and
National Stock Exchange of India Limited (stock exchanges where the shares of the
Company are listed).
e. In the absence of a scheme of arrangement, the transfer of shares would qualify as
an inter-se transfer between promoters under Regulation 10(1)(a)(ii) of the SAST

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Regulations, provided that the Acquirer and promoter group companies have been
named as promoters in the shareholding pattern filed by the Company in terms of the
listing agreement or under the SAST Regulations, for at least 3 years prior to the
acquisition.
Question
Pharmatech (“Target Company”) is a public limited company, listed on BSE Limited,
engaged in the business of manufacturing and marketing of pharmaceutical products. As
per the shareholding pattern filed by the Target Company for the quarter ended December
31, 2017 the promoters of the Target Company are Star Pharmaceutical Industries Limited
(“Star Pharma”) and Daisan Company Limited (“Daisan”) which hold 46.84% and 20% of
the equity shares of the Target Company respectively. Pursuant to an acquisition of 20% of
the total equity share capital of the Target Company in 2011, Daisan was included as part
of the promoter and promoter group of the Target Company for the first time in the
shareholding pattern filed for the quarter ended December 31, 2012. In the same
shareholding pattern, Prax Laboratories Limited (“Prax”) was also included as part of the
promoter and promoter group of the Target Company. However, pursuant to a merger of
Star Pharma and Prax, Prax was replaced by Star Pharma as part of the promoter and
promoter group of the Target Company in the shareholding pattern filed for the quarter
ended March 31, 2017. Though the merger became effective from April 1, 2016, Star Pharma
was included in the shareholding pattern only after receipt of requisite approvals i.e.
March 31, 2017. Star Pharma is now exploring a potential acquisition of 20% equity shares
of the Target Company held by Daison. In view of the above facts, answer the following
questions:
a. Would the acquisition of shares by Star Pharma trigger an obligation to make an
open offer under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (“SAST Regulations”)?
b. Can the acquisition of shares by Star Pharma be considered as an inter-se transfer
of shares between promoters? Why?
c. Can Star Pharma complete its acquisition of 20% equity shares of the Target
Company through a creeping acquisition of 5% in each financial year or can such
an acquisition under Regulation 3(2) of the SAST Regulations be made only once
considering the words ‘any financial year’ in Regulation 3(2)?
d. If there was a possibility of postponing the acquisition, what date would you
suggest as the date for acquisition in view of the SAST Regulations?

Answer
a. As per Regulation 3(2) of the SAST Regulations, an acquisition of shares or voting
rights entitling the acquirer to exercise more than 5% of the voting rights in a

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financial year, where the acquirer (along with persons acting in concert) already
holds 25% or more of the voting rights in the target company, triggers an obligation
on the part of the acquirer to make a public announcement of an open offer for
acquiring such shares. Since Star Pharma already holds 46.84% shares of the
Target Company (i.e. more than 25% voting rights), a further acquisition of 20% of
equity shares of the Target Company would necessarily require it to make an open
offer.
b. The acquisition of 20% shares by Star Pharma from Daison cannot qualify as an inter-
se transfer of shares between promoters because Star Pharma does not fulfil the
condition for inter-se transfer under Regulation 10(1)(a)(ii) of the SAST Regulations.
This regulation requires the person to be named as a promoter in the shareholding
pattern filed by the target company in terms of the listing agreement or under the
SAST Regulations for at least 3 years prior to the proposed acquisition. In this respect,
even though Daison has been named as a promoter in the filings for the past 5 years,
Star Pharma has been named as such only since the quarter ended March 31, 2017 i.e.
less than even 1 year. Hence, such transaction, as of date, cannot qualify for an
inter-se transfer between promoters under Regulation 10(1)(a)(ii) of the SAST
Regulations
c. Star Pharma can complete its acquisition of 20% shares of the Target Company
by way of a creeping acquisition in ‘every’ financial year i.e. it can acquire up to 5%
of the shares of the Target Company in every financial year, without attracting the
obligation to make a public announcement of open offer under Regulation 3(2) of the
SAST Regulation
d. In order to avail the exemption from an obligation to make an open offer in terms
of an inter- se promoter transfer under Regulation 10(1)(a)(ii) of the SAST
Regulations, both Star Pharma and Daison are required to be named as part of the
promoter and promoter group of the Target Company in its shareholding pattern for
at least 3 years prior to the acquisition. Since Star Pharma was first named as such
only for the quarter ending March 31, 2017, it will complete 3 years of being named
as a part of the promoter and promoter group of the Target Company in its
shareholding pattern filed on March 31, 2020. Hence, to take advantage of the
exemption under Regulation 10(1)(a)(ii), the proposed acquisition should ideally
take place post March 31, 2020.
Question
In a particular case, a target company issued 200 lakh warrants @ 100 per warrant to two
promoters enabling them to get a right to have equity shares at a later date by paying 50
crore upfront. Assume that such a preferential allotment is made as per the preferential
issue guidelines of SEBI. In a takeover bid, the contention before the SEBI is whether these

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warrants should be treated as partly paid-up shares.

Answer
As per SEBI regulation for preferential issues, where the warrants are issued on
preferential basis with an option to the holder thereof to apply for and to be allotted
shares, the holder of the warrants gets only option to buy equity shares. In the respect one
should note that the warrants cannot be treated as partly paid up shares in view of the
following:-
 Holder of the warrant is not a member while holder of partly paid up shares is a
member of the company.
 Holder of partly paid up shares can be exercise voting rights in proportionate to his
holding however the holder of warrants cannot.
Accordingly the contention of SEBI to treat the warrants as partly paid up shares is not
correct. An open offer under the SEBI (Substantial Acquisition of shares and takeover)
regulation, 2011 is not triggered on the issue of warrants but only on their conversion into
equity shares.

Question
Mr. X is Promoter of ABC (India) Limited (Target Company). Mr. X is presently holding
53,073 shares constituting 0.52% of the paid up equity capital of the Target Company.
Further, Mr. X has been allotted 75,000 convertible warrants, convertible in to equity.
After conversion of warrant in to equity the shareholding of Mr. X will increase from 0.52%
to 1.26% of the paid up equity capital. Further, Ms. Z who is Mr. X's elder sister's daughter
and holding 7,80,000 equity shares constituting 7.76% of the paid up equity share capital
of the Company. Ms. Z is a foreign shareholder and she wanted to gift (Off Market
Transaction) her entire shareholding to her mother Mrs. Y and in turn Mrs. Y wanted to gift
the entire shareholding to Mr. X. If the entire transaction as contemplated, if concluded,
then the shareholding of Mr. X will increase from 0.52% to 9.02% and the shareholding of
the promoter group will increase from 34.28% to 43.30%. You have been engaged as
Practising Company Secretary by Mr. X to advise on the following:
a. Is this increase in the promoter group shareholding would trigger open offer
requirements in terms of Regulation 3(2) of the SEBI (SAST) Regulation, 2011.
b. Further, whether such transaction would be exempted under Regulation 10 of the
SEBI (SAST) Regulations, 2011.
Answer
a. The set of facts as disclosed in the question contains three transactions. First,
conversion of convertible warrants in to equity. Secondly, transfer of shares through
off market transaction from Ms. Z to Mrs. Y and thirdly, transfer of shares through

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off market transaction from Mrs. Y to Mr. X. Regarding the first transaction, the
trigger and open offer requirements, if any has to be considered at the time of
conversion of warrants in to equity as the same would depends on the shareholding
pattern of the promoter and promoter’s group prevailing at the time of conversion
of warrants in to equity shares. Regarding the second and third transaction,
considering that Ms. Z, Mrs. Y and Mr. X are immediate relative thus they would be
considered as PAC in terms of Regulation 2(1)(q) of the SEBI (SAST) Regulations,
2011. Therefore, the shareholding of the promoters along with PACs would increase
more than 5% limit and would trigger open offer requirements under Regulation
3(2) of the SEBI (SAST), 2011.
b. However, the transaction is between immediate relatives, the transaction would be
exempt from the obligation to make an open offer as per Regulation 10(1)(a)(i) of
the SEBI (SAST), Regulations, 2011 subject to the compliance with the conditions as
mentioned under the proviso to Regulation 10(1)(a)(i) and Regulation 10(5), (6) and
(7) of the SEBI (SAST), Regulations, 2011.

Question
Visualsight Ltd. is a listed company. The promoters hold 61.50% paid up equity share
capital as on 31st March, 2018. On November 2 2018, some of the promoters who hold
convertible warrants in the company converted 1500000 warrants into shares as result of
which the holding of promoters increased by 4.10%. Vihaan, (“transferor"), one of the
promoters holds 18.50% of equity share capital in the company proposed to gift 1.20%
equity shares of the company to immediate relative by way of transfer. Taking into
account SEBl (SAST) Regulations, answer the following questions in detail:
a. Whether the proposed transfer triggers an obligation upon the Transferor for open
offer?
b. Will the transaction covered under creeping acquisition?
c. Would the promoters be permitted to avail any exemption under the regulation?
(4+2+2=8 marks) (Dec 2019)
Answer
a. In terms of Regulation 3(2) and 3(3) of the SAST Regulations, an obligation to make
an open offer would arise if the acquirer (along with persons acting in concert) is
already entitled to exercise 25% or more of the voting rights in an Indian listed
company, and acquires additional shares or voting rights entitling it to exercise
more than 5% voting rights in an Indian listed company, in a financial year.
By virtue of conversion of warrants into shares, the promoter shareholding in the
Company has already increased by 4.10%. Therefore, a further transfer (by way of

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gift) of shares constituting 1.20% of the equity share capital of the Company to an
immediate relative in the same financial year would increase the gross acquisition of
shares by the promoter group in excess of the 5% threshold under Regulation 3(2) of
the SAST Regulations, hence triggering the requirement to make an open offer
b. Creeping acquisition limit is 5% in a financial year ending 31st March. In above case
the gross acquisition is more than 5% (4.10%+1.20%=5.30%) Thus the transaction
will not be covered under creeping acquisition.
c. The Transfer would qualify as an inter-se transfer between immediate relatives
under Regulation 10(1)(a)(i) of the SAST Regulations, and hence is exempt from the
requirement to make an open offer under the SAST Regulations

Question
An unlisted public company (“Acquirer”) doing business of exporting steel and it is a part
of the Promoter Group of Maurya Hotels (India) Ltd. (MHIL), a company listed on stock
exchange. In view of improving its efficiency, MHIL is planning to restructure its group. The
Acquirer has agreed to enter into a scheme of arrangement where the shares held by the
promoter group companies (eight companies) will be transferred to it. Post-merger, the
shareholding of the Acquirer in the Company will increase from 2% to 24%. However, the
overall promoter shareholding will remain unchanged. You, being practicing company
secretary, appointed as consultant by the Acquirer, answer the following:
a. Will the transfer of shares trigger an obligation to make an open offer under the
SEBI (SAST) Regulations on the Acquirer?
b. What are the disclosure requirements under the SAST Regulations, if any, that the
parties to the scheme will have to comply with? (5 marks) (June 2019)
Answer
a. Regulations 3, 4 and 5 of the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 set out the events that trigger an obligation to make
an open offer on the acquirer (along with persons acting in concert). The said
triggers points are as follows:
 Acquisition (directly or indirectly) of such shares or voting rights in an Indian
listed company whereby the acquirer becomes entitled to exercise 25% or more
of the voting rights in such Indian listed company;
 Where an acquirer (along with persons acting in concert with him) is already
entitled to exercise 25% or more of the voting rights in an Indian listed
company, and acquires (directly or indirectly) additional shares or voting rights
entitling an acquirer to exercise more than 5% voting rights in an Indian listed
company, in a financial year; and

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Since the Acquirer, in the above facts, does not attract any of the triggers set
out above, the transfer of shares will not impose any obligation on the Acquirer
to make an open offer under the SEBI (SAST) Regulations.
b. The Acquirer and promoter group companies will be required to make a disclosure of
the change in shareholding under Regulation 29(2) of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011. According to Regulation
29(3) of the said regulations, the disclosure should be made within 2 working days
of such acquisition or the disposal to the target company at its registered office and
to the stock exchanges where the shares of the target company are listed.

Case Laws
1. 07. 07. 2020 M/s Sungold Capital Limited vs. SEBI Whole Time Member,
Securities and
Exchange Board of
India
One of the principles underlying under SAST regulations is exit opportunity to the public
shareholders of the Target company at the best price and accordingly, the provisions of
SAST regulations deals with offer price, that offer price in an open offer highest of the
prices of shares of the Target company derived through various methods.
Facts of the case
The respective acquirers/PAC’s after acquiring shares/voting rights of Sungold Capital
Limited (“Target Company”) beyond the threshold of initial/creeping acquisition have
failed to make an open offer in terms of Regulation 10 and 11(1) of SAST
Regulations, 1997, on, April 1, 2007 and September 14, 2007, respectively.
As per Regulation 21(19) of SAST Regulations, 1997, the acquirer and the PAC’s were jointly
and severally liable for discharge of obligations under SAST Regulations, 1997.
SAST Regulations, 1997 has been repealed by Regulation 35(1) of SAST Regulations, 2011
and has been replaced by SAST Regulations, 2011.
Regulation 35(2)(b) of SAST Regulations, 2011,provides that all obligations incurred
under the SAST Regulations, 1997, including the obligation to make an open offer, shall
remain unaffected as if the repealed regulations has never been repealed.
Therefore, the obligations to make open offer, incurred by the acquirers / PAC’s under SAST
Regulations, 1997, are saved and can be enforced against them by virtue of Regulation 35
of SAST Regulations, 2011.
Order
SEBI directed acquirers/PAC’s of the target company to make a public announcement of a

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combined open offer for acquiring shares of Sungold Capital Ltd., under Regulation 10 and
11(1) of the SAST Regulations, 1997, within a period of 45 days from the date when this
order comes into force, in accordance with SAST Regulations,1997. The acquirers/PAC’s
shall along with the offer price, pay interest at the rate of 10% per annum for delay in
making of open offer, for the period starting from the date when the Noticees incurred
the liability to make the public announcement and till the date of payment of
consideration, to the shareholders who were holding shares in the Target Company on
the date of violation and whose shares are accepted in the open offer, after adjustment of
dividend paid, if any.

2. 17. 03. 2020 Susheel Somani & Ors. (Appellant) vs. SEBI Securities Appellate
(Respondent) Tribunal
Penalty imposed by SEBI on violating SAST regulations, further reduced by SAT considering
it a technical breach
Facts of the case
Aggrieved by the order of the Adjudicating Officer of the respondent SEBI dated December
27, 2017 imposing a penalty of Rs. 15 lacs for violation of provisions of public
announcement of an open offer under Regulation 3(2) read with Regulation 13(1) of the
SEBI (SAST) Regulations, 2011, the present appeal is preferred.
The appellants contended before the AO that there was no violation of Regulation 3(2)
read with Regulation 13(1) of the SAST Regulations, 2011 since the transfer was inter se
between the promoters, the same was exempted from making a public announcement as
provided by Regulation 10 of the SAST Regulations.
As regard the exemption, the AO found that while Regulation 10 of the SAST Regulations
provides for making disclosures to the stock exchanges and to the company within a period
of two working days. In the present case, the appellants made the disclosures on 7th day
as against the provisions of Regulation 29(3).
[Reg. 29(3) - the disclosures are required to be made within two working days]
Order
Thus, technically the appellants were not exempted from making public announcement
and, thus, are in violation of the relevant regulations. The AO has observed that as the
condition of making disclosures within two working days is not fulfilled, the act was not fit
for grant of exemption. In the circumstances, the penalty was imposed. The appellants
made the disclosures though belatedly after five days as required by Regulation 29 of the
SAST Regulations.
Thus, it was a technical breach and, therefore, AO instead of imposing a penalty of Rs. 15
lacs, imposed a penalty of Rs. 5 lacs which would have been just and sufficient. The appeal

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was partly allowed.

3. 07. 09. 2017 Mega resources Ltd. (Appellant) vs. SEBI Securities Appellate
(Respondent) Tribunal
Ignorance of law will not excuse the appellant to escape the liability of violating the law
Facts of the case
The Appellant, Mega Resources Limited, is aggrieved by the order dated 13.08.2014 passed
by the Adjudicating Officer, SEBI imposing a penalty of Rs. 2,00,000/- under Section 15A(b)
of the SEBI Act and Rs. 50,00,000/- under Section 15 H(ii) of the SEBI Act for failure on the
part of the appellant to comply with the provisions of Regulation 7(1) read with
Regulation 7(2) and Regulation 11(1) read with Regulation 14(1) of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997.
The appellant has admitted that pursuant to the acquisition of 25000 equity shares
through off-market transactions the shareholding of the Promoters/Promoter Group of the
Company had increased from 50.46% to 60.46% of the Target Company. This triggered
Regulation 11(1) of the erstwhile SAST Regulations along with the requirement of
submission of certain disclosures under Regulation 7(1) and 7(2) of the erstwhile
Regulations. It is admitted by the appellant that the non compliance with the disclosure
requirements in respect of acquisition of shares and failure to make an open offer to the
shareholders of the Company was due to lack of awareness of the erstwhile regulations on
the part of the Appellant and purely unintentional and without any malafide intentions.
However, It is trite law that ignorance of law will not excuse the appellant to escape the
liability of violating the law nor ever absolve the wrongdoer of his crime or misconduct.
Further, the appellant contended that in the matter of imposition of penalty, the Section
15(H)(ii) of the SEBI Act, 1992 was amended dated October 29, 2002 and the penalty for
non-disclosure of acquisition of shares and takeovers was enhanced from a maximum of
Rs. Five Lakh to Rs. Twenty Five crore. It is argued that since the violation in Appeal was
committed in February, 2001, the appellant would be governed by the erstwhile provisions
of Section 15H(ii) of the SEBI Act, which existed on the date of violation in question.
Order
It is true that the maximum monetary penalty imposable for non disclosure of acquisition
of shares and takeovers under the erstwhile SEBI Act on the date of violation by the
Appellant was Rs. Five Lakh and by the amendment dated October 29, 2002 it is up to Rs.
Twenty Five Crore or three times of the amount of profits made out of such failure,
whichever is higher. However, the moot point in this connection to be noted is that as on
October 29, 2002 the obligation to make disclosure and public announcement under
Regulations 7(1) read with 7(2) and 11(1) read with 14(1) continued. Therefore, because the

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violation was continued even after October 29, 2002, the appellant has been rightly
imposed penalty under the amended provisions of Section 15H(ii) of the SEBI Act. Since the
punishment imposable now for such non-disclosure and public announcement is up to Rs.
Twenty Five Crore, SAT finds that the penalty of Rs. Fifty Lakh is just and reasonable and
not disproportionate.
The contention of the appellant in this regard is, therefore, liable to be turned down.
Therefore, in the peculiarity of the facts and circumstances of the case and, in particular,
the continuity of the obligation to make disclosure and public announcement, the penalty
of Rs. 50 Lakh is upheld and the appeal is dismissed.

4. 16. 03. 2020 G P Shah investment Private Limited & Ors. Securities Appellate
(Appellant) vs. SEBI (Respondent) Tribunal
Facts of the case
The present appeal has been filed against the order of the Adjudicating Officer, SEBI dated
March 13, 2019 imposing a penalty of 5 crores to be paid by the appellants jointly and
severally, under Section 15H (ii) of the SEBI Act, 1992 for violation of Regulation 3(2) of the
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“SAST
Regulations, 2011” for convenience). This Tribunal held that the date on which the
appellants acquired the shares triggered the provisions of Regulation 3(2) of the SAST
Regulations, 2011 and consequently incurred an obligation to make a combined public
announcement of an open offer for acquiring the shares of the target company.
Order
SAT finds that no relief can be granted to the appellants as AO granted several
opportunities but the appellants choose not to appear or file any reply. In the light of the
aforesaid, SAT are of the opinion that sufficient opportunity was given to the appellants to
contest the matter which they failed to do so. Thus, remanding the matter back to the AO
in the given circumstances does not arise. With regard to the quantum of penalty, SAT
finds that the order of the Whole Time Member (WTM) directing the appellants to make a
public announcement was issued as far back as on July 08, 2013 which after 7 years has
not as yet been complied with. Considering the aforesaid and the admitted violations, SAT
did not find any error in the imposition of penalty imposed by the AO though, under
Section 15HB a maximum penalty of Rs 25 crores or three times the amount of profits could
have been imposed. In view of the aforesaid, SAT do not find any merit in the appeal and
the same is dismissed with no order as to costs.

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Chapter 7
SEBI (Buyback of Securities) Regulations, 1998

Objective of Buy-Back
Buy-back is a process whereby a company purchases its own shares or other specified
securities from the holders thereof for.
 to improve earnings per share;
 to improve return on capital, return on net worth and to enhance the long-term
shareholder value;
 to provide an additional exit route to shareholders when shares are undervalued or are
thinly traded;
 to prevent unwelcome takeover bids;
 to return surplus cash to shareholders;
 to achieve optimum capital structure;
 to service the equity more efficient.

Section 68 of The Companies Act, 2013

Buy back of securities are governed by Section 68 of the Companies Act, 2013 and Rule 17
of Companies (Share Capital and Debentures) Rules, 2014.
Listed companies have to comply with the regulations laid down by SEBI also in this
behalf. Conditions for Buy Back pursuant to section 68(2) of the Companies Act, 2013
 Securities offered for buy-back must be fully paid-up.
 The buy-back must be authorized by the articles of association of the company.
 There must be a gap of at least one year between two buy back offers by the
company.
 Buy back must be authorized by a Special Resolution.
 But if the buy-back amounts to 10% or less of the total paid-up equity capital and free
reserves of the company then the Board resolution is enough and the company is not
required to pass any special resolution.
 A company can buy-back up to 25% of the aggregate of paid-up capital and free
reserves of the company.
However, in case of buy back of equity shares the limit of 25% of paid up capital shall
be construed as 25% of Equity paid up capital
 the ratio of the aggregate of secured and unsecured debts owed by the company after
buy-back is not more than twice the paid-up capital and its free reserves.
 However the Central Government may, by order, notify a higher ratio of the debt to

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capital and free reserves for a class or classes of companies.

 all the shares or other specified securities for buy-back are fully paid-up.
Illustration
Extract of Balance Sheet of X Ltd consist of:
Equity Share Capital – Rs. 6,00,000 of Rs. 10 each
12% Preference Share Capital – Rs. 100,000 of Rs. 100 each
14% Debenture Capital – Rs. 300,000 of Rs. 100
What is the maximum equity share capital and number of equity shares that can be bought
back?
Solution
(i) Maximum equity share capital that can be bought back = Rs. 600000*25% = Rs.
1,50,000
(ii) Maximum number of equity shares that can be bought back =Rs. 1,50,000/10 =
15000 –-equity shares

Past Paper Question

RN Ltd., has equity share capital of 20, 00.000 of face value of Rs 10
each, listed in Bombay Stock Exchange. The company has proposed for
buy-back of its shares up to 25 %. As a Company Secretary explain the
conditions for buy-back of shares (7 marks) (Dec 2019)

Small Shareholder
A shareholder of a company, who holds shares or other specified securities whose market
value, on the basis of closing price of shares or other specified securities, on the recognised
stock exchange in which highest trading volume in respect of such securities, as on record
date is not more than two lakh rupee

Authorisation in the Articles

 The articles of association of the company should authorise the buyback of securities.
In case, such a provision is not available, it would be necessary to alter the articles of
association to authorise buyback.
 A special resolution is required to passed at a general meeting of the company for such
authorisation.
 No special resolution is required where the buy-back is, 10% or less of the total paid-
up equity capital and free reserves of the company and such buy-back has been
authorised by the board of directors by means of a resolution passed at its meeting.

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Method of Buy-Back
The buy-back may be:-
 From the existing security holders on a proportionate basis.
 From the open market through—
 book-building process
 stock exchange;
 From odd-lot holders
However, no offer of buy-back for 15% or more of the paid up capital and free reserves of
the company shall be made from the open market.

Past Paper Question

Can a Company buy-back its own shares or any specified securities through
negotiated deals or through any private arrangements? Comment with methods
allowed for buy-back (5 marks)(June 2019)
The financial data of a listed company as on 31st March, 2018 are as follows :
Authorized equity share capital Rs 10 crore
(1 crore shares of Rs 10 each)
Paid-up equity share capital Rs 5 crore
General reserve Rs 3 crore
Debenture redemption reserve Rs 2 crore
The Board of directors of your company passed resolution by circulation for
buy-back of shares to the extent of 9% of the company’s paid-up share capital
and free reserves. You are required to examine the validity of the proposal with
reference to the provisions of the SEBI Regulations. (4 marks) (June 2019)

Explanatory Statement
The notice of the meeting at which the special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating –
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of shares or securities intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back.

Additional Disclosures
The company is required to provide an additional disclosure as per Schedule I to these
regulations, in addition to disclosures mentioned above under sub section 3 of section 68 of

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the Companies Act, 2013 as discussed below:

(1) Date of the Board meeting at which the proposal for buy back was approved by the
Board of Directors of the company;
(2) Necessity for the buy back;
(3) Maximum amount required under the buy back and its percentage of the total paid
up capital and free reserves;
(4) Maximum price at which the shares or other specified securities are proposed be
bought back
(5) Maximum number of securities that the company proposes to buy back;
(6) Method to be adopted for buy-back
(7) A confirmation that there are no defaults subsisting in repayment of deposits,
redemption of debentures or preference shares or repayment of term loans to any
financial institutions or banks;
(8) the company will not, having regard to its state of affairs, will not be rendered
insolvent within a period of one year from that date.

Buy Back Process

Issue of Public
Determination of Offer
Appointment of advertisement in
Price, Opening and
Merchant National daily on
Closure of the Buyback
Banker(s)/Registrar Completion of Buy-
Offer
back process

Filing the Resolution Merchant Banker to Acceptance and

with SEBI/ Stock file Final Report with Payment to Security
Exchanges(s) SEBI Holders

Public Announcement to
Extinguishment of
be released in
File the return with Certificates and
newspapers and
ROC and SEBI intimation to Stock
simultaneous filing with
Exchange
SEBI/Stock Exchange

Buy-Back from Existing Security-Holders Through Tender Offer

A company may buy back its securities from its existing security-holders on a proportionate
basis. It may be noted that fifteen per cent of the number of securities which the company
proposes to buy-back or number of securities entitled as per their shareholding, whichever
is higher, shall be reserved for small shareholders.

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Past Paper Question

TechNoGrow Ltd. approved buy back proposal of 200000 Equity share capital in
its Board meeting on 25th April, 2019. The record date was fixed on 25th June,
2019. The closing market price on NSE as on 25th April, 2019 and 25th June, 2019
was Rs 2640.40 and Rs 2514.05 respectively. Determine the number of equity
shares which is eligible to be tendered by Small Shareholder Category (rounded
off to lower whole number). (5 marks) (Dec 2019)
Answer:- In terms of proviso to the Regulation 6 of the SEBI (Buyback of Securities)
Regulations, 2018, fifteen percent of the number of securities which the
company proposes to buy back or number of securities entitled as per their
shareholding, whichever is higher, shall be reserved for small shareholders.
Hence the total shares reserved for buyback under the offer will be:
200,000 x 15% = 30,000 shares
Further, as per regulation 2(n) of the SEBI (Buy back of Securities) Regulations,
2018 'small shareholder' means a shareholder of a company, who holds shares
or other specified securities whose market value, on the basis of closing price or
shares or other specified securities, on the recognized stock exchange in which
highest trading volume in respect of such securities, as on record date is not
more than two lakh rupee.
The closing price on record date is Rs 2514.05. The number of shares eligible for
buy back under small shareholders category will be:
Rs 2514.05 = 79.55 shares
200000
79.55 shares rounded off to lower whole number i.e 79 shares. Hence, equity
shareholders holding not more than 79 shares of TechNoGrow Ltd. shall be
classified as Small Shareholders.
Disclosures, Filing Requirements and Timelines for Public Announcement and Draft
Letter of Offer
Public Announcement  The company which has been authorised by a special resolution
or a resolution passed by the Board of Directors at its meeting
shall make a public announcement within two working days
from the date of resolution in at least one English National
Daily, one Hindi National Daily and a Regional language at the
place where the Registered office of the company is situated
and shall contain all the material information
 A copy of the public announcement along with the soft copy
shall also be submitted to SEBI simultaneously through a
merchant banker.

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Filing with SEBI The company shall within 5 working days of the public
announcement file the following:
 a draft-letter of offer, along with soft copy containing
disclosures.
 a declaration of solvency in the prescribed form and in a
manner prescribed in the Companies Act, 2013.
 Prescribed fees as specified in these regulations
SEBI may give its comments on the draft letter of offer within 7
working days of the receipt of the draft letter of offer.
In the event, SEBI specifies any changes, the merchant banker to
the buyback offer and the company shall carryout such changes in
the letter of offer before it is dispatched to the shareholders.
Offer Procedure
(1) A company making a buy-back offer shall announce a record date for the purpose of
determining the names of the security holders, who are eligible to participate in the
proposed buy-back offer.
(2) The letter of offer along with the tender form shall be dispatched to the security
holders who are eligible to participate in the buy-back offer, not later than 5
working days from the receipt of communication of comments from SEBI.
(3) The date of the opening of the offer shall be not later than 5 working days from the
date of dispatch of letter of offer.
(4) The offer for buy back shall remain open for a period of 10 working days.
(5) The company shall accept shares or other specified securities from the security
holders as on record date.
(6) The shares proposed to be bought back shall be divided into two categories;
(a) Reserved category for small shareholders; and
(b) General category for other shareholders,
and the entitlement of a shareholder in each category shall be calculated
accordingly.

Yes, unregistered shareholder may also tender his

Can unregistered shares for buy-back by submitting the duly executed
shareholder tender his Transfer deed for transfer of shares in his name, along
shares for buyback? with the offer form and other relevant documents as
required for transfer, if any

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Escrow Account
(1) The company should by way of security for performance of its obligations on or
before the opening of the offer, deposit in an escrow account the sum as specified
under these regulations.
(2) The escrow amount is payable in the following manner:
(a) if the consideration payable does not exceed Rs 25% of the consideration
100 crores payable
(b) if the consideration payable exceeds Rs 100 25% upto Rs 100 crores
crores and 10% thereafter
(3) The escrow account referred to above shall consist of:
a. cash deposited with a scheduled commercial bank, or
b. bank guarantee in favour of the merchant banker, or
c. deposit of acceptable securities with appropriate margin, with the merchant
banker, or
d. a combination of (a), (b) and (c) above;
(4) Where the escrow account consists of deposit with a scheduled commercial bank, the
company while opening the account, should empower the merchant banker to
instruct the bank to issue a banker’ cheque or demand draft for the amount lying to
the credit of the escrow account
(5) Where the escrow account consists of bank guarantee, such bank guarantee shall be
in favour of the merchant banker and valid until 30 days after the closure of the
offer;
(6) Where the escrow account consists of securities, the company should empower the
merchant banker to realise the value of such escrow account by sale.
Note: The cash component of the escrow account may be maintained in an interest bearing
account. However, the merchant banker shall ensures that the funds should be available
at the time of making payment to shareholders.
After the payment of consideration to all the securities holders who have accepted the
offer and after completion of all formalities of buy-back, the amount, guarantee and
securities in the escrow, if any, shall be released to the company.
In case of non-fulfilment of obligations under the regulations, SEBI in the interest of the
securities holders may forfeit the escrow account either in full or in part. Such forfeited
amount may be distributed amongst the securities holders who accepted the offer and
balance, if any, on pro rata which shall be utilised for investor protection.
Payment to the Security Holders
The company shall complete the verifications of offers received and make payment of
consideration to those security holders whose offer has been accepted or return the shares
or other specified securities to the security holders within 7 working days of the closure of

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the offer.

Past Paper Question

PQR Limited, a listed company. is intending to make buy-back of its equity
shares. Referring to SEBI Buy-back Regulations, explain the following:
(i) The manner of deposit of amount in Escrow account.
(ii) How can an unregistered shareholder tender his shares for buy-back?
(iii) What is time limit for completing buy-back process?
(4 marks) (Aug 2021)

Extinguishing of Bought-Back Securities

The company shall also ensure that all the securities bought-back are extinguished within
7 days of the last date of completion of buy–back.
The company shall furnish the particulars of the securities certificates extinguished and
destroyed to the stock exchanges where the shares of the company are listed, within 7
days of extinguishment and destruction of the certificates.
The shares or other specified securities offered for buy-back if already dematerialised shall
be extinguished and destroyed in the manner specified under SEBI (Depositories and
Participants) Regulations, 2018.
The company shall, furnish a certificate to SEBI certifying compliance as specified above
and duly certified and verified by –
 the registrar and whenever there is no registrar by the merchant banker;
 two directors of the company one of whom shall be a managing director where there
is one
 the statutory auditor of the company,
The company shall also maintain a record of security certificates which have been
cancelled and destroyed as prescribed in the Companies Act.

Odd-Lot Buy Back

The provisions pertaining to buy-back through tender offer as specified in this Lesson
shall be applicable mutatis mutandis to buy-back of odd-lot shares or other specified
securities.

Buy-Back from Open Market

Regulation 14 of the Regulations lays down that a buy-back of shares or other specified
securities from the open market may be in any one of the following methods:
(i) Through stock exchange
(ii) Book-building process.

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Buy-back through the Stock Exchange

Pre-condition  The buy-back should be made only on stock exchanges
having Nationwide Trading Terminal facility
 The buy-back of securities should not be from the promoters
or persons in control of the company;
Disclosures, filing  The company should appoint a merchant banker
requirements and  The public announcement shall be made within 2 working
timelines of public days from the date of passing board resolution or special
announcement resolution through postal ballot.
 Simultaneously with the issue of such public announcement,
the company shall file a copy of the public announcement
with SEBI.
 The public announcement shall also contain disclosures
regarding details of the brokers and stock exchanges through
which the buy-back of shares or other specified securities
would be made.
Note: In case of the buy-back from open market, no draft letter
of offer/ letter of offer is required to be filed with SEBI.
Opening of the offer on  The buy-back offer shall open not later than 7 working days
stock exchange from the date of public announcement and shall close within
6 months from the date of opening of the offer;
Subsequent  The company shall submit the information regarding the
compliances shares or other specified securities bought back, to the stock
exchange on a daily basis
 The company shall upload the information regarding the
shares or other specified securities bought back on its
website on a daily basis;
Escrow Account
 The company shall, before opening of the offer, create an escrow account towards
security for performance of its obligations under these regulations, and deposit in
escrow account 25 % of the amount earmarked for the buy-back as specified in the
resolution of the board of directors or the special resolution, as the case may be.
 The escrow account may be in the form of
(a) cash deposited with any scheduled commercial bank or
(b) bank guarantee issued in favour of the merchant banker by any scheduled
commercial bank.
 Where part of the escrow account is in the form of a bank guarantee, the company
shall deposit with a scheduled commercial bank, in cash, a sum of at least 2.5% of the

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total amount earmarked for buyback

 The escrow amount may be released for making payment to the shareholders subject
to atleast 2.5% of the amount earmarked for buy-back remaining in the escrow
account at all points of time.
 In the event of non-compliance as specified above, SEBI may direct the merchant
banker to forfeit the escrow account, subject to a maximum of 2.5% of the amount
earmarked for buy-back as specified in the resolutions. except in cases where,-
(i) volume weighted average market price (VWAMP) of the shares or other
specified securities of the company during the buy-back period was higher than
the buy-back price as certified by the Merchant banker based on the inputs
provided by the Stock Exchanges.
(ii) inadequate sell orders despite the buy orders placed by the company as certified
by the Merchant banker based on the inputs provided by the Stock Exchanges.
(iii) such circumstances which were beyond the control of the company and in the
opinion of SEBI
 In the event of forfeiture for non-fulfillment of obligations as specified under these
regulations, the amount forfeited shall be deposited in the Investor Protection and
Education Fund of SEBI.

Buy-back through Book-Building

Pre-condition  Special resolution or Board Resolution, as the case may be,
shall be passed for authorisation of Buy back of shares
Disclosures, filing  The company should appoint a merchant banker.
requirements and  A public announcement shall be made at least 7 days prior to
timelines of public the commencement of the buy- back.
announcement  The Public announcement shall also contain the detailed
methodology of the book building process, the manner of
acceptance, the format of acceptance to be sent by the security
holders and the details of bidding centres.
Escrow Account  The provisions with respect to deposit of amount in escrow
account as specified in buy-back through tenders offers shall
also apply to buy back of shares or other specified securities
through book building process.
 The deposit in the escrow account shall be made before the date
of the public announcement.
Filing with SEBI  A copy of the public announcement must be filed with SEBI
within 2 days of the announcement along with the fees as
specified.

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Offer Procedure  The book-building process should be made through an

electronically linked transparent facility.
 The number of bidding centres should not be less than thirty
and there should be at least one electronically linked
computer terminal at all the bidding centres.
 The offer for buy-back should be kept open to the security-
holders for a period of not less than 15 days and not exceeding
30 days.
 The merchant banker and the company should determine
the buy-back price based on the acceptances received and
the final buy-back price, which should be paid to all holders
whose securities have been accepted for the buy-back.
Extinguishment of  The provisions pertaining to extinguishment of certificates for
Certificates tender offer shall be applicable mutatis mutandis to the buy-
back through book building

Obligation of the Company

The company shall ensure that:
a. the letter of offer, the public announcement of the offer or any other advertisement,
circular, brochure, contains true, factual and material information and does not
contain any misleading information and must state that the directors of the company
accept the responsibility for the information contained in such documents;
b. the company shall not issue any specified securities including by way of bonus till
the date of closure of the offer.
c. the company shall pay consideration only by cash;
d. the company shall not withdraw the offer to buy-back after the draft letter of offer
is filed with the SEBI or public announcement of the offer to buy-back is made;
e. the promoter or the person shall not deal in the specified securities of the company
during the period “from the date of passing the resolution till the closing of the
offer.
f. the company shall not raise further capital for a period of one year from the closure
of buy-back offer
g. The company should nominate a compliance officer and investors service centre for
compliance with the buy-back regulations and to redress the grievances of the
investors.
h. The particulars of the said security certificates extinguished and destroyed should be
furnished by the company to the stock exchanges where the securities of the
company are listed, within 7 days of extinguishment and destruction of the

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certificates.
i. The company should not buy-back the locked-in securities and non-transferable
securities till the pendency of the lock-in or till the securities become transferable.
j. The company should issue, within two days of the completion of buy-back, a public
advertisement in a national daily, disclosing the following:
(i) number of securities bought;
(ii) price at which the securities were bought;
(iii) total amount invested in the buy-back;
(iv) details of the security-holders from whom securities exceeding one per cent of
the total securities were bought-back; and
(v) the consequent changes in the capital structure and the shareholding pattern
after and before the buy- back.

Obligation of the Merchant Banker

The merchant banker should ensure that:
a. the company is able to implement the offer;
b. the provision relating to escrow account has been made;
c. firm arrangements for monies for payment to fulfill the obligations under the offer
are in place;
d. the public announcement of buy-back is made and the letter of offer has been filed
in terms of the Regulations;
e. the merchant banker should furnish to SEBI, a due diligence certificate which should
accompany the draft letter of offer;
f. the merchant banker should ensure that the contents of the public announcement of
offer as well as the letter of offer are true, fair and adequate and quoting the source
wherever necessary.
g. the merchant banker should ensure compliance section 68 and section 70 of the
Companies Act 2013 and any other applicable laws or rules in this regard;
h. upon fulfillment of all obligations by the company under the Regulations, the
merchant banker should inform the bank with whom the escrow or special amount
has been deposited to release the balance amount to the company and send a final
report to SEBI in the specified form, within 15 days from the date of closure of the
buy-back offer.

Buy-Back Vis-à-vis Compliance Under SEBI (SAST) Regulation, 2011

In case the acquirer’s initial shareholding was more than 25% and the increase in
shareholding due to buyback is beyond the permissible creeping acquisition limit of 5% per
financial year, the acquirer can get an exemption from making an open offer, subject to the

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following:
 Such acquirer does not vote in favour of the resolution authorising the buy-back of
securities under section 68 of the Companies Act, 2013;
 In the case of a shareholder’s resolution, voting is by way of a postal ballot;
 where a resolution of shareholders is not required for the buyback, such shareholder,
in his capacity as a director, or any other interested director has not voted in favour
of the resolution of the board of directors of the target company authorising the buy-
back of securities under section 68 of the Companies Act, 2013 ; and
 The increase in voting rights does not result in an acquisition of control by such an
acquirer over the target company.
In case the above conditions are not fulfilled, the acquirer may, within 90 days from the
date of increase, dilute his stake so that his voting rights fall below the threshold which
requires an open offer

Past Paper Question

“Increase in voting rights in a target company by any shareholder pursuant to
buyback is exempted from the obligation to make an open offer subject to
certain conditions”. In the light of the statement, you are required to enumerate
these conditions. (4 marks) (Dec 2020)

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Chapter 8
SEBI (Delisting of Equity Shares) Regulations, 2009

Introduction
Delisting denotes removal of the listing of the securities of a listed company from the
Stock Exchange.
Delisting differs from suspension or withdrawal of admission to dealings of listed
securities, which is for a limited period.
‘Suspension’ of trading in securities means that no trade can take place in the securities of
the company suspended for a temporary period. Suspension is not done at the instance of
company but it is action taken by the Stock Exchanges against the company, generally for
non-compliance of listing conditions as stipulated under SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 (LODR Regulations).
Once, the company makes good the compliance of the listing conditions under LODR
Regulations, stock exchange withdraw suspension and permits trading. Stock exchanges
may impose fines or freeze promoter/promoter
On the other hand, ‘delisting’ of securities means removal of the name of the company
from the stock exchange and no trade can take place in the securities of the company
delisted. Delisting of securities can be done either by company voluntarily or by the stock
exchange, compulsorily. Generally stock exchange, in order to impose severe punishment
on companies compulsorily delists securities of any company, as a last resort. Compulsory
delisting affects reputation of company and to the extent of liquidity in trading those
shares.
Delisting of securities may be of two types, namely, voluntary delisting and compulsory
delisting. In the case of voluntary delisting, a listed company seeks of its own volition for
the delisting of its securities; while in case of compulsory delisting, the Stock Exchange
itself delists the securities of such Company.

Notes:-

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Agencies Involved in Delisting Process and their Role

Agencies Functions
Merchant banker to the  Determines exit price.
offer  Makes public announcements.
 Finalises schedule of delisting
 Manages escrow account
 Assist the acquirer in determining the final exit price.
 Interacts with regulatory authorities / stock exchange
for the delisting process
Registrar to the Offer  Completes dispatch of notice, letter of offer and
payment / rejection intimation to the shareholders of
the Company
 Holds equity shares tendered under the offer post
settlement of equity shares

Professionals involved  Intimates stock exchange.

 Manages the special resolution approval process and
resolution filed with ROC on approval.
 Assists the company in preparation of various
documents required for the process

Circumstances where Delisting is not Permissible

 Buy back of equity shares by the company; or
 Preferential allotment made by the company; or
 Unless a period of three years has elapsed since the listing of that class of equity
shares; or
 Instruments which are convertible into the same class of equity shares that are
sought to be delisted are outstanding.
 Delisting of convertible securities
No acquirer or promoter or promoter group or their related entities shall :
 Employ any device, scheme or artifice to defraud any shareholder or other person;
or
 Engage in any transaction or practice that operates as a fraud or deceit upon any
shareholder or other person; or
 Engage in any act or practice that is fraudulent, deceptive or manipulative in
connection with such delisting.

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Past Paper Question

(d) Young Ltd. is a company incorporated under the provisions of the Companies
Act, 2013. The Company is listed on National Stock Exchange since 1st January,
2017. The promoters of the Company are now exploring the possibility to
voluntarily delist the Company on or before 1st October, 2019 under the SEBI
(Delisting of Equity Shares) Regulations, 2009 by providing an exit opportunity
to all the public shareholders. Assume that you are a legal advisor of the
Company and accordingly, answer the following questions :
(i) Is the Company eligible for voluntary delisting in terms of the Delisting
Regulations?
(ii) What are the circumstances/conditions under which equity shares of a
company cannot be delisted as per the Delisting Regulations?
(4 marks) (Dec 2020)

Voluntary Delisting
The difference between two options is that of giving ‘exit opportunity’ to the
shareholders. This is described as under:
Option I
 No ‘exit opportunity’ required to be given: In this option, if after the proposed
delisting from any one or more recognised stock exchanges, the equity shares still
remain listed on any recognised stock exchange which has nation-wide trading
terminals, no exit opportunity needs to be given to the public shareholders. The
procedure for such delisting of shares can be through a board resolution, public
notice and application to the concerned exchange
Option II
 ‘Exit opportunity’ must be given: This option requires that if after the proposed
delisting, the equity shares do not remain listed on any recognised stock exchange
having nation-wide trading terminals, exit opportunity shall be given to all the
public shareholders holding the equity shares sought to be delisted, through reverse
book building.

Procedure for Voluntary Delisting from All the Stock Exchanges

1. Convene a Board Meeting [Regulation 8 (1) (a)]
The decision of the board meeting that the Board of directors has proposed to Delist
the company from the exchanges be sent to the exchanges.
2. Special Resolution Through postal Ballot [Regulation 8 (1) (b)]
The prior approval of shareholders of the company is taken by special resolution to be
passed through postal ballot, disclosing all material facts in the explanatory

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statement sent to the shareholders in relation to such resolution.

Note – The special resolution shall be acted upon if and only if the votes cast by public
shareholders in favour of the proposal amount to at least two times the number of
votes cast by public shareholders against it.
3. In principal Approval by the Exchange [Regulation 8 (1) (c)]
The company makes an application to the concerned recognized stock exchange for in-
principle approval of the proposed delisting in the form specified by the recognized
stock exchange.
The application shall be accompanied by an audit report as required under regulation
76 of the Securities and Exchange Board of India (Depositories and Participants)
Regulations, 2018 in respect of the equity shares sought to be delisted, covering a
period of 6 months prior to the date of the application.
4. Final Application for delisting to concerned Stock Exchange [Regulation 8(1) (d)]
The company shall make an application to the concerned recognized stock exchange
for grant of final delisting approval within one year of passing the special resolution
in the form specified by the recognized stock exchange.
5. In principal Approval by the Exchange [Regulation 8 (3)]
The recognized stock exchange shall dispose off the application of the in-Principal
approval complete in all respects within a period not exceeding 5 working days from
the date of receipt of such application.
While considering an application seeking in-principle approval for delisting, the
recognised stock exchange satisfy itself on the following grounds – [Regulation 8(4)]
 The resolution of investor grievances by the company;
 Payment of listing fees to that recognised stock exchange;
 The compliance with any condition of the listing agreement with that recognised
stock exchange
 Any litigation or action pending against the company pertaining to its activities
in the securities market or any other matter having a material bearing on the
interests of its equity shareholders;
 Any other relevant matter as the recognised stock exchange may deem fit to
verify
6. Appointment of Merchant Banker [Regulation 10 (4)]
The acquirer or promoter shall appoint a merchant banker registered with SEBI and
such other intermediaries as are considered necessary. It should not be associated to
the promoter or acquirer.
7. Opening of Escrow account [Regulation 11]
The acquirer or promoter open an escrow account and deposit therein the total
estimated amount of consideration calculated on the basis of floor price and number

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of equity shares outstanding with public shareholders. The escrow account shall
consist of either cash deposited with a scheduled commercial bank, or a bank
guarantee in favour of the merchant banker, or a combination of both.
 Where the escrow account consists of deposit with a scheduled commercial bank,
the promoter shall, while opening the account, empower the merchant banker to
instruct the bank to issue banker’s cheques or demand drafts for the amount
lying to the credit of the escrow account
 Where the escrow account consists of a bank guarantee, such bank guarantee
shall be valid till payments are made in respect of all shares tendered
8. Public Announcement [Regulation 10]
The acquirer or promoters of the company within 1 working day from the date of
receipt of in- principle approval for delisting from the recognized stock exchange,
make a public announcement in at least one English national daily with wide
circulation, one Hindi national daily with wide circulation and one regional language
newspaper of the region where the concerned recognized stock exchange is located.
9. Dispatch of Letter of offer [Regulation 12]
The acquirer or promoter shall dispatch the letter of offer to the public shareholders of
equity shares, not later than 2 working days from the date of the public
announcement.
The letter of offer shall contain all the disclosures made in public announcement and
such other disclosures as may be necessary for the shareholders to take an informed
decision.
10. Duration of the Bidding period [Regulation 13]
The date of opening of the offer shall not be later than 7 working days from the date
of the public announcement and shall remain open for a period of 5 working days
during which the public shareholders may tender their bids.
An illustration for arriving at the final offer price is given as under:
Bid price Number of Demand Cumulative
Investor (Number of demand
shares) (Number of
shares)
550 5 2,50,000 2,50,000
565 8 4,00,000 6,50,000
575 10 2,00,000 8,50,000
585 4 4,00,000 12,50,000
595 6 1,20,000 13,70,000
600 5 1,30,000 15,00,000 Final offer
price

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605 3 2,10,000 17,10,000

610 3 1,40,000 18,50,000
615 3 1,50,000 20,00,000
620 1 5,00,000 25,00,000
48 25,00,000
Assuming floor price of Rs.550/- per share, promoter/ acquirer shareholding at 75% and
number of shares required for successful delisting as 15,00,000, the final price would be
the price at which the promoter reaches the threshold of 90%, i.e., it would be Rs.600/-
per share.
If the Final Price is accepted.
11. Minimum number of equity shares to be acquired [Regulation 17]
An offer made shall be deemed to be successful only if, –
the post offer promoter shareholding (along with the persons acting in concert with
the promoter) taken together with the shares accepted through eligible bids at the
final price, reaches 90% of the total issued shares of that class
12. Public Announcement after closure of offer [Regulation 18]
Within 5 working days of closure of the offer, the promoter/acquirer and the merchant
banker shall make a public announcement in at least one English national daily with
wide circulation, one Hindi national daily with wide circulation and one regional
language newspaper of the region where the concerned recognized stock exchanges
are located regarding the success of the offer
13. Payment of consideration [Regulation 20]
The promoter shall immediately upon success of the offer, open a special account with
a SEBI registered banker to an issue and transfer thereto, the entire amount due and
payable as consideration in respect of equity shares tendered in the offer, from the
escrow account. All the shareholders whose equity shares are verified to be genuine
shall be paid the final price stated in the public announcement within ten working
days from the closure of the offer.
14. Final Application to Stock Exchange [Regulation 8 (5)]
A final application for delisting be made to the concerned recognised stock exchange
accompanied with such proof of having given the exit opportunity
The recognized stock exchange shall dispose off the application of the delisting
complete in all respects and pass the delisting order.
15. Right of remaining shareholders to tender equity shares [Regulation 21]
Remaining public shareholder holding such equity shares may tender their shares to
the promoter upto a period of minimum 1 year from the date of delisting and, in such
a case, the promoter shall accept the shares tendered at the same final price at which

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the earlier acceptance of shares was made

If the Final Price is not accepted
16. Returning of the equity Shares tendered [regulation 16 (2)]
Where the acquirer or promoter decides not to accept the offer price so determined, the
acquirer or promoter shall not acquire any equity shares tendered pursuant to the
offer and the equity shares deposited by a shareholder shall be returned or released to
him within ten working days of closure of the bidding period;
Past Paper Question
The equity share of Ashina Buildcon Ltd., was listed on National Stock Exchange
Ltd. (NSE). NSE delisted its shares by complying SEBI guidelines on delisting.
The order of delisting was passed on March 05, 2017. Kunj, one of the
shareholder has not participated in the bidding process due to ill health, He
wanted to tender shares on January 01, 2018. Analyze the problem in the light
of the SEBI (Delisting of Equity Shares) Regulations, 2009.
(4 marks)(Dec 2018)
The Board of directors of a listed company desire to delist its equity shares from
all the recognised stock exchanges. The voting details through postal ballot are
as under :
— Total nos. of voters : 7,000 (Public : 5,000 & Promoters : 2,000)
— Voting at shareholders meeting :
(a) Public shareholders : In favour : 3,300 votes In against : 1,700 votes
(b) All promoters shareholders have voted in favour of resolution.
By referring SEBI delisting regulation, decide upon the resolution passed by the
shareholders. (4 marks) (June 2019)
SAARC Ltd., a company listed on nationwide two stock exchanges. It decided to
delist its securities from both the stock exchanges. By complying all delisting
regulations, the promoters have made an open offer to buy shares from public
shareholders. Referring to the SEBI Delisting Regulations, advise the company
with respect to the following matters:
(a) How the payment of consideration will be made to the successful
shareholders who have tendered their shares in an open offer?
(b) What are the rights of remaining shareholder who have not tendered
their shares during open offer? (4 marks) (Aug 2021)

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Procedure for Voluntary Delisting from few Stock Exchanges subject to Listing at Atleast
One Stock Exchange having Nationwide Terminals
1. Convene a Board Meeting [Regulation 7 (1) (a)]
The proposed delisting shall be approved by a resolution of the board of directors of
the company in its meeting.
2. Outcome of Board Meeting to Stock Exchange [Regulation 29 of SEBI Listing
Regulations]
The decision of the board meeting that the Board of directors has proposed to Delist
the company from the exchanges be sent to the exchanges.
3. Public notice [Regulation 7 (1) (b)]
The company to give a public notice of the proposed delisting in at least one English
national daily with wide circulation, one Hindi national daily with wide circulation
and one regional language newspaper of the region where the concerned recognized
stock exchanges are located.
4. Details shall mention in Public notice [Regulation 7 (2)]
 The names of the recognized stock exchanges from where the equity shares of the
company are intended to be delisted.
 The reasons for such delisting.
 The fact of continuation of listing of equity shares on recognized stock exchange
having nationwide trading terminals.
5. Application to the concerned recognized stock exchange. [Regulation 7 (1)(c )]
The company shall make an application to the concerned recognized stock exchange
for delisting its equity shares.
6. Delisting order by the Exchange. [Regulation 7 (3)]
The recognized stock exchange shall dispose off the Application of the delisting
complete in all respects within a period not exceeding 30 working days from the date
of receipt of such application.
7. Disclosure in the Annual report. [Regulation 7 (1)(d)]
In the first Annual report which will be prepared after the delisting, include the names
of the recognised stock exchanges from where the company got voluntary delisted
during that year and the reason of the delisting there from.

Notes:-

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Past Paper Question

The Managing director of AB Ltd. a listed company wishes to implement for
voluntary delisting from a few stock exchanges subject to listing of atleast one
stock exchange having nationwide terminals. As a Company Secretary prepare
a note on your Managing Director. In the light of SEBI (Delisting of Equity
Shares) Regulations 2009. (4 marks) (Dec 2019)

Voluntary Delisting by Small Companies

Small Company means
(a) A company has a paid up capital not exceeding 10 crore rupees and net worth not
exceeding 25 crore rupees as on the last date of preceding financial year;
(b) The number of equity shares of the company traded on each such recognised stock
exchange during the 12 calendar months immediately preceding the date of board
meeting is less than 10% of the total number of shares of such company.
(c) the company has not been suspended by any of the recognised stock exchanges
having nationwide trading terminals for any non-compliance in the preceding one
year;
Procedure
1. Convene a Board Meeting [Regulation 8 (1) (a)]
The proposed delisting shall be approved by a resolution of the board of directors of
the company in its meeting.
2. Appointment of Merchant Banker [Regulation 27 (3)(b)]
The promoter appoints a merchant banker registered with SEBI.
3. Outcome of Board Meeting to Stock Exchange (Schedule III of SEBI (LODR),
Regulations, 2015)
The decision of the board meeting that the Board of directors has proposed to Delist
the company from the exchanges be sent to the exchanges within 30 minutes of the
closure of the meeting.
4. Special Resolution Through postal Ballot (Regulation 8 (1) (b))
The prior approval of shareholders of the company be taken by special resolution to be
passed through postal ballot, disclosing all material facts in the explanatory
statement sent to the shareholders in relation to such resolution.
5. Application for In Principal Approval to Concerned Stock Exchange [Regulation 8(1)(c)]
The company makes an application to the concerned recognized stock exchange for in-
principle approval of the proposed delisting in the form specified by the recognized
stock exchange. The application shall be accompanied by an audit report as required
under regulation 76 of the Securities and Exchange Board of India (Depositories and

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Participants) Regulations, 2018 in respect of the equity shares sought to be delisted,

covering a period of six months prior to the date of the application.
6. Public notice [Regulation 7(1)(b)]
The company shall give a public notice of the proposed delisting in at least one English
national daily with wide circulation, one Hindi national daily with wide circulation
and one regional language newspaper of the region where the concerned recognized
stock exchanges are located.
7. Consent of the Public Shareholders [Regulation 27 (3)(d)]
Atleast 90% of the public shareholders shall give their positive consent in writing for
the delisting of the shares and the shareholders shall have the option to surrender
their shares at the exit price determined or to remain the shareholders even if the
shares get delisted.
8. Receiving consent from the Shareholders [Regulation 27(3)(e)]
The process of inviting the positive consent and finalisation of the proposal for
delisting of shares to be made within 75 working days of dispatching the Letter to all
the shareholder
9. Payment to shareholders [Regulation 27 (3)(f)]
The promoters shall make the payment in cash to the public shareholders who have
tendered their shares within 15 working days from the date of expiry of 75 working
days as mentioned above.
10. Final Application to Stock Exchange [Regulation 8 (5)]
A final application for delisting be made to the concerned recognised stock exchange
accompanied with such proof of having given the exit opportunity in accordance with
the above said provisions.
11. Delisting Order
The recognized stock exchange shall dispose off the Application of the delisting
complete in all respects and pass the delisting order.
Can the promoter of a small company, as defined under regulation 27 of Delisting
Regulations, be considered to have complied with the condition under regulation 27(3)(d)
if the public shareholders holding at least 90% of the public shareholding give their
positive consent in writing to the proposal for delisting?
Yes, the promoter of a small company would be considered to have complied with the
condition under regulation 27(3) (d) if the public shareholders, irrespective of their
numbers, holding 90% or more of the public shareholding give their positive consent in
writing to the proposal for delisting. (Please refer to SAT Order dated November 04, 2011 in
the matter of V. T. Somasundaram and M/s. Trichy Distilleries & Chemicals Limited vs.
Madras Stock Exchange and SEBI.)

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Compulsory Delisting
Compulsory delisting refers to permanent removal of securities of a listed company from
a stock exchange as a penalizing measure at the behest of the stock exchange for not
making submissions/comply with various requirements set out in the Listing agreement
within the time frames prescribed.
A recognized stock exchange may, by order, delist any equity shares of a company on any
ground prescribed in the rules made under section 21A of the Securities Contracts
(Regulation) Act, 1956.
1. Constitution of Panel [Regulation 22 (2)]
2. The decision regarding compulsory delisting shall be taken by a panel to be
constituted by the recognized stock exchange consisting of -
i. Two directors of the recognized stock exchange (one of whom shall be a public
representative);
ii. One representative of the investors;
iii. One representative of the Ministry of Corporate Affairs or Registrar of
Companies; and
iv. The Executive Director or Secretary of the recognized stock exchange.
3. Public notice before delisting order [Regulation 22 (3)]
Before making a delisting order the recognized stock exchange shall give a notice in
one English national daily with wide circulation and one regional language newspaper
of the region where the concerned recognized stock exchange is located and shall also
display such notice on its trading systems and website
4. Public notice after Delisting Order [Regulation 22 (6)
Where the recognized stock exchange passes the delisting order, it shall,
i. Forthwith publish a notice in one English national daily with wide circulation
and one regional language newspaper of the region where the concerned
recognized stock exchange is located
ii. Inform all other stock exchanges where the equity shares of the company are
listed, about such delisting and the surrounding circumstances.
5. Exit Price Determination by an Independent Valuer (Regulation 23 (1)
The recognized stock exchange shall form a panel of expert valuers from whom the
valuer or valuers shall be appointed

Notes:-

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Process Flow Chart for Compulsory Delisting

Constitution of Panel by Recognised stock exchange to take decision regarding the
compulsory delisting by the exchange

Public notice of compulsory delisting by recognized stock exchange in one English and
one regional language newspaper of the region where the concerned recognized stock
exchange is located

Representation by the any person who may be aggrieved by the proposed delisting

Delisting order by the recognized stock exchange

Public notice after delisting order by recognized stock exchange in one English and
regional language newspaper of the region where the concerned recognized stock
exchanges is located and information to all the stock exchanges where the shares of
the company listed and also on its trading systems and website

Appointment of independent Valuer

Determination of the fair value of shares by the independent valuers appointed by the
recognized stock exchange

Acquisition of shares by the promoters at determined fair value

Company Promoters/PAC/ Directors can neither access securities market nor seek listing
for a period of 10 years

Compulsory Delisting-Time Line

Compulsory Delisting Time-line in
Working
Days
1. Constitution Of Panel [Reg. 22(2)]
The recognised stock exchange(s) shall constitute the panel to take the -----
decision regarding the compulsory delisting of the Company.

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2. Public Notice Before Making The Delisting Order [Reg. 22(3)]

The recognised stock exchange (s) shall give the public notice for the X
compulsory delisting of the company in one English, one Hindi
national daily and one Regional language news paper where the
concerned stock exchange is located and also on its trading system &
website.
3. Representations [Reg. 22(4)]
Any person aggrieved by such public notice may give representation X + 15
within maximum 15 working days from the date of the public notice.
4. Delisting Order [Reg. 22(3)]
The recognised stock exchange(s) may pass the delisting order after X + 30
giving the reasonable opportunity of being heard to the concerned
person.
5. Public Notice After Delisting Order [Reg. 22(6)]
The recognized stock exchange(s) shall publish the delisting order in X + 31
one English, one Hindi national daily newspaper and one Regional
language newspaper where the concerned stock exchange is located.
6. Intimation To Other Exchange(s) [Reg. 22(6)]
The recognized stock exchange(s) shall intimate other exchange(s) X + 31
where the company is listed about the delisting order.
7. Appointment Of Independent Valuer [Reg. 23(1)]
The recognised stock exchange(s) shall appoint the independent X + 30
valuer(s) from the panel of expert valuers.
8. Determination Of Fair Value [Reg. 23(1)]
The independent valuer(s) shall determine the fair value of the X + 30
delisted equity shares at which the shares may be tendered by the
public shareholders
9. Acquisition Of Shares [Reg. 23(3)]
The promoters shall acquire the shares at the fair value from the –---
public shareholders.
10. Consequence Of Compulsory Delisting [Reg. 24]
The company / promoters / person acting in concert/ directors cannot –----
access securities market or seek listing for a period of 10 years.

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Case Law
1. 19. 06. 2020 Ronson Traders Limited (Applicant) Whole Time Member
Securities and Exchange Board
of India
Facts of the application
Ronson Traders Limited (“RTL” / “Applicant” / “the company”), is a Non-Banking Financial
Company incorporatedunder the Companies Act, 1956 on October 16, 1982, having its
registered office at 9/1, R. N. Mukherjee Road, 5th Floor, Kolkata - 700 001. The equity
shares of the applicant are listed on Calcutta Stock Exchange Limited (“CSE”).
Securities and Exchange Board of India (“SEBI”) received an application dated December
06, 2019 (“Application”) from RTL seeking exemption / relaxation under Regulation 25A of
the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) from
strict enforcement of Regulation 27 of Delisting Regulations. Additional information and
clarifications were also submitted by the applicant vide letters dated December 26, 2019,
February 14, 2020 and June 15, 2020.
Regulation 27 of the Delisting Regulations permits delisting of equity shares of a small
company from all recognised stock exchanges without having to follow the extensive
procedure under Chapter IV of the Delisting Regulations, subject to the fulfilment of
criteria specified therein.
Regulation 25A of the Delisting Regulations states that SEBI has the Power to relax strict
enforcement of the regulations.
Order
In the interest of investors in securities and in exercise of powers under sections 11(1) and
11B of the SEBI Act, 1992 and regulation 25A of the SEBI (Delisting of Equity Shares)
Regulations, 2009, SEBI find it appropriate to grant the company i.e. Ronson Traders
Limited, relaxation from the applicability of Regulation 8(1B)(i) (limited to the extent of
compliance with minimum public shareholding norms) and Regulation 27(1)(a) (with
regard to the net worth requirement) for the specific purpose of seeking voluntary
delisting of its equity shares, subject to the conditions as specified in the order.

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Chapter 9
SEBI (Share Based Employee Benefits) Regulations, 2014 – An Overview

Background
SEBI has issued SEBI (ESOS & ESPS) Guidelines, 1999 (“ESOS Guidelines”) to enable listed
companies to reward their employees through stock option schemes and stock purchase
schemes

Companies Act, 2013

As per Section 62(1) (b) of Companies Act 2013, a Company can offer shares through
employee stock option to their employees through special resolution subject to the
conditions specified under Rule 12 of Companies (Share Capital and Debentures) Rules
2014.
For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’
means –
Employee means:-
(a) Permanent employee (India or outside India)
(b) Director whether WTD or not (Excluding independent director)
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or Outside
India or of a holding company
But does not include :-
(i) An employee who is a promoter or a person belonging to the promoter group; or
(ii) A director who either himself or through his relative or through anybody
corporate, directly or indirectly, holds more than ten percent of the outstanding
equity shares of the company.
However, in case of Startup Company, the conditions mentioned in table point (i) and (ii)
shall not apply upto 10 years from the date of its incorporation or registration.
Question
In terms of the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014
and the Companies Act, 2013, independent directors are not entitled to ESOPs. However,
prior to commencement of these provisions, independent directors were eligible to receive
ESOPs. In light of this, if an independent director has been granted ESOPs before
commencement of the said provisions and such options remains to be exercised, can he/she
still exercise such ESOPs?
Answer
Yes, the restriction on grant of ESOPs to independent director applies only on fresh grants
of ESOPs after commencement of the aforesaid provisions. Any grant already made prior

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to commencement of these provision shall remain valid, i.e., an independent director can
exercise such ESOPs subject to fulfillment of terms and conditions of the ESOPs schemes
framed by the Companies in terms of the relevant regulations.
Past Paper Question
Answer the following with reference to the Companies (Share Capital and
Debentures) Rules, 2014, as to whether these are the eligible employees under
Employee Stock Option? (Yes/No with reasons)
(i) Ankit is a permanent employee deputed in USA for a specific project
(ii) Smart Ltd. is an independent company. Smart Ltd. is an independent
company.
(iii) Anil is a promoter and employee.
(iv) Aneesh is a director holding 11% of outstanding equity shares of the
company.
(v) If it is a startup company, will the situation be the same in (iii) & (iv)
above? (5 marks) (Dec 2018)
Answer Rule 12 of Companies (Share Capital and Debentures) Rules 2014,· define the
eligible employees for the purpose of employee stock option. The answers given
below are based on the eligibility criteria set out in the rule:
(i) Yes. As per Rule 12 (1) (a), a permanent employee of the company who
has been working in India or outside India. Hence, Ankit is an eligible
employee for ESOP.
(ii) No. Since Smart Ltd. is a company, the Companies Act, 2013 and rules
made there under does not recognise a company as an employee.
(iii) No. As per Rule 12 (1) (i), an employee who is a promoter or a person
belonging to the promoter group is riot an employee. Hence, Anil is not an
eligible employee for ESOP.
(iv) No. As per Rule 12 (1) (ii), a director who either himself or through his
relative or through anybody corporate, directly or indirectly, holds more
than ten percent of the outstanding equity shares of the company, is not
eligible employee. Hence, Aneesh is not an· eligible employee for this
purpose.
(v) Yes, Anil and Aneesh are eligible employees for both the situation in (iii) &
(iv) above. As per notification issued by the Department of Industrial
Policy and Promotion, Ministry of Commerce and Industry Government of
India, Government of India, the conditions mentioned in (iii) & (iv) above,
shall not apply for a startup company upto five years from the date of its
incorporation or registration.

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SEBI (Share Based employee Benefits) Regulations, 2014

Applicabilty

Employee Stock Employee Stock Stock Appreciation General Employee Retirement

Option Schemes Purchase Schemes Rights Schemes Benefits Schemes Benefit Schemes

Direct Route

Trust Route

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Implementation of Schemes through Trust

1. If a company has implemented the scheme through a trust and the same has to be
decided upfront at the time of taking approval of the shareholders for setting up the
schemes
2. A company may implement several schemes as permitted under these regulations
through a single trust.
3. However, such single trust shall keep and maintain–
 proper books of account,
 records and documents,
 for each such scheme
4. A person shall not be appointed as a trustee, if he-
(i) is a director, key managerial personnel or promoter of the company or its holding,
subsidiary or associate company or any relative of such director, key managerial
personnel or promoter; or
(ii) beneficially holds 10% or more of the paid-up share capital of the company;
However, where individuals or ‘one person companies’ as defined under the Companies Act,
2013 are appointed as trustees, there shall be a minimum of two such trustees, and in case
a corporate entity is appointed as a trustee, then it may be the sole trustee.
5. The trustee should ensure that appropriate approval from the shareholders has been
obtained by the company in order to enable the trust to implement the scheme(s)
6. The company may lend monies to the trust on appropriate terms and conditions to
acquire the shares either through new issue or secondary acquisition, for the purposes
of implementation of the scheme(s).
7. For the purposes of disclosures to the stock exchange, the shareholding of the trust
shall be shown as ‘non-promoter and non-public’ shareholding.
Explanation: Shares held by the trust shall not form part of the public shareholding which
needs to be maintained at a minimum of 25% as prescribed under Securities Contracts
(Regulations) Rules, 1957
8. Secondary acquisition in a financial year by the trust shall not exceed 2% of the paid up
equity capital as at the end of the previous financial year.
9. The total number of shares under secondary acquisition held by the trust shall at no
time exceed the below mentioned prescribed limits as a percentage of the paid up
equity capital as at the end of the financial year immediately prior to the year in which
the shareholder approval is obtained for such secondary acquisition:
Particulars Limits
For the schemes enumerated in Part A, Part B or Part C of Chapter III of 5%
these Regulations

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For the schemes enumerated in Part D, or Part E of Chapter III of these 2%

Regulations
For all the schemes in aggregate 5%
10. The trust shall be required to hold the shares acquired through secondary acquisition
for a minimum period of six months except where they are required to be transferred in
the circumstances enumerated in this regulation.
Shares have been acquired by the trust from secondary market and held for the minimum
period of six months in terms of regulation 3(13) of SEBI (SBEB) Regulations, 2014 pursuant
to which the same are transferred to employees under ESPS. Whether the requirement of
Lock-in, in terms of regulation 22(2) of these regulations, shall be applicable to shares
received by employees?
No, lock-in shall not be applicable to the shares received by employees.
11. The trust shall be permitted to undertake off-market transfer of shares only under the
following circumstances:
(i) transfer to the employees pursuant to scheme(s);
(ii) when participating in open offer under SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011, or when participating in buy-back, delisting or any
other exit offered by the company generally to its shareholders.
12. The trust shall not become a mechanism for trading in shares and hence shall not sell
the shares in secondary market
13. The trust shall be required to make disclosures and comply with the other requirements
applicable to insiders or promoters under the SEBI (Prohibition of Insider Trading)
Regulations, 2015.

Past Paper Question

Tango Trading Ltd. is a public company which has its equity shares listed on
NSE. The Company wants to implement Employee Stock Option Plan (ESOP) for
its employees. ESOP Plan will be operated through a trust in accordance with
the SEBI (Share Based Employee Benefits) Regulations, 2014. The company is
willing to issue shares under ESOP scheme to one of its whole time director,
Irfan. Irfan holds 12% of the outstanding equity shares of the company. In view
of the above facts, answer the following questions :
(i) Can the company issue shares to its director, Irfan under ESOP scheme?
(ii) Prepare a brief note on the process of implementation of ESOP scheme
through Trust route. (4 marks)(Dec 2020)

Differentiate between "Direct Route for ESOP" and "Trust Route for ESOP".
(4 marks) (Aug 2021)

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Eligibility Criteria
An employee shall be eligible to participate in the schemes of the company as determined
by the compensation committee.
Explanation - Where such employee is a director nominated by an institution as its
representative on the board of directors of the company –
(i) The contract or agreement entered into between the nominating institution and
nominee director shall, specify the following:-
a. whether the grants by the company under its scheme(s) can be accepted by
the said employee in his capacity as director of the company;
b. that grant if made to the director, shall not be renounced in favour of the
nominating institution; and
c. the conditions subject to which fees, commissions, other incentives, etc. can be
accepted by the director from the company.
(ii) The institution nominating its employee as a director of a company shall file a copy
of the contract or agreement with the said company, which shall, in turn file the
copy with all the stock exchanges on which its shares are listed.
(iii) The director so appointed shall furnish a copy of the contract or agreement at the
first board meeting of the company attended by him after his nomination.

Compensation Committee
A company shall constitute a compensation committee for administration and
superintendence of the schemes.

Shareholders’ Approval
A Scheme shall not be offered to employees of a company unless the shareholders of the
company approve it by passing a special resolution in the general meeting.
The explanatory statement to the notice and the resolution proposed to be passed by
shareholders for the schemes shall include the information as specified by SEBI in this
regard.

Past Paper Question

Yale is a nomine director on the Board of a listed company. On the proposal of
ESOP in the Board meeting, he objected about his exclusion from this scheme.
State the prior conditions to be fulfilled for a nomine director under the SEBI
regulations for ESOP eligibility. (4 marks) (Dec 2019)

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Variation of terms of the Schemes

 The company shall not vary the terms of the schemes in any manner, which may be
detrimental to the interests of the employees.
 The company may by special resolution in a general meeting vary the terms of the
schemes offered as to an earlier resolution of the general body but not yet exercised
by the employee provided such variation is not prejudicial to the interests of the
employees.
 The notice for passing special resolution for variation of terms of the schemes shall
disclose full details of the variation, the reasons for such variation and the details of
the employees who are beneficiaries of such variation.
 A company may re-price the options, if the scheme is rendered unattractive due to fall
in the price of the shares in the stock market.

Winding up of the Schemes

In case of winding up of the schemes being implemented by a company through trust, the
excess monies or shares remaining with the trust after meeting all the obligations, if any,
shall be utilised for repayment of loan or by way of distribution to employees as
recommended by the compensation committee.

Non-Transferability
 Option, SAR or any other benefit granted to an employee under the regulations shall
not be transferable to any person.
 The option, SAR, or any other benefit granted to the employee shall not be pledged,
hypothecated, mortgaged or otherwise alienated in any other manner.
 In the event of death of the employee while in employment, all the options, SAR or
any other benefit granted to him under a scheme till such date shall vest in the legal
heirs or nominees of the deceased employee.
 In case the employee suffers a permanent incapacity while in employment, all the
options, SAR or any other benefit granted to him under a scheme as on the date of
permanent incapacitation, shall vest in him on that day.
 In the event of resignation or termination of the employee, all the options, SAR, or any
other benefit which are granted and yet not vested as on that day shall expire.

Administration of Specific Schemes

Employee Stock Option Scheme (ESOS)
Meaning As per Companies Act, 2013
Employees’ stock option” is defined under Section 2(37) of the

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Companies Act as:

“option given to the directors, officers or employees of a
company or of its holding company or subsidiary company or
companies, if any, which gives such directors, officers or
employees, the benefit or right to purchase, or to subscribe for,
the shares of the company at a future date at a pre-determined
price”.
As per SEBI (Share Based employee Benefits) Regulations, 2014
“Employee Stock Option Scheme” means a scheme under which a
company grants employee stock option directly or through a
trust.
Pricing The company granting option to its employees pursuant to ESOS
will have the freedom to determine the exercise price subject to
conforming to the accounting policies as specified in these
regulation.
Vesting Period There shall be a minimum vesting period of one year in case of
ESOS.
Lock-in-period The company may specify the lock-in period for the shares issued
pursuant to exercise of option.
Rights of the option The employee shall not have right to receive any dividend or to
holder vote or in any manner enjoy the benefits of a shareholder in
respect of option granted to him, till shares are issued upon
exercise of option.
Consequence of failure The amount payable by the employee, if any, at the time of
to exercise option grant of option-
 may be forfeited by the company if the option is not
exercised by the employee within the exercise period; or
 may be refunded to the employee if the options are not
vested due to non - fulfilment of conditions relating to
vesting of option as per the ESOS.

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Employee Stock Purchase Scheme

Meaning As per SEBI (Share Based employee Benefits) Regulations, 2014-
“Employee Stock Purchase Scheme” means a scheme under which a
company offers shares to employees, as part of public issue.
Pricing The company may determine the price of shares to be issued under an
ESPS, provided they conform to the provisions of accounting policies
under these regulation.
Lock-In  Shares issued under an ESPS shall be locked-in for a minimum
period of one year from the date of allotment.
However, in case where shares are allotted by a company under
an ESPS, there was merger of the company then the lock-in period
already undergone in respect of shares of the transferor company
shall be adjusted against the lock-in period.
 If ESPS is part of a public issue and the shares are issued to
employees at the same price as in the public issue, the shares
issued to employees pursuant to ESPS shall not be subject to lock-
in.

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Stock Appreciation Rights Scheme (SARS)

Meaning As per SEBI (Share Based employee Benefits) Regulations,
2014-
“Stock Appreciation Right” means a right given to a SAR
grantee entitling him to receive appreciation for a specified
number of shares of the company where the settlement of such
appreciation may be made by way of cash payment or shares
of the company.
Explanation – An SAR settled by way of shares of the company
shall be referred to as equity settled SAR.
Administration and The company shall have the freedom to implement cash settled
Implementation or equity settled SAR scheme. However, in case of equity
settled SAR scheme, if the settlement results in fractional
shares, then the consideration for fractional shares should be
settled in cash.
Vesting There shall be a minimum vesting period of one year in case of
SAR scheme.
However, in a case where SAR is granted by a company under
a SAR scheme which has merged or amalgamated, the period
during which the SAR granted by the transferor company were
held by the employee shall be adjusted against the minimum
vesting period
Rights of the SAR Holder The employee shall not have right to receive dividend or to
vote or in any manner enjoy the benefits of a shareholder in
respect of SAR granted to him.

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Past Paper Question

Explain the Stock Appreciation Rights Scheme (SARS). (5 marks)(Dec 2018)

General Employee Benefits Scheme (GEBS)

Meaning As per SEBI (Share Based employee Benefits) Regulations, 2014 –
“General Employee Benefits Scheme” means any scheme of a
company framed in accordance with these regulations, dealing in
shares of the company or the shares of its listed holding company,
for the purpose of employee welfare including healthcare benefits,
hospital care or benefits, or benefits in the event of sickness,
accident, disability, death or scholarship funds, or such other
benefit as specified by such company.
Administration and The shares of the company or shares of its listed holding company
Implementation shall not exceed 10 % of the book value or market value or fair
value of the total assets of the scheme, whichever is lower, as
appearing in its latest balance sheet for the purposes of GEBS.

Retirement Benefit Scheme (RBS)

Meaning A As per SEBI (Share Based employee Benefits) Regulations, 2014 –
“Retirement Benefit Scheme” means a scheme of a company,
framed in accordance with these regulations, dealing in shares of
the company or the shares of its listed holding company, for
providing retirement benefits to the employees subject to
compliance with existing rules and regulations as applicable under
laws relevant to retirement benefits in India.
Administration and Retirement benefit scheme may be implemented by a company
Implementation provided it is in compliance with these regulations, and provisions

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of any other law in force in relation to retirement benefits.

The shares of the company or shares of its listed holding company
shall not exceed 10% of the book value or market value or fair
value of the total assets of the scheme, whichever is lower, as
appearing in its latest balance sheet for the purposes of RBS.

Procedure for issuing ESOP by a Listed Company

1. Hold a Board Meeting to consider and approve ESOP and formation of Compensation
Committee;
2. Compensation committee shall plan draft the scheme of ESOP;
3. Hold Board meeting to adopt the final scheme, appoint the Merchant banker and
approve the notice of the General meeting for shareholders approval;
4. Hold General Meeting for approval of shareholders;
5. Make an application to the stock exchange for obtaining in-principal approval of the
stock exchange;
6. Issue of letter of grant of option to the eligible employees along with the letter of
acceptance of option;
7. On receipt of letter of acceptance of option along with upfront payment (if any), from
the employee issue the option certificates;
8. After expiry of vesting period, not less than one year the options shall vest in the
employee. At that time, the Company shall issue a letter of vesting along with the
letter of exercise of options;
9. Receipt to letter of exercise from the employee;
10. Hold a Board Meeting at the suitable Interval during the exercise period for allotment
of shares on options exercised by the optioness;
11. Dispatch of letter of allotment along with the share certificates or credit the shares so

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allotted with the Depositories;

12. Make an application to the Stock exchange for listing of the Shares so allotted; and
13. Receipt of Listing of the shares from the Stock exchange.

Past Paper Question

Your Board of directors is contemplating to take-up the agenda to issue ESOS in
next meeting. Being a Company Secretary, advise your Board of directors about
brief procedure for issuing of securities under SEBI Employees Stock Option
Scheme (ESOS) by a listed Company (5 marks)(June 2019)

Contra Trade
Question
What is contra trade?
Answer
Contra trade means opposite trading or reversal of the actual position. Clause 10 of
Schedule B of the PIT Regulations imposes a restriction on designated persons to execute a
contra trade in those securities of which the designated persons are reasonably expected to
have access to UPSI during a period as specified in the code of conduct of a company
formulated under the PIT Regulations.
Question
Does the contra trade restriction (for a period not less than six months) under clause 10 of
Schedule B of the SEBI (Prohibition of Insider Trading) Regulation, 2015 also apply to the
exercise of ESOPs and the sale of shares so acquired?
Answer
Exercise of ESOPs shall not be considered to be “trading” except for the purposes of
Chapter III of the Regulations.
However, other provisions of the Regulations shall apply to the sale of shares so acquired.
Provisions
If a designated person has sold/ purchased shares, he can subscribe and exercise ESOPs at
any time after such sale/purchase, without attracting contra trade restrictions.
Where a designated person acquires shares under an ESOP and subsequently sells/pledges
those shares, such sale shall not be considered as contra trade, with respect to exercise of
ESOPs
Example
Where a designated person purchases some shares (say on August 01, 2015), acquires
shares later under an ESOP (say on September 01, 2015) and subsequently sells/pledges
(say on October 01, 2015) shares so acquired under ESOP. The sale will not be a contra

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trade but will be subject other provisions of the Regulations, however, he will not be able
to sell the shares purchased on August 01, 2015 during the period of six months from
August 01, 2015.
Where a designated person sells shares (say on August 01, 2015), acquires shares later
under an ESOP (say on September 01, 2015) the acquisition under ESOP shall not be a
contra trade. Further, he can sell/pledge shares so acquired at any time thereafter without
attracting contra trade restrictions. He, however, will not be able to purchase further
shares during the period of six months from August 01, 2015 when he had sold shares.

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Chapter 10
SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview

Introduction
Section 2 (88) of the Companies Act, 2013 defines “sweat equity shares” which means such
equity shares as are issued by a company to its directors or employees at a discount or for
consideration, other than cash, for providing their know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name called.
Company issue shares at a discount or for consideration other than cash to selected
employees and directors as per norms approved by the Board of Directors or any
committee, like compensation committee, formed for this purpose. This is based on the
know how provided or intellectual property rights created and given for value additions
made by such directors and employees to the company.
It may be noted that the intellectual property right, know how or value additions arise as
of now mainly in the case of Information Technology related companies and
Pharmaceutical companies.

Companies Act, 2013

According to Section 54 of the Companies Act, 2013 a company may issue sweat equity
shares of a class of shares already issued, if the following conditions are fulfilled:
(a) The issue is authorized by a special resolution passed by the company in the general
meeting.
(b) The resolution specifies the number of shares, current market price, consideration if
any and the class or classes of directors or employees to whom such equity shares are
to be issued.
(c) The sweat equity shares of a company whose equity shares are listed on a recognised
stock exchange are issued in accordance with the regulations made by SEBI in this
regard and if they are not listed the sweat equity shares are to be issued in accordance
with the rule 8 of Companies (Share Capital and Debenture) Rules, 2014.
Whether Issue of sweat equity shares can be in the form of preferential Issue?
Issue of Sweat Equity Shares is not a ‘preferential issue’ as per regulation 2(1)(z) of SEBI
(ICDR) Regulations, 2018 which gives the meaning of a preferential issue excludes an issue
of sweat equity shares there from, which means issue of sweat equity shares is not a
preferential issue within the meaning of preferential issue.
Further Rule 8 (13) of The Companies (Share Capital and Debentures) Rules, 2014, clearly
excludes issue of sweat equity shares from the definition of preferential offer.

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SEBI (Issue of Sweat Equity) Regulations, 2002

Listed companies which are issuing sweat equity shares are

Applicability required to comply with SEBI (Issue of Sweat Equity)
Regulations, 2002.

These regulations shall not apply to an unlisted company.

However, unlisted company coming out with initial public

Non-Applicability
offering and seeking listing of its securities on the stock
exchange, pursuant to issue of sweat equity shares, shall
comply with the SEBI (ICDR) Regulations, 2018.

Sweat Equity Shares May Be Issued To An Employee And Directors

Company whose equity shares are listed on a recognized stock exchange may issue sweat
equity shares in accordance with Section 54 of Companies Act, 2013 and these
Regulations to its Employees and Directors

Special Resolution
For the purposes of passing a special resolution under, the Board of Directors at the time
of sending notice to the shareholders shall send additional information for approving the
issuance of sweat equity shall, inter alia, contain the following information:
(i) The total number of shares to be issued as sweat equity.
(ii) The current market price of the shares of the company.
(iii) The value of the intellectual property rights or technical know how or other value
addition to be received from the employee or director along with the valuation
report / basis of valuation.
(iv) The names of the employees or directors or promoters to whom the sweat equity
shares shall be issued and their relationship with the company.
(v) The consideration to be paid for the sweat equity.
(vi) The price at which the sweat equity shares shall be issued.
(vii) Ceiling on managerial remuneration, if any, which will be affected by issuance of
such sweat equity.
(viii) A statement to the effect that the company shall conform to the accounting policies
as specified by SEBI.
(ix) Diluted Earning Per Share pursuant to the issue of securities to be calculated in

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accordance with International Accounting Standards / standards specified by the

Institute of Chartered Accountants of India.

Issue Of Sweat Equity Shares To Promoters

In case of Issue of sweat equity shares to promoters, the same shall also be approved by
simple majority of the shareholders in General Meeting.
Further, the promoters to whom such Sweat Equity Shares are proposed to be issued shall
not participate in such resolution and separate resolution shall be passed for each
transaction of issue of Sweat Equity. Such resolution shall be valid for a period of not
more than twelve months from the date of passing of the resolution. For the purposes of
passing the resolution, the explanatory statement shall contain the disclosures as
specified in the Schedule.

Pricing Of Sweat Equity Shares

The price of sweat equity shares shall be higher of the following:
 The average of the weekly high and low of the closing prices of the related equity
shares during last six months preceding the relevant date; or
 The average of the weekly high and low of the closing prices of the related equity
shares during the two weeks preceding the relevant date.
 If the shares are listed on more than one stock exchange, but quoted only on one
stock exchange on given date, then the price on the stock exchange shall be
considered.
 If the share price is quoted on more than one stock exchange, then the stock
exchange where there is highest trading volume during that date shall be
considered
Relevant date” for this purpose means the date which is thirty days prior to the date on
which the meeting of the General Body of the shareholders is convened, in terms of clause
(a) of sub section (1) of section 54 of the Companies Act, 2013

Notes:-

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Past Paper Question

A listed NBFC has been granted licence to run as small finance bank by the
Reserve Bank of India under recently announced policy to improve the financial
inclusion of the country. During the last three years, the attrition rate for top
level management employees was not too high As, RBI has granted licences to
many small banks, therefore, the promoters of the Bank feels that attrition rate
will be high in coming period. The Board of directors wishes to allot Sweat
Equity shares to employees. You, being compliance officer of the Bank, advise
the Board about pricing of the Sweat Equity shares. (5 marks) (June 2019)
Portable Marketing Ltd., a listed company on stock exchange, having paid up
capital 500 crore consisting of 50 crore equity share of 10 each. The Board of
directors of company has recommended issuing of sweat equity shares to its
promoters/directors and employees as a part of their recognition for valuable
contribution to the growth of company. The board meeting was held on 1st
March, 2020 and extra-ordinary general meeting was held on 27th March, 2020
for approving the issue of sweat equity shares. The details of closing market
price available on stock exchange are given below
The average of the weekly high and preceding 31st Rs 540/-
low of the closing prices of the January, 2020
related equity shares during six preceding 26th Rs 550/-
months February, 2020
The average of the weekly high and preceding 31st Rs 580/-
low of the closing prices of the related January, 2020
equity shares during two weeks preceding 26th Rs 575/-
February, 2020
The closing price of equity shares of on 27th March, Rs 578/-
the company 2020
Referring to the provisions of Companies Act, 2013 and SEBI Regulations, answer
the following:
(i) What are the conditions to be fulfilled for issue of sweat equity shares?
(ii) Can sweat equity shares be issued to promoters? If yes, what are the
conditions to be fulfilled?
(iii) What is the relevant date in above case?
(iv) What should be the minimum price at which sweat equity shares should be
issued? (8 marks) (Aug 2021)

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Valuation of Intellectual Property

 The valuation of the intellectual property rights or of the know how provided or other
value addition shall be carried out by a merchant banker.
 The merchant banker may consult such experts and valuers, as he may deem fit
having regard to the nature of the industry and the nature of the property or other
value addition.
 The merchant banker shall obtain a certificate from an independent Chartered
Accountant that the valuation of the intellectual property or other value addition is in
accordance with the relevant accounting standards.

Accounting Treatment
Where the sweat equity shares are issued for a non-cash consideration, such non cash
consideration shall be treated in the following manner in the books of account of the
company:-
 where the non-cash consideration takes the form of a depreciable or amortizable
asset, it shall be carried to the balance sheet of the company in accordance with the
relevant accounting standards; or
 where the above clause is not applicable, it shall be expensed as provided in the
relevant accounting standards.

Past Paper Question

Z Ltd. has issued Sweat Equity Shares for a non-cash consideration. What are the
possible accounting treatments in the books of Z Ltd.? (4 marks) (June 2019)

Placing of Auditors Certificate Before Annual General Meeting

In the General meeting subsequent to the issue of sweat equity, the Board of Directors
shall place before the shareholders, a certificate from the auditors of the company that
the issue of sweat equity shares has been made in accordance with the Regulations and in
accordance with the resolution passed by the company authorizing the issue of such
Sweat Equity Shares.

Ceiling On Managerial Remuneration

The amount of Sweat Equity shares issued shall be treated as part of managerial
remuneration for the purpose of sections 197 of the Companies Act, 2013, if the following
conditions are fulfilled:
 the Sweat Equity shares are issued to any director or manager; and
 they are issued for non-cash consideration, which does not take the form of an asset

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which can be carried to the balance sheet of the company in accordance with the
relevant accounting standards.

Lock-In
The Sweat Equity shares shall be locked in for a period of three years from the date of
allotment.

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Chapter 11
SEBI (Prohibition of Insider Trading) Regulations, 2015

Introduction
The Patel committee in 1986 in India defined Insider
Trading as, “Insider trading generally means trading in
the shares of a company by the persons who are in the
management of the company or are close to them on the
basis of undisclosed price sensitive information regarding
the working of the company, which they possess but
which is not available to others.”

Past Paper Question

Write notes on the following :
Insider trading (4 marks) (June 2015)

Important Definitions
Connected Person “Connected Person” means –
Any person who is or has during the six months prior to the
concerned Act been associated with a company, or indirectly, in any
capacity including:
 By reason of frequent communication with its officers; or
 By being in a contractual, fiduciary or employment
relationship; or
 By being a director, officer or an employee of the company; or
Holds any position including a professional or business relationship
between himself and the company whether temporary or permanent
that allows such person, directly or indirectly, access to UPSI or is
reasonably expected to allow such access.
Insider “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 company, or who has
received or has had access to such unpublished price sensitive
information.
Person deemed to “Person is deemed to be a connected person”, if such person –

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be connected (i) is a company under the same management or group, or any

person subsidiary company
(ii) is an intermediary as specified in section 12 of the Act,
Investment company, Trustee Company, Asset Management
Company or an employee or director thereof or an official of a
stock exchange or of clearing house or corporation;
(iii) 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 member of the Board of Trustees 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 have a fiduciary relationship with the
company;
(iv) is a Member of the Board of Directors or an employee of a
public financial institution as defined in section 2(72) of the
Companies Act, 2013; or
(v) is an official or an employee of a Self-regulatory Organisation
recognised or authorised by the Board of a regulatory body; or
(vi) is a relative of any of the aforementioned persons;
(vii) is a banker of the company.
(viii) relatives of the connected person
Price sensitive “Unpublished price sensitive information” means any information,
Information relating to a company or its securities, directly or indirectly, that is
not generally available which upon becoming generally available, is
likely to materially affect the price of the securities and shall,
ordinarily including but not restricted to, information relating to the
following–
 Financial results
 Dividends (both interim and final);
 Change in capital Structure
 Mergers, de-mergers, acquisitions, delisting, disposals and
expansion of business and such other transactions;
 Changes in key managerial personnel;

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Past Paper Question

Comment on the following statements:
'Insider' means any person who is or was connected with the company or is
deemed to have been connected with the company. (4 marks) (June 2016)
Write notes on the following:
Person deemed to be connected person (4 marks) (Dec 2016)
Questions on Price Sensitive Information
Insider trading normally means trading in shares of a company by the persons
who are in the management of the company or close to them on the basis of
price sensitive information which they possess but others not. In the light of this,
state whether the following information is price sensitive :
(i) The CEO of a company met with an accident and had been hospitalised.
(ii) Intended declaration of rights issue in near future.
(iii) RBI has increased repo rate by 25 basis points.
(iv) The company is going to have another plant at Rudrapur, Uttarakhand
(v) The Chairman of the company has submitted his resignation to the
Board under protest for selling a particular brand to another company.
(5 marks) (Dec 2013)
Price sensitive information (4 marks) (June 2014)
Comment on the following statements :
Price sensitive information is any information which relates directly or indirectly
to a company. (4 marks) (June 2015)
What is 'price sensitive information’? Which information is deemed to be price
sensitive information? State with reasons whether the following information is
price sensitive:
(i) The CEO of a company died in an air-crash.
(ii) RBI has increased its statutory liquidity ratio (SLR) by 25 basis points.
(iii) The company is setting-up another plant in Gujarat.
(iv) The company is negotiating with a foreign company to sell its stake in
Star Ltd. (8 marks) (June 2016)
Referring to the SEBI Insider Trading Regulations, answer the following:
(a) What is unpublished price sensitive information?
(b) State with reasons whether the following information is price sensitive
(i) RBI has increased its Statutory Liquidity Ratio (SLR) by 15 basis points.
(ii) The company is increasing its authorized share capital.
(4 marks) (Aug 2021)

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Disclosure of Interest or Holding in a Listed Companies by Certain Persons

Initial Disclosure

Every promoter, key shall disclose his

Within 30 days
managerial person and director shareholding of
from these
of every company whose securities of the
regulation
securities are listed on any company as on the date
taking effect
recognised stock exchange of these regulation

shall disclose his holding Within 7 days

Every person on appointment
of securities of the of such
as a key managerial person or
company as on the date appointment
a director of the company or
of appointment or or becoming a
upon becoming a promoter
becoming a promoter promoter

Continual Disclosure

if the value of the

Every promoter, employee and securities traded
Within 2
director of every company exceed Rs 10 lakh
trading days of
shall disclose to the company with single or
such
the number of securities series of
transaction
acquired or disposed of transavtion in any
calendar quarter

Every company shall notify the Within 2 trading days of receipt

particulars of such trading to the stock of the disclosure or from
exchange on which the securities are becoming aware of such
listed information

Question
What information should a listed Company maintain in its structured digital database
under Regulation 3(5), in case the designated person is a fiduciary or intermediary?
Answer:
The listed company should maintain the names of the fiduciary or intermediary with whom
they have shared information along with the Permanent Account Number PAN) or other

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unique identifier authorized by law, in case PAN is not available. The fiduciary /
intermediary, shall at their end, be required to maintain details as required under the
Schedule C in respect of persons having access to UPSI.
For example: If the listed company has appointed a law firm or Merchant Banker in respect
of fund raising activity, it should obtain the name of the entity, so appointed, along with
the PAN or other identifier, in case PAN is not available. The law firm or the Merchant
Banker would in turn maintain its list of persons along with PAN or other unique identifier
(in case PAN is not available), in accordance with Regulation 9A(2)(d) and as required
under Schedule C, with whom they have shared the unpublished price sensitive
information

Informant Incentives and Rewards

A new Chapter IIIA has been prescribed under the
Regulation for incentive and reward for the informants
who submits to the SEBI a Voluntary Information
Disclosure relating to any alleged violation of insider
trading
‘Informant’
‘Informant’ means an individual(s), who voluntarily submits to the SEBI a Voluntary
Information Disclosure Form relating to an alleged violation of insider trading laws that
has occurred, is occurring or has a reasonable belief that it is about to occur, in a manner
provided under these regulations, regardless of whether such individual(s) satisfies the
requirements, procedures and conditions to qualify for a reward.
Submission of Original information to the Board [Regulation 7(B)]

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Informant Reward [Regulation 7(d)]

 Upon collection or substantial recovery of the monetary sanctions amounting to at
least twice the Reward, the SEBI may at its sole discretion, declare an Informant
eligible for Reward and intimate the Informant or his or her legal representative to
file an application in the format provided in Schedule-E for claiming such Reward.
 However the amount of Reward shall be 10% of the monetary sanctions collected or
recovered and shall not exceed Rupees One crore or such higher amount as the SEBI
may specify from time to time.
 The SEBI may if deemed fit, out of the total Reward payable, grant an interim
reward not exceeding Rupees 10 lacs or such higher amount as the SEBI may specify
from time to time
 In case of more than one Informant jointly providing the Original Information, the
Reward, shall be divided equally amongst the total number of Informants. The
Reward under these regulations shall be paid from the Investor Protection and
Education Fund.
Determination of amount of reward [Regulation 7(e)]
 The amount of the Reward, if payable, shall be determined by the SEBI.
 While determining the amount of Reward the SEBI may specify the factors that may
be taken into consideration by the Informant Incentive Committee.
 An Informant may be eligible for a Reward whether or not he reported the matter to
his organization
Application for reward [Regulation 7(F)]
Informants, who are considered tentatively eligible for a Reward, shall submit the
Informant Reward Claim Form set out in Schedule E to the SEBI within the period specified
in the intimation sent by the Board.
Prior to the payment of a Reward, an Informant shall directly or through his or her legal
representative, disclose his or her identity and provide such other information as the SEBI
may require.
Rejection of Claim for Reward [Regulation 7 (g)]
No Reward shall be made to an Informant:
 who does not submit original information;
 who has acquired the Original Information, through or as a member, officer, or an
employee of:-
(i) any regulatory agency constituted by or under any law in India or outside
India, including the SEBI;
(ii) any self-regulatory organization;
(iii) the surveillance or investigation wings of any recognised stock exchange or
clearing corporation; or

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(iv) any law enforcement organization including the police or any central or state
revenue authorities.
 against whom the SEBI may initiate or has initiated criminal proceedings under
securities laws;
 who wilfully refused to cooperate with the SEBI during its course of investigation,
inquiry, audit, examination or other proceedings under securities laws;
 who:
(i) knowingly makes any false, fictitious, or fraudulent statement or
representation;
(ii) uses any false writing or document knowing that the writing or document
contains any false, fictitious, or fraudulent statement or entry;
(iii) fails to furnish the complete information available with him or accessible by
him in relation to the alleged violation.
 who is obligated, under any law or otherwise, to report such Original Information to
the SEBI, including a compliance officer under securities laws. Provided that the SEBI
may if deemed fit, at its sole discretion, exempt a person from any of these
disqualifications.
Protection against Retaliation and Victimization [Regulation 7 (i)]
Every person required to have a Code of Conduct under these regulations shall ensure that
such a Code of Conduct provides for suitable protection against any discharge, termination,
demotion, suspension, threats, harassment, directly or indirectly or discrimination against
any employee who files a Voluntary Information Disclosure Form, irrespective of whether
the information is considered or rejected by the SEBI or he or she is eligible for a Reward
under these regulations.
Nothing in these regulations shall prohibit any Informant who believes that he or she has
been subject to retaliation or victimization by his or her employer, from approaching the
competent court or tribunal for appropriate relief.
Any employer, who violates above, may be liable for penalty, debarment, suspension,
and/or criminal prosecution by the SEBI. However nothing in these regulations will require
the SEBI to direct re-instatement or compensation by an employer.
Nothing in these regulations shall diminish the rights and privileges of or remedies
available to any Informant under any other law in force.

Minimum Standards of Code of Conduct

Schedule B of these regulations lays down the following minimum standards for Code of
Conduct to regulate, monitor and report trading by insiders :-
1. The compliance officer shall report to the board of directors and in particular, shall
provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of

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the board of directors at such frequency as may be stipulated by the board of

directors.
2. All information shall be handled within the organisation on a need-to-know basis and
no unpublished price sensitive information shall be communicated to any person
except to discharge of his legal obligations.
3. The code of conduct shall contain norms for appropriate Chinese Walls procedures, and
processes for permitting any designated person to “cross the wall”.
Chinese Wall Policy:-
Price sensitive information(s) in a company are required to be disseminated to the
stock exchanges on continuous basis & so as to prevent the misuse of such price-
sensitive information the organization adopts such policy which separates those areas
(internal) of the organization which routinely have access to confidential/price-
sensitive information from external areas such as sales, marketing, investment
advisers & all other public departments providing support services to the organization
4. Designated persons in the organisation shall be governed by an internal code of
conduct governing dealing in securities.
5. A notional trading window shall be used as an instrument of monitoring trading by
the designated persons.
6. The trading window shall be closed when the compliance officer determines that a
designated person or class of designated persons can reasonably be expected to have
possession of unpublished price sensitive information. Such closure shall be imposed in
relation to such securities to which such unpublished price sensitive information
relates.
Failure to close trading window by the Compliance Officer, during the occurring of an
event that generates price-sensitive information is a violation of the said Code of
Conduct which holds the Compliance Officer liable for adjudicating proceedings.
[Edelweiss Financial Services Ltd.]
7. Designated persons and their immediate relatives shall not trade in securities when the
trading window is closed.
8. The timing for re-opening of the trading window shall be determined by the
compliance officer taking into account various factors and shall not be earlier than 48
hours after the information becomes generally available.
9. The trading window shall also be applicable to any person having contractual or
fiduciary relation with the company, such as auditors, accountancy firms, law firms,
analysts, consultants etc., assisting, or advising the company.
10. When the trading window is open, trading by designated persons shall be subject to
preclearance by the compliance officer, if the value of the proposed trades is above

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such thresholds as the board of directors may stipulate.

11. The compliance officer shall confidentially maintain a list of such securities as a
“restricted list” which shall be used as the basis for approving or rejecting applications
for preclearance of trades.
12. Prior to approving any trades, the compliance officer shall be entitled to seek
declarations to the effect that the applicant for pre-clearance is not in possession of
any unpublished price sensitive information.
13. He shall also have regard to whether any such declaration is reasonably capable of
being rendered inaccurate.
14. The code of conduct shall specify any reasonable timeframe, which in any event shall
not be more than 7 trading days, within which trades that have been pre-cleared have
to be executed by the designated person, if he fails the applicant need to pre-clear
transaction again.
15. The code of conduct shall stipulate the sanctions and disciplinary actions, including
wage freeze, suspension etc. that may be imposed, by the persons required to
formulate a code of conduct for the contravention of the code of conduct.
16. The code of conduct shall specify that in case it is observed by the persons required to
formulate a code of conduct, that there has been a violation of these regulations, they
shall inform the Board promptly.
17. The action by the company shall not preclude SEBI from taking any action in case of
violation of SEBI (Prohibition of Insider Trading) Regulations, 2015

Past Paper Question

Comment on the following statements:
"A company shall specify a trading period for trading in its own securities."
(4 marks) (Dec 2014)
As a Company Secretary in employment of Delux Ltd., a listed company, what
will be your role in monitoring trading window under SEBI (Prohibition of Insider
Trading) Regulations, 2015. (4 marks)(Dec 2020)

Principles and Procedure of Fair Disclosure

Schedule A of these regulations lays down the following principles of fair disclosure for
purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price
Sensitive Information:-
1. Prompt public disclosure of unpublished price sensitive information that would impact
price discovery no sooner than credible and concrete information comes into being in
order to make such information generally available.
2. Uniform and universal dissemination of unpublished price sensitive unpublished price

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sensitive information to avoid selective disclosure.

3. Designation of a senior officer as a chief investor relations officer to deal with
dissemination of information and disclosure of unpublished price sensitive
information.
4. Prompt dissemination of unpublished price sensitive information that gets disclosed
selectively, inadvertently or otherwise to make such information generally available.
5. Appropriate and fair response to queries on news reports and requests for verification
of market rumours by regulatory authorities.
6. Ensuring that information shared with analysts and research personnel is not
unpublished price sensitive information.
7. Developing best practices to make transcripts or records of proceedings of meetings
with analysts and other investor relations conferences on the official website to ensure
official confirmation and documentation of disclosures made.
8. Handling of all unpublished price sensitive information on a need-to-know basis.

Penalty Provisions for Violations of the Regulations

SEBI to issue following directions to the violators:-
(a) directing the insider not to deal in securities in any particular manner;
(b) prohibiting the insider 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;
(e) directing the person who acquired the securities in violation of these regulations to
deliver the securities back to the seller:
However, 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.

Penalty for Insider Trading under Section 15G of SEBI Act, 1992:
Penalty Min – 10 Lakhs
25 crore
Or

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3 times of amount of profits made out of insider trading

(whichever is higher)
Penalty for Insider Trading under Section 24 of SEBI Act, 1992
If any person fails to Minimum – 1 month
pay the penalty Imprisonment ---
imposed by the Maximum – 10 years
adjudicating officer or Or
fails to comply with Fine – Maximum 25 crore
any of his directions or Or
orders Both

Trading when in Possession of Unpublished Price Sensitive Information (UPSI)

When there is an off-  Who are aware of price sensitive information without being
market transfer between in breach of regulation 3
promoters AND
 Both parties had made a conscious and informed trade
decision.
In the case of non-  The individuals who were in possession of such unpublished
individual insiders price sensitive information were different from the
individuals taking trading decisions
AND
 Such decision-making individuals were not in possession of
such unpublished price sensitive information when they
took the decision to trade;
AND
 Appropriate and adequate arrangements were in place to
ensure that these regulations are not violated and no
unpublished price sensitive information was communicated
by the individuals
Trading Plans Regulation 5 states that an insider would be required to
submit trading plan in advance to the compliance officer for
his approval. The compliance officer is also empowered to take
additional undertakings from the insiders for approval of the
trading plan. Such trading plan on approval will also be
disclosed to the stock Exchanges, where the securities of the
company are listed.
The trading plan shall comply with requirements as follows:
 It shall be submitted for a minimum period of 12 months.

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 No overlapping of plan with the existing plan submitted by

Insider
 It shall set out either the value of trades to be effected or
the number of securities to be traded along with
 the nature of the trade and
 the intervals at, or
 dates on which such trades shall be effected.
 Trading can only commence only after 6 months from public
disclosure of plan.
 No trading between 20th day prior to closure of financial
period and 2nd trading day after disclosure of financial
results.
 Compliance officer to approve the plan.
 The trading plan once approved shall be irrevocable and the
insider shall mandatorily have to implement the plan,
without being entitled to either deviate from it or to execute
any trade in the securities outside the scope of the trading
plan.
 Upon approval of the trading plan, the compliance officer
shall notify the plan to the stock exchanges on which the
securities are listed.

Past Paper Question

"Trading plan is an exception to the general rule that an insider should not trade
when in possession of unpublished price sensitive information". In the light of
this statement, explain the concept of trading plan and its essential elements.
(4 marks) (Aug 2021)

Role of Company Secretary in Compliance Requirements

The obligations cast upon the Company Secretary in relation to the insider trading
regulations can be summarized as under:
1. To set forth the rules and regulation and get it approved by the board of directors
2. In case of unlisted company the company secretary is required

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 To prepare the Chinese wall policy for adoption in the company.

 To prepare Restricted/ Grey List of securities from time to time.
3. To frame and then to monitor adherences to the rules for the preservation of “Price
Sensitive information”.
4. Receive initial disclosure from every Promoter, KMP and director or every person on
appointment as KMP or director or becoming a Promoter shall disclose its shareholding
in the prescribed form within :
 30 days from these regulations taking effect or
 7 days of such appointment or becoming a promoter
5. To monitor and confirm whether transactions for which pre-clearance has been
granted were executed within one week.
6. Ensure that no trading shall between 20th day prior to closure of financial period and
2nd trading day after disclosure of financial results.
7. To maintain a record of all directors, officers and persons covered within the ambit of
the term ‘designated employee’ and any changes in the same.
8. To maintain a list of all information termed as ‘price sensitive information’.
9. To maintain a record of names of files containing confidential information deemed to
be price sensitive information and persons in charge of the same.
10. To ensure that computer data is adequately secured.
11. To keep records of periods specified as ‘close period’ and the ‘Trading Widow’.
12. To ensure that the ‘Trading Window’ is closed at the time of declaration of price
sensitive information
13. To ensure that the trading widow is opened 48 hours after the price sensitive
information is made public.

Case Law
1. 16. 06. 2020 Aditya Omprakash Gaggar (Noticee) Adjudicating Officer, Securities
vs. SEBI Exchange Board of India
Acts such as making UPSI available on a discriminatory basis will compromise the
confidence of investors and has a serious impact on the price of the securities.
Facts of the case
During November 2017, there were certain articles published in newspapers / print media
referring to the circulation of Unpublished Price Sensitive Information (hereinafter referred
to as “UPSI”) in various private WhatsApp groups about certain companies ahead of their
official announcements to the respective Stock Exchanges. Against this
backdrop, SEBI initiated a preliminary examination in the matter of circulation of
UPSI through WhatsApp groups during which search and seizure operation for 26

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entities of Market Chatter WhatsApp Group were conducted and approximately 190
devices, records etc., were seized.
The WhatsApp chats extracted from the seized devices were examined further and
while examining the chats, it was found that in respect of around 12 companies whose
earnings data and other financial information got leaked in WhatsApp.
Accordingly, SEBI carried out an investigation in the matter of circulation of UPSI through
WhatsApp messages with respect to Bata Ltd., to ascertain any possible violation of
the provisions of the Securities and Exchange Board of India Act, 1992 and SEBI
(Prohibition of Insider Trading) Regulations, 2015 during the period of January 1, 2016 to
February 10, 2016.
It was observed that Bata India Ltd. had announced financial results for quarter and nine
months ended on December 31, 2015 on February 10, 2016. The investigation inter alia
revealed that Mr. Aditya Omprakash Gaggar (hereinafter also referred to as “Noticee”)
among other had communicated the UPSI related to Bata India Ltd. viz; Sales, PAT and
EBITDA for quarter ended December 2015 through WhatsApp messages from the WhatsApp
chat of Ms. Shruti Vora.
Order
The instant case before SEBI is one such example where the information constituting UPSI
has been circulated through WhatsApp messages, which conveniently wipes out any trace
of the insider leaking the UPSI when the messages are deleted and manages to reach
the selected group of targets. Such acts which are essentially in the form of making
UPSI available on a discriminatory basis, if legitimized in the garb of routine sharing of
market gossips/rumors will compromise the confidence of investors and the activity of
such kind has a serious impact on the price of the securities where the limited set of people
having access to UPSI stand to gain at the expense of the innocent gullible investors. SEBI
in the opinion that the peculiar nature of such communication of UPSI as in the instant
case has to be strictly dealt with, in order to curb and discourage any future attempts at
the same
Thus, SEBI imposed a penalty of ₹15,00,000/-(Rupees Fifteen Lakhs only) on the Noticee
viz., Mr.Aditya Omprakash Gaggar in terms of the provisions of Section 15G of the
Securities and Exchange Board of India Act, 1992 for the violation of Sections 12 A (d)
& 12 A (e) of the Securities and Exchange Board of India Act, 1992 and Regulation 3
(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015. The Noticee shall remit /
pay the said amount of penalty within 45 days of the receipt of this order.

2. 06. 07. 2020 Mr. Amalendu Mukherjee (Noticee) Whole Time Member, Securities
In the matter of Ricoh India Limited Exchange Board of India

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vs. SEBI
The practice of insider trading is intended to be prohibited in order to sustain the investors’
confidence in the integrity of the security market.
Facts of the case
The Noticee, Amalendu Mukhergee, traded through the account of Fourth Dimension
Solutions Limited (“FDSL”) in the scrip of Ricoh India Limited (“Ricoh”) while in possession
of UPSI during the period of UPSI. Noticee traded through the account of FDSL from August
14, 2014 to November 17, 2015. While trading so, the Noticee made a wrongful gain of
Rs.1,13,56,118/- in the account of FDSL. Similarly, the Noticee wrongfully avoided a loss of
Rs.1,16,77,892/- in the account of FDSL.
The Noticee is the Managing Director and Promoter, having shareholding of 73.23% in FDSL
and control over its financials and operations. In view of,
a. improper conduct of insider trading
b. the fraud of manipulation of accounts of Ricoh with the involvement of FDSL and its
Managing Director i.e, the Noticee, and
c. being the ultimate beneficiary as controlling promoter and dominant shareholder of
FDSL.
d. for the protection of interest of investors relating to Ricoh, the corporate veil of FDSL
requires to be lifted in the present facts and circumstances of the case.
As the corporate veil is lifted, the Noticee is also liable for the above discussed insider
trading and its consequences. Therefore, Noticee is also individually liable for an amount
of INR 2,30,34,010/-and interest there on.
Order
SEBI directed Fourth Dimension Solutions Limited (FDSL) Managing Director Amalendu
Mukherjee to disgorge an amount worth over INR 2,30,34,010/- for insider trading in the
scrip of Ricoh India Ltd. The amount has to be paid along with 12 % interest within 45 days.
In addition, Amalendu Mukherjee has been restrained from accessing securities markets for
a period of seven years.

3. 16. 07. 2020 Mr. B. Renganathan (‘Noticee’) in the Adjudicating Officer, Securities
matter of edelweiss Financial Services Exchange Board of India
Ltd. vs. SEBI
Compliance officers are expected to discharge a responsible role in the corporate
functioning. The standards of good compliance aid and build up good corporate
governance to add value and confidence to the market and its investors.
Facts of the case
SEBI, upon receipt of examination report from National Stock Exchange (NSE), conducted

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investigation in the dealings in the scrip of Edelweiss Financial Services Ltd.

(‘EFSL’/‘Company’) to examine the violation, if any, of the provisions of SEBI (Prohibition
of Insider Trading) Regulations, 2015 (‘PIT Regulations, 2015’) for the period of January 25,
2017 to April 05, 2017 (‘Investigation Period’/‘IP’).
The Company is listed on NSE and Bombay Stock Exchange (BSE). It is observed that Mr. B
Renganathan (‘Noticee’) was the compliance officer and Company Secretary of EFSL during
IP. During the course of investigation, it was observed by SEBI that Ecap Equities Limited
(‘Ecap’), a wholly owned subsidiary of EFSL, had acquired Alternative Investment Market
Advisors Private Limited (‘AIMIN’), a fintech company, on April 05, 2017 by entering into a
share purchase agreement (SPA). The same was disclosed by EFSL to NSE and BSE on the
same day. Further, a Term Sheet in respect of the said transaction was signed between
Ecap and AIMIN on January 25, 2017. Therefore, it was alleged that the acquisition of AIMIN
by Ecap was a price sensitive information which had come into existence on January 25,
2017 upon signing of Term Sheet. Despite that, the Noticee, being the compliance officer of
the company, failed to close the trading window during the period of January 25, 2017 to
April 05, 2017. By his failure to close the trading window during this period, it is alleged
that the Noticee has violated the provisions of Clause 4 of Minimum Standards for Code of
Conduct to Regulate, Monitor and Report Trading by Insiders mentioned in Schedule B read
with Regulation 9(1) of PIT Regulations, 2015. In view of this, adjudication proceedings
were initiated against the Noticee under the provisions of section 15HB of the ‘SEBI Act’.
Order
Adjudicating Officer, SEBI find non-compliance on the part of the Noticee by failing to close
trading windows when necessary as per law. Therefore, there were repeated instances
wherein the Noticee had failed to close the trading window. In view of the above the
argument of the Noticee that there was no repetition of violation is not acceptable.
Adjudicating Officer’s considered view that a repetitive violation, in disregard to the
applicable provisions of law, cannot be construed to be a technical violation.
After taking into consideration the facts and circumstances of the case, material/facts on
record, the reply submitted by the Noticee, Adjudicating Officer imposed a penalty of Rs.
5,00,000/- (Rupees Five Lakh only) on the Noticee. The Noticee shall remit / pay the said
amount of penalty within 45 days of receipt of this order.

4. 27. 07. 2020 Dr. Udayant Malhoutra (Appellant) Securities Appellate Tribunal
vs. SEBI (Respondent)
There is no doubt that SeBi has the power to pass an interim order and that in extreme
urgent cases SEBI can pass an ex-parte interim order but such powers can only be exercised
sparingly and only in extreme urgent matters.

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Facts of the case

The present appeal has been filed against an ex-parte order dated June 15, 2020 passed by
the Whole Time Member (‘WTM’) of SEBI directing the appellant to deposit a sum of Rs.
2,66,59,215/-plus interest till date totaling Rs.3,83,16,230.73 in an Escrow Account towards
notional loss allegedly avoided by him by using unpublished price sensitive information
and further directed that the bank accounts / demat accounts of the appellant shall
remain frozen till such time the amount is not deposited. The WTM further directed the
appellant to show cause as to why an order of disgorgement should not be passed.
The facts leading to the filing of the present appeal is, that the appellant is the Chief
Executive Officer and Managing Director of a listed company known as Dynamatic
Technologies Limited (‘DTL’) which is engaged in the manufacturing of aerospace,
automotive and engineered products. The appellant has been the Managing Director since
1989. The charge leveled against the appellant is, that he had sold 51,000 shares of the
company DTL on October 24, 2016 having inside knowledge of the price sensitive
information, namely, the unaudited financial results of the quarter ending September 30,
2016. It was alleged that the financial results were approved by the Board of Directors on
November 11, 2016 whereupon the price of the scrips of the company drastically went
down. It was alleged that the appellant had inside information of the price sensitive
information and, being a connected person had sold the shares and thus made a notional
gain or averted a notional loss.
Order
In the instant case, SAT do not find any case of extreme urgency which warranted the
respondent to pass an ex-parte interim order only on arriving at the prima-facie case that
the appellant was an insider as defined the SEBI (Prohibition of Insider Trading)
Regulations, 2015 without considering the balance of convenience or irreparable injury. In
the light of the aforesaid, the impugned order cannot be sustained and the same is
quashed at the admission stage itself without calling for a counter affidavit except the
show cause notice. The appeal is allowed.

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Chapter 12
Mutual Fund

Introduction
Mutual fund is a mechanism for pooling the resources by
issuing units to the investors and investing funds in
securities according to its objectives as disclosed in offer
document. Investments in securities are spread in
different industries and sectors and thus the risk is
reduced. Diversification reduces the risk because all
stocks may not move in the same direction in the same
proportion at the same time. The mutual funds normally
come out with a number of schemes with different
investment objectives which are launched from time to
time. A mutual fund is required to be registered with SEBI
before it can collect funds from the public
What is a mutual fund?  A trust that raises money through sale of units
 Gives investors exposure to different segments of markets
 Investors get access to professional management
 Plays an active role in building wealth and generating
income for investors
 A key participant in the capital market
 Source for corporates to raise money
List of all stakeholders  RBI
in Indian mutual fund  SEBI
industry  AMFI
 Ministry of Finance
 SROs
 Income Tax Regulations
 Investors‘ Associations
Regulator: Securities  Regulates mutual funds, custodians and registrars & transfer
and Exchange Board of agents
India (SEBI)  The applicable guidelines for mutual funds are set out in SEBI
(Mutual Funds) Regulations, 1996 updated periodically
Industry Body:  All 44 AMCs are members of AMFI
Association of Mutual  Recommends and promotes best business practices and code

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Funds in India (AMFI) of conduct

 Disseminates information and carries out studies/research on
mutual fund industry

Past Paper Question

The mutual funds have emerged as one of the important class of financial
intermediaries which cater to the needs of retail investors." Discuss.
(6 marks) (Dec 2014)

Structure of a Mutual Fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (“AMC”) and a custodian.

• The trust is established by a sponsor or more than one

Sponsor
sponsor who is like a promoter of a company.

Asset Management • The AMC, approved by SEBI, manages the funds by making
Company investments in various types of securities.

• The trustees of the mutual fund hold its property for the
benefit of the unit-holders.
• The trustees are vested with the general power of
Trustee
superintendence and direction over AMC. They monitor the
performance and compliance of SEBI Regulations by the
mutual fund.

• The custodian, who is registered with SEBI, holds the

Custodian
securities of various schemes of the fund in its custody.

Types Of Mutual Fund

Open Ended Close Ended
Can be purchased on any transaction day Can be purchased only during NFO
Can be redeemed on any transaction day Can be redeemed only at maturity
(Except when units are locked-in in the case
of ELSS funds)
High liquidity Low on liquidity

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Past Paper Question

Distinguish between following:
Open ended mutual fund and close ended mutual fund (4 marks) (Dec 2016)

Types Of Mutual Fund Plans

Regular Plans Direct Plans
Sold through a distributor Sold directly by the AMC
Higher Expense Ratio Lower Expense Ratio
(Due to commissions paid to distributor) (No commission paid to distributor)
Potentially lower returns to the investor Potentially higher returns
(Due to higher expenses) (Due to lower expenses)

Schemes According To Investment Objective

1. Income Oriented Schemes: The fund primarily offers fixed
income to investors. The main securities in which investments
are made by such funds are the fixed income yielding ones like
bonds, corporate debentures, Government securities and money
market instruments, etc.
2. Growth Oriented Schemes: These funds offer growth
potentialities associated with investment in capital market
namely:
 high source of income by way of dividend and
 rapid capital appreciation, both from holding of good
quality scrips.
These funds, with a view to satisfying the growth needs of
investors, primarily concentrate on the low risk and high
yielding equity scrips of the corporate sector.
3. High Growth Schemes: These funds primarily invest in high risk
and high return volatile securities in the market and induce the
investors with a high degree of capital appreciation.

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4. Hybrid Schemes: These funds cater to both the investment

needs of the prospective investors – namely fixed income as
well as growth orientation. Therefore, investment targets of
these mutual funds are mix of both the fixed income securities
like bonds and debentures and also sound equity scrips. In fact,
these funds utilise the concept of balanced investment
management. These funds are, thus, also known as “balanced
funds”.
5. Real Estate Funds: These are close ended mutual funds which
invest predominantly in real estate and properties.

6. Infrastructure Debt Fund: They invest primarily in the debt

securities or securitized debt investment of infrastructure
companies.

7. Money Market Mutual Funds: These funds invest in short- term debt securities in the
money market like:-
(i) certificates of deposits
(ii) commercial papers
(iii) government treasury bills etc.
Owing to their large size, the funds normally get a higher yield on such short term
investments than an individual investor.

8. Off-shore Funds: Such funds invest in securities of foreign

companies with RBI permission.

9. New Direction Funds: They invest in companies engaged in scientific and

technological research such as birth control, anti-pollution, oceanography etc.

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10. Tax Saving Schemes: These schemes offer tax rebates to the
investors under tax laws as prescribed from time to time. This is
made possible because the Government offers tax incentive for
investment in specified avenues. For example, Equity Linked
Saving Schemes (ELSS) and pensions schemes.
11. Fund of Funds: They invest only in units of other mutual funds. Such funds do not
operate at present in India.

Fund of Funds

Fund 1 Fund 2 Fund 3

12. Exchange Trade Funds: ETFs are a new variety of mutual funds
that first introduced in 1993.
ETFs are funds that track indexes such as Sensex, Nifty, etc.
When you buy shares/ units of an ETF, you actually buy
shares/ units of a portfolio that tracks the performance of the
index. ETFs just reflect the performance of the index they track.
Unlike regular mutual funds, ETFs trade like a common stock
on the stock exchange and the price of an ETF changes as per
the trading in the market takes place.
The trading value of an ETF depends on the net asset value of
the underlying stock that it represents. ETFs, generally, have
higher daily liquidity and lower fees than mutual fund
schemes.

Notes:-

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13. Special Schemes: This category includes index schemes that attempt to replicate the
performance of particular index such as the BSE, Sensex or the NSE-50 or sectoral
schemes.
 Index fund schemes are ideal for investors who are satisfied with a return
approximately equal to that of an index.
 Sectoral fund schemes are ideal for investors who have already decided to
invest in particular sector or segment.

14. Leverage Funds: Such funds, also known as borrowed funds, increase the size and
value of portfolio and offer benefits to members from out of the excess of gains over
cost of borrowed funds. They tend to indulge in speculative trading and risky
investments.
15. Hedge Funds: They employ their funds for speculative trading, i.e. for buying shares
whose prices are likely to rise and for selling shares whose prices are likely to fall.

Advantages Of Mutual Funds

The advantages of investing in a mutual fund are:-
1. Professional Management: Investors avail the services of experienced and skilled
professionals who are backed by a dedicated investment research team which
analyses the performance and prospects of companies and selects suitable
investments to achieve the objectives of the scheme.
2. Diversification: Mutual funds invest in a number of
companies and sectors. This diversification reduces
the risk because all stocks do not move at the same
time and in the same proportion.

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3. Convenient Administration: Investing in a mutual

fund reduces paper work and helps investors to avoid
many problems such as bad deliveries, delayed
payments and unnecessary follow up with brokers
and companies. Mutual funds save investors time
and make investing easy and convenient.

4. Return Potential: Over a medium to long term,

Mutual funds have the potential to provide a higher
return as they invest in a diversified basket of
selected securities.
5. Low Costs: Mutual funds are a relatively less
expensive way to invest compared to directly
investing in the capital markets because the benefits
of scale in brokerage, custodial and other fees
translate into lower costs for investors.

6. Liquidity: In open ended schemes, investors can get their money back promptly at net
asset value related prices from the mutual fund itself. With close ended schemes,
investors can sell their units on a stock exchange at the prevailing market price or at
net asset value (NAV) on the date of maturity.
7. Transparency: Investors get regular information on the value of their investment in
addition to disclosure on the specific investments made by scheme, the proportion
invested in each class of assets and the fund manager’s investment strategy and
outlook.

Risks Involved In Mutual Funds

Mutual funds may face the following risks, leading to non-satisfactory performance:-
1. Excessive diversification of portfolio, losing focus on the securities
of the key segments.
2. Too much concentration on blue-chip securities.
3. Poor planning of investment returns.
4. Unresearched forecast on income, profits and Government
policies.
5. Fund managers being unaccountable for poor results.
6. Failure to identify clearly the risk of the scheme as distinct from
risk of the market.
7. Under performance in comparison to peers.

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Past Paper Question

Explain the various risks involved in investing in mutual funds.
(4 marks)(Dec 2014)

Types of Risks
Volatility risk Typically, equity-based funds invest in the shares of companies that are
listed on stock exchanges. The value of such funds is based on companies’
performance, which often gets affected due to the prevalent
microeconomic factors.
Credit risk Credit risk in mutual fund investment often results from a situation,
wherein, the issuer of the scheme fails to pay the promised interest. In
case of debt funds, typically, fund managers include investment-grade
securities with high credit ratings.
Liquidity risk Mutual funds with a long-term and rigid lock-in period like ELSS often
come with liquidity risk. Such a risk signifies that investors often find it
challenging to redeem their investments without incurring a loss.
Concentrated This mutual fund risk is also prevalent among investors. It can be
risk described as the situation when investors tend to put all their money into
a single investment scheme or in one sector. For instance, investing
entirely in just one company’s stocks often bears a substantial risk of
losing capital if caught amidst bad market situations
Inflation risk It can be best described as the risk of losing one’s purchasing power,
mainly due to the rising inflation rate. Typically, investors are exposed to
the impact of this risk when the rate of returns earned on investments
fails to keep up with the increasing inflationary rate.

Eligibility criteria For registration of Mutual Funds

For the purpose of grant of a certificate of registration, the applicant has to fulfill the
following, namely –
 the sponsor should have a sound track record and general reputation of fairness and
integrity in all his business transactions.
 the applicant is a fit and proper person.
 the sponsor has contributed or contributes at least 40% to the net worth of the asset
management company.
 the sponsor or any of its directors or the principal officer to be employed by the
mutual fund should not have been guilty of fraud or has not been convicted of an
offence involving moral turpitude or has not been found guilty of any economic

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offence
 appointment of trustees to act as trustees for the mutual fund in accordance with
the provisions of the regulations
 appointment of asset management company to manage the mutual fund and
operate the scheme of such funds in accordance with the provisions of these
regulations
 appointment of custodian in order to keep custody of the securities or goods or gold
and gold related instrument or other assets of the mutual fund held in terms of SEBI
(Mutual Fund) Regulations, 1996 and provide such other custodial services as may
be authorised by the trustees.

Key Players In Mutual Fund

A mutual fund is a professionally-managed investment scheme, usually run by an asset
management company that brings together a group of people and invests their money in
stocks, bonds and other securities. It is formed by trust body.
There are five principal constituents and three market intermediaries in the formation and
functioning of mutual fund:
Five principal constituents:-
1. Sponsor: A sponsor is an influential investor who creates
demand for a security because of their positive outlook on it.
The sponsor brings in capital and creates a mutual fund trust
and sets up the AMC. The sponsor makes an application for
registration of the mutual fund and contributes at least 40%
of the net worth of the AMC. Sponsor
2. Asset Management Company: An asset management company
(AMC) is a company that invests its clients’ pooled funds into
securities that match declared financial objectives. Asset
management companies provide investors with more
diversification and investing options than they would have
themselves. AMCs manage mutual funds, hedge funds and
pension plans, these companies earn income by charging
service fees or commissions to their clients.
3. Trustee: The trustees of the mutual fund hold its property for
the benefit of the unit-holders. The trustees are vested with
SBI Mutual
the general power of superintendence and direction over AMC. Fund Trustee
They monitor the performance and compliance of SEBI
Regulations by the mutual fund.
Private Ltd.

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4. Unit Holders: A unit holder is an investor who owns the units

issued by a trust. The securities issued by trusts/MF are called
units, and investors in units are called unitholders. The unit in
turn reflect share of the investor in the Net Assets of the fund.

5. Mutual fund: A mutual fund established under the Indian

Trust Act to raise money through, the sale of units to the
public for investing in the capital market. The funds thus
collected as per the directions of Asset Management Company
for invested. The mutual fund has to be SEBI registered.

Three market intermediaries are:-

1. Custodian: A custodian is a person who carries on the business of providing custodial
services to the client. The custodian keeps the custody of the securities of the client.
The custodian also provides incidental services such as maintaining the accounts of
securities of the client, collecting the benefits or rights accruing to the client in
respect of securities.
Every custodian should have adequate facilities, sufficient capital and financial
strength to manage the custodial services. The SEBI (Custodian of Securities)
Regulations, 1996 prescribe the roles and responsibilities of the custodians.
2. Transfer Agents: A transfer agent is a person who has been granted a Certificate of
Registration to conduct the business of transfer agent under SEBI Regulations Act
1993. Transfer agents’ services include issue and redemption of mutual fund units,
preparation of transfer documents and maintenance of updated investment records.
They also record transfer of units between investors where depository does not
function. They also facilitate investors to get customized reports.
3. Depository: A depositor facilitates the smooth flow of trading and ensure the
investor`s about their investment in securities.

Net Asset Value (NAV)

What is NAV?
 NAV is the market value of the securities held by the scheme.
 Mutual funds invest the money collected from investors in securities
markets. Since market value of securities changes every day, NAV of a
scheme also varies on day to day basis.
 The NAV per unit is the market value of securities of a scheme divided
by the total number of units of the scheme on any particular date.

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 For example, if the market value of securities of a mutual fund scheme is INR 200 lakh
and the mutual fund has issued 10 lakh units of INR 10 each to the investors, then the
NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed
by the mutual funds on a daily basis.
 Unlike stocks (where the price is driven by the market and changes from minute-to-
minute), mutual funds don’t declare NAVs through the day.
 Instead, NAVs of all mutual fund schemes are declared at the end of the trading day
after markets are closed, in accordance with SEBI Mutual Fund Regulations.
How is it calculated?
Net Asset Value = Net Asset of the Scheme
Number of units outstanding
Net Asset of the Scheme = Market value of investments + Receivables+ other accrued
income+ other assets –Accrued Expenses- Other Payables- Other Liabilities
Net Asset Value (NAV) – Cut-off Timeline
Type of Transaction Before/ After Cut-off Time Applicable NAV
Equity-oriented & Debt funds (except liquid funds)
Purchase & Switch-in 3 pm Before Same day NAV
(value < Rs.2 lakhs) After Next business day NAV
Purchase & Switch-in 3 pm Before NAV of the business day on
(value > Rs.2 lakhs) After which funds are available
for utilization
Redemption & 3 pm Before Same day NAV
Switch-out After Next business day NAV
Liquid Funds
Purchase & Switch-in 2 pm Before Previous day NAV if funds
are realized
After NAV of the day previous to
the funds realized
Redemption & 3 pm Before NAV of the day immediately
Switch-out preceding the next business
day
After NAV of the day preceding
the second business day
from submission

Past Paper Question

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R is holding 2000 units of a equity-oriented scheme of a mutual fund and 1000

units of a debt scheme of a mutual fund. On 7th June, 2020 he is interested to
redeem these units. Prevailing net asset value (NAV) of these units are as under:
Date Net Asset Value (NAV)
Equity oriented Debt oriented
scheme (in Rs) scheme (in Rs)
6th June 45 35
th
7 June 46 34
th
8 June 47 33
He makes an application for redemption of above units on 7th June, 2020 at 2:30
pm. Based on given information answer the following:
(i) What do you mean by cut-off time? What are the cut-off time for equity-
oriented & Debt funds (except liquid funds)?
(ii) What will the applicable NAV in his case?
(iii) What will be applicable NAV if application for redemption is made at
3:15 pm? (3+1+1 marks) (Aug 2021)

Illustration:-1
Name of the Scheme XYZ
Size of the Scheme Rs .100 Lacs
Face Value of the Share Rs. 10
Number of the outstanding shares 10 Lacs
Market value of the fund’s investments Receivables Rs. 180 Lacs
Accrued Income Rs. 1 lakhs
Receivables Rs. 1 lakhs
Liabilities Rs. 50,000
Accrued Expenses Rs. 50,000
Find NAV per unit ?
Solution:-
NAV per unit = (Market Value of Investments + Receivables + Accrued Income – Liabilities –
Accrued Expenses) / No of units (mutual fund)
= (1,80,00,000 + 1,00,000 + 1,00,000 – 50,000 – 50,000)/10,00,000
NAV = Rs 18. 10 per unit

Illustration:-2
ABC mutual Fund Has the following assets in scheme XYZ at the close business on 31st
March, 2019.
Company No. of Shares Market Price Per Share

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N Ltd 25000 Rs 20
D Ltd 35000 Rs 300
S Ltd 29000 Rs 380
C Ltd 40000 Rs 500
The total number of units of scheme XYZ is 10 Lakh. The Scheme XYZ has accrued expenses
of Rs 2,50,000 and other Liabilities of Rs 2, 00,000.
Calculate the NAV per unit of the scheme XYZ
Solution:-
Company No. of Shares Market Price Per Value of Assets /
Share Liabilities
N Ltd 25000 Rs 20 5,00,000
D Ltd 35000 Rs 300 1, 05,00,000
S Ltd 29000 Rs 380 1, 10, 20,000
C Ltd 40000 Rs 500 2, 00,00,000
Market value of Portfolio 4, 20, 20,000
Accrued Expenses (2,50,000)
Liabilities (2,00,000)
Net Assets 4,15,70,000
No of Units 10,00,000
NAV Rs 41. 57 per unit

Illustration:-3
The redemption price of mutual fund unit is Rs 48 while the front end load and back end
load charges are 2% and 3% respectively. Compute::-
(i) NAV per unit
(ii) Public offer price of the unit.
Solution:-
Redemption Price = NAV Public Offer Price = NAV

(1 + Back End Load) (1 - Front end Load)

Public offer Price = 49. 44
48 = NAV
(1 - 0.02)
(1 + 0.03)
= 48 x 1. 03 = 49. 44
NAV = Rs 49. 44
0. 98
Public Offer Price = Rs 50.45

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Offer Doument

Offer Document  AMC raises money in new schemes through New Fund Offer
(NFO)
 Offer document contains key details about the NFO – open and
close dates, scheme objective, nature of the scheme, etc.
 Filed with SEBI
Parts of Offer Document
Scheme Information A document that contains the details of the scheme. SID has to be
Document (SID) updated every year
Key Contents:
 Scheme name on the cover page, along with scheme structure
(open / closed-ended) expected scheme nature (equity / debt /
balanced / liquid / ETF)
 Highlights of the scheme
 Risk factors
 Due diligence certificate issued by the AMC
 Fees and expenses
 Rights of unit holders
 Penalties, litigations, etc
Statement of A document that contains statutory information about the fund
Additional house offering the scheme. SAI has to be updated the end of every
Information quarter
Key Contents:
 Information about sponsor, mutual fund, trustees, custodian and
registrar & transfer agents
 Condensed financial information for schemes launched in the last
three financial years
 Information on how to apply
 Rights of unit holders
 Details of the fund managers
 Tax, legal and other general information
Key Information  Essentially a summary of SID & SAI

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Memorandum (KIM)  As per SEBI regulations, every application form should be

accompanied by the KIM
 The KIM has to be updated at least once a year

Know Your Client (KYC)

What is KYC?  A one-time process made mandatory to invest in mutual funds
 Key details required: PAN, Address proof, contact details,
occupation and income details
Where can it be  CDSL Ventures Limited KRA
done?  CAMS KRA
 Karvy KRA
 NDML KRA (wholly owned subsidiary of NSDL)
 DOTEX KRA (wholly owned subsidiary of NSE)

Foreign Account Tax Compliance Act (FATCA)

What is FATCA?  Requires that all financial institutions (including Indian mutual
funds) need to report financial transactions of US persons and
entities in which US persons hold a substantial ownership.
 Enacted to prevent tax evasion through foreign investments.
 Key details required: Country of birth, Country of citizenship,
country of tax residence, TIN from such country.
 Currently made mandatory for all investors (existing and new)
in Indian mutual funds.
 For non-individual investors, Ultimate Beneficial Ownership
(UBO) details have to be provided.

Expense Ratio
The fees charged by the scheme to manage investors’ money
What does it contain?
 Fees paid to service providers like trustees, Registrar & Transfer Agents, Custodian,
Auditor, etc.
 Asset management expenses
 Commissions paid to distributors
 Other selling expenses including advertising expenses
 Expenses on investor communication, account statements, dividend/ redemption
cheques / warrants
 Listing fees and Depository fees

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 GST
Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur /
charge certain operating expenses for managing a mutual fund scheme such as:-
 sales & marketing / advertising expenses,
 administrative expenses,
 transaction costs,
 investment management fees,
 registrar fees,
 custodian fees,
 audit fees – as a percentage of the fund’s daily net assets.
This is commonly referred to as ‘Expense Ratio’. In short, Expense ratio is the cost of
running and managing a mutual fund which is charged to the scheme. All expenses
incurred by a Mutual Fund, AMC will have to be managed within the limits specified under
Regulation 52 of SEBI Mutual Fund Regulations.
The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value
(NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the
TER has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the
higher the NAV.
In terms of Regulation 52(1) of SEBI (Mutual Funds) Regulations, 1996, all scheme related
expenses including commission paid to distributors, by whatever name it may be called
and in whatever manner it may be paid, shall necessarily be paid from the scheme only
within the regulatory limits.
The Assets Management Company shall predominantly disclose on daily basis, the TER
(Scheme wise, date wise) of all the scheme shall under a separate head- Total expense
ratio of Mutual fund Scheme on their website and website of AMFI.
Any change in base TER in comparison to previous base TER charged to any scheme / plan
shall be communicated to investors of the scheme / plan through notice via email or SMS
atleast 3 working days prior to effecting such change. Further the notice of change in base
TER shall be updated on website atleast 3 working days prior to effecting such change.
However, any decrease in TER in a mutual fund scheme due to various regulatory
requirements would not require issuance of any prior notice to the investors.

Past Paper Question

“Expense Ratio for a mutual fund should be as low as possible.” Explain how
increase or decrease in Total Expense Ratio (TER) shall be disclosed by Asset
Management Company under SEBI (Mutual Funds) Regulations, 1996?
(5 marks) (Dec 2018)

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Holding Period Return

Holding period return is the total return received from holding an
asset or portfolio of assets over a period of time, generally expressed
as a percentage. Holding period return is calculated on the basis of
total returns from the asset or portfolio – i.e. income plus changes in
value. It is particularly useful for comparing returns between
investments held for different periods of time.
Calculation of HPR
HPR = (Income + (end of period value- original value) x 100
Original Value
Illustration:-4
Calculate HPR for a unit holder who bought a unit at Rs 17. 60 and received a dividend of
Rs 2 per unit during the period. Face value of the unit is ₹ 10and current unit price is ₹19.875
Solution
HPR = (Income + (end of period value- original value) x 100
Original Value
= 2 + (19. 875 - 17. 60) x 100
17. 60
HPR = 24. 29%

Procedure for Launching of Schemes

 No scheme shall be launched by the asset management company unless such scheme
is approved by the trustees and a copy of the offer document has been filed with the
SEBI.
 The offer documents shall contain adequate disclosures to enable the investors to
make informed decisions.
 The mutual fund shall pay the minimum filing fee to the SEBI while filing the offer
document and the balance filing fee within such time as may be specified by the SEBI.
 The listed entity, which intends to list units of its scheme on the recognised stock
exchange(s), shall obtain ‘in-principle’ approval from recognised stock exchange(s) in
the manner as specified by the recognised stock exchange(s) from time to time.
 Every mutual fund desirous of listing units of its schemes on a recognised stock
exchange shall execute an agreement with such stock exchange.
 The listing of close-ended schemes is mandatory and they should be listed on a
recognised stock exchange within six months from the closure of subscription.
 Units of a close-ended scheme can be converted into an open-ended scheme with the
consent of a majority of the unit-holders and disclosure is made in the offer

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document about the option and period of conversion.

 Units of close-ended scheme may be rolled over by passing a resolution by a majority
of the shareholders.
 No scheme other than equity-linked saving scheme can be opened for subscription for
more than 15 days. Further, the minimum subscription and the extent of over
subscription that is intended to be retained should be specified in the offer document.
 The AMC is required to refund the application money if minimum subscription is not
received, and also the excess over subscription within five working days of closure of
subscription.
 A close-ended scheme shall be wound up on redemption date, unless it is rolled over,
or if 75% of the unit-holders of a scheme pass a resolution for winding up of the
scheme; if the trustees on the happening of any event require the scheme to be
wound up; or if SEBI, so directs in the interest of investors.

Code of conduct of Mutual Funds

(i) The schemes should not be organized, operated and managed in the interest of
sponsors or the directors of AMC or special class of unit holders;
(ii) It shall ensure the adequate dissemination of adequate, fair, accurate and timely
information of all the stake holders;
(iii) The excessive concentration of business with the broking firm should be avoided;
(iv) The scheme - wise segregation of bank accounts and securities accounts must be
ensured;
(v) The investment should be made in accordance with the investment strategies stated
on the offer documents;
(vi) The high standards of integrity and fairness in all the dealings should be maintained
by the trustees and AMCs;
(vii) The AMCs shall not make any exaggerated statements;
(viii) A half yearly report on the activity of the mutual funds shall be submitted to SEBI
by the trustees.

Advertisement of conduct of Mutual Funds

(i) Advertisement shall be accurate, true, fair, clear,
complete, unambiguous and concise.
(ii) Advertisement shall not contain statement which are false,
misleading, biased or deceptive, based on assumptions and
shall not contain any testimonials or any ranking based on
any criteria.

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(iii) No celebrities shall form part of advertisement.

(iv) No advertisement shall directly or indirectly discredit other
advertisements or make unfair comparisons.
(v) Advertisements shall be accompanied by a standard
warning in legible fonts which states “Mutual fund
investments are subject to market risks, read all schemes
related document carefully.” No addition or deletion of
words shall be made to the standard warning.
(vi) In audio visual media based advertisements, the standard
warning in visual and accompanying voice over reiteration No Celebrities
shall be audible in a clear and understandable manner. For
example, in standard warning both the visual and the
voice over reiteration containing 14 words running for at
least 5 seconds may be considered as clear and
understandable.
(vii) Advertisement shall not be so designed as likely to be
misunderstood or likely to be disguise the significance of
any statement.

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Chapter 13
Collective Investment Scheme

Introduction
A collective investment scheme is a scheme that comprises a pool of assets that is
managed by a collective investment scheme manager and is governed by the Collective
Investment Schemes Regulations given by SEBI.
With a CIS, the money or funds from a group of investors are pooled or collected together
to form a CIS portfolio.

‘Collective Investment Scheme’ means any scheme or arrangement

which satisfies the conditions specifies in section 11AA.

Section 11AA provides that any scheme or arrangement which

Definition satisfies the conditions referred to in sub-section (2) or sub-
SEBI Act section (2A) shall be a collective investment scheme.
1992 However, any pooling of funds under any scheme or
arrangement, which is not registered with SEBI or is not covered
under sub-section (3), involving a corpus amount of 100 crore
rupees or more shall be deemed to be a collective investment
scheme.

Sec 11AA

Sub-section 2 Sub-section 2A Sub-section 3

Sec 11 AA (2)
Any scheme or arrangement made or offered by any person under which,—
(d) the contributions, or payments made by the investors, by whatever name called,
are pooled and utilized for the purposes of the scheme or arrangement;
(e) the contributions or payments are made to such scheme or arrangement by the
investors with a view to receive profits, income, produce or property, whether
movable or immovable, from such scheme or arrangement;

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(f) the property, contribution or investment forming part of scheme or arrangement,

whether identifiable or not, is managed on behalf of the investors;
(g) the investors do not have day-to-day control over the management and operation
of the scheme or arrangement.
Sec 11 AA (2A)
Any scheme or arrangement made or offered by any person satisfying the conditions as
may be specified in accordance with the regulations made under this Act.
Sec 11AA (3)
Sub-section (2) or sub-section (2A) shall not applicable if any scheme or arrangement –
(iii) made or offered by a co-operative society registered under the Cooperative Societies
Act, 1912 or a society being a society registered or deemed to be registered under
any law relating to co-operative societies for the time being in force in any State;
(iv) under which deposits are accepted by non-banking financial companies as defined
in clause (f) of section 45-I of the Reserve Bank of India Act, 1934;
(v) being a contract of insurance to which the Insurance Act, 1938, applies;
(vi) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under
the Employees Provident Fund and Miscellaneous Provisions Act, 1952;
(vii) under which deposits are accepted under section 74 of the Companies Act, 2013;
(viii) under which deposits are accepted by a company declared as a Nidhi or a mutual
benefit society under section 406 of the Companies Act, 2013;
(ix) falling within the meaning of Chit business as defined in clause (d) of section 2 of
the Chit Fund Act, 1982;
(x) under which contributions made are in the nature of subscription to a mutual fund;
such other scheme or arrangement which the Central Government may, in
consultation with SEBI, notify, shall not be a collective investment scheme.

SEBI (Collective Investment Schemes) Regulations, 1999 – An Overview

SEBI (Collective Investment Schemes) Regulations, 1999 defines Collective Investment
Management Company to mean a company incorporated under the Companies Act, 2013
and registered with SEBI under these regulations, whose object is to organize, operate and
manage a collective investment.
No person other than a Collective Investment Management Company which has obtained a
certificate under the regulations should carry on or launch a collective investment scheme.
“Close ended collective investment scheme” means any collective investment scheme
launched by a collective investment management company. In which the maturity period
of the collective investment scheme is specified and these is no provision for repurchase
before the expiry of the collective investment scheme.”

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“Collective investment scheme property” includes:

(i) subscription of money or money’s worth (including bank deposits) to the collective
investment scheme
(ii) property acquired, directly or indirectly, with, or with the proceeds of, subscription
of money mentioned in item (i)
(iii) income arising, directly or indirectly from, subscription money or property
mentioned in item (i) or (ii)

Restriction On Business Activities

The Collective Investment Management Company should not:
(i) undertake any activity other than that of managing the CIS
(ii) act as a trustee of any CIS
(iii) launch any CIS for the purpose of investing in securities
(iv) invest in any CIS floated by it
However, it has been provided that a CIMC may invest in its own CIS, if it makes a
disclosure of its intention to invest in the offer document of the CIS, and does not charge
any fees on its investment in that CIS

Eligibility For Appointment As Trustee

The persons registered with the SEBI as Debenture Trustee under SEBI (Debenture Trustee)
Regulations, 1993 are only eligible to be appointed as trustees of collective investment
schemes. However, no person is eligible to be appointed as trustee, if he is directly or
indirectly associated with the persons who have control over the CIMC. The CIMC shall
furnish to SEBI particulars in respect of trustees appointed in the prescribed form. No
person should be appointed as trustee of a scheme, if he has been found guilty of an
offence under the securities laws or the SEBI or any authority to which the SEBI has
delegated its power has passed against such person, an order under the Act for violation of
any provision of the Act or of regulations made hereunder.

Termination of Trusteeship
The trusteeship of a trustee should come to an end –
(a) If the trustee ceases to be trustee under SEBI (Debentures Trustees) Regulations,
1993; or
(b) if the trustee is in the course of being wound up; or
(c) if unit holders holding at least three-fourths of the nominal value of the unit capital
of the scheme pass a resolution for removing the trustee and SEBI approves such
resolution; or
(d) if in the interest of the unit holders, SEBI, for reasons to be recorded in writing

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decides to remove the trustee for any violation of the Act or these regulations
committed by them or the trustee should be afforded reasonable opportunity of
being heard before action is taken under this clause;
(e) if the trustee serves on the Collective Investment Management Company, a notice of
not less than three months expressing intention of not to continue as trustee.

Procedure for launching of Schemes

No scheme should be launched by the CIMC unless such scheme is approved by the Trustee
and rated by a registered credit rating agency and appraised by an appraising agency.

Disclosures In the Offer Document

The CIMC shall before launching any scheme file a copy of the offer document of the
scheme with the SEBI and pay filing fees as specified. The offer document should contain
such information as specified. The offer document should also contain true and fair view of
the scheme and adequate disclosures to enable the investors to make informed decision.
SEBI may in the interest of investors require the CIMC to carry out such modifications in the
offer document as it deems fit.
In case no modifications are suggested by SEBI in the offer document within 21 days from
the date of filing, the Collective Investment Management Company may issue the offer
document to the public.

Allotment of Units And Refunds of Money

The Collective Investment Management Company should specify in the offer document the
minimum and the maximum subscription amount it seeks to raise under the scheme; and in
case of oversubscription, the process of allotment of the amount oversubscribed. The CIMC
should refund the application money to the applicants, if the scheme fails to receive the
minimum subscription amount. Any amount refundable should be refunded within a period
of six weeks from the date of closure of subscription list, by Registered A.D. and by cheque
or demand draft. In the event of failure to refund the amounts within the period specified,
the CIMC has to pay interest to the applicants at a rate of fifteen percent per annum on the
expiry of six weeks from the date of closure of the subscription list. A scheme shall not be
open for more than 90 days.

Unit Certificates
The Collective Investment Management Company should issue to the applicant whose
application has been accepted, unit certificates as soon as possible but not later than six
weeks from the date of closure of the subscription list. However, if the units are issued

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through a depository, a receipt in lieu of unit certificate will be issued as per provisions of
SEBI (Depositories and Participants) Regulations, 1996 and bye-laws of the depository.

Transfer of Units
A unit certificate issued under the scheme should be freely transferable. The CIMC on
production of instrument of transfer together with relevant unit certificates, register the
transfer and return the unit certificate to the transferee within 30 days from the date of
such production. However, if the units are held in a depository such units shall be
transferable in accordance with the provisions of the SEBI (Depositories and Participants)
Regulations, 2018 and bye-laws of the depository. The subscription amount received
should be kept in a separate bank account in the name of the scheme and utilised for –
(1)
(a) adjustment against allotment of units only after the trustee has received a
statement from the registrars to the issue and share transfer agent regarding
minimum subscription amount, as stated in the offer document, having been
received from the public, or
(b) for refund of money in case minimum subscription amount, as stated in the offer
document, has not been received or in case of over-subscription.
(2) The minimum subscription amount as specified in the offer document couldn’t be
less than the minimum amount, as specified by the appraising agency, needed for
completion of the project for which the scheme is being launched.
(3) The moneys credited to the account of the scheme should be utilised for the purposes
of the scheme and as specified in the offer document.
(4) Any unutilised amount lying in the account of the scheme should be invested in the
manner as disclosed in the offer document.

Winding Up of Scheme
A scheme should be wound up on the expiry of duration specified in the scheme or on the
accomplishment of the objective of the scheme as specified in the offer document. A
scheme may be wound up:
(a) on the happening of any event which, in the opinion of the trustee, requires the
scheme to be wound up and the prior approval of the SEBI is obtained; or
(b) if unit holders of a scheme holding at least three-fourth of the nominal value of the
unit capital of the scheme, pass a resolution that the scheme be wound up and the
approval of SEBI is obtained thereto; or
(c) if in the opinion of SEBI, the continuance of the scheme is prejudicial to the interests
of the unit-holders; or
(d) if in the opinion of the CIMC, the purpose of the scheme cannot be accomplished and

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it obtains the approval of the trustees and that of the unit holders of the scheme
holding at least three-fourth of the nominal value of the unit capital of the scheme
with a resolution that the scheme be wound up and the approval of SEBI is obtained
thereto.

Obligations Of Collective Investment Management Company

Every Collective Investment Management Company should:
(i) be responsible for managing the funds or properties of the scheme on behalf of the
unit holders
(ii) take all reasonable steps and exercise due diligence to ensure that the scheme is
managed in accordance with the provisions of these regulations, the offer document
and the trust deed;
(iii) exercise due diligence and care in managing assets and funds of the scheme
(iv) also responsible for the acts of commissions and omissions by its employees or the
persons whose services have been availed by it;
(v) appoint registrar and share transfer agents and should also abide by their
respective Code of Conducts as specified in the Third Schedule;
(vi) give receipts for all monies received and report of the receipts and payments to
SEBI, on monthly basis;
(vii) hold a meeting of Board of Directors to consider the affairs of scheme, at least twice
in every 3 months and also ensures that its officers or employees do not make
improper use of their position or information to gain, directly or indirectly, an
advantage for themselves or for any other person or to cause detriment to the
scheme;
(viii) obtain adequate insurance against the properties of the schemes and
(ix) comply with such guidelines, directives, circulars and instructions as may be issued
by SEBI from time to time on the subject of Collective Investment Scheme i.e. as the
end of March, June, September and December.

Penal Provisions
Violation of Provisions of SEBI regulations by Registered CIMC:-
5. SEBI may Suspend / Cancel Certificate
6. Initiate criminal Prosecution under Section 24 of SEBI Act,1992
7. Passing Direction
 Requiring the person concerned not to collect any money from investor or to
launch any scheme
 Prohibiting the person concerned from disposing of any of the properties of the
scheme acquired in violation of the Regulations

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 Requiring the person concerned to dispose off the assets of the scheme in a
manner as may be specified in the directions
 Requiring the person concerned to refund any money or the assets to the
concerned investors along with the requisite interest or otherwise, collected under
the scheme
 Prohibiting the person concerned from operating in the capital market or from
accessing the capital market for a specified period.

Question
Collective investment scheme (CIS) provides a relatively secure means of investing on the
stock exchange and other financial instruments
Answer
A collective investment scheme is a trust based scheme that comprises a pool of assets that
is managed by a collective investment scheme manager and is governed by the Collective
Investment Schemes Regulations prescribed by SEBI. CIS provide a relatively secure means
of investment on the stock exchange and other financial instruments. The sums of money
that are exchanged on the stock exchange and in the money markets make them too pricy
for most people. With a CIS, the money or funds form a group of investors, are pooled or
collected together to form a CIS portfolio.

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Chapter 14
SEBI (Ombudsman) Regulations, 2003

Introduction
The securities market operations promote the economic growth of the country. More
efficient is the securities market, the greater is the promotion effect on economic growth. It
is, therefore, necessary to ensure that securities market operations are more efficient,
transparent and safe. In this context, the investors need protection from the various
malpractices and unfair practices made by the corporate and intermediaries.
If the investors are not protected properly by way of providing fair rate of return and
safeguarding their capital, the corporate will not be able to mobilize funds from the
market at reasonable rate in times to come. With a view to gain the confidence of
investors in the securities market it is necessary to provide adequate rate of return on
investors’ capital. This will enable us to bring more investors to the capital market. This
can be done by a series of systematic measures which would build their confidence in the
systems and processes and protect the interest of investors.

SCORES (SEBI Complaints Redress System)

SCORES is a web based centralized grievance redress system of SEBI
(http://scores.gov.in). SCORES enables investors to lodge and follow
up their complaints and track the status of redressal of such
complaints online from the above website from anywhere. This
enables the market intermediaries and listed companies to receive
the complaints online from investors, redress such complaints and
report redressal online. All the activities starting from lodging of a
complaint till its closure by SEBI would be online in an automated
environment and the complainant can view the status of his
complaint online. An investor, who is not familiar with SCORES or
does not have access to SCORES, can lodge complaints in physical
form at any of the offices of SEBI. Such complaints would be scanned
and also uploaded in SCORES for processing.
The salient features of SCORES are:
1. Centralised database of investor complaints
2. Online movement of complaints to the concerned listed company or SEBI registered
intermediary
3. Online upload of Action Taken Reports (ATRs) by the concerned listed company or

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SEBI registered intermediary

4. Online viewing by investors of actions taken on the complaint and its current status
5. SCORES is web enabled and provides online access 24 x7;
6. Complaints and reminders thereon can be lodged online at the above website at any
time from anywhere;
7. An email is generated instantaneously acknowledging the receipt of complaint and
allotting a unique complaint registration number to the complainant for future
reference and tracking;
8. The complaint forwarded online to the entity concerned for its redressal;
1. The entity concerned uploads an Action Taken Report (ATR) on the complaint;
2. SEBI peruses the ATR and closes the complaint if it is satisfied that the complaint
has been redressed adequately;
3. The concerned investor can view the status of the complaint online from the above
website by logging in the unique complaint registration number;
4. The entity concerned and the concerned investor can seek and provide clarification
on his complaint online to each other;
5. Every complaint has an audit trail; and
6. All the complaints are saved in a central database which generates relevant MIS
reports to enable SEBI to take appropriate policy decisions and/or remedial actions,
if any.

SCORES HOME PAGE

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How to lodge a Complaint in SCORES

Process for Lodging complaint Online in Score by investor

From 1st August 2018, it has been made mandatory to register on SCORES for lodging a
complaint.
1. To become a registered user of SCORES, investors may click on “Register here” under
“Investor Corner” appearing on the homepage of SCORES portal. Investors will have
to fill in Registration form. Fields like Name, Address, E-mail Address, PAN and
Mobile Number are mandatory fields and are required to be filled up. The username
and password of SCORES will be sent to the investor’s registered email id.
2. If an investor is already a registered user, they can login by entering their username
and password.
3. After logging into SCORES, investors must click on “Complaint Registration” under
“Investor Corner”.
4. Investor should provide complaint details.
5. Investors must select the correct complaint category, entity name, and nature of
complaint.

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6. Investors must provide complaint details in brief (up to 1000 characters).

7. A PDF document (up to 2MB of size for each nature of complaint) can also be
attached along with the complaint as supporting document.
On successful submission of complaint, system generated unique registration number will
be displayed on the screen which may be noted for future correspondence. An email
acknowledging the complaint with complaint registration number will also be sent to the
email id entered in the complaint registration form. A text message will also be sent to the
investor informing them about registration of the complaint.

Limitations In Dealing With Complaints

1. Sometimes a complaint is successfully resolved and the entity is advised to send
reply to complainant. But in certain cases, the entity or company denies
wrongdoing, and it remains unclear as to who is wrong or whether any wrongdoing
occurred at all.
2. If this happens, SEBI cannot act as a judge or an arbitrator and force the entity or
company to resolve the complaint. Further, SEBI cannot act as personal
representative or attorney of the complainant.
3. Securities laws and other laws provide important legal rights and remedies if an
investor has suffered wrongdoing.
4. On their own, investors can also seek to resolve their complaint through the courts,
consumer courts, or arbitration.

Matters that are not considered as Complaints in SCORES

1. Complaint not pertaining to investment in securities market.
2. Anonymous Complaints (except whistleblower complaints).
3. Incomplete or un-specific complaints.
4. Allegations without supporting documents.
5. Suggestions or seeking guidance/explanation.
6. Not satisfied with trading price of the shares of the companies.
7. Non-listing of shares of private offer.
8. Disputes arising out of private agreement with companies/intermediaries.
9. Matter involving fake/forged documents.
10. Complaints on matters not in SEBI purview.
11. Complaints about any unregistered/ un-regulated activity.

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Past Paper Question

SEBI Complaints Redress System (SCORES) has been established to resolve
the grievances of the investors, What is the procedure for redressal of investor
grievances using SCORES platform? State the revised features.
(4 marks) (Dec 2019)
What are the matters that cannot be considered as complaints under
SCORES? Specify details. (4 marks) (Dec 2019)

Time Line for lodging Complaint on SCORES

From 1st August 2018, an investor may lodge a complaint on SCORES within three years
from the date of cause of complaint, where;
 Investor has approached the listed company or registered intermediary for redressal
of the complaint and,
 The concerned listed company or registered intermediary rejected the complaint or,
 The complainant does not receive any communication from the listed company or
intermediary concerned or,
 The complainant is not satisfied with the reply given to him or redressal action taken
by the listed company or an intermediary.
In case investor fails to lodge a complaint within the stipulated time, he may directly take
up the complaint with the entity concerned or may approach appropriate court of law.

Redressal of complaints against Stock Brokers and Depository Participants through Scores
With a view to make the complaint redressal mechanism through SCORES more efficient,
all stock brokers and depository participants are directed to address/redress the complaint
within a period of 15 days from the receipt of the complaint. In case additional information
is required from the complaint, the same shall be sought within 7 days from the receipt of
the complaint. In such cases, the period of 15 days shall run from the receipt of additional
information.
Example
If the date of declaration of dividend by a company is 01. 01. 2015, as per the Companies
Act, 2013 the Company has to pay the dividend within 30 days from the declaration of the
dividend date to all its registered shareholder. If the Company fails to pay the declared
dividend within 30 days i.e. 31. 01. 2015 as the dividend was declared on 01. 01. 2015, the
date of cause of complaint would be 31. 01. 2015 and a complaint can be lodged on SCORES
within 3 years from 31. 01. 2015 i.e. on or before 30. 01. 2018.

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Handling of the Complaints by Listed Entities and SEBI Registered Intermediaries

It was seen that investors frequently lodged complaint on SCORES without actually taking
the matter up with the concerned company/ intermediary. In view of the same, from
August 01, 2018, complaints will be handled as follows:-
A. At the time of lodging of complaint, the investor is asked “Have you lodged a complaint
with the concerned intermediary / listed company for redressal of your complaint?”
B. If the investor selects the option “No”:
a. The complaint will be routed directly to the concerned entity. Since this is the first
time the issue will be raised with the concerned entity, such “Direct complaints” will
be addressed by the concerned entity and the response will come to the investor
without any interference of SEBI officials.
b. The concerned entity is required to send a response to the investor directly within 30
days.
c. If the concerned entity fails to send a response within 30 days to the investor, then
the complaint will be routed to SEBI automatically. Thereafter, the complaint will
have a new SCORES registration number.
d. In case the investor is dissatisfied with the redressal of the complaint, the investor
has to indicate the same against the complaint and then the complaint will come to
SEBI. If the investor does not indicate the same within 15 days of receipt of reply
from the company, it will be assumed that the investor is satisfied with the redressal
and the complaint will be closed.
C. If the investor selects the option “Yes”
a. The complainant has to provide the date of taking up the complaint and also the
address where the communication was last made.
b. The complaint will be routed to SEBI. When the complaint comes to SEBI, the
complaint is examined and its decided whether the subject matter falls under the
purview of SEBI and whether it needs to be referred to concerned entity. After
examination, SEBI forwards the complaint to the concerned entity with an advice to
send a written reply to the investor and file an action take

Notes:-

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SEBI Mobile Application : Recent Development

In its efforts to improve the ease of doing business,
SEBI dated March 5, 2020, launched a Mobile
Application for the convenience of investors to lodge
their grievances in SEBI Complaints Redress System
(SCORES).
SCORES mobile app will make it easier for investors to
lodge their grievances with SEBI, as they can now
access SCORES at their convenience of a smart phone.
The Mobile App will encourage investors to lodge their
complaints on SCORES rather than sending letters to
SEBI in physical mode.
This is another effort of SEBI in improving digitalization in securities market. The App has
all the features of SCORES which is presently available electronically where investors have
to lodge their complaints by using internet medium. After mandatory registration on the
App, for each grievance lodged, investors will get an acknowledgement via SMS and e-
mail on their registered mobile numbers and e-mail ID respectively.
Investors can, not only file their grievances but also track the status of their complaint
redressal. Investors can also key in reminders for their pending grievances. Tools like FAQs
on SCORES for better understanding of the complaint handling process can also be
accessed. Connectivity to the SEBI Toll Free Helpline number has been provided from the
App for any clarifications/help that investors may require.
SCORES is a platform designed to help investors to lodge their complaints online with SEBI,
pertaining to securities market, against listed companies, SEBI registered intermediaries
and SEBI recognized Market Infrastructure Institutions. Since its launch in June 2011, SEBI
on an average has received about 40,000 complaints every year. A total of 3, 57,000
complaints has been resolved using SCORES platform, so far. As per SEBI norms, entities
against whom complaints are lodged are required to file an Action Taken Report with SEBI
within 30 days of receipt of complaints.
The Mobile App “SEBI SCORES” is available on both IOS and Android platforms.

Notes:-

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Ombudsman
Ombudsman in its literal sense is an independent person appointed
to hear and act upon citizen’s complaint about government
services. This concept was invented in Sweden and the idea has
been widely adopted. For example, various banks, insurance
companies have appointed Ombudsman to attend to the complaints
of their customers.
SEBI has issued SEBI (Ombudsman) Regulations, 2003. Regulation
2(l) of the Regulations defines Ombudsman as under:
“Ombudsman” means any person appointed under regulation 3 of
these regulations and, includes stipendiary Ombudsman.
Regulation 2(n) of the Regulations defines stipendiary Ombudsman
as 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, sitting fees as may be determined by SEBI
from time to time.

Powers and Functions of Ombudsman

Powers:-
1. To receive complaints against any intermediary or a listed
company or both;
2. To consider such complaints and facilitate resolution thereof
by settlement;
3. To approve a friendly settlement of the dispute between the
parties;
4. To adjudicate such complaints in the event of failure of
settlement thereof by friendly settlement.
Functions:-
The Ombudsman is required to draw up an annual budget for his
office in consultation with SEBI and shall incur expenditure within
and in accordance with the provisions of the approved budget and
submit an annual report to the SEBI within 3 months of the close of
each financial year containing general review of activities of his
office. The ombudsman is also under obligation to furnish from time
to time such information to SEBI as may be required by SEBI

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Procedure for Redressal of Grievance

A person may lodge a complaint on any one or more of the following grounds either to
SEBI or to the Ombudsman concerned:
a. 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.
b. Non-receipt of share certificates, unit certificates, debenture certificates, bonus
shares;
c. Non-receipt of dividend by shareholders or unit-holders;
d. Non-receipt of interest on debentures, redemption amount of debentures or interest
on delayed payment of interest on debentures;
e. Non-receipt of interest on delayed refund of application monies;
f. Non-receipt of annual reports or statements pertaining to the portfolios;
g. Non-receipt of redemption amount from a mutual fund or returns from collective
investment scheme;
h. Non-transfer of securities by an issuer company, mutual fund, Collective Investment
Management Company or depository within the stipulated time;
i. Non-receipt of letter of offer or consideration in takeover or buy-back offer or
delisting;
j. Non-receipt of statement of holding corporate benefits or any grievances in respect
of corporate benefits, etc;
k. Any grievance in respect of public, rights or bonus issue of a listed company;
l. Any grievance in respect of issue or dealing in securities against an intermediary or
a listed company

Procedure For Filing A Complaint

1. 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.
2. If SEBI 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 SEBI for forwarding his complaint to the Ombudsman of competent
jurisdiction.
3. The complaint is required to be in writing duly signed by the complainer his
authorised representative and supported by documents, if any.
4. The Ombudsman may dismiss a complaint when such complaint is frivolous in his
opinion.
No complaint to the Ombudsman shall lie –
a. unless the complainant had, before making a complaint to SEBI or the Ombudsman,

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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 1 month after
the listed company or intermediary received his representation or
 the complainant is not satisfied with the reply given to him by the listed
company or an intermediary;
b. unless the complaint is made within 6 months from the date of the receipt of
communication of rejection of his complaint or within 7 months after the receipt of
complaint by the listed company or intermediary.
c. if the complaint is in respect of the same subject matter which was settled through
the Office of SEBI or Ombudsman concerned in any previous proceedings.
d. if the complaint pertains to the same subject matter for which any proceedings
before SEBI 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.

Past Paper Question

Prateek applied in the IPO of Maxgrow Ltd. for 100 Equity Shares. He was not
eligible to get any shares according to the allotment schedule and also has not
received the refund amount within the time stipulated under the Companies Act,
2013. Prateek approached the Company through written representation on
January 10, 2018. The company neither replied nor processed the refund claim. In
the light of the SEBI Regulations, answer the following :

(i) How much time should elapse before approaching Ombudsman from the
date of written representation?
(ii) State the grounds and the procedure for filing a complaint before
Ombudsman.
(iii) Whether Prateek can hire services of a legal practitioner to plead his case
before Ombudsman? (8 marks) (Dec 2018)

Notes:-

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Ombudsman

In case the matter is not resolved by mutually acceptable agreement within a

period of 1 month of the receipt of the complaint or such extended period as may
be permitted by the Ombudsman

He may, based upon the material placed before him and after giving opportunity
of being heard to the parties, give his award in writing or pass any other
Award and Adjudication

directions or orders as he may consider appropriate.

Such award shall be made within a period of three months from the date of the
filing of the complaint.

The Ombudsman should send his award to the parties to the adjudication to
perform their obligations under the award.

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.

If the Ombudsman considers the request made above to be justified, he shall

make the correction within fifteen days from the receipt of the request which shall
form part of the award.
Finality of Award

An award given by the Ombudsman shall be final and binding on the parties
and persons claiming under them respectively

Any party aggrieved by the award on adjudication may file a petition before
SEBI within 1 month from the receipt of the award or corrected award setting
out the grounds for review of the award.

Notes:-

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Review of Award
 SEBI may review the award if there is substantial mis-carriage of
justice, or there is an error apparent on the face of the award.
 Where a petition for review of the award, such petition shall not
be entertained by SEBI unless the party filing the petition has
deposited with SEBI 75% of the amount mentioned in the award.
 Further, SEBI may for reasons to be recorded in writing, waive or
reduce the amount to be deposited.
 SEBI may review the award and pass such order as it may deem
appropriate, within a period of 45 days of the filing of the
petition for review.
 The party so directed shall implement the award within 30 days
of receipt of the order of SEBI on review or within such period as
may be specified by SEBI

Past Paper Question

An Ombudsman has issued an award in a complaint proceeding to your
Company. Aggrieved by the award of Ombudsman, directors of your company
have decided to file petition before the SEBI. As a company secretary, advise the
Board of directors of your company regarding provisions and procedures to be
adopted for filing such petition under the SEBI (Ombudsman) Regulations, 2003.
(8 marks)(Dec 2020)

SEBI (Informal Guidance) Scheme, 2003

The following persons may make a request for informal Guidance under the scheme:
(a) any intermediary registered with the SEBI.
(b) any listed company.
(c) any company which intends to get any of its securities listed and which has filed either
a listing application with any stock exchange or a draft offer document with the SEBI
or the Central Listing authority.
(d) any mutual fund trustee company or asset management company.
(e) any acquirer or prospective acquirer under the SEBI (Substantial Acquisition of Shares
& Takeovers) Regulations, 1987. (Now SEBI Takeover Regulation, 2011)

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Past Paper Question

Explain what is Informal Guidance under SEBI (Informal Guidance) Scheme, 2013
and who can seek guidance from SEBI? (5 marks) (June 2019)

The Informal Guidance may be sought for and given in two forms:
No-action letters: SEBI indicates that the Department would or
would not recommend any action under any Act, Rules,
Regulations, Guidelines, Circulars or other legal provisions
administered by SEBI to the Board if the proposed transaction
would would not
described in a request made under para 6.**

Interpretive letters: SEBI provides an interpretation of a

specific provision of any Act, Rules, Regulations, Guidelines,
Circulars or other legal provision being administered by SEBI.
SEBI may dispose off the request as early as possible and in
any case not later than 60 days after the receipt of the
request.
**SEBI may not respond to the following types of requests:
(i) those which are general and those which do not
completely and sufficiently describe the factual situation;
(ii) those which involve hypothetical situations;
(iii) those requests in which the requestor has no direct or
proximate interest;
(iv) where the applicable legal provisions are not cited;
(v) where a no-action or interpretive letter has already been
issued by that or any other Department on a substantially
similar question involving substantially similar facts, as
that to which the request relates;
(vi) those cases in which investigation, enquiry or other
enforcement action has already been initiated;
(vii) those cases where connected issues are pending before
any Tribunal or Court and,
(viii) those cases where policy concerns require that the
Department does not respond.
Where a request is rejected for non-compliance, the fee, if any, paid by the requestor shall
be refunded to him after deducting there from a sum of Rs.5, 000/- towards processing
charges.
However, SEBI is not be under any obligation to respond to a request for guidance made

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under this scheme, and shall not be liable to disclose the reasons for declining to reply the
request.

Past Paper Question

Wadhwani Enterprises Limited, an unlisted company, has decided to bring an
initial public offer and filed a draft offer document with SEBI. The company is
not able to correctly interpret a circular issued by SEBI. The managing director of
the Company wants to seek informal guidance under SEBI Informal Guidance
Scheme. Ramesh. director of the company is of a view that since the company is
not yet listed so company cannot seek informal guidance from SEBI. Being a
company secretary, advise on the following matters:
(i) Who can apply for informal guidance? Whether company can apply for
informal guidance in the given situation?
(ii) What are the matters on which informal guidance cannot be sought?
(5 marks) (Aug 2021)

Confidentiality Of Request
1. Any person submitting a letter or written communication under
this scheme may request that it receive confidential treatment
for a specified period of time (not exceeding 90 days) from the
date of the Department’s response.
2. The request shall include a statement of the basis for
confidential treatment.
3. If the Department determines to grant the request, the letter or
written communication will not be available to the public until
the expiration of the specified period.
4. If it appears to the Department that the request for confidential
treatment should be denied, the requestor will be so advised
and such person may withdraw the letter or written
communication within 30 days of receipt of the advise, in which
case the fee, if any, paid by him would be refunded to him.
5. In case a request has been withdrawn, no response will be given and the letter or
written communication will remain with the SEBI but will not be made available to
the public.
6. If the letter or written communication is not withdrawn, it shall be available to the
public together with any written response.
7. The letter issued by a Department under this scheme should not be construed as a
conclusive decision

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8. Such a letter cannot be construed as an order of the SEBI and shall not be
appealable.
9. SEBI shall not be liable for any loss or damage that the requestor or any other
person may suffer on account of the request not being replied or being belatedly
replied
10. Where SEBI issues a letter under this scheme, it may post the letter, together with
the incoming request, on the SEBI website in accordance with the Guidance Scheme

Letter or written communication

Withdrawn Not withdrawn

No Response will be given and Response will be given and

will not be made available to the shall be made available to the

public. public.

Question:-
"SEBI expects the investors to make investments with their eyes and ears open."
Answer:-
The main object of SEBI is to protect the interest of the investors. However the concept of
investor protection is not complete until there is an active participation on the part of the
investor.
The commercial word used in case of Sale of Goods Act,1930 “Caveat Emptor” is also
followed in securities market i.e let the investor beware. So investor while making the
investment must be alert or make investment with their eyes and ears open.
The investors may take care of the following points about the company and its
background:-
1. Promoter’s education, experience and success track
2. Profit and loss , balance sheet of the company
3. Auditor’s report and observation
4. Change in management etc
So the sentence given in the questions is correct.

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Case Laws
1. 17. 03. 2020 Usha India Limited. (Noticee) vs. SEBI Adjudicating Officer,
Securities and Exchange Board
of India
Facts of the case
Securities and Exchange Board of India (hereinafter referred to as, “SEBI”) vide Circular No.
CIR/OIAE/2/2011 dated June 03, 2011, directed all listed companies to obtain SEBI
Complaints Redressal System (hereinafter referred to as, “SCORES”) authentication and
also redress any pending investor grievances in that platform only. Subsequently, SEBI
also vide Circulars No CIR/OIAE/1/2012 dated August 13, 2012, No. CIR/OIAE/1/2013
dated April 17, 2013 and No CIR/OIAE/1/2014 dated December 18, 2014, (hereinafter
referred to as, “SEBI circulars”) inter alia directed all companies whose securities were
listed on Stock Exchanges to obtain SCORES authentication within a period of 30 days from
the date of issue of this circular and also to redress the pending investor grievances within
the stipulated time period.
It was alleged that Usha India Limited (hereinafter referred to as, “Noticee/Company”) had
failed to obtain the SCORES authentication and to redress investor grievances pending
therein within the timelines stipulated by SEBI, therefore not complying with the aforesaid
SEBI Circulars.
Order
After taking into consideration all the facts and circumstances of the case, Adjudicating
officer imposed a penalty of Rs. 1,00,000/- (Rupees One Lakh Only) under Section 15HB of
the SEBI Act and Rs. 1,00,000/- (Rupees One Lakh Only) under section 15C of the SEBI Act,
i.e. penalties totalling to Rs. 2,00,000/- (Rupees Two Lakh Only) on the Noticee viz. Usha
India Limited, which will be commensurate with its non compliances.

2. 29. 11. 2017 Shikhar Consultants Ltd. (Noticee) Adjudicating Officer, Securities
vs. SEBI and Exchange Board of India
Facts of the case
Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had issued its
first circular viz. CIR/OIAE/2/2011 dated June 03, 2011 for inter alia obtaining
authentication on SEBI Complaints Redress System (hereinafter referred to as “SCORES”)
for processing investor complaints received by SEBI. Thereafter, SEBI issued two more
Circulars, i.e. CIR/OIAE/1/2012 dated August 13, 2012 and CIR/OIAE/1/2013 dated April 17,
2013 inter alia directing all the companies whose securities were listed on stock exchanges
to obtain SCORES authentication and also redress the pending investor grievances within

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the stipulated time period. On December 18, 2014, SEBI issued Circular No. CIR/OIAE/1/2014
dated December 18, 2014 consolidating the earlier Circulars/ directions. The said Circular
dated December 18, 2014 further inter alia stated that failure by any listed company to
obtain SCORES authentication would not only be deemed as non-redressal of investor
grievances, but, also indicate willful avoidance of the same and that failure to take action
under the rescinded circulars before the date of issuance of SEBI Consolidated Circular,
shall be deemed to have been done or taken or commenced under the provisions of Circular
dated December 18, 2014. The aforenamed SEBI Circulars are hereinafter collectively
referred to as the “SEBI Circulars”.
SEBI observed that Shikhar Consultants Ltd. (hereinafter referred to as the “Noticee”/
“Company”) had failed to comply with the said provisions of the SEBI Circulars.
It was, therefore, alleged that the Noticee has failed to obtain SCORES authentication and
thereby violated the SEBI Circulars, thus, making the Noticee liable for imposition of
penalty under Section 15HB of the Securities and Exchange Board of India Act, 1992
(hereinafter referred to as “the SEBI Act”).
Order
After taking into consideration all the facts and circumstances of the case, Adjudicating
Officer imposed a penalty of Rs. 8,00,000/- (Rupees Eight Lakh Only) on the Noticee,
Shikhar Consultants Ltd., under Section 15HB of the SEBI Act, which will be commensurate
with the violations committed by the Noticee.
Appeal to SAT against order of SEBI:
Shikhar Consultants Ltd. - Appellant Versus Securities and Exchange Board of India -
Respondent.
This appeal is filed to challenge the order passed by the Adjudicating Officer (‘A. O.’ for
short) of Securities and Exchange Board of India (‘SEBI’ for short) on November 29, 2017.
By the said order penalty of Rs. 8 lac is imposed on the appellant under Section 15HB of
Securities and Exchange Board of India Act, 1992 (‘SEBI Act’ for short), inter-alia, for not
complying with the directions contained in the SEBI circular dated August 13, 2012.
As per SEBI circular dated August 13, 2012, it was obligatory on part of all the listed
companies including the appellant to obtain SCORES authentication by September 14, 2012.
Admittedly, the appellant did not apply for and obtain SCORES authentication within the
time stipulated under the SEBI circular dated August 13, 2012. Appellant applied for
SCORES authentication belatedly on July 26, 2017 and the same was granted to the
appellant on July 31, 2017.
As the appellant failed to obtain SCORES authentication within the time stipulated in the
circular August 13, 2012, the A. O. has held that the appellant is guilty of violating the
SEBI’s circular dated August 13, 2012 and, accordingly, imposed penalty of Rs. 8 lac on the
appellant.

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SAT Order dated April 9, 2018

By failing to obtain SCORES authentication within the stipulated time, appellant has
violated the SEBI circular dated August 13, 2012 is not in dispute. However, apart from
various mitigating factors set out hereinabove, it is seen that in several similar cases, the
A. O. of SEBI has deemed it fit not to impose any penalty against those entities even
though the minimum penalty imposable is Rs. 1 lac under Section 15HB of SEBI Act.
In these circumstances, while directing the adjudicating Officers of SEBI to ensure that they
pass orders in consonance with the provisions of SEBI act, in the facts of present case,
having regard to the mitigating factors set out hereinabove, SAT deem it proper to reduce
the penalty from Rs. 8 lac to Rs. 1 lac being the minimum penalty imposable under Section
15HB of SEBI Act. 10. Appeal is partly allowed in the aforesaid terms with no order as to
costs.

3. 27. 04. 2018 Atcom Technologies Ltd. (Noticee) vs. Adjudicating Officer, Securities
SEBI and Exchange Board of India
Facts of the case
The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) issued its
first circular viz. CIR/OIAE/2/2011 dated June 03, 2011 for inter alia obtaining
authentication on SEBI Complaints Redress System(hereinafter referred to as “SCORES”)
for processing investor complaints received by SEBI. Thereafter, SEBI issued two more
Circulars, i.e. CIR/OIAE/1/2012 dated August 13, 2012 and CIR/OIAE/1/2013 dated April 17,
2013 inter alia directing all the companies whose securities were listed on stock exchanges
to obtain SCORES authentication and also redress the pending investor grievances within
the stipulated time period provided therein. On December 18, 2014, SEBI issued Circular No.
CIR/OIAE/1/2014 dated December 18, 2014 consolidating the earlier Circulars/ directions.
The said Circular dated December 18, 2014 further inter
alia stated that failure by any listed company to obtain SCORES authentication shall not
only be deemed as non-redressal of investor grievances, but also indicate willful avoidance
of the same and that failure to take action under the rescinded circulars before the date of
issuance of SEBI Consolidated Circular, shall be deemed to have been done or taken or
commenced under the provisions of Circular dated December 18, 2014. The aforementioned
SEBI Circulars are hereinafter collectively referred to as the “SEBI Circulars”.
It was observed by SEBI that Atcom Technolgoies Ltd.(hereinafter referred to as the
“Noticee”/ “Company”/”Atcom”) had failed to comply with the provisions of the SEBI
Circulars.
It was, therefore, alleged that the Noticee violated the SEBI Circulars by failing to obtain
SCORES authentication within the time period provided therein thus, making the Noticee

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liable for imposition of penalty under Section 15HB of the Securities and Exchange Board of
India Act, 1992 (hereinafter referred to as “the SEBI Act”).
Order
After taking into consideration all the facts and circumstances of the case, Adjudicating
Officer imposed a penalty of Rs. 8,00,000/- (Rupees Eight Lakh Only)on the Noticee,
Atcom Technologies Ltd., under Section 15HB of the SEBI Act, which shall be commensurate
with the violations committed by the Noticee. The Noticee shall remit / pay the said
amount of penalty within forty five (45) days of receipt of this order.

4. 01. 12. 2014 Vidharbha Industries Ltd. (Appellant) Securities Appellate Tribunal
vs. SEBI (Respondent)
Facts of the case
Penalty under Section 15HB of SEBI Act, 1992 for not obtaining SCORES Authentication
Appellant is aggrieved by the order passed by Adjudicating Officer (AO), SEBI on August
28, 2014. By that order the penalty of 2 lakh rupees was imposed on the appellant under
Section 15HB of the SEBI Act, 1992 on ground that appellant had failed to comply with the
requirements specified in SEBI circular dated April 17, 2013 for SCORES authentication.
Relevant facts are that SEBI had introduced an online electronic system for resolution of
investors grievances i.e., SCORES in the year 2011. For the purpose of accessing the
complaints of the investors against the companies as uploaded in the SCORES, listed
companies were required to log in to SCORES system electronically through a company
specific user id and password to be provided by SEBI.
Where a listed company fails to obtain SCORES authentication within the time stipulated
by SEBI, then it amounts to violating the directions of SEBI and in such a case penalty is
imposable under Section 15HB of SEBI Act which shall not be less than one lakh rupees but
which may extend to one crore rupees. Thus, in the present case, the AO had imposed
penalty of Rs. 2 Lac which cannot be said to be arbitrary, excessive or unreasonable.
Accordingly, the appeal was dismissed with no order as to costs.

5. 11. 09. 2015 M/s. Golden Proteins Ltd. (Appellant) Securities Appellate Tribunal
vs. SEBI (Respondent)
Facts of the case
The appellant has challenged the impugned order dated January 15, 2015 passed by the
learned adjudicating officer under Section 15C of the Securities and Exchange Board of
India Act, 1992 (for short ‘SEBI Act, 1992’) read with Rule 5(c) of the Securities and
Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by

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Adjudicating Officer) Rules, 1995 (for short Adjudication Rules) imposing a monetary
penalty of Rs 1 lac for not resolving investors’ grievances on time.
After the introduction of online electronic system for investors’ grievances, namely,
SCROES, SEBI particularly vide letters dated December 7, 2011 and January 18, 2012 advised
the appellant to obtain SCORES authentication and resolve grievance of one investor
pending as on August 27, 2012.
Despite repeated opportunities, the appellant failed to resolve the same and hence a show
cause notice dated August 30, 2013 was issued to the appellant company under the
provisions of the SEBI Act, 1992 read with Rule 4 of the Adjudication Rules to show as to
why an appropriate penalty should not be imposed on him for the alleged violations in
question.
After conducting an inquiry as per the rules and after affording an opportunity of personal
hearing to the appellant, the learned adjudicating officer came to the conclusion that the
appellant as a listed company was expected to comply with the extant regulatory and
statutory requirements. As already observed, the notice failed in resolving the investor’s
grievance pending against it despite being called upon to do so by SEBI.
After hearing both the learned counsel for the parities, SAT find no merit in the appeal and
the same is liable to be dismissed. SAT have noted from the pleadings that the appellant
sought registration under SCORES only on January 14, 2015 i.e. almost after one and half
years of issuance of show cause notice in this regard. It is also not clear from the pleadings
whether action taken report (ATR) has been filed as per the requirement of SCORES by the
appellant. Therefore, the noticee is liable to pay monetary penalty under Section 15C of the
SEBI Act, 1992.
Order
In the circumstances, penalty of Rs. 1 lac imposed on the appellant is not justified. The
appellant company is sick company within the meaning of The Sick Industrial Companies
Act, 1985 is not ground for the appellant evade SEBI norms particularly regarding redressal
of investor’s grievance on time. This Tribunal has consistently held that timely redressal of
the investors’ grievances by the companies is of utmost importance. Keeping this
importance in mind, SEBI by circular dated August 2, 2011, SEBI introduced a system of
processing investors’ complaints in a centralized web based complaints redress system,
which is commonly known as ‘SCORES’.
Under this system, a centralized database of all the complaints and their online movement
to the concerned intermediaries is monitored. Similarly, online upload of action taken
reports (ATR) by the concerned entities and its viewing by investors of the action on the
complaints and their current status etc. all are displayed. Violation of such an important
regulatory measure cannot be taken lightly in the facts and circumstances of the present
case.

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The appeal, accordingly, stands dismissed with no order as to costs.

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Chapter 15
Structure of Capital Market
Part I- Primary Market
Part A- Capital Market Investment Institutions
Introduction
In any economy, financial Institutions play an important role because all the financial
dealings and matters are handled and monitored by such Institutions. The major
components of financial Institutions are banks, insurance companies, investment
companies, consumer finance companies, and other specialized financial institutes. These
institutions provide a variety of financial products and services to fulfil the varied needs of
the commercial sector. Besides, they provide assistance to new enterprises, small and
medium scale enterprises as well as industries established in backward areas. Thus, they
have helped in reducing regional disparities by inducing widespread industrial
development.
National Level Institutions
A wide variety of financial institutions have been set up at the national level. These
institutions cater to the diverse financial requirements of the entrepreneurs. They include
development banks like IDBI, SIDBI, FIs like IFCI, IIBI; TFCI and Insurance Companies like
LIC, GIC, UTI; etc.
1. All-India Development Banks (AIDBs):- Includes those development banks which
provide institutional credit not only to large and medium scale enterprises but also
help in promotion and development of small scale industrial units.
Following are the banks which caters to the need for the growth of different sectors on
India :
 Industrial Development Bank of India (IDBI):- It was established in July 1964 as an
apex financial institution for industrial development in the country. It caters to the
diversified needs of medium and large scale industries in the form of financial
assistance, both directly and indirectly. Direct assistance is provided by way of
project loans, underwriting of and direct subscription to industrial securities, soft
loans, technical refund loans, etc. Indirect assistance is provided in the form of
refinance facilities to industrial concerns.
 Industrial Finance Corporation of India (IFCI):- It was the first development finance
institution set up under the IFCI Act 1948 in order to pioneer long-term institutional
credit to medium and large scale enterprises. It aims to provide financial assistance
to industry by way of rupee and foreign currency loans, underwrites/subscribes
the issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has

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also diversified its activities in the field of merchant banking, syndication of loans,
assignments relating to amalgamations and mergers, etc.
 Small Industries Development Bank of India (SIDBI):- It was set up by the
Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the
principal financial institution for promotion, financing and development of small
scale industries in the economy. It aims to empower the Micro, Small and Medium
Enterprises (MSME) sector with a view to contributing to the process of economic
growth, employment generation and balanced regional development.
 Industrial Investment Bank of India Ltd (IIBI):- It was set up in 1985 under the
Industrial reconstruction Bank of India Act, 1984, as the principal credit and
reconstruction agency for sick industrial units. It was converted into IIBI on March
17, 1997, as a full-fledged development financial institution. It assists industry
mainly in medium and large sector through wide ranging products and services.
Besides project finance, IIBI also provides short duration non-project asset-backed
financing in the form of underwriting/direct subscription, deferred payment
guarantees and working capital/ other short-term loans to companies to meet
their fund requirements.
2. Specialised Financial Institutions (SFIs):- These are the institutions which have been set
up to serve the increasing financial needs of trade and commerce in the area of
venture capital, credit rating and leasing, etc.
Following institutions are considered as SFIs in our country:
 IFCI Venture Capital Funds Ltd (IVCF):- IVCF formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/ process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its ‘Risk Capital Scheme’. Since 1988, it also started providing finance under
‘Technology Finance and Development Scheme’ to projects for commercialisation of
indigenous technology for new processes, products, market or services. Over the
years, it has acquired great deal of experience in investing in technology-oriented
projects.
 ICICI Venture Funds Ltd:- Formerly known as Technology Development &
Information Company of India Limited (TDICI), it was founded in 1988 as a joint
venture with the Unit Trust of India. Subsequently, it became a fully owned
subsidiary of ICICI. It is a technology venture finance company, set up to sanction
project finance for new technology ventures. The industrial units assisted by it are
in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines,
biotechnology, environmental engineering, etc.

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 Tourism Finance Corporation of India Ltd. (TFCI):- It is a specialised financial

institution set up by the Government of India for promotion and growth of tourist
industry in the country. Apart from conventional tourism projects, it provides
financial assistance for non-conventional tourism projects like amusement parks,
ropeways, car rental services, ferries for inland water transport, etc.
3. Investment Institutions:- These are the most popular form of financial intermediaries,
which particularly catering to the needs of small savers and investors. They deploy
their assets largely in marketable securities.
Following are the Investment Institutions established by the Government:
 Life Insurance Corporation of India (LIC):- It was established in 1956 as a wholly-
owned corporation of the Government of India. It was formed by the Life Insurance
Corporation Act, 1956, with the objective of spreading life insurance much more
widely and in particular to the rural area. It also extends assistance for
development of infrastructure facilities like housing, rural electrification, water
supply, sewerage, etc.
In addition, it extends resource support to other financial institutions through
subscription to their shares and bonds, etc.
 Unit Trust of India (UTI):- It was set up as a body corporate under the UTI Act,
1963, with a view to encourage savings and investment. It mobilises savings of
small investors through sale of units and channelises them into corporate
investments mainly by way of secondary capital market operations.
 For more than two decades it remained the sole vehicle for investment in the
capital market by the Indian citizens. Thus, its primary objective is to stimulate
and pool the savings of the middle and low income groups and enable them to
share the benefits of the rapidly growing industrialisation in the country.
Bifurcation of UTI into 2 entities
UTI-I and UTI-II with effect from 1st February 2003
 General Insurance Corporation of India (GIC):- It was formed by the enactment of
the General Insurance Business (Nationalisation) Act, 1972(GIBNA), for the purpose
of superintending, controlling and carrying on the business of general insurance or
non-life insurance. Initially, GIC had four subsidiary branches, namely, National
Insurance Company Ltd, The New India Assurance Company Ltd, The Oriental
Insurance Company Ltd and United India Insurance Company Ltd . But these
branches were delinked from GIC in 2000 to form an association known as ‘GIPSA’
(General Insurance Public Sector Association).

State level Institutions

Several financial institutions have been set up at the State level which supplement the

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financial assistance provided by the all India institutions. They act as a catalyst for
promotion of investment and industrial development in the respective States. They broadly
consist of ‘State financial corporations’ and ‘State industrial development corporations’.
 State Financial Corporations (SFCs):- These are the State-level financial
institutions which play a crucial role in the development of small and medium
enterprises in the concerned States. They provide financial assistance in the form
of term loans, direct subscription to equity/debentures, guarantees, discounting of
bills of exchange and seed/ special capital, etc. SFCs have been set up with the
objective of catalysing higher investment, generating greater employment and
widening the ownership base of industries. They have also started providing
assistance to newer types of business activities like floriculture, tissue culture,
poultry farming, commercial complexes and services related to engineering,
marketing, etc. There are around 18 State Financial Corporations (SFCs) in the
country.
 State Industrial Development Corporations (SIDCs):- These corporations have been
established under the erstwhile Companies Act, 1956, as wholly-owned
undertakings of State Governments. They have been set up with the objectives of
promoting industrial development in the respective States and providing financial
assistance to small entrepreneurs. They are also involved in setting up of medium
and large industrial projects in the joint sector/assisted sector in collaboration with
private entrepreneurs or wholly-owned subsidiaries. They undertake a variety of
promotional activities such as preparation of feasibility reports; conducting
industrial potential surveys; entrepreneurship training and development
programmes; as well as developing industrial areas and industrial estates.
Participants of Capital Market
Qualified Intuitional Buyers
QIBs are investment institutions who buy the shares of a company on a large scale.
Qualified Institutional Buyers are those Institutional investors who are generally perceived
to possess expertise and the financial proficiency to evaluate and to invest in the Capital
Markets.
There are various types of institutions defined in the rules and regulations, but to qualify
as a ‘Qualified Institutional Buyer’ (QIB), certain regulations formulated by the SEBI needs
to be kept in mind. As the name itself suggests, it is in the form of an institution and under
the institutionalized mechanism, they invest in the company.
According to Regulation 2(1)(zd) of Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations, 2018, Qualified Institutional Investors
comprises of —
(i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign

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venture capital investor registered with SEBI;

(ii) a foreign portfolio investor other than Category II foreign portfolio investor,
registered with SEBI;
(iii) a public financial institution as defined in section 4A of the Companies Act, 1956
[now Section 2(72) of the Companies Act, 2013] ;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development
Authority;
(viii) a provident fund with minimum corpus of twenty five crore rupees;
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) insurance funds set up and managed by army, navy or air force of the Union of
India;
(xi) insurance funds set up and managed by the Department of Posts, India;
(xii) non-banking financial companies.
(xiii) systemically important non-banking financial companies.

Foreign Portfolio Investor

Foreign Portfolio Investor (FPI) means a person who
satisfies the eligibility criteria prescribed under SEBI
(Foreign Portfolio Investors) Regulations, 2014 and has been
registered under Chapter II of these regulations, which shall
be deemed to be an intermediary in terms of the provisions
of the SEBI Act, 1992.
All existing Foreign Institutional Investors (FIIs) and QFIs
are to be merged into one category called FPI.
Categories of FPI
Category I FPIs include (i) Government and Government related investors such as
central banks, sovereign wealth funds, international or
multilateral organizations or agencies including entities
controlled or at least 75% directly or indirectly owned by
such Government and Government related investor(s);
(ii) Pension funds and university funds;
(iii) Appropriately regulated entities such as insurance or
reinsurance entities, banks, asset management companies,
investment managers, investment advisors, portfolio
managers, broker dealers and swap dealers;

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(iv) Entities from the Financial Action Task Force member

countries which are –
I. appropriately regulated funds;
II. unregulated funds whose investment manager is
appropriately regulated and registered as a Category
I foreign portfolio investor. However the investment
manager undertakes the responsibility of all the acts
of commission or omission of such unregulated fund;
III. university related endowments of such universities
that have been in existence for more than five years;

Category II FPIs include (i) appropriately regulated funds not eligible as Category-I
foreign portfolio investor;
(ii) endowments and foundations;
(iii) charitable organisations;
(iv) corporate bodies;
(v) family offices;
(vi) Individuals;
(vii) appropriately regulated entities investing on behalf of
their client, as per conditions specified by the Board from
time to time;
(viii) Unregulated funds in the form of limited partnership and
trusts;

Past Paper Question

The stock market of developing countries is normally attractive for the foreign
investors. A foreign endowments fund is planning to invest in equity shares of
Indian companies State the category under which this Foreign Portfolio Investor
(FPI) be covered. Will your answer be different if it is a Central bank of a
foreign country (5 marks) (Dec 2019)
Write short notes on the following:
Foreign Portfolio Investor (3 marks) (Aug 2021)

Alternative Investment Funds

According to SEBI (AIF) Regulations, 2012, “Alternative Investment Fund” means any fund
established or incorporated in India in the form of a trust or a company or a limited

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liability partnership or a body corporate which,-

(i) is a privately pooled investment vehicle which collects funds from investors,
whether Indian or foreign, for investing it in accordance with a defined investment
policy for the benefit of its investors; and
(ii) is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective
Investment Schemes) Regulations, 1999 or any other regulations of SEBI to
regulate fund management activities.
However, the following shall not be considered as Alternative Investment Fund for the
purpose of these regulations, –
(i) Family trusts set up for the benefit of ‘relatives’ as defined under Companies Act,
2013.
(ii) ESOP Trusts set up under the SEBI (Employee Stock Option Scheme and Employee
Stock Purchase Scheme), Guidelines, 1999 or as permitted under Companies Act,
2013.
(iii) Employee welfare trusts or gratuity trusts set up for the benefit of employees.
(iv) Holding companies within the meaning of Section 2(46) of the Companies Act,
2013.
(v) Funds managed by securitisation company or reconstruction company which is
registered with the Reserve Bank of India
(vi) Any such pool of funds which is directly regulated by any other regulator in India;
Categories of AIF
Category I : which invests in start-up or early stage ventures or social ventures or SMEs or
infrastructure or other sectors or areas which the government or regulators consider as
socially or economically desirable and shall include venture capital funds, SME Funds,
social venture funds, infrastructure funds and such other Alternative Investment Funds as
may be specified;
Category II: which does not fall in Category I and III and which does not undertake leverage
or borrowing other than to meet day-today operational requirements and as permitted in
these regulations;
Category III: which employs diverse or complex trading strategies and may employ
leverage including through investment in listed or unlisted derivatives.
One AIF can float several schemes. Investors in these funds are large institutions, high net
worth individuals and corporates. In India AIF is regulated by SEBI (Alternative Investment
Funds) Regulations, 2012.

Private Equity
Private equity is a type of equity (finance) who takes securities and debt in operating
companies that are not publicly traded on a stock exchange. Unlike stocks, mutual funds,

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and bonds, private equity funds usually invest in more illiquid assets, i.e. companies. By
purchasing companies, the firms gain access to those assets and revenue sources of the
company, which can lead to very high returns on investments.
Private equity consists of investors and funds that make investments directly into private
companies or conduct buyouts of public companies. Capital for private equity is raised
from retail and institutional investors, and can be used to fund new technologies, expand
working capital within an owned company, make acquisitions, or to strengthen a balance
sheet. The major of private equity consists of institutional investors and accredited
investors who can commit large sums of money for long periods of time.
Private equity investments often demand long holding periods. Generally, the private
equity fund raise money from investors like Angel investors, Institutions like – pension
funds, insurance companies, banks, funds of funds etc.
Types of Private Equity
Private equity investments can be divided into the following categories:
 Leveraged Buyout (LBO): This refers to a strategy of making equity investments as
part of a transaction in which a company, business unit or business assets is acquired
from the current shareholders typically with the use of financial leverage. The
companies involved in these type of transactions that are typically more mature and
generate operating cash flows.
 Venture Capital: It is a broad sub-category of private equity that refers to equity
investments made, typically in less mature companies, for the launch, early
development, or expansion of a business.
 Growth Capital: This refers to equity investments, mostly minority investments, in the
companies that are looking for capital to expand or restructure operations, enter new
markets or finance a major acquisition without a change of control of the business.

Past Paper Question

Write short notes on the following:
Private Equity (3 marks) (Dec 2018)

Notes:-

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Angel Fund
An angel investor or angel is an affluent individual who provides
capital for a business start-up, usually in exchange for
convertible debt or ownership equity.
Angel investments are typically the earliest equity investments
made in start-up companies. They commonly band together in
investor networks. Often these networks are based on regional,
industry in investor or academic affiliation. Angel Investors are
often former entrepreneurs themselves, and typically enjoy
working with companies at the earliest stages of business
formation. As per SEBI (Alternative Investment Fund)
Regulations, 2012, angel fund is a sub-category of venture
capital. Procurement of funds from angel investors of their
further investment has to be conducted as per these regulations.
The effective Angels help entrepreneurs to shape, business
models, create business plans and connect to resources - but
without stepping into a controlling or operating role. Often
Angels are entrepreneurs who have successfully built companies,
or have spent a part of their career in coaching young companies.

Past Paper Question

Write short notes on the following:
Angel fund (3 marks) (Dec 2019)

Anchor Investors
Anchor investor means a Qualified Institutional Buyer (QIB) who makes an application for
a value of 10 crore rupees or more in a public issue made through the book building process
in accordance with these regulations.
Allocation to anchor investors shall be on a discretionary basis and subject to the
following:
I. In case of public issue on the main board, though the book building process:
If allocation is upto Rs 250 crore
Allocation Minimum No. of Investor Maximum No. of Investor
Allocation upto Rs. 10 crore ---- 2
Allocation above Rs. 10 crore 2 15
and upto Rs. 250 crore
subject to minimum allotment of Rs.5 crore per such investor.

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If allocation is above Rs 250 crore

Allocation Minimum No. of Investor Maximum No. of Investor
Above Rs 250 crore 5 maximum of 15 such
investors for allocation upto
Rs. 250 crore and an
additional 10 such investors
for every additional Rs. 250
crore or part thereof.
subject to a minimum allotment of Rs.5 crore per such investor.
II. In case of public issue on the SME exchange, through the book building process:
Allocation Minimum No. of Investor Maximum No. of Investor
If allocation is upto Rs 25 crore
Allocation upto Rs. 2 crore ---- 2
Allocation above Rs. 2 crore and 2 15
upto Rs. 25 crore
subject to minimum allotment of Rs.1 crore per such investor.
Allocation Minimum No. of Investor Maximum No. of Investor
If allocation is upto Rs 25 crore
Allocation upto Rs. 25 crore 5 maximum of 15 such
investors for allocation upto
Rs. 25 crore and an
additional 10 such investors
for every additional Rs. 25
crore or part thereof.
subject to minimum allotment of Rs.1 crore per such investor.
 The bidding for Anchor Investors shall open one day before the issue opening date.
 Allocation to Anchor Investors shall be completed on the day of bidding by Anchor
Investors.
 Shares allotted to the Anchor Investor shall be locked-in for 30 days from the date
of allotment in the public issue.
 Upto 60% of the portion available for allocation to QIB shall be available to anchor
investor(s) for allocation/allotment (“anchor investor portion”) and one-third of the
anchor investor portion shall be reserved for domestic mutual funds

Past Paper Question

What is meant by Anchor Investor? What are the limitations of allocation to
anchor investors in the Book building process? (5 marks) (Dec 2018)

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High Net worth Individuals

HNIs or high net worth individuals is a class of individuals who are
distinguished from other retail segment based on their net wealth,
assets and investible surplus. While there is no standard put forth for
the classification, the definition of HNIs varies with the geographical
area as well as financial markets and institutions.
Though there is no specific definition, generally in the Indian context,
individuals with over Rs. 2 crore investible surplus may be considered
to be HNIs while those with investible wealth in the range of Rs. 25
lac - Rs. 2 crore may be deemed as Emerging HNIs.
If you are applying for a IPO of equity shares in an Indian company,
generally, if you apply for amounts in excess of Rs. 2 lakhs, you fall
under the HNI category. On the other hand, if you apply for amounts
under Rs. 2 lakhs, you are considered as a retail investor. There may
be so many ways in which HNIs are categorized and defined, there is
no single bracket that could put them under.

Past Paper Question

Write short notes on the following:
High Net Worth Individuals (3 marks) (June 2019)

Venture Capital
Venture Capital is one of the innovative financing resource for a
company in which the promoter has to give up some level of
ownership and control of business in exchange for capital for a
limited period, say, 3-5 years. Venture Capital is generally equity
investments made by Venture Capital funds, at an early stage in
privately held companies, having potential to provide a high rate
of return on their investments. It is a resource for supporting
innovation, knowledge based ideas and technology and human
capital intensive enterprises.
Essentially, a venture capital company is a group of investors
who pool investments focused within certain parameters. The
participants in venture capital firms can be institutional investors
like pension funds, insurance companies, foundations,
corporations or individuals but these are high risk investments
which may give high returns or high loss.

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Areas of Investment
Different venture groups prefer different types of investments. Some specialize in seed
capital and early expansion while others focus on exit financing. Biotechnology, medical
services, communications, electronic components and software companies seem to be the
most likely attraction of may venture firms and receiving the most financing. Venture
capital firms finance both early and later stage investments to maintain a balance
between risk and profitability.
In India, software sector has been attracting a lot of venture finance. Besides media, health
and pharmaceuticals, agri-business and retailing are the other areas that are favoured by
a lot of venture companies.

Past Paper Question

Write short notes on the following:
Venture Capital Fund (3 marks) (Dec 2018)

Pension Fund
Pension Fund means a fund established by an employer to facilitate and organize the
investment of employees’ retirement funds which is contributed by the employer and
employees. The pension fund is a common asset pool meant to generate stable growth
over the long term, and provide pensions for employees when they reach the end of their
working years and commence retirement. Pension funds are commonly run by some sort of
financial intermediary for the company and its employees like N.P.S. scheme is managed
by UTIAMC (Retirement Solutions), although some larger corporations operate their
pension funds in-house. Pension funds control relatively large amounts of capital and
represent the largest institutional investors in many nations.
Pension funds play a huge role in development of the economy and it play active role in
the Indian equity market.
This pension fund ensures a change in their investment attitudes and in the regulatory
climate, encouraging them to increase their investment levels in equities and would have a
massive impact on capital market and on the economy as a whole.
Pensions broadly divided into two sectors:
A-Formal sector Pensions
B-Informal sector Pensions
A. Formal Sector Pensions
Formal sector pensions in India can be divided into three categories; viz pensions under an
Act or Statute, Government pensions and voluntary pensions.

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B-Informal sector Pensions

This scheme will cover unorganized workers who are working or engaged as home based
workers, street vendors, agriculture workers, construction workers, among others.
Legislations
There are three defining Acts for pensions in India.
1. Pensions under the EPF & MP Act 1952: These include the Employees Provident Fund,
Employees Pension Scheme, and Employees Deposit Linked Insurance Scheme,
2. Pensions under the Coal mines PF & MP Act 1948: These include Coal mines provident
fund, Coal mines pension scheme & Coal mines linked insurance scheme.
3. Gratuity under the Payment of Gratuity Act, 1972: There are other provident funds in
India like Assam Tea Plantations PF, J&K PF, and Seamens PF etc.

Atal Pension Yojana (APY)

Government of India (GoI) is concerned about the old age income security of the working
poor and is focused on encouraging and enabling them to save for their retirement. To
address the longevity risks among the workers in unorganized sector and to encourage the
workers in unorganized sector to voluntarily save for their retirement.
The GoI has therefore announced a new scheme called Atal Pension Yojana (APY) in 2015-
16 budget. The APY is focused on all citizens in the unorganized sector The scheme is
administered by the Pension Fund Regulatory and Development Authority (PFRDA)
through NPS architecture. Under the APY, there is guaranteed minimum monthly pension
for the subscribers ranging between Rs. 1000 and Rs. 5000 per month. The benefit of
minimum pension would be guaranteed by the GoI.

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Government Pension
Government pensions in India are referred under the Directive Principles of State Policy and
are therefore not covered under a Statute. The Government amended the regulations to
put in place the new pension system.
The old scheme continues for the existing employees (i.e. those who joined service prior to
January 1, 2004).
Pensions for government employees would include employees of the central as well as the
state governments.
(A) Central Government Pensions like Civil servants pensions, Defences, Railways,
Posts.
(B) State Government Pensions, Bank pensions like Reserve Bank of India (RBI),
Public Sector Banks, National Bank for Agriculture and Rural Development
(NABARD) and other banks pensions.
Superannuation schemes are also sold in the market. These are typically the retirement
plans sold by Mutual funds and Insurance companies (Life Insurance & Postal Life
Insurance).

Past Paper Question

Write short notes on the following:
Pension Fund (3 marks) (Dec 2018)
What are Pension Fund and Government Pension? State the legislations
governing pension in India. (5 marks) (Dec 2019)

Part B- Capital Market Instruments

Equity Shares
According to explanation (i) to Section 43 of Companies Act, 2013 ‘‘equity share capital’’,
with reference to any company limited by shares, means all share capital which is not
preference share capital. Section 43 further provides for equity share capital
(i) with voting rights, or
(ii) with differential rights as to dividend, voting or otherwise.
Important characteristics of equity shares are given below:
1. Equity shares, have voting rights at all general meetings of the company. These votes
have the affect of the controlling the management of the company.
2. Equity shares have the right to share the profits of the company in the form of
dividend (cash) and bonus shares. However, even equity shareholders cannot
demand declaration of dividend by the company which is left to the discretion of the
Board of Directors.

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3. When the company is wound up, payment towards the equity share capital will be
made to the respective shareholders only after payment of the claims of all the
creditors and the preference share capital.
Equity share holders enjoy different rights as members under the Companies Act, 2013 such
as:
(a) The right to vote on every resolution placed before the company – (Section 47)
(b) The rights to subscribe to shares at the time of further issue of capital by the
company (Pre-emptive Right) – (Section 62)
(c) Right to appoint proxy to attend and vote at the meeting on his behalf – (Section
105)
(d) Right to receive copy of annual accounts of the company – (Section 136)
(e) Right to receive notice of the meeting of members – (Section 101)
(f) Right to inspection of various statutory registers maintained by the company –
(Section 94)
(g) Right to requisition extraordinary general meeting of the company – (Section 100)
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 also specifies
that the listed entity shall seek to protect and facilitate the exercise of the following rights
of shareholders:
(a) right to participate in, and to be sufficiently informed of, decisions concerning
fundamental corporate changes.
(b) opportunity to participate effectively and vote in general shareholder meetings
(c) Being informed of the rules, including voting procedures that govern general
shareholder meetings.
(d) opportunity to ask questions to the board of directors,
(e) Effective shareholder participation in key corporate governance decisions, such as
the nomination and election of members of board of directors.
(f) exercise of ownership rights by all shareholders, including institutional investors.
(g) adequate mechanism to address the grievances of the shareholders.
(h) protection of minority shareholders from abusive actions by controlling
shareholders
Shares With Differential Voting Rights
Section 43(a)(ii) of the Companies Act, 2013, authorized equity share capital with
differential rights as to dividend, voting or otherwise in accordance with rule 4 of
Companies (Share Capital and Debentures) Rules, 2014 which prescribes the following
conditions for issue of DVRs :
(a) the articles of association of the company authorizes the issue of shares with
differential rights;
(b) the company having consistent track record of distributable profit for the last three

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years;
(c) the issue of shares is authorized by ordinary resolution passed at a general meeting
of the shareholders.
(d) The Company should not have defaulted in:-
 filing annual returns /financial statements for the last three years
 repayment of matured deposits or declared dividend
 redemption of its preference shares /debentures which are due for redemption.
 repayment of instalment of term loan taken from any public financial
institution or state level
 financial institution or from a scheduled bank that has become due and payable.
 statutory dues of the employees of the company

Past Paper Question

Z holding equity shares in PQR Ltd., made a request to the company to issue
shares with differential voting rights. Enumerate the conditions if any to be
satisfied by the PQR Ltd. for issue of shares with differential voting rights to Z.
(5 marks) (Dec 2019)

Preference Shares
According to explanation (ii) to Section 43 of Companies Act, 2013 ‘‘preference share
capital’’, with reference to any company limited by shares, means that part of the issued
share capital of the company which carries or would carry a preferential right with respect
to
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed
rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital,
The following kinds of preference shares are issued by the companies:
 Cumulative preference shares
 Non-cumulative preference shares
 Convertible preference shares
 Non-Convertible Redeemable preference shares
 Participating preference share
 Non-participating preference shares

Debentures
Section 2(30) of the Companies Act, 2013 defines debentures. “Debenture” includes
debenture stock, bonds or any other instrument of a company evidencing a debt, whether

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constituting a charge on the assets of the company or not;

However,
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;
and
(b) such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India, issued by a company,
Debenture is a document evidencing a debt or acknowledging it and any document which
fulfils either of these conditions is a debenture.
The important features of a debenture are:
1. It is issued by a company as a certificate of indebtedness.
2. It usually indicates the date of redemption and also provides for the repayment of
principal and payment of interest at specified date or dates.
3. It usually creates a charge on the undertaking or the assets of the company.
4. Debentures holders do not have any voting rights.
5. Company shall pay interest, irrespective of profits.
Based on convertibility, debentures can be classified under three categories:
1. Fully Convertible Debentures (FCDs)
2. Non Convertible Debentures (NCDs)
3. Partly Convertible Debentures (PCDs)
4. Optionally Fully Convertible Debenture (OFCD)

Bonds
Bonds are the debt security where an issuer is bound to pay a specific rate of interest
agreed as per the terms of payment and repay principal amount at a later time. The bond
holders are generally like a creditor where a company is obliged to pay the amount. The
amount is paid on the maturity of the bond period. Generally these bonds duration would
be for 5 to 10 years.
Characteristics of a Bond
1. Bond has a Fixed face value, which is the amount to be returned to the investor upon
maturity
2. Fixed maturity date, which can range from a few days to 20-30 years or even more.
3. All bonds repay the principal amount after the maturity date.
4. Provides regular payment of interest, semi-annually or annually.
5. Interest is calculated as a certain percentage of the face value known as a ‘coupon
payment’.
6. Generally considered as less risky investment as compared to equity.
7. It helps to diversify and grow investor’s money.

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Types of Bonds
These are the bonds issued either directly by Government of India or
by the Public Sector Units (PSU’s) in India. These bonds are secured as
Government they are backed up with security from Government. These are
Bonds generally offered with low rate of interest compared to other types of
bonds.

These are the bonds issued by the private corporate companies.

Corporate Bonds Indian corporates issue secured or non secured bonds. However care
to be taken to consider the credit rating given by Credit Rating
Agencies before investing in these bonds.

Banks and other

financial These bonds are issued by banks or any financial institution. The
financial market is well regulated and the majority of the bond
institutions bonds markets are from this segment.
In India, the tax saving bonds are issued by the Government of India for providing
benefit to investors in the form of tax savings. Along with getting normal interest,
Tax saving bonds the bond holder would also get tax benefit. In India, all these bonds are listed in
National Stock Exchange and Bombay Stock Exchange in India, hence they can be
easily liquidated and sold in the open market

Foreign Currency Convertible Bonds (FCCBs)

The FCCBs are unsecured instruments which carry a fixed rate of interest and an option for
conversion into a fixed number of equity shares of the issuer company. Interest and
redemption price (if conversion option is not exercised) is payable in dollars. FCCBs shall be
denominated in any freely convertible Foreign Currency.
However, it must be kept in mind that FCCB, issue proceeds need to conform to ECB end use
requirements.
Example
Suppose a company ‘A’ issues bonds with following terms –
Issue Price of the Bond Rs. 1000
Coupon rate 2%
Maturity 2 years
Convertible into equity shares @ Rs.800 per share
Now suppose an investor subscribes to 4 of these bonds. Thus the total investment is
Rs.4000. On this investment, he is entitled to get an interest @ 2% for 2 years. On the
maturity date, i.e. after 2 years, the investor will have an option – to either claim full
redemption of the amount from the company or get the bonds converted into fully paid
equity shares @ Rs. 800 per share. Thus if he goes for the conversion he will be entitled to
5 (4000/800) equity shares. The choice he makes will depend on the market price of the

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share on the date of conversion.

If the shares of the company ‘A’ is trading at lower than Rs.800, let’s say Rs.500, the
investor will be better off by claiming full redemption of his bonds and buying the shares
from the market. In this case, he will get 8 (4000/500) equity shares as against 5 which he
was getting on conversion. Similarly if the market price of the share is higher than Rs. 800,
the investor will benefit by getting its shares converted. Thus, on the day of maturity, an
investor will seek full redemption if the conversion price is higher than the current market
price, and will go for conversion if the conversion price is less than the current market
price.

Past Paper Question

Aruna Steel Ltd. issued Bonds with the following terms:
Issue price of the Bond: Rs 1000
Coupon rate: 3%
Maturity 5 years
Convertible into equity shares @ 500 per share
Ivan had purchased 20 bonds. At the time of maturity, the market price of the
equity shares was 400.
What are the options available to Ivan on the maturity date and which option
he should prefer? (5 marks)(Aug 2021)

Foreign Currency Exchangeable Bonds (FCEBs)

The FCEB is used to raise funds from the international markets against the security and
exchangeability of shares of another company. Foreign Currency Exchangeable Bond
(FCEB) means –
1. A bond expressed in foreign currency.
2. The principal and the interest in respect of which is payable in foreign currency.
3. Issued by an issuing company, being an Indian company.
4. Subscribed by a person resident outside India.
5. Exchangeable into equity shares of another company, being offered company which
is an Indian company.
6. Either wholly or partly or on the basis of any equity related warrants attached to
debt instruments.
It may be noted that issuing company to be the part of promoter group of offered company
and the offered company is to be listed and is to be eligible to receive foreign investment.
Under this option, an issuer company may issue FCEBs in foreign currency, and these FCEBs
are convertible into shares of another company (offered company) that forms part of the
same promoter group as the issuer company. E.g., company ABC Ltd. issues FCEBs, then the

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FCEBs will be convertible into shares of company XYZ Ltd. that are held by company ABC
Ltd. and where companies ABC Ltd. and XYZ Ltd. form part of the same promoter group.
Unlike FCCBs that convert into shares of issuer itself, FCEBs are exchangeable into shares
of Offered Company (OC). Also, relatively, FCEB has an inherent advantage that it does
not result in dilution of shareholding at the OC level.

Indian Depository Receipt

According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt” means
any instrument in the form of a depository receipt created by a domestic depository in
India and authorised by a company incorporated outside India making an issue of such
depository receipts.
An IDR is an instrument denominated in Indian Rupee in the form of a depository receipt
created by a domestic depository (Custodian of securities registered with SEBI) against the
underlying equity of issuing company to enable foreign companies to raise funds from
Indian Securities Markets.
In an IDR, foreign companies would issue shares, to a domestic (Indian) depository, which
would in turn issue depository receipts to investors in India. The actual shares underlying
the IDRs would be held by an Overseas Custodian, which shall authorize the Indian
depository to issue the IDRs. To that extent, IDRs are derivative instruments because they
derive their value from the underlying shares.
Standard Chartered PLC is only company to offer IDR in the Indian market. The foreign
company issuing IDRs need to comply with the requirements of rules prescribed under
Companies Act, SEBI Regulations and RBI notifications/circulars.

Create IDR Invest in IDR

Foreign Company Domestic Indian Investor

Depository

Overseas
Custodian Denominated in
Rs

Deposit Equity Listed on Indian

shares SE

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Derivative
A derivative is a financial instrument that derives its value from an underlying asset. This
underlying asset can be stocks, bonds, currency, commodities, metals and even intangible,
assets like stock indices. Derivatives can be of different types like futures, options, swaps
etc. The most popular derivative instruments are futures and options.
The term Derivative has been defined in Securities Contracts (Regulations) Act, as:-
Derivative includes –
(a) 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;
(b) a contract which derives its value from the prices or index of prices, of underlying
securities;
(c) Commodity derivatives; and
(d) such other instruments as may be declared by the Central Government to be
derivatives.

Future
Future refers to a future contract which means an exchange traded forward contract to
buy or sell a predetermined quantity of an asset on a predetermined future date at a
predetermined price.
There are two positions that one can take in a future contract:
 Long Position: This is when a futures contact is purchased and the buyer agrees to
receive delivery of the underlying asset. (Stock/Indices/Commodities).
 Short Position: This is when a futures contract is sold and the seller agrees to make
delivery of the underlying asset. (stock/Indices/Commodities)

Reliance Ltd

15th March

100 shares
Rs 50 per share

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Currency Futures
A currency future, also known as FX future, is a futures contract to exchange one currency
for another at a specified date in the future at a price (exchange rate) that is fixed on the
purchase date. Generally, the price of a future contract is in terms of INR per unit of other
currency e.g. US Dollars. Currency future contracts allow investors to hedge against
foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US
Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Cross
Currency Futures & Options contracts on EUR-USD, GBP-USD and USD-JPY are also
available for trading in Currency Derivatives segment.

Past Paper Question

What is future contract? (3 marks) (Aug 2021)

Options
Options Contract give its holder the right, but not the obligation, take or make delivery on
or before a specified date at a stated price. But this option is given to only one party in the
transaction while the other party has an obligation to take or make delivery. Since the
other party has an obligation and a risk associated with making the good the obligation,
he receives a payment for that. This payment is called as option premium.

Call Option When investor will exercise the option?

Investor has Right to BUY
Only if Tata shares are trading Above
100 Tata shares at a price of
Rs 100 on 31st July
Rs 100 on 31st July

Put Option When investor will exercise the option?

Investor has Right to SELL
Only if Infosys shares are trading
100 Infosys shares at a price
Below Rs 100 on 31st July
of Rs 100 on 31st July

Option contracts are classified into two types on the basis of which party has the option:
 Call option: A call option is with the buyer and gives the holder a right to buy the
securities and not the obligation.
 Put option: The put option is with the seller and the option gives the right to sell the
securities and not the obligation.
Option Contracts are classified into two types on the basis of time at which the option can
be exercised:

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 European Option: European style options are those contacts where the option can be
exercised only on the expiration date. Options traded on Indian stock exchanges are of
European Style.
 American Option: American style options are those contacts where the option can be
exercised on or before the expiration date.
Example
Case 1
Rajesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of Rs.
250. This contract allows Rajesh to sell 100 shares of Infosys at Rs. 3000 per share at any
time between the current date and the end of May. In order to avail this privilege, all
Rajesh has to do is pay a premium of Rs. 25,000 (Rs. 250 a share for 100 shares).
The buyer of a put has purchased a right to sell. The owner of a put option has the right to
sell.
Case 2
If an investor is of the opinion that a particular stock say “Ray Technologies” is currently
overpriced in the month of February and hence expect that there will be price corrections in
the future. However he doesn’t want to take a chance, just in case the prices rise. So the
best option for the investor would be to take a Put option on the stock.
Lets assume the quotes for the stock are as under:
Spot Rs. 1040
May Put at 1050 Rs.10
May Put at 1070 Rs. 30
So the inevstor purchases 1000 “Ray Technologies” Put at strike price of Rs.1070 and Put
price of Rs. 30/-.
The investor pay Rs. 30,000 as Put premium.
The position of investor in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = Rs 1020
2. May Spot price of Ray Technologies = Rs 1080
In the first situation you have the right to sell 1000 “Ray Technologies” shares at
Rs.1,070/-the price of which is Rs. 1020/-. By exercising the option the investor earn Rs.
(1070-1020) =Rs.50 per Put, which amounts to Rs. 50,000/. The net income in this case is
Rs. (50000-30000) =Rs. 20,000.
In the second price situation, the price is more in the spot market, so the investor will not
sell at a lower price by exercising the Put. He will have to allow the Put option to expire
unexercised. In the process the investor only lose the premium paid which is Rs. 30,000.
While buyer of an options has limited risk (Premium Amount), seller of an option has very
high risk (Market Price-Strike Price or Strike Price - Market Price), as the case may be,
depending on whether it is an call or put option.

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Past Paper Question

1 Naman had executed following trades on Gama Ltd. stock :
(i) Purchased one 3-month call option with a premium of Rs 25 at an
exercise price of Rs 530.
(ii) Purchased one 3-month put option with a premium of Rs 5 at an exercise
price of Rs 430.
(iii) The lot size is 100 share per lot and the current price of Gama Ltd. stock is
Rs 500.
Determine Naman’s profit or loss, if the price of Gama Ltd. stock after 3 months
is :
a. Rs 500
b. Rs 350. (5 marks) (Dec 2018)
What are the Option contracts?
You are required to compute the profit/loss for each investor in below option
contracts:
1 Mr. X writes a call option to purchase share at an exercise price of Rs 60 for
a premium of Rs 12 per share. The share price rises to Rs 62 by the time the
option expires.
2 Mr. Y buys a put option at an exercise price of Rs 80 for a premium of Rs
8.50 per share. The share price falls to Rs 60 by the time the option expires.
3 Mr. Z writes a put option at an exercise price of Rs 80 for a premium of Rs 11
per share. The price of the share rises to Rs 96 by the time the option expires.
4 Mr. XY writes a put option with an exercise price of Rs 70 for a premium of
Rs 8 per share. The price falls to Rs 48 by the time the option expires.
(5 marks) (June 2019)

Warrants
Warrant means an option issued by a company whereby the buyer is granted the right to
purchase a number of shares (usually one) of its equity share capital at a given exercise
price during a given period.
The holder of a warrant has the right but not the obligation to convert them into equity
shares. Thus in the true sense, a warrant signifies optional conversion. In case the investor
benefits by conversion of warrant, then he will convert the warrants, else he may simply
let the warrant lapse.
For example if the conversion price of the warrant is Rs. 70/-and the current market price
is Rs.110/-, then the investor will convert the warrant and enjoy the capital gain of Rs.40/-
In case the conversion is at Rs.70/- and the current market price is Rs.40/-, then the
investor will simply let the warrant lapse without conversion

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Real Estate Investment Trust (‘REIT’)

REITs allow anyone to invest in portfolios of real estate assets the same way they invest in
other industries through the purchase of individual company stock or through a mutual
fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income
produced through real estate investment – without buying any finance property.

Benefits of REITs include:

 Less Capital Intensive: Direct investment in real estate property is very capital
intensive. But each shares of REITs will be comparatively more affordable (it will not
require large capital outflows).
 Suitable for small Investors: Investing through REITs will eliminate dealing with
builders, thereby avoiding potential exposure to big builders
 Transparency: REITs stocks are listed in stock market, hence details will be available
on public domain
 Assured Dividends: REITs generates income in form of dividend. REITs dividend
payment is relatively assured as most of their income is in the form of rental (lease)
income.
 Tax Free: Dividend earned by the investors of REIT will be tax free.
 Fast Capital Appreciation: capital appreciation can be phenomenal.
 Easy to buy: Investment in REITS easier than investment in Real Estate properties
REITs are similar to mutual funds and shares and they provide income by way of :
 Dividend: REITs pay dividends to its shareholders.
 Capital Appreciation: As REIT stocks are listed in BSE and NSE, price appreciation of its
shares will also make money.

Infrastructure Investment Trusts (‘InvITS’)

Considering the importance of infrastructure sector with an aim to provide a suitable
platform for financing / refinancing infrastructure projects and allow the investors to
participate in the growth story of infrastructure, the Government introduced a new
investment vehicle named Infrastructure Investment Trusts (‘InvITs’) in 2014.
The primary objective of InvITs is to promote the infrastructure sector of India by
encouraging more individuals to invest in it. Typically, such a tool is designed to pool
money from several investors to be invested in income generating assets. The cash flow

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thus generated is distributed among investors as dividend income. When compared to Real
Estate Investment Trust or REITs, the structure and operation of both are quite similar.
An InvIT is established as a trust and is registered with the SEBI. Typically, infrastructure
investment trust SEBI comprises 4 elements, namely –
 Trustee: They are required to be registered with SEBI as debenture trustees. Also, they
are required to invest at least 80% into infra assets that generate steady revenue.
 Sponsor: Typically, a body corporate, LLP, promoter or a company with a net worth of
at least Rs. 100 crore classifies as a sponsor. Further, they must hold at least 15% of
the total InvITs with a minimum lock-in period of 3 years
 Investment Manager: As a body corporate of LLP, an investment manager supervises
all the operational activities surrounding InvITs.
 Project Manager: The authority is mostly responsible for executing projects. However,
in the case of PPP projects, it serves as an entity that also supervises ancillary
responsibilities.

Securitized Debt Instruments

Securitized debt instruments are financial securities that are created by securitizing
individual loans (debt).
Securitization is a financial process that involves issuing securities that are backed by
assets, most commonly debt. The assets are transformed into securities, and the process is
called securitization. The owner of the securities receives an income from the underlying
assets; hence, the term asset-backed securities.
Securitized debt instruments come with various advantages over conventional forms of
investing and are more valuable to a portfolio. One of the most common types of
securitized debt is mortgage-backed securities.

Municipal Bonds
Municipal bonds are also referred to as ‘muni bonds’. The urban local government and

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agencies issue these bonds. Municipal bonds are issued when a government body wants to
raise funds for projects such as infrarelated, roads, airports, railway stations, schools, and
so on. SEBI issued guidelines in 2015 for the urban local bodies to raise funds by issuing
municipal bonds. Municipal bonds exist in India since the year 1997. Bangalore Municipal
Corporation is the first urban local body to issue municipal bonds in India. Ahmedabad
followed Bangalore in the succeeding years. The municipal bonds lost the ground after the
initial investors’ attraction it received and failed to raise the desired amount of funds. To
revive the municipal bonds, SEBI came up with guidelines for the issue of municipal bonds
in 2015. Municipality should meet the following eligibility criteria to issue municipal bonds
in India:
 The municipality must not have a negative net worth in each of the three previous
years.
 The municipality must have no default in the repayment of debt securities and loans
availed from the banks or non-banking financial companies in the last year.
 The municipality, promoter and directors must not be enlisted in the willful defaulters
published by the Reserve Bank of India (RBI). The municipality should have no record
of default in the payment of interest and repayment of principal with respect to debt
instruments.
Mechanism for Issuance of Securities in Primary Market
Book Building
SEBI (ICDR) Regulation, 2018 defines book building as follows:
Book building means a process undertaken to elicit demand and to assess the price for
determination of the quantum or value of specified securities or Indian Depository Receipts, as
the case may be, in accordance with SEBI (ICDR) Regulation, 2018.
The book building process in India is very transparent. All investors including small investors
can see demand for the shares of the company at various price points on the website of the
Exchange before applying.

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Total Public Issue (i.e. net offer to the public(NOTP)

Other than Book

Book building method
Book building

(a) Minimum 50% to retail individual-

Allocation if the issue is in accordance with Regulation investors and
6(1) & 103 (1) of SEBI (ICDR)
(b) remaining to:
- not less than 35% to retail individual investors;
(i) individual applicants other than
- not less than 15% to non-institutional investors; retail individual investors; and
- not more than 50% to qualified institutional buyers, (ii) other investors including
(5% of this portion shall be alloted to mutual fund) corporate bodies or institutions,
Allocation if the issue is in accordance with Regulation However, the unsubscribed portion
6 (2) and 103 (2) of SEBI (ICDR) in either of the categories specified
- not more than 10% to retail individuall investors; in clauses (a) or (b) may be allocated
- not more than 15% to non-institutional investors; to applicants in the other category.

- not less than 75% to qualified institutional buyers

(5% of this portion shall be alloted to mutual fund)

Book Building Method

1. Appoints Lead Book Runners/Co Book Runners, Lead Merchant Banker (LMB) to act
as Lead Book Runner.
2. Filing of draft offer document with SEBI for obtaining observation and, Exchanges for
in-principle approval for listing
3. Filing of Red herring prospectus with SEBI, Exchange and Registrar of Companies
(RHP)
4. Lead Book Runners (LBR) appoints Syndicate members (SM)
5. LBR/SM to finalise bidding/collection centres who are either:
(a) SEBI Registered stock broker
(b) Self-certified Syndicate Bank (for ASBA facility)
6. Pre issue advertisement shall be made.
7. Bidding and allocation for anchor investors one day before opening of issue.
8. Issue opens and Investor submits forms at bidding centres.
9. Electronic Bidding Process and determination of price.
10. Registration of final prospectus with ROC.
11. Allocation/Manner of Allotment.
12. In case of Book Built Issue, the issuer in consultation with merchant banker, fixes the
Price band.

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13. In case of Fixed Price Issue, the issuer in consultation with merchant banker, fixes the
price of the shares to be offered (Face Value + Share Premium) and makes on offer. If
the investors subscribes minimum 90% of the offer, the issue will be succeeds.
Example
Let’s take an example.
Number of shares issued by the company = 100.
Price band = Rs. 30 – Rs. 40.
Now let’s check what individuals have bid for.
Bid Number of shares Price per share (Rs.) Cumulative demand
1 20 40 20
2 10 38 30 (20+10)
3 20 37 50 (30+20)
4 30 36 80 (50+30)
5 20 35 100 (80+20)
6 20 33 120 (100+20)
7 20 30 140 (120+20)
The shares will be sold at the Bid 5 price of 20 shares for Rs.35. Because Bidders 1 to 5 are
willing to pay at least Rs. 35 per share. The total bids from Bidders 1 to 5 ensure all 100
shares will be sold (20 + 10 + 20 + 30 + 20). The cut-off price is therefore Bid 5’s price = Rs.
35.
Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don’t get an allotment because
their bids are below the cut-off price.

Past Paper Question

ABC Limited, a public company, has come with public issue of 15,00,000 equity
shares through a book building process. The price band is 500-600. The
following table shows demand of securities at various price levels. What should
be the cut-off price as per book building mechanism?
Bid Price (Rs) No of Investor Demand (Number of shares)
520 25 8,50,000
530 10 4,00,000
535 15 2,00,000
545 4 4,00,000
560 6 1,00,000
575 5 2,00,000
585 3 1,10,000
590 3 1,40,000
595 3 3,50,000

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600 1 7,00,000
Total 75 34,50,000
(5 marks) (Aug 2021)

Application Supported By Block Amount (ASBA)

ASBA is an application for subscribing to an issue, containing an authorization to block the
application money in a bank account.
SEBI has introduced a supplementary process of applying in public issues, viz., the
“Applications Supported by Blocked Amount (ASBA)”.
Advantages of ASBA
Applying through ASBA facility has the following advantages:
 The investor need not pay the application money by cheque rather the investor
submits ASBA which accompanies an authorization to block the bank account to the
extent of the application money.
 The investor does not have to bother about refunds, as in ASBA only that much money
to the extent required for allotment of securities, is deducted from the bank account
only when his application is selected for allotment after the basis of allotment is
finalized.
 The investor continues to earn interest on the application money as the same remains
in the bank account, which is not the case in other modes of payment.
The investor deals with the known intermediary, i.e., its own bank.

Process
 The ASBA process is mandatory in all public issues made through the book building
route. ASBA is an application for subscribing to an issue, containing an authorization
to block the application money in a bank account.
 An ASBA investor submits an ASBA physically or electronically through the internet
banking facility, to the SCSB with whom the bank account to be blocked is
maintained,
 then the SCSB blocks the application money in the bank account specified in the ASBA,
on the basis of an authorization.
 The application money remains blocked in the bank account till finalisation of the
basis of allotment in the issue or till withdrawal/failure of the issue
 Once the basis of allotment of finalized, the Registrar to the Issue sends an
appropriate request to the SCSB for unblocking the relevant bank accounts and for
transferring the requisite amount to the issuer’s account.
 In case of withdrawal/failure of the issue, the amount shall be unblocked by the SCSB
on receipt of information

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 The process of applying for public issue, rights issue, etc has become very easy for
investors. The investors are no more required to wait for receipt of refund in case of
the public issue.
A retail investor has the option of making application through ASBA or through cheque.
However, non-retail investors i.e. Qualified Institutional Buyers and Non-Institutional
Investors shall mandatorily make use of ASBA facility for making application in public/
rights issue.

Self-certified Syndicate Bank

Self-Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying through
the ASBA process.
A bank desirous of offering ASBA facility shall submit a certificate to SEBI as per the
prescribed format for inclusion of its name in SEBI’s list of SCSBs.
A SCSB shall identify its Designated Branches (DBs) at which an ASBA investor shall submit
ASBA and shall also identify the Controlling Branch (CB) which shall act as a coordinating
branch for the Registrar of the issue, Stock Exchanges and Merchant Bankers. The SCSB, its
DBs and CB shall continue to act as such, for all issues to which ASBA process is applicable.
The SCSB may identify new DBs for the purpose of ASBA process and intimate details of the
same to SEBI, after which SEBI will add the DB to the list of SCSBs maintained by it. The
SCSB shall communicate the following details to Stock Exchanges for making it available on
their respective websites; these details shall also be made available by the SCSB on its
website:

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(i) Name and address of all the SCSB.

(ii) Addresses of DBs and CB and other details such as telephone number, fax number and
email ids.
(iii) Name and contacts details of a nodal officer at a senior level from the CB.
Question
Girdhar (Retail Individual Investor) had applied for Initial Public Offer of Six Sigma Ltd.
through Applications Supported By Block Amount (ASBA) process. The Self Certified
Syndicate Banks (SCSBs) failed to make bids in the Stock Exchange system even after the
amount has been blocked. The issue was oversubscribed. Based on the SEBI
guidelines/circulars, answer the following :
(i) What are the factors that have been taken into account by SEBI for finalization of
uniform policy for calculation of the minimum fair compensation?
(ii) Calculate the minimum fair compensation payable to Girdhar based on the following
information : Listing Price : Rs 350, Issue Price : Rs 300, Minimum Bid lot-20 shares,
probability of allotment of shares on the basis of allotment (ratio 7 : 8).
(4 marks) (Dec 2018)
Answer
(i) The following factors have been taken into account by SEBI for finalization of
uniform policy for calculation of the minimum fair compensation
(a) the opportunity loss suffered by the investor due to non-allotment of shares;
(b) the number of times the issue was oversubscribed in the relevant category;
(c) the probability of allotment; and
(d) the listing gains if any on the day of listing.
(ii) The proposed formula for calculation of minimum fair compensation is as follows: -
Compensation= (Listing Price – Issue Price) x No. of shares that would have been
allotted if bid was successful x Probability of allotment of shares determined on the
basis of allotment
In this case if the number of shares applied by an applicant whose bid was
unsuccessful due to failure/error on part of SCSB is 20 shares or multiples thereof,
then the minimum compensation is calculated as under:
Compensation = (350 – 300) x 20 x (7/8)
= Rs 875/-

Use of Unified Payments inTerface (UPI) with ASBA in Public Issue Process
“UPI as a payment option” can be used in the public issue process”?
1. UPI as part of bidding :
 Investor will fill in the bid details in the application form as per the existing

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process along with his UPI ID.

 As per the existing process, investor may submit the application with any of the
intermediary (Syndicate Member / Registered Stock Brokers / Registrar and
Transfer Agents / Depository Participants), who, on receipt of application will
upload the bid details along with UPI id in the stock exchange bidding platform.
 The stock exchange will electronically share the bid details, along with investors
UPI id, with the Escrow/ Sponsor Bank appointed by the issuer company.
2. UPI as part of blocking :
 The Escrow / Sponsor Bank will initiate a mandate request on the investor i.e.
request the investor to authorize blocking of funds equivalent to applicant amount
and subsequent debit of funds in case of allotment.
 The request raised by the Escrow/Sponsor Bank, would be electronically received
by the investor as SMS/intimation on his / her bank provided mobile no. linked to
UPI ID.
 Upon validation of block request by the investor, the said information would be
electronically received by the investors’ bank, where the funds, equivalent to
application amount, would get blocked in investors account. Intimation regarding
confirmation of such block of funds in investors account would also be received by
the investor.
3. UPI as part of payment for shares post allocation process:
 The registrar to the issue, based on information of bidding and blocking received
from stock exchange, would undertake reconciliation and prepare the basis of
allotment.
 Upon approval of such basis the instructions would be sent to sponsor bank to
initiate process for credit of funds in the public issue escrow account and
unblocking excess money.
 Based on authorization given by investor using UPI PIN at the time of blocking, the
funds, equivalent to the allotment, would be debited from investors account and
remaining funds, if any, would be unblocked.
Whether use of UPI, as a payment mechanism in public issues, is mandatory?
The applicability of UPI as a payment mechanism has been prescribed in a Phased manner
as under:
Phase I: From January 01, 2019, the UPI mechanism for retail individual investors through
intermediaries will be made effective along with the existing process and existing timeline
of T+6 days. The same will continue, for a period of 3 months or floating of 5 main board
public issues (means 5 public issue), whichever is later.
Phase II: Thereafter, for applications by retail individual investors through intermediaries,
the existing process of physical movement of forms from intermediaries to Self-Certified

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Syndicate Banks (SCSBs) for blocking of funds will be discontinued and only the UPI
mechanism with existing timeline of T+6 days will continue, for a period of 3 months or
floating of 5 main board public issues, whichever is later.
Phase III: Subsequently, final reduced timeline will be made effective using the UPI
mechanism

Past Paper Question

What is Unified Payments Interface (UPI)? How is public issue application using
UPI different from public issue application using ASBA submitted with
Intermediaries? Explain. (5 marks) (Dec 2019)

Green shoe Option

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.
ICICI bank was the first to use Green Shoe Option in its public issue through book building
mechanism in India.
Illustration
Consider a company planning an IPO of say, 100,000 shares, at a book-built price of Rs.
100/-, resulting in an IPO size of Rs. 100,00,000. As per the ICDR Regulations, the over-
allotment component under the Green Shoe mechanism could be up to 15% of the IPO, i.e.
up to 15,000 shares, i.e. Green Shoe shares. Prior to the IPO, the stabilising agent would
borrow such number of shares to the extent of the proposed Green Shoe shares from the
pre- issue shareholders. These shares are then allotted to investors along with the IPO
shares. The total shares issued in the IPO therefore stands at 115,000 shares. IPO proceeds
received from the investors for the IPO shares, i.e. Rs.100,00,000–100,000 shares at the
rate of Rs.100 each, are remitted to the Issuer Company, while the proceeds from the Green
Shoe Shares (Rs.15,00,000/-, being 15,000 shares x Rs.100/-) are parked in a special escrow
bank account, i.e. Green Shoe Escrow Account. During the price stabilisation period, if the
share price drops below Rs.100, the stabilising agent would utilise the funds lying in the
Green Shoe Escrow Account to buy these back shares from the open market.
This gives rise to the following three situations:
Situation #1 - where the stabilising agent manages to buyback all of the Green Shoe Shares,
i.e.,15,000 shares;
Situation #1 – Where all Green Shoe Shares are bought back: In this situation, funds in the
Green Shoe Escrow Account (Rs.15,00,000 in this case) would be deployed by the
stabilising agent towards buying up shares from the open market. Given that the prices
prevalent in the market would be less than the issue price of Rs. 100, the stabilising agent

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would have sufficient funds lying at his disposal to complete this operation. Having bought
back all of the 15,000 shares, these shares would be temporarily held in a special depository
account with the depository participant (Green Shoe Demat Account), and would then be
returned back to the lender shareholders, within a maximum period of two days after the
stabilisation period.
Situation #2 - where the stabilising agent manages to buyback none of the Green Shoe
Shares;
Situation #2 – Where none of the Green Shoe Shares are bought back: This situation would
arise in the (very unlikely) event that the share prices have fallen below the Issue Price, but
the stabilising agent is unable to find any sellers in the open market, or in an event where
the share prices continue to trade above the listing price, and therefore there is no need for
the stabilising agent to indulge in price stabilisation activities
In either of the above-said situations, the stabilising agent is under a contractual obligation
to return the 15,000 shares that had initially been borrowed from the lending
shareholder(s). Towards meeting this obligation, the issuer company would allot 15,000
shares to the stabilising agent into the Green Shoe Demat account (the consideration being
the funds lying the Green Shoe Escrow Account), and these shares would then be returned
by the stabilising agent to the lending shareholder(s), thereby squaring off his
responsibilities.
Situation #3 - where the stabilising agent manages to buy-back some of the Green Shoe
Shares, say 10,000 shares.
Situation #3 – Where some of the Green Shoe Shares are bought back, say 10,000 shares:
This situation could arise in an event where the share prices witness a drop in the initial
stages of the price stabilisation period, but recover towards the latter stages.
In this situation, the stabilising agent has a responsibility to return 15,000 shares to the
lending shareholder(s), whereas the stabilising activities have yielded only 10,000 shares.
Similar to the instance mentioned in Situation #2 above, the issuer company would allot
the differential 5,000 shares into the Green Shoe Demat Account to cover up the shortfall,
and the Stabilising Agent would discharge his obligation to the lending shareholder(s) by
returning the 15,000 shares that had been borrowed from them.
Both in Situation #2 and #3, the issuer company would need to apply to the exchanges
for obtaining listing/trading permissions for the incremental shares allotted by them. Any
surplus lying in the Green Shoe Escrow Account would then be transferred to the Investor
Protection and Education Fund established by SEBI

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Past Paper Question

A listed company, Nishan Hitech Ltd. issued 10 lakh equity shares at a price of
Rs 150 per share. The company provided Green shoe option for stabilizing the
post listing price of the shares. On the day of listing of shares, the news of trade
war between the two developed countries flashes and the price of shares of
company fall to Rs 110. Decide how many shares can be purchased by the
stabilizing agent to control the price? State the provisions for balance money
lying in the special account for green shoe option. (5 marks) (Dec 2018)

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Good Luck Finance Ltd., a listed company issued 20 lakh equity shares of Rs 180
each. The Company provided Green Shoe Option and Nishan was nominated as
Stabilising Agent. On the date of listing, Corona Virus threat spread across the
globe. Consequently post listing, the share price of the company fall to
From the above:
(i) Compute the quantum of shares that can be bought by Nishan
(ii) State the provisions for balance of shares lying in the special account for
Green Shoe Option. (5 marks)(Aug 2021)

Part II- Secondary Market

Trading Mechanism
In the Indian securities market various products trade like equity shares, warrants,
debenture, etc. The trading in the securities of the company takes place in dematerialised
form in India. Dematerialization is the process by which physical certificates of an investor
are converted to an equivalent number of securities in electronic form and credited to the
investor’s account with his Depository Participant (DP).Trading in the securities of the
company takes place on the screen based platforms provided by the Exchanges. Currently
for equity shares the settlement cycle is (T+2 days) (T means trading day). Any shares
which are traded on the Exchange is required to be settled by the clearing corporation of
the exchange on 2 working day.

Past Paper Question

Write short notes on the following:
Trading Mechanism (3 marks) (Aug 2021)

Types Of Securities
Securities traded in the stock exchanges can be classified as under:
1. Listed cleared Securities: The securities admitted for dealing on stock exchange after
complying with all the listing requirements and placed by the Board on the list of cleared
securities are called by this name
2. Permitted Securities: The securities listed on some of the recognised stock exchanges,
when permitted to be traded by those stock exchanges where they are not listed are
called permitted securities. Such permission is given if suitable provisions exist in the
regulations of the concerned stock exchanges.

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Past Paper Question

Distinguish between the following:
'Listed securities' and 'permitted securities' (3 marks) (June 2015)

Margin Trading
Margin trading was introduced by SEBI to curb speculative dealings in shares leading to
volatility in the prices of securities.
 Initial margin in this context means the minimum amount, calculated as a
percentage of the transaction value, to be placed by the client, with the broker,
before the actual purchase. The broker may advance the balance amount to meet full
settlement obligations.
 Maintenance margin means the minimum amount, calculated as a percentage of
market value of the securities, calculated with respect to last trading day’s closing
price, to be maintained by client with the broker.
When the balance deposit in the client’s margin account falls below the required
maintenance margin, the broker shall promptly make margin calls. However, no
further exposure can be granted to the client on the basis of any increase in the
market value of the securities. The broker may liquidate the securities if the client
fails to meet the margin calls made by the broker or fails to deposit the cheques on
the day following the day on which the margin call has been made or the cheque has
been dishonoured.

Past Paper Question

Distinguish between the following:
'Initial margin' and 'Maintenance margin' (2 marks) (June 2016)
Write short notes on the following:
Margins (3 marks) (Aug 2021)

Book Closure And Record Date

Book closure is the periodic closure of the Register of Members and Transfer Books of the
company, to take a record of the shareholders to determine their entitlement to dividends
or to bonus or right shares or any other rights pertaining to shares. Record date is the date
on which the records of a company are closed for the purpose of determining the stock
holders to whom dividends, proxies rights etc. are to be sent.
In accordance with Section 91 of the Companies Act, 2013 a company may close the register
of members for a maximum of 45 days in a year and for not more than 30 days at any one
time. Book closure become necessary for the purpose of paying dividend, making rights
issue or bonus issue. The listed company is required to give notice of book closure in a news

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paper at least 7 days before the commencement of the book closure. The members whose
names appear in the register of members on the last date of book closure are entitled to
receive the benefits of dividend, right shares or bonus shares as the case may be.

Past Paper Question

Distinguish between the following:
'Book closure' and 'record date'. (3 marks) (Dec 2013)
Write short note on the following:
'Book closure' and 'record date' (3 marks) (Dec 2018)

Block Deal
The SEBI vide letter MRD/DoP/SE/Cir - 19/05 dated September 02, 2005 and
CIR/MRD/DP/118/2017 dated October 26, 2017 guidelines outlining a facility of allowing
Stock Exchanges to provide separate trading window to facilitate execution of large trades.
The Exchanges have introduced new block window mechanism for the block trades from
January 01, 2018.
Session Timings:
(a) Morning Block Deal Window: This window shall operate between 08:45 AM to 09:00
AM.
(b) Afternoon Block Deal Window: This window shall operate between 02:05 PM to 2:20
PM.
In the block deal the minimum order size for execution of trades in the Block deal window
shall be Rs.10 Crore.
The orders placed shall be within ±1% of the applicable reference price in the respective
windows as stated above.
The stock exchanges disseminates the information on block deals such as the name of the
scrip, name of the client, quantity of shares bought/sold, traded price, etc to the general
public on the same day, after the market hours
Past Paper Question
What is meant by Block deal? How is it being executed in the Stock Exchange?
(5 marks) (Dec 2018)
Bulk Deal
Bulk deal is a trade, where total quantity bought or sold is more than 0.5% of the number
of equity shares of a listed company.
Bulk deal can be transacted by the normal trading window provided by brokers throughout
the trading hours in a day. Bulk deals are market driven and take place throughout the
trading day.
The stock broker, who facilitates the trade, is required to reveal to the stock exchange

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about the bulk deals on a daily basis.

Bulk orders are visible to everyone. If the bulk deal happens through a single trade, it
should be notified to the exchange immediately upon the execution of the order. If it
happens through multiple trades, it should be notified to the exchange within one hour
from the closure of the trading.

Past Paper Question

Write short notes on the following:
Bulk Deal (3 marks) (June 2019)
What is bulk deal? State the difference between block deal and bulk deal?
(5 marks) (Aug 2021)

Basis of Sensex
Sensitive Index or Sensex is the stock market index indicator for the BSE. It is also
sometimes referred to as BSE S&P Sensex. It was first published in 1986 and is based on the
market weighed stock index of 30 companies based on the financial performance. The large,
established companies that represent various industrial sectors are a part of this.
The calculation of Sensex is done by a Free-Float method that came into existence from
September 1, 2003.
The level of Sensex is a direct indication of the performance of 30 stocks in the market. The
free-float method takes into account the proportion of the shares that can be readily traded
in the market. This does not include the ones held by various shareholders and promoters or
other locked-in shares not available in the market.
Steps to calculate Sensex:
 The market capitalization is taken into account. This is done by multiplying all the
shares issued by the company with the price of its stock.
 BSE determines a Free-float factor that is a multiple of the market capitalization of the
company. This helps in determining the free-float market capitalization based on the
details submitted by the company.
Ratio and Proportion are used based on the base index of 100. This helps to determine
the Sensex.

Past Paper Question

Write a short note on the following:
Basis of SENSEX (3 marks) (June 2019)

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Nifty
National Stock Exchange Fifty or Nifty is the market indicator of NSE. It is a collection of 50
stocks. It is also referred to as Nifty 50 .it is owned and managed by India Index Services
and Products Ltd. (IISL).
Nifty is calculated through the free-float market capitalization weighted method. It
multiples the Equity capital (expressed in terms of number of shares outstanding) with a
price to derive the market capitalization. To determine the Free-float market capitalization,
equity capital (as stated earlier) is multiplied by a price which is further multiplied with
IWF (Investible Weight Factors) which is the factor for determining the number of shares
available for trading freely in the market. The Index is determined on a daily basis by
taking into consideration the current market value (free float market capitalization)
divided by base market capital and then multiplied by the Base Index Value of 1000.

Past Paper Question

Write a short note on the following:
Nifty (3 marks) (Dec 2019)

Market Surveillance
Market surveillance plays a vital role in ensuring market integrity which is the core
objective of regulators.
Market integrity is achieved through combination of surveillance, inspection, investigation
and enforcement of relevant laws and rules.
Globally market surveillance is either conducted by the Regulators or Exchanges or both. In
India, the primary responsibility of market surveillance has been entrusted to Stock
exchanges and is being closely monitored by SEBI.
Millions of Orders are transmitted electronically every minute and therefore surveillance
mechanisms to detect any irregularities must also be equally developed. Exchanges adopt
automated surveillance tools that analyse trading patterns and are installed with a
comprehensive alerts management system.
Market Surveillance is broadly categorised in 2 parts viz, Preventive Surveillance and Post
trade Surveillance
A. Preventive Surveillance –
1. Stringent On boarding norms for Trading Members - Stringent net worth, back
ground, viability etc. checks while on boarding Trading Members.
2. Index circuit filters - It brings coordinated trading halt in all equity and equity
derivative markets at 3 stages of the index movement, either way viz., at 10%, 15%
and 20% based on previous day closing index value.

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3. Trade Execution Range - Orders are matched and trades take place only if the trade
price is within the reference price and execution range.
4. Order Value Limitation - Maximum Order Value limit allowed per order.
5. Cancel on logout - All outstanding orders are cancelled, if the enabled user logs out.
6. Kill switch - All outstanding orders of that trading member are cancelled if trading
member executes kill switch.
7. Compulsory close out - Incoming order, if it results in member crossing the margins
available with the exchange, such order will be partially or fully cancelled, as the
case may be, and further disallow the trading member to create fresh positions.
8. Capital adequacy check - Refers to monitoring of trading member’s performance and
track record, stringent margin requirements, position limits based on capital, online
monitoring of member positions and automatic disablement from trading when
limits are breached
9. Fixed Price Band / Dynamic Price band - Limits applied within which securities shall
move; so that volatility is curbed. For non-derivative securities price band is 5%, 10%
& 20%. For Derivative products an operating range of 10% is set and subsequently
flexed based on market conditions.
10. Trade for Trade Settlement - The settlement of scrip’s available in this segment is
done on a trade for trade basis and no netting off is allowed.
11. Rumour Verification - Any unannounced news about listed companies is tracked on
online basis and letter seeking clarification is sent to the companies and the reply
received is disseminated
B. Post trade surveillance -
1. End of day alert – Alerts generated using statistical tools. The tool highlights stocks
which have behaved abnormally form its past behaviour
2. Pattern recognition model – Models designed using high end tools and trading
patterns which itself identifies suspects involving in unfair trading practise.
3. Transaction alerts for member - As part of surveillance obligation of members the
alerts are downloaded to members under 14 different heads.

Past Paper Question

“Prior information of open position of any share during market hours can easily
fluctuate the price of the share”. How Preventive Surveillance helps to reduce
the fraudulent price variation in the shares in a day? (5 marks) (June 2019)
How does market surveillance try to ensure market integrity in the securities
market? Explain. (5 marks) (Dec 2019)
Write short notes on the following:
Key features of Preventive Surveillance (3 marks) (Aug 2021)

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Risk Management in Secondary Market

The performance of secondary market has a vital bearing on the performance of primary
market. A number of measures were taken to modernise the stock exchanges in the country.
These measures focussed on infrastructure development, transparency, efficiency and
enhanced investor protection.
With a view to enhancing market safety, SEBI fixed intra-day trading and gross exposure
limits for brokers.
SEBI continued to maintain a constant interface with the stock exchanges on various issues
concerning investor protection and overall improvement in quality of intermediation. SEBI
also directed its efforts towards encouraging the stock exchanges to become effective as
self-regulatory institutions.
Transaction costs and time were also significantly reduced. During the year several of the
smaller exchanges also introduced on-line screen based trading. The key risk management
measures initiated by SEBI include:-
1. Categorization of securities into groups 1, 2 and 3 for imposition of margins based on
their liquidity and volatility
2. Specification of mark to Market margins.
3. Specification of Intra-day trading limits and Gross Exposure Limits.
4. Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the
Stock Exchanges.
5. Specification of time limits of payment of margins.
6. Collection of margins on upfront basis.
7. Index based market wide circuit breakers.
8. Automatic de-activation of trading terminals in case of breach of exposure limits.
9. Collection of margins from institutional clients on T+1 basis.

Past Paper Question

What are the key risk management measures initiated by SEBI in the secondary
market Describe (4 marks) (Dec 2016)

Impact of various policies on Stock Exchange

FED Policy
The Federal Reserve System is the central bank of the United States. It performs five
general functions to promote the effective operation of the U.S. economy and, more
generally, the public interest. The Federal Reserve:
10. conducts the nation’s monetary policy to promote maximum employment, stable
prices, and moderate long-term interest rates in the U.S. economy;

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11. promotes the stability of the financial system

12. promotes the safety and soundness of individual financial institutions and monitors
their impact on the financial system as a whole;
13. promotes consumer protection and community development through consumer-
focused supervision and examination.
How change in US Fed rate can impact India?
The Fed Funds Rate is the interest rate at which the top US banks borrow overnight money
from common reserves. All American banks are required to park a portion of their deposits
with the Federal Reserve in cash, as a statutory requirement.
Actually, fed fund rate gives the direction in which US interest rates should be heading at
any given point of time. If the Fed is increasing the interest rates, lending rates for
companies and retail borrowers will go up and vice versa. In India, hike in repo rate may
not impact the countries outside India. On the other hand, US interest rates matter a lot to
global capital flows. Some of the world’s richest institutions and investors have their base
in USA. They constantly compare Fed rates with interest rates across the world to make
their allocation decisions.
Any changes in the Fed Fund Rates impact the domestic borrowing market to a large extent.
For instance, if the Fed rates go up, it will make the RBI hesitant in cutting rates at that
time. The reason is that if RBI cut rates it will lead to heavy pullout of foreign investors
from the Indian bond market.

Credit Policy of RBI

The Reserve Bank of India has a credit policy which aims at pursuing higher growth with
price stability. Higher economic growth means to produce more quantity of goods and
services in different sectors of an economy;
The term monetary policy is also known as RBI’s credit policy or money management policy.
It is basically the central bank’s view on what should be the supply of money in the
economy and also in what direction the interest rates should move in the banking system.
The credit policy aims at increasing finance for the agriculture and industrial activities.
When credit policy is implemented, the role of other commercial banks is very important.
Commercial banks flow of credit to different sectors of the economy depends on the actual
cost of credit and arability of funds in the economy.
The objectives of a monetary policy are similar to the five year plans of our country. In a
nutshell it is basically a plan to ensure growth and stability of the monetary system. The
significance of the monetary policy is to attain the following objectives
(a) Rapid Economic Growth: It is an important objective as it can play a decisive role in
the economic growth of country. It influences the interest rates and thus has an
impact on the investment. If the RBI adopts an easy credit policy, it would be doing

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so by reducing interest rates which in turn would improve the investment outlook in
the country.
(b) Exchange Rate Stability: Another important objective is maintaining the exchange
rate of the home currency with respect to foreign currencies. If there is volatility in
the exchange rate, then the international community loses confidence in the
economy. So it is necessary for the monetary policy to maintain the stability in
exchange rate.
(c) Price Stability: The monetary policy is also supposed to keep the inflation of the
country in check. Any economy can suffer both inflation and deflation both of which
are harmful to the economy. So the RBI has to maintain a fair balance in ensuring
that during recession it should adopt an ‘easy money policy’ whereas during
inflationary trend it should adopt a ‘dear money policy’
(d) Balance of Payments (BOP) Equilibrium: Another key objective is to maintain the BOP
equilibrium which most of the developing economies don’t tend to have. The BOP has
two aspects which are ‘BOP surplus’ and ‘BOP deficit’. The former reflects an excess
money supply in the domestic economy, while the later stands for stringency of
money. If the monetary policy succeeds in maintaining monetary equilibrium, then
the BOP equilibrium can be achieved.
(e) Neutrality of Money: RBI’s policy should regulate the supply of money. It is possible
that the change in money supply causes disequilibrium
Various Quantitative instrument of Credit Policy
(a) Repo Rate: The rate at which the Commercial Banks borrow money from RBI.
Reduction in Repo Rate helps the Commercial Banks to get money at a cheaper rate
and an Increase in Repo Rate discourages the Commercial Banks to get money as the
rate increases and becomes expensive. The increase in the Repo Rate will increase the
cost of borrowing and lending of the banks which will discourage the public to
borrow money and encourages them to deposit.
(b) Cash Reserve Ratio (CRR) : Cash reserve ratio is the amount which the commercial
banks have to maintain as cash deposit with the Reserve Bank of India. RBI may
increase the CRR if it thinks that there is large amount of money supply in the
economy. Conversely, it will decrease the CRR if it is of the opinion that inflation is in
control and the industry needs a monetary boost up. The reduction in CRR will
provide more money in the hands of commercial banks which it will pass it on to the
industry. More money in the hands of industry will boost up production, consumption
and employment.
(c) Statutory Liquidity Ratio (SLR) : Statutory Liquidity Ratio is the amount which
commercial banks have to keep it with itself. So, SLR is the amount of money which
banks have to keep in its custody at all times.

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SLR is also a very powerful tool to control liquidity in the economy. To encourage
industries to boost up their production, SLR may be decreased to put more money in
the hands of commercial banks. An increase in SLR is used as an inflation control
measure to control price rise.
(d) Reverse Repo Rate (RRR): is the rate at which the RBI borrows money from the
Commercial Banks. An increase in the reverse repo rate will decrease the money
supply and vice-versa, other things remaining constant. An increase in Reverse Repo
Rate means that Commercial Banks will get more incentives to park their funds with
the RBI, therefore decreasing the supply of money in Market. An increase in the Repo
Rate and the Reverse Repo rate indicates strengthening of RBI’s Monetary Policy.
(e) Bank Rate: is the rate at which RBI discount bills for commercial banks. This banking
system involves commercial and Co-operative Banks, Industrial Development Bank of
India, IFC, EXIM Bank and other approved financial institutions. Funds are provided
through lending directly or rediscounting or buying money market instruments like
Commercial Bills or Treasury Bills. Increase in Bank Rate increases the cost of
borrowing by commercial banks which results in the reduction of credit volume to the
banks and hence declines the money supply. Increase in Bank Rate means tightening
of RBI’s Monetary Policy.
Question
Distinguish between the following:
Cash reserve ratio and statutory liquid ratio
Answer
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in .cash or as deposits with the
central bank. CRR is set according to the guidelines of RBI on this behalf.
Statutory liquid ratio is used by the bankers and indicates the minimum percentage of
deposits that the bank has to maintain in the form of the gold, cash or other approved
securities. Thus we can say that it is a ratio of cash and some other approved securities to
liabilities it regulates the credit growth in India

Inflation Index
In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two major indices
for measuring inflation. In United States, CPI and PPI (Producer Price Index) are two major
indices.
The Wholesale Price Index (WPI) was main index for measurement of inflation in India till
April 2014 when RBI adopted new Consumer Price Index (CPI) (combined) as the key
measure of inflation.
Wholesale Price Index

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Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry
of commerce & Industry, Government of India. It was earlier released on weekly basis for
Primary Articles and Fuel Group.
However, since 2012, this practice has been discontinued. Currently, WPI is released
monthly. Salient notes on WPI are as follows:
Base Year
Current WPI Base year is 2004-05=100. Its worth note that the base year for CPI is 2012
currently. This is one reason for increasing difference between CPI and WPI in recent times.
Items
There are total 676 items in WPI and inflation is computed taking 5482 Price quotations.
These items are divided into three broad categories viz. (1) Primary Articles (2) Fuel & power
and (3) Manufactured Products.
WPI does not take into consideration the retail prices or prices of the services.

Consumer Price Index

Consumer Price Indices (CPI) released at national level are:
 CPI for Industrial Workers (IW)
 CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
 CPI (Rural/Urban/Combined).
While the first two are compiled and released by the Labour Bureau in the Ministry of
Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of
Statistics and Programme Implementation. In India, RBI uses CPI (combined) released by
CSO for inflation purpose. Important notes on this index are as follows
Base Year
Base year for CPI (Rural, Urban, Combined) is 2012=100.
Number of items
The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it
clear that CPI basket is broader than WPI basket. The items in CPI are divided into 6 main
groups.
Key differences between WPI & CPI
 Primary use of WPI is to have inflationary trend in the economy as a whole. However,
CPI is used for adjusting income and expenditure streams for changes in the cost of
living.
 WPI is based on wholesale prices for primary articles, administered prices for fuel items
and ex-factory prices for manufactured products. On the other hand, CPI is based on
retail prices, which include all distribution costs and taxes.
 Prices for WPI are collected on voluntary basis while price data for CPI are collected by
investigators by visiting markets.

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 CPI covers only consumer goods and consumer services while WPI covers all goods
including intermediate goods transacted in the economy.
 WPI weights primarily based on national accounts and enterprise survey data and CPI
weights are derived from consumer expenditure survey data.

Past Paper Question

Write a note on the following:
Key difference between WPI & CPI (3 marks) (June 2019)
What is inflation index? State the difference between wholesale price index
(WPI) and consumer price index (CPI). (5 marks) (Aug 2021)

Impact of Policies on Indian Stock Market

Generally, when a country is operating in a low interest rate regime, borrowers can borrow
money at a lower interest rate. This aids in increased purchased power of the consumers.
The demand for the goods increase and subsequently sensing a higher demand, the prices
will also raise. This condition drives the inflation rates higher. When the inflation rates
raise more than the optimal levels, the Reserve Bank of India (RBI) steps into increase
interest rate to control inflation rate. When inflationary pressure starts building in the
economy RBI hikes the repo rate and/or cash reserve ratio (CRR) to manage the money
supply causing higher inflation.
Maintaining an optimal inflation rate is the primary task of Monetary Policy decision
makers of any nation. An optimal inflation rate ensures a healthy economy.
So, it becomes a the prime responsibility of Reserve Bank to monitor Wholesale Price Index
(WPI) and Consumer Price Index (CPI) to ensure that economy is balance.
A rise in the inflation rate impacts market sentiments. A higher inflation rate drives the
interest rates higher and hence borrowing becomes costly for the banks, corporates and
financial institutions. Therefore, the valuations of capital-intensive companies and sectors
may come under pressure as their margins decrease due to the higher interest burden.
However, the markets are governed by many factors and the direction cannot be
determined by reading just one factor. Global sentiments and global funds inflows are
other crucial factors that impact the direction of stock markets significantly.

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Chapter 16
Securities Market Intermediaries

Overview of Capital Market

Introduction
Every modern economy is based on a sound financial system which helps in production,
capital and economic growth by encouraging savings habits, mobilising savings from
households and other segments and allocating savings into productive usage such as
trade, commerce, manufacture etc. Financial system covers both credit and cash
transactions. All financial transactions are dealt with by cash payment or issue of
negotiable instruments like cheque, bills of exchanges, hundies etc. Thus a financial
system is a set of institutional arrangements through which financial surpluses are
mobilised from the units generating surplus income and transferring them to the others in
need of them.

Constituents of Financial System

 Financial Market
 Products
 Market participants

Securities Market
The Securities Market has two inter-dependent and inseparable segments, the new issues
(primary) market and the stock (secondary) market.
Primary Market
The primary market provides the channel for sale of new
securities, while the secondary market deals in securities
previously issued. The issuer of securities sells the securities in
the primary market to raise funds for investment and/or to
discharge some obligation.
In other words, the market wherein resources are mobilised by
companies through issue of new securities is called the
primary market. These resources are required for new projects
as well as for existing projects with a view to expansion,
modernisation, diversification and upgradation

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The Primary Market (New Issues) is of great significance to the

economy of a country. It is through the primary market that
funds flow for productive purposes from investors to
entrepreneurs. The latter use the funds for creating new
products and rendering services to customers in India and
abroad. The strength of the economy of a country is gauged by
the activities of the Stock Exchanges. The primary market
creates and offers the merchandise for the secondary market.
Secondary Market
Secondary market essentially comprises of stock exchanges
which provide platform for purchase and sale of securities by
investors. The trading platform of stock exchanges is accessible
only through brokers and trading of securities is confined only
to stock exchanges.

Difference Between Primary Market & Secondary Market

Basis for Primary Market Secondary Market
comparison
Meaning The market place for issuing fresh The market place for trading issued
securities securities
Objectives To raise funds Capital Appreciation
Scope Includes issuance of new securities Includes the further trading of
through Initial Public Offer (IPO) securities already offered to the
public
Another name New Issue Market After issue market
Purchasing of Investors can purchase securities Purchase and sale of securities is
securities directly from the Company done by the investors among
themselves
Financing Primary market provides funds to It does not provide funding to
new and old companies for their companies
expansion and diversification
Parties to Company and Investors Investors among themselves
transactions
Intermediaries Underwriters Brokers
Utilisation of Fund gained from primary market Fund received from secondary
fund becomes the capital of the market becomes income of investors
company

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Securities Market Intermediaries

Introduction
The capital market intermediaries are vital link between
investor, issuer and regulator. The objective of these
SEBI
intermediaries is to smoothen the process of investment
and to establish a link between the investors and the users
of funds.
Corporations and Governments do not market their
securities directly to the investors. Instead, they hire the
services of the market intermediaries to represent them to
the investors.
Investors, particularly small investors, find it difficult to
make direct investment. Market intermediaries help
investors to select investments by providing investment Link
consultancy, market analysis and credit rating of
investment instruments. In order to operate in secondary
market, the investors have to transact through share Issuer
brokers, Registrars and Transfer Agents etc. Investor

Role Of Capital Market Intermediaries

The following market intermediaries are involved in the Securities Market:
 Merchant Bankers
 Registrars and Share Transfer Agents
 Underwriters
 Bankers to issue
 Debenture Trustees
 Portfolio managers
 Stock-brokers and sub-brokers
 Custodians
 Investment Advisers

Notes :-

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Merchant Bankers
Merchant Banker means any person engaged in the business
of issue management by making arrangements regarding
selling buying or subscribing to securities or acting as
manager / consultant / advisor or rendering corporate
advisory services in relation to such issue management.

It is necessary for an issuer to appoint a merchant banker

for:-
1 to carry out the activities of issue management
a. Preparation of prospectus/ letter of offer.
b. Preparation of other information related to issue.
c. Determining of financial structure.
2 Private placement of securities
3 Underwriting connected with the aforesaid public issue
management business;
4 Corporate advisory services related to securities market
including takeovers, acquisition and disinvestment;
5 Stock broking;
6 Advisory services for projects;
7 Syndication of rupee term loans;
SEBI Regulation -SEBI (Merchant Bankers) Regulations, 1992
Net worth requirement - Not less than 5 crore rupees.

Past Paper Question

"Merchant bankers are the key intermediary between the company and issue of
capital.’ - Comment (5 marks) (June 2016)

Registrars And Share Transfer Agents

Registrar to an Issue means the person appointed by a body corporate or any persons or
group of persons to carry on the following activities on its or his or their behalf i.e.:
(i) collecting application for investor in respect of an issue;
(ii) keeping a proper record of applications and monies received from investors or paid
to the seller of the securities;
(iii) (a) assisting body corporate or person or group of persons in determining the basis
of allotment of the securities in consultation with the stock exchange;
(b) finalising the list of person entitled to allotment of securities

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(c) processing and despatchment of allotment letters, refund orders or certificates

and other related documents in respect of the issue;
Pre-issue Activities
 Sending instructions to Banks for reporting of collection figures and collection of
applications.
 Providing Practical inputs to the Lead Manager and Printers regarding the design of
the Bid cum Application form.
 Facilitate and establish information flow system between clients, Banks and
Managers to the issue.
 Liaison with Regulatory Authorities such as SEBI & Stock Exchanges.
Activities during the Issue
 Collection and Reporting of daily Collection figures.
 Collection of Data and Forms from Banks.
 Liaising with clients and Intermediaries to the Issue.
Post Issue Activities
 Data capturing & validation.
 Reconciliation.
 Facilitating Listing.
 Filing of Return of Allotment.
 Uploading of data to the Depositories for crediting of securities electronically.
 Dispatch of Refund orders / Share Certificates
 Periodic Report submission to Regulatory Authorities.
 Reconciliation of Refund payments.
 Attending to post issue Investor queries.
 Web-based investor enquiry system for allotment / refund details

Past Paper Question

What do you understand by 'registrar to an issue’? State various activities
carried out by the registrar to an issue. (5 marks) (Dec 2013)
Explain briefly the roles and responsibilities of 'Registrar to an issue' in an initial
public offer (IPO). (5 marks) (Dec 2015)
The Registrar to an Issue and Share Transfer Agents constitute an important
category of intermediaries in the securities market. List out the ‘pre-issue’ and
‘post-issue’ work undertaken by them. (5 marks)(Dec 2020)

Share Transfer Agent means:

(i) any person who on behalf of any body corporate, maintains the records of holders

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of securities issued by such body corporate and deals with all matters connected
with the transfer and redemption of its securities;
(ii) the department or division, by whatever name called, of a body corporate
performing the activities as share transfer agents if at any time the total number of
holders of its securities issued exceed one lakh.
General Obligations And Responsibilities Of Registrars Share Transfer Agent
1 Every registrar to an issue and share transfer agent holding a certificate shall at all
times abide by the Code of Conduct.
2 Registrar to an issue shall not to act as such registrar for any issue of securities in
case he or it is an associate of the body corporate issuing the securities.
3 Every registrar to an issue and share transfer agent being a body corporate shall
keep and maintain proper books of accounts and records.
4 the registrar to an issue or share transfer agent shall preserve the books of accounts
and other records and documents maintained for a minimum period of three years.
PRESCRIBED YEARS

5 Every registrar to an issue and share transfer agent 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 SEBI or the
Central Government and for redressal of investors’ grievances.
SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
Capital adequacy requirement (Networth) for
 Category I is Rs. 50, 00,000 and
 Category II is Rs. 25, 00,000.

Underwriters
Underwriter means a person who engages in the business of underwriting of an issue of
securities of a body corporate. Underwriting is an arrangement whereby certain parties
assure the issuing company to take up shares, debentures or other securities to a specified
extent in case the public subscription does not amount 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.
Underwriting is Compulsory for a public issue. 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.
It is the underwriter who agrees to take up securities which are not fully subscribed in a
public issue. The underwriter makes a commitment to get the issue subscribing either by

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others or by themselves.
General Obligations And Responsibilities Of Underwriter
1 Every underwriter shall at all times abide by the Code of Conduct.
2 Every underwriter shall enter into an agreement with each body corporate on whose
behalf he is acting as underwriter.
3 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.
4 The total underwriting obligations under all the agreements shall not exceed twenty
times the net worth.
5 Every underwriter, in the event of being called upon to subscribe for securities of a
body corporate pursuant to an agreement shall subscribe to such securities within
45 days of the receipt of such intimation from such body corporate.
6 Every underwriter shall keep and maintain proper books of account and records.
7 Every underwriter shall preserve the books of account and other records and
documents for a minimum period of five years.
8 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 SEBI or the Central Government and for
redressal of investors’ grievances.
9 The SEBI may at any time call for any information from an underwriter with respect
to any matter relating to underwriting business.
SEBI (Under Writers) Regulations, 1993
Networth Requirement- Not less than Rs. 20 lakhs

Bankers To An Issue
Banker to an Issue means a scheduled bank carrying on all or any
of the following activities:
 Acceptance of application and application monies;
 Acceptance of allotment or call monies;
 Refund of application monies;
 Payment of dividend or interest warrants.
Bankers to the issue, as the name suggests, carries out all the
activities of ensuring that the funds are collected and transferred
to the Escrow accounts. The banks are expected to furnish prompt
information and records to the company and to the lead manager
for monitoring and progressing the issue work. For this purpose,
the company has to enter into an agreement with different banks

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specifying the conditions, terms and remuneration for services to

be rendered by each such bank.

General Obligations And Responsibilities Banker To An Issue

1 Every banker to an issue shall maintain books of account, records and the
documents.
2 Every banker to an issue shall furnish the information to the SEBI when required.
3 Every banker to an issue shall enter into an agreement with the body corporate for
whom it is acting as banker to an issue.
4 Every banker to an issue shall inform the SEBI forthwith if any disciplinary action is
taken by the Reserve Bank against the banker to an issue only in relation to issue
payment work.
5 Every banker to an issue shall abide by the code of conduct.
6 Every banker to an issue 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 SEBI or the Central Government and for
redressed of investors’ grievances.
SEBI (Bankers to an Issue) Regulations, 1994

Past Paper Question

Write short notes on the following:
Banker to an Issue (3 marks) (Dec 2018)
Write short notes on the following:
Banker to an Issue (3 marks) (Dec 2020)

Portfolio Managers
Portfolio means “basket of securities”
Portfolio manager means any person who manages a
portfolio of securities or the funds of the clients as the
case may be. A portfolio manager is responsible for
making an individual aware of the various
investment tools available in the market and benefits
associated with each plan. A portfolio manager plays
an important role in deciding the best investment
plan for an individual as per his income, age as well
as ability to undertake risks.

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There are two types of Portfolio Manager:-

 Discretionary Portfolio manager: - He manages the funds
of the client independently and with full discretion in
accordance with the needs of the client.
 Non- Discretionary Portfolio manager: - He manages the
funds of the client without discretion and in accordance
with the instruction and direction of the client.
General Obligations And Responsibilities of Portfolio Manager
1 Every portfolio manager shall abide by the Code of Conduct.
2 The portfolio manager shall, before taking up an assignment of management of
funds and portfolio on behalf of a client, enter into an agreement in writing with
such client that clearly defines the inter se relationship and sets out their mutual
rights, liabilities and obligations relating to management of portfolio.
3 The discretionary portfolio manager shall individually and independently manage
the funds of each client in accordance with the needs of the client whereas the
nondiscretionary portfolio manager shall manage the funds in accordance with the
directions of the client..
4 The portfolio manager shall not accept from the client, funds or securities worth less
than fifty lakh rupees.
5 The portfolio manager shall act in a fiduciary capacity with regard to the client’s
funds.
6 The portfolio manager shall segregate each client’s holding in securities in separate
accounts.
7 The portfolio manager shall keep the funds of all clients in a separate account to be
maintained by it in a Scheduled Commercial Bank.
8 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,
9 The portfolio manager shall not derive any direct or indirect benefit out of the
client’s funds or securities.
10 The portfolio manager shall not borrow funds or securities on behalf of the client.
11 The portfolio manager shall not lend securities held on behalf of the clients to a
third person except as provided under SEBI (Portfolio Managers) Regulations, 2020.
12 The portfolio manager shall ensure proper and timely handling of complaints from
his clients and take appropriate action immediately.
SEBI (Portfolio Managers) Regulations, 2020
Networth Requirement-Not less than Rs. 5 crores

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Past Paper Question

Write short notes on the following:
Role of Portfolio Manager (3 marks) (Dec 2019)

MEMBER OF STOCK EXCHANGE ANY

Stock Brokers & Sub-Broker STOCK EXCHANGE
Stock-broker means a member of stock exchange and they are the intermediaries who are
allowed to trade in securities on the exchange of which they are members. They buy and
sell on their own behalf as well as on behalf of their clients.
Sub-broker means any person not being a member of 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.
A stock broker plays a very important role in the secondary market helping both the seller
and the buyer of the securities to enter into a transaction. The buyer and seller may be
either a broker or a client. If a member of the stock exchange (broker) has orders to buy
and to sell the same kind of securities, he may complete the transaction between his clients
CONTRACT NOTE MEANS
concerned. For each transaction he has to issue necessary contract note RECIPT NOTE
General Obligations And Responsibilities Stock Broker
1 Every Stock Broker shall keep and maintain the proper books of account, records
and documents.
2 Every stock broker shall preserve the books of account and other records
maintained for a minimum period of five years.
3 Every stock broker 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 SEBI or the Central Government and for
redressal of investors’ grievances.
SEBI (Stock Brokers & Sub- Brokers) Regulations, 1992
Networth Requirement- As specified in Schedule VI of the Regulation.

Custodians
A custodian is a person who carries on the business of providing
custodial services to the client. Custodial services refer to the
safeguarding of securities of a client. The custodian keeps the custody
of the securities of the client. The custodian also provides incidental
services such as maintaining the accounts of securities of the client,
collecting the benefits or rights accruing to the client in respect of
securities.

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According to the SEBI the roles and responsibilities of the custodians are to:-
 Administrate and protect the assets of the clients.
 Open a separate custody account and deposit account in the name of each client
 Record assets.
 Conduct registration of securities
General Obligations And Responsibilities Of Custodian
1 Every custodian shall abide by the Code of Conduct.
2 Where a custodian is carrying on any activity besides that of acting as custodian then
the activities relating to his business as custodian shall be separate and segregated
from all other activities.
3 Every custodian shall have adequate mechanisms for the purposes of reviewing,
monitoring, evaluating and inspection the custodian’s controls, systems, procedures
and safeguards.
4 No custodian shall assign or delegate its functions as a custodian to any other person
unless such person is a custodian.
5 Every custodian shall open a separate custody account for each client, in the name of
the client whose securities are in its custody and the assets of one client shall not be
mixed with those of another client.
6 Every custodian shall enter into an agreement with each client on whose behalf it is
acting as custodian.
7 Every custodian shall have adequate internal controls to prevent any manipulation
of records and documents including audits for securities , goods and rights or
entitlements arising from the securities and goods held by it on behalf of its client.
8 Every custodian shall maintain the records and documents.
9 Every custodian 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 SEBI or the Central Government and for redressal of
investors’ grievances.
10 Where any information is called for by the SEBI, it shall be the duly of the custodian
to furnish such information within such reasonable period as the SEBI may specify`
SEBI (Custodian of Securities) Regulations, 1996
Networth Requirement- Minimum of Rs. 50 crores

Notes :-

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Past Paper Question

'Custodian of securities' means any person who carries on or proposes to carry on
the business of providing custodial services-Comment (4 marks) (June 2016)
Write a note on the following:-
Custodian of Securities (3 marks) (June 2019)
Write a note on the following:-
Custodian of Securities (3 marks) (Dec 2020)

Debenture Trustees
Debenture Trustee’ means a trustee of a trust deed for securing any issue of debentures of a
body corporate
General Obligations And Responsibilities of Debenture Trustees
1 Call for periodical reports from the body corporate;
2 Take possession of trust property in accordance with the provisions of the trust
deed;
3 Enforce security in the interest of the debenture holders;
4 Do such acts as necessary in the event the security becomes enforceable;
5 Carry out such acts as are necessary for the protection of the debenture holders
6 To do all things necessary in order to resolve the grievances of the debenture
holders;
7 Ensure on a continuous basis that the property charged to the debenture is
available and adequate at all time to discharge the interest and principal amounts
payable in respect of the debentures 100 % SECURE
8 To take appropriate measures for protecting the interest of the debenture holders as
soon as any breach of the trust deed or law comes to his notice;
9 Inform SEBI immediately of any breach of trust deed or provision of any law;
10 Communicate to the debenture holders on half yearly basis the compliance of the
terms of the issue by the body corporate, defaults, if any, in payment of interest or
redemption of debentures and action taken there for;
11 Debenture trustee may inspect books of accounts, records, registers of the body
corporate and the trust property to the extent necessary for discharging its
obligations. NOMINAL DIRECTOR
APPOINTED BY DEBERNTURE
12 Appoint a nominee director on the board of the body corporate when required
TRUSTEE

SEBI (Debenture Trustees) Regulations, 1993

Networth Requirement - Not less than Rs. 10 crores

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Past Paper Question

“Debenture Trustee should exercise due diligence to ensure compliances with the
provisions of the Companies Act, listing agreement of stock exchange and the
trust deed.” In the light of the above statement, enumerate the various
responsibilities of Debenture trustee as per SEBI (Debenture Trustees)
Regulations, 1993. (5 marks)(Dec 2020)
Write a short note on following:-
Debenture Trustee (3 marks)(Aug 2021)

Investment Adviser
“Investment Adviser” means any person, who for
consideration, is engaged in the business of providing
investment advice to clients or other persons or group of
persons and includes any person who holds out himself as an
investment adviser, by whatever name called.
General Obligations And Responsibilities Of Investment Advisor
Investment advisers are those, who guide one about his or her financial dealings and
investments. Basically Investment adviser give advice and provide services related to the
investment management process. The Investment adviser shall done the risk profiling for
clients to assess their risks
1 An investment adviser shall act in a fiduciary capacity towards its clients and shall
disclose all conflicts of interests as and when they arise.
2 An investment adviser shall not receive any consideration by way of remuneration
or compensation or in any other form from any person other than the client being
advised, in respect of the underlying products or securities for which advice is
provided.
3 An investment adviser shall maintain an arms-length relationship between its
activities as an investment adviser and other activities.
4 An investment adviser shall not divulge any confidential information about its client
5 An investment adviser shall abide by Code of Conduct as specified in Third Schedule.
6 Investment advisers shall furnish to SEBI information and reports as may be
specified by SEBI from time to time.
SEBI (Investment Advisers) Regulations, 2013
Networth Requirement – Investment advisers who are nonindividuals shall have a net
worth of not less than 50 lakh rupees.
Investment advisers who are individuals shall have net tangible assets of value not less
than 5 lakh rupees

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Past Paper Question

Write a note on the following:-
Investment adviser (4 marks) (Dec 2015)
Question:-
"Investment advisors provide guidance about financial dealings and investments."
Comment on this statement and state the role of investment advisors in capital market.
Answer:-
“Investment Adviser” means any person, who for consideration, is engaged in the
business of providing investment advice to clients or other persons or group of persons
and includes any person who holds out himself as an investment adviser, by whatever
name called.
“Investment advice” means advice relating to investing in, purchasing, selling or
otherwise dealing in securities or investment products, and advice on investment portfolio
containing securities or investment products, whether written, oral or through any other
means of communication for the benefit of the client and shall include financial planning:
However, investment advice given through newspaper, magazines, any electronic or
broadcasting or telecommunications medium, which is widely available to the public,
shall not be considered as investment advice for the purpose of these regulations.

Research Analysts
“Research analyst” means a person who is primarily responsible for,-
(i) preparation or publication of the content of the research report; or
(ii) providing research report; or
(iii) making ‘buy/sell/hold’ recommendation; or
(iv) giving price target; or
(v) offering an opinion concerning public offer,
with respect to securities that are listed or to be listed in a stock exchange, whether or not
any such person has the job title of ‘research analyst’ and includes any other entities
engaged in issuance of research report or research analysis.
Roles And Responsibilities
They study Companies and industries, analyse raw data, and make forecasts or
recommendations about whether to buy, hold or sell securities. They analyse information
to provide recommendations about investments in securities to their clients.
Investors often view analysts as experts and important sources of information about the
securities they review and often rely on their advice. There are basically three broad types
of analysts, viz. sell-side analysts, buy-side analysts and independent analysts.

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General Obligations And Responsibilities Of Research Analyst

1 Research analyst or research entity shall maintain an arms-length relationship
between its research activity and other activities.
2 Research analyst or research entity shall abide by Code of Conduct.
3 In case of change in control of the research analyst or research entity, prior approval
from the SEBI shall be taken.
4 Research analyst or research entity shall furnish to the SEBI information and reports
as may be specified by the SEBI from time to time.
5 It shall be the responsibility of the research analyst or research entity to ensure that
its employees or partners, as may be applicable, comply with the certification and
qualification requirements at all times.
6 Research analyst or research entity shall maintain the following records:
(i) research report duly signed and dated;
(ii) research recommendation provided;
(iii) rationale for arriving at research recommendation;
(iv) record of public appearance.
7 All records shall be maintained either in physical or electronic form and preserved
for a minimum period of five years.
8 Research analyst or research entity shall conduct annual audit in respect of
compliance with these regulations from a member of Institute of Chartered
Accountants of India or Institute of Company Secretaries of India.
9 Research analyst or research entity which is a body corporate or limited liability
partnership firm shall appoint a compliance officer who shall be responsible for
monitoring the compliance of the provisions of the Act, these regulations and
circulars issued by the SEBI.
SEBI (Research Analysts) Regulations, 2014
Capital adequacy requirement (Networth) for
 Body corporate or limited liability partnership firm – not less than Rs. 25 Lakh
 Individual or partnership firm shall have net tangible assets of value not less than
Rs. 1 Lakh

Past Paper Question

What do you mean by ‘Research Analysts’? Elucidate the net worth
requirements, and role and responsibilities of Research Analyst as per SEBI
(Research Analyst) Regulations, 2014 (5 marks) (June 2019)
Write short notes on the following:
Research Analysts (3 marks) (Dec 2019)

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Credit Rating Agencies

“Credit rating agency” means a body corporate which is
engaged in, or proposes to be engaged in, the business of rating
of securities offered by way of public or rights issue.

Roles and Responsibilities

Credit rating is extremely important as it not only plays a role
in investor protection but also benefits industry as a whole in
terms of direct mobilization of savings from individuals. Rating
also provides a marketing tool to the company. Ratings also
encourage discipline amongst corporate borrowers to improve
their financial structure and operating risks to obtain a
better rating for their debt obligations and thereby lower the
cost of borrowing.
General Obligations And Responsibilities Of Credit Rating Agency
1 Every credit rating agency shall abide by the Code of Conduct.
2 Every credit rating agency shall enter into a written agreement with each client
whose securities it proposes to rate.
3 Every credit rating agency shall, during the lifetime of securities rated by it
continuously monitor the rating of such securities.
4 Every credit rating agency shall disseminate information regarding newly assigned
ratings, and changes in earlier rating promptly through press releases and websites,
and, in the case of securities issued by listed companies, such information shall also
be provided simultaneously to the concerned regional stock exchange and to all the
stock exchanges where the said securities are listed.
5 Every credit rating agency shall disclose Rating Definitions and Rationale.
6 Where any information is called for by the SEBI from a credit rating agency for the
purposes of these regulations, including any report relating to its activities, the
credit rating agency shall furnish such information to the SEBI.
7 Every credit rating agency shall comply with such guidelines, directives, circulars
and instructions as may be issued by the SEBI from time to time,
8 Every credit rating agency 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 SEBI or the Central
Government.
9 Every credit rating agency shall keep and maintain books of accounts, records and
documents for a minimum period of five years.

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SEBI (Credit Rating Agencies) Regulations, 1999

Networth Requirement- Minimum net worth of Rs. 25 crores

Internal Audit of Intermediaries by Company Secretary in Practice ETHICS

Efficient internal control systems and processes are pre-requisite for good governance. The
governance being a dynamic concept requires constant evaluation and monitoring of the
systems and processes.
Capital markets intermediaries are an important constituent of overall governance
framework. Being an important link between regulators, investors and issuers, they are
expected to ensure that their internal controls are so efficient that ensure effective investor
service at all times and provide regulators comfort as to the compliance of regulatory
prescription. It is in this direction that SEBI has authorised Practising Company Secretaries
to undertake internal audit of various capital market intermediaries.
SEBI has mandated that RTA has to undergo for compulsory internal audit for which a PCS
is authorised by SEBI to carry out the internal audit at par with other professionals.

Role of Company Secretary

Every market intermediaries shall appoint a company secretary as a compliance officer
who shall be responsible for monitoring the compliance of the Act, rules and
regulations, notifications, guidelines, instructions etc. issued by SEBI or the Central
Government and for redressal of investors’ grievances. The compliance officer shall
immediately and independently report to SEBI for any non-compliance observed by him.

Case Laws
1. 01. 07. 2020 Mr. Vishal Vijay Shah (Noticee) in the Whole Time Member,
matter of Maharashtra Polybutenes Securities and Exchange
Limited v. SEBI Board of India
Facts of the case:
In the facts of the instant proceedings, it is observed that the Vishal Vijay Shah (“Noticee”),
a registered Stock Broker had received funds in the client and settlement bank accounts
from third parties in cash and had made payments to third parties on behalf of clients. It is
further observed that the Noticee had also made withdrawal of cash from the client bank
accounts. Under the SEBI Circulars, a responsibility has been cast on the Stock Broker to
ensure that payments are received directly from the respective clients and not from third
parties.
Accordingly, the Noticee should have taken expedient steps to ensure that funds received
from third parties are exceptionally dealt with and suitable explanations should have been

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asked from the client when such blatant third party monetary amounts were received.
However, there is nothing on record to suggest that such steps were indeed taken.
Further, the Noticee in its submissions has itself admitted to having carried out such
irregular practices. The aforementioned conduct of the Noticee clearly demonstrates that it
failed to maintain fairness in the conduct of its business, exercise due skill and care and
comply with the statutory requirements. Thus, in addition to the violation of the SEBI
Circulars the Noticee has also violated the provisions of Clauses A(1), (2) & (5) of the Code
of Conduct as specified under Schedule II read with Regulation 9(f) of the Stock Brokers
Regulations.
The BSE had earlier conducted inspection of the Noticee and upon a consideration of the
BSE Inspection Reports in light of the Inspection Report, it is observed that the violations
committed by the Noticee in the instant proceedings are repetitive in nature. Further, it is a
well settled position of law that SEBI may initiate multiple proceedings for the same set of
violations.
Order:
The Noticee had violated the aforementioned provisions of the Stock Brokers Regulations
and aforementioned SEBI Circulars. Having regard to the facts and circumstances of the
instant proceedings.
SEBI accepted the recommendation of the Designated Authority that the Certificate of
Registration of the Noticee be suspended for a period of one year.

2. 05. 06. 2020 Narendra Singh Tanwar, Proprietor of M/s Whole Time Member,
Capital True Financial Services (Noticee) Securities Exchange
vs. SEBI Board of India

The noticee cease and desist from acting as an investment Adviser as it refused to refund
the money so taken by it as service fee from complainant.
Facts of the case:
SEBI had received a complaint against Mr. Narendra Singh Tanwar, Proprietor of M/s
Capital True Financial Services (hereinafter referred to as “Noticee”), a registered
Investment Adviser (hereinafter referred to as “IA”) inter alia alleging that a promise was
made on behalf of the Noticee to the complainant assuring him a huge return of Rs. 28.80
lakh on a investment of Rs. 20,000/- over a short period of 4 months and 10 days.
Pursuant to such an assurance, an amount of Rs. 1,30,000/- was transferred by the
complainant to the Noticee towards first instalment of the service fee, out of total service
fee of Rs. 4,47,200/- demanded by the Noticee in instalments. However, after suffering
loss on the very first day of availing the services of the Noticee, the complainant asked the

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Noticee to return the amount paid to him. As the Noticee refused to refund the money so
taken by it as service fee and also stopped attending the phone calls of the complainant, a
compliant was lodged with SEBI. The said complaint was forwarded to the Noticee for
resolution and to submit an Action Taken Report (ATR) in the SEBI Complaints Redress
System (SCORES).
Order:
In view of the foregoing findings and in the interest of investors and for the protection of
their rights, SEBI issue following directions:
(i) The Certificate of Registration as Investment Adviser bearing Registration number
INA000009038 issued in favour of the Noticee is hereby cancelled.
(ii) The Noticee shall forthwith cease and desist from acting as an Investment Adviser.
(iii) The Noticee shall not use the term ‘Investment Adviser’ directly or indirectly in any
manner whatsoever on the letter-head, on the website, signage board, or otherwise.
(iv) The Noticee is debarred from accessing the securities market and is further prohibited
from buying, selling or otherwise dealing in securities, directly or indirectly, or being
associated with securities market in any manner, for a period of 2 years and during
the period of restraint, the existing holding of securities including the holding of units
of mutual funds of the Noticees shall remain frozen.

3. 29. 05. 2020 Arihant Capital Markets Ltd. (Noticee) vs. Adjudicating Officer,
SEBI Securities Exchange
Board of India

SEBI imposed penalty for the alleged violation of the provisions of SEBI (Stock Broker and
Sub Brokers) Regulations, 1992.
Facts of the case:
SEBI conducted investigation into trading activities of certain entities in the scrip of Moryo
Industries Ltd. for the period of January 15, 2013 to August 31, 2014. Based on the findings
of the investigation, SEBI initiated adjudication proceedings against Arihant Capital
Markets Ltd.(hereinafter be referred to as, the “Noticee”) under Section 15HB of the
Securities and Exchange Board of India Act, 1992 , for the alleged violation of Clause A(2)
of the Code of Conduct for Stock Brokers as specified under Schedule II read with
Regulation 7 (as existed at the relevant time) of the Securities and Exchange Board of India
(Stock Broker and Sub Brokers) Regulations, 1992.
Order:
In view of the above, after considering all the facts and circumstances of the case and
exercising the powers conferred upon SEBI under Section 15-I (2) of the SEBI Act, 1992 read

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with Rule 5 of the Adjudication Rules, SEBI hereby impose monetary penalty of Rs.
5,00,000/-(Rupees Five Lakhs only) on the Noticee. The Noticee shall remit / pay the said
amount of penalty within 45 days of receipt of this order or May 31, whichever is later. .

4. 24. 12. 2019 Star India Market Research (Appellant) vs. Securities Appellate
SEBI (Respondent) Tribunal

Penalty imposed by SEBI on violating SEBI (Investment Advisor) Regulations, 2013, further
reduced by SAT keeping in view the financial capability of appellant
SEBI imposed a penalty of Rs. 40 lakh on a SEBI registered Investment Advisor on violation
of Regulation 15, 16 and 17 with Schedule III of the SEBI( Investment Advisor) Regulations,
2013. The main alleged violations against the appellant are
(i) Offering products without considering the risk profile of the clients
(ii) Offering high net-worth individual (HNIs) services to unsuitable clients
(iii) Receiving payments in advance for future services
(iv) Charging high and unreasonable fee from clients.

Appellant filed appeal to SAT and appeal was partly allowed. Though it is admitted fact
that the appellant has committed certain violations however SAT finds that the penalty
imposed was too harsh and disproportionate. The appellant is a small investment advisor
with a profit of about Rs. 30 lakh in a year and with a small amount of net worth. The
penalty therefore is reduced from Rs. 40 lakh to Rs. 20 lakh.

5. 31. 03. 2020 Jaypee Capital Services Ltd (Noticee) vs. Whole Time Member,
SEBI Securities and Exchange
Board of India

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a

Certificate of Registration as a Depository Participant to Jaypee Capital Services Limited
(JCSL/Noticee) in accordance with provisions of SEBI (Depositories and Participants)
Regulations, 1996 (DP Regulations) initially for a period of five years which was valid from
August 11, 2006 to August 10, 2011. The certificate of registration was, thereafter, renewed
in 2011 for a further period of five years and the renewed certificate was valid till August
10, 2016.
SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited

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(hereinafter referred to as ‘CDSL’) informing that it has terminated the agreement with the
Noticee w.e.f April 04, 2016 due to noncompliance
On the part of JCSL with the bye-laws of CDSL. CDSL vide the said letter also requested
SEBI to cancel the certificate of registration granted to the Noticee at act as a Depository
Participant with immediate effect. Thereafter, National Securities Depositories Limited
(hereinafter referred to as “NSDL”) vide its letter dated April 22, 2016 informed SEBI that it
has also terminated the agreement with JCSL w.e.f May 23, 2016 due to the non-
compliance on part of JCSL with the various bye-laws of NSDL.
Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it
was alleged that the Noticee was no longer eligible to be admitted as a participant of
depository and had failed to inform SEBI about the termination of its agreements with
CDSL and NSDL.
Order:
The failure on the part of the Noticee to inform SEBI of the termination of the agreement
by the depositories would therefore have to be considered as a violation of Clause 14 of the
Code of Conduct for the DPs as given under third schedule read with Regulation 20AA of
the DP Regulations.
Whole Time Member, in exercise of powers conferred under Section 19 of the Securities and
Exchange Board of India Act, 1992 read with Regulation 28(2) of the SEBI (Intermediaries)
Regulations, 2008, hereby cancel the certificate of registration granted to the Noticee /
Jaypee Capital Services Limited (SEBI Registration No. IN-DP-NSDL-291-2008/IN-DP-CDSL-
368- 2006) with immediate effect.

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Practical Questions

Question
For ensuring independence in the spirit of Independent Directors and their active
participation in functioning of the company, SEBI has accepted many recommendations of
Committee setup under the Chairmanship of Shri Uday Kotak and made amendments in the
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Explain any four
amended provisions related to Independent Directors. (4 marks) (Dec 2018)
Answer
(Students may write any four amendments)
Based on the recommendations of Kotak Committee, the amendments made in the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to
Independent Directors are as follows:
1. The Board of Directors of the top 500 listed entities shall have at least one
independent woman director by April 1, 2019 and the Board of Directors of the top
1000 listed entities shall have at least one independent woman Director By April 1,
2020.
2. The quorum for every meeting of the Board of Directors of the top 1000 listed
entities with effect from April 1, 2019 and the top 2000 listed entities with effect
from April 1, 2020 shall be one-third of its total strength or three Directors,
whichever is higher, including at least one independent director.
3. A person shall not serve as an independent director in more than seven listed
entities. However, any person who is serving as a whole time director I managing
director in any listed entity shall serve as an independent director in not more than
three listed entities.
4. The evaluation of independent director shall be done by the Directors which shall
include:
a. performance of the director; and
b. fulfilment of the Independence criteria as specified in SEBI Listing
Regulation and their Independence from the management
However in the above evaluation, directors who are subject to evaluation shall not
participate.
5. The quorum for a meeting of the nomination and remuneration committee shall be
either two members or one-third of the members of the committee whichever is
greater including at least one independent director in attendance
6. At least one independent director on the Board of Directors of the listed entities shall
be the director on the Board of Directors of an unlisted material subsidiary, whether

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incorporated in India or not.

7. No person shall be appointed or continue as an alternate director for an independent
director of a listed entity with effect from October 1, 2018.
Detailed reasons for the resignation of an independent director who resigns before the
expiry of his tenure along with a confirmation by such director that there are no other
material reasons other than those provided.

Question
Credit Rating Agencies may not be taking cognizance of information for delays in servicing
debt obligations while reviewing of its ratings. What are the material events requiring a
review by the Credit Rating Agencies as per SEBI’s circular? (5 marks) (Dec 2018)
Answer
The statement is based on SEBI circular no. SEBI/HO/MIRSD/MIRSD4/CIR/P/2017/71 dated
301h June, 2017, issued for Monitoring and Review of Ratings by Credit Rating Agencies
(CRAs):
As per regulation 15 of SEBI (Credit Rating Agencies) Regulations, 1999, CRAs ?re required
to continuously monitor the rating of securities and disseminate information regarding
newly assigned ratings, and changes in earlier rating, promptly through press releases on
website of CRAs as well as all the stock exchanges where the said securities are listed.
Material Events requiring a review
CRAs shall carry out a review of the ratings upon the occurrence of or announcement/
news of material events including, but not restricted to the following:
 Quarterly/Half-Yearly/Annual results; ·
 Merger/Demerger/Amalgamation/Acquisition;
 Corporate debt restructuring, reference to BIFR and winding-up petition filed by any
party/creditors;
 Significant decline in Share prices/Bond prices of the issuer or group companies which
is not linked to overall market movement;
 Significant increase in debt level or cost of debt of the issuer company;
 Losses, sharp revenue De-growth, etc. based on publicly disclosed financial
statements, which are not in line with CRA's earlier estimates·
 Granting, withdrawal, surrender, cancellation or suspension of key licences or
regulatory approval
 Disruption/commencement/postponement of operation of any unit or division the
listed entity;
 Any attachment or prohibitory orders against the Issuer

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Question
Explain the provisions for compulsory internal audit of Registrars to an Issue/Share
Transfer Agents (RTAs). (5 marks)(Dec 2018)
Answer
SEBI vide its circular dated 20th April, 2018 provides for the compulsory internal audit of
Registrar to an Issue/Share Transfer Agents which is discussed below:
1. All Registrar to an Issue/Share Transfer Agents are required to carry out internal audit
on annual basis by independent qualified CA/CS/CMA and Certified Information
Systems Auditor (ClSA) who doesn’t have any conflict of interest.
2. Eligibility of auditors for conducting the internal audit of the RTA:
 The audit firm shall have a minimum experience of 3 years in the financial sector.
 An auditor shall be appointed for a maximum term of 5 years, with a cooling off
period of 2 years.
3. The auditor shall cover all aspects of RTA operations including investor grievance
redressal mechanism and compliance with the requirements stipulated in the SEBI Act,
Rules and Regulations made there under, and guidelines/circulars issued by SEBI from
time to time.
4. The reports and state the methodology adopted, deficiencies observed, and
consideration of response of the management on the deficiencies.
5. The report shall include a summary of operations and of the audit, covering the size of
operations, number of transactions audited and the number of instances where
violations/ deviations where observed while making observations on the compliance of
any regulatory requirement.
6. The report shall comment on the adequacy of systems adopted by the RTAs for
compliance with the requirements of regulations and guidelines issued by SEBI and
investor grievance redressal.
7. The RTA shall submit a copy of report of the internal audit to Issuer Company within 3
months from the end of the financial year. Copy of the same shall also be preserved by
the RTA
8. The Governing Council (Board of Directors, Board of Partners, proprietor; etc. as
applicable) of the RTA shall consider the report of the internal auditor and take steps
to rectify the deficiencies, if any The RTA shall send the Action Taken Report in
prescribed format to Issuer Company within next one month and a copy thereof shall
be maintained by the RTA
9. The audit observations along with the corrective steps taken by the RTA shall be placed
before the Board of Directors of the Issuer Company.
10. The Issuer Companies shall satisfy themselves regarding the adequacy of the corrective
measures taken by the concerned RTA. If not satisfied by corrective measures, Issuer

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Company may take more stringent corrective measures.

Question
The financial data of Natural Energy Limited as on 31st March, 2018 are as under :
(i) Authorised Share Capital : Rs 700 crore
(ii) Paid-up Capital : Rs 300 crore
(iii) Free Reserves : Rs 800 crore
The company has pending convertible debenture of Rs 150 crore, due for conversion in
financial year 2018-19. The company proposes to issue bonus shares in the ratio of 1: 1 after
conversion of debenture. You being a company secretary, advise on the procedure to be
followed by referring SEBI regulations (7 marks) (June 2019)
Answer
Chapter XI consisting of regulation 293-295 of the SEBI (ICDR) Regulations, 2018
stipulates the provisions with respect to issue of bonus shares. Regulation 293 provides
that, subject to the provisions of the Companies Act, 2013 or any other applicable law, the
listed issuer shall be eligible to issue bonus shares to its members if:-
(a) it is authorized by its Articles of Association for issue of bonus shares,
capitalization of reserves, etc.
Provided that if there is no such provision in the Articles of Association, the issuer
shall pass a resolution at its general body meeting making provisions in the Articles
of Association for capitalization of reserve;
(b) it has not defaulted payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(c) it has not defaulted in payment of statutory dues of the employees such as
contribution to provident fund, gratuity and bonus;
(d) any outstanding partly paid shares on the date of the allotment of the bonus shares
are made fully paid-up;
(e) any of its promoters or directors is not a fugitive economic offender
The Article of Association must authorize it to issue the bonus shares. If there is no
provision in the Article for Bonus shares, firstly articles shall be amended by the company.
Determination of increase in authorized capital required:
Paid-up share capital as on 31/03/2018 Rs. 300 crores
Paid-up share capital after conversion Rs. 450 crores
Proposed Bonus issue One share for
every share held
Post Bonus issue Capital Rs. 900 Crores
Since authorized capital is Rs. 700 crores only, it is required to increase the authorized

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capital by 200 crores or more.

The Reserves & Surplus is Rs. 800 crores, therefore bonus issue of Rs 450 crores can be
made out of reserves & surplus.
Other conditions to be followed:
 Bonus shares shall not be issued in lieu of dividend
 A resolution shall be passed by the Board in its meeting
 Bonus issue shall be completed within 15 days from the date of approval of Board of
Directors, if shareholders’ approval is not required
 Where the shareholders is required, bonus issue shall be completed within 2 months
from the date of the board meeting
 The bonus issue once announced shall not be withdraw

Question
“An Alternative Investment Fund which has been granted registration under a particular
category cannot change its category subsequent to registration, except with the approval
of the SEBI”. Enumerate the conditions for approval of SEBI. (5 marks) (June 2019)
Answer
As per SEBI Circular No CIR/IMD/DF/12/2013 dated 7th August, 2013, only AIFs who have
not made any investments under the category in which they were registered earlier shall
be allowed to make application for change in category. Such AIFs are required to make an
application in Form A along with necessary supporting documents, Application fees of Rs.
1,00,000 must be paid along with the application to SEBI. AIFs are not required to pay
registration fees for such applications.
The AIF has received commitments/ raised funds prior to application for change in
category. The AlF shall be required to send letters/ emails to all its investors providing the
option to withdraw their commitments / funds shall be returned to them. Partial
withdrawal may be allowed subject to the compliance with the minimum investment
amount required under AIF regulations.
The AIF shall not make any investments ·till deployment of the fund as per the scheme
other than the liquid funds/ bank deposits until approval for the change in category is
granted by SEBI.
On approval of the request from SEBI, the AIF .is required to send a copy of the revised
placement memorandum and other relevant information to all its investors.

Question
“SEBI has amended the provisions related to registration of Sub-Broker to act as a market

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intermediary”. Elucidate the statement and discuss the migration path for existing
registered Sub-Brokers. (5 marks) (June 2019)
Answer
Under the current regulatory framework Sub-Brokers ('SB') need to seek the registration
from SEBI under SEBI (Stock Broker and Sub-Broker) Regulations, 1992, and Authorized
Persons ('AP') need to seek registration from the concerned Exchange. There is no
difference in the operative role of the Sub Broker and that of an Authorised Person.
Therefore, SEBI vide its circular no. SEBI/HO/MIRSD/DoP/CIR/P/2018/117 dated 03/08/2018
has discontinued with sub-broker as an intermediary to be registered with SEBI.
In view of the same, the need for the category of the Sub-Broker as a market intermediary
may no longer be required. Therefore, it is decided that -
(a) No fresh registration shall be granted to any person as Sub-Broker. Any pending
applications for registration as Sub-Broker under process, shall be returned to the
concerned Stock Exchanges for onward transmission to the applicant.
(b) The registered Sub-.Brokers shall have time till March 31, 2019 in order to migrate to
act as an Authorised Person (AP) and I or Trading Member (TM). The sub-Brokers,
who do not choose to migrate into AP and/or TM, shall deemed to have surrendered
their registration with SEBI as Sub-Broker, w.e.f. March 31, 2019.
(c) Consequent upon migration/deemed surrender, the Certificate of Registration granted
to the Sub Broker by SEBI shall stand withdrawn.
The migration path for existing registered Sub-Broker shall be under:
 In case of a registered Sub-Broker who is already approved to act as AP in
Derivatives Segment of the Exchanges, he shall be registered with the Exchanges to
continue activities of Sub-Broker as AP in Cash Segment.
 In case of a registered Sub-Broker who is not approved by Stock Exchanges to act as
AP in Derivatives Segment, Exchanges shall register them as AP in Cash Segment, to
continue their operations without disruption.
 The existing Sub-Broker has an option to become a Trading Member, if the Sub-
Broker meets the eligibility criteria prescribed under Stock Exchange Bye-Laws SEBI
Regulations and by complying with these Regulations.

Question
Dhruv has purchased 1000 shares @ Rs 80 per share of a company. He wanted to pay Rs
5,000 in cash and balance through bank transfer to stock broker. As a Company Secretary
advise Dhruv by referring SEBI regulation/circular. (5 marks) (June 2019)
Answer
SEBI vide its circular no. SEBI/HO/MIRSD/DoP/CIR/P/2018/113 has discontinued acceptance

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of cash by Stock Brokers.

In view of the various modes of payments through electronic means available today, it is
directed that Stock Brokers shall not accept cash from their clients either directly or by
way of cash deposit to the bank account of stock broker.
All payments shall be received I made by the Stock_ Brokers from/to the clients strictly by
account payee crossed cheques/ demand draft or by way of credit into the bank account
through electronic fund transfer, or any other mode permitted by the Reserye Bank of
India. The stock brokers shall accept cheques drawn only by the clients and also issue
cheques in favour of the clients only, for their transactions. Stock Brokers shall not accept
cash from their clients either directly or by way of cash deposit to the bank account of
Stock Broker.

Question
Life-Changing Assets Management Ltd., a mutual funds company desires to engage a
bollywood celebrity to popularize its schemes. Explain the SEBI provisions with regard to
celebrity endorsements of Mutual Funds at industry level. (4 marks) (June 2019)
Answer
SEBI vide its Circular No. CIR/IMD/DF/23/2017 dated 15/03/2017 reviewed the
advertisement guidelines for mutual funds.
In this respect, it has been decided to permit celebrity endorsements at industry level, for
the purpose of increasing awareness of Mutual Funds as a financial product category.
However, such celebrity endorsements of Mutual Funds at industry level shall be subject to
the following conditions:
 Celebrity endorsement shall be allowed only at the industry level, for the purpose of
increasing awareness of Mutual Funds as a financial product category. Such celebrity
endorsements should not promote a scheme of a particular Mutual Fund or be used as
a branding exercise of a Mutual Fund house.
 Expenses towards such celebrity endorsements for increasing awareness of Mutual
Funds shall be limited to the amounts that are aggregated by Mutual Funds at
industry level for the purpose of conducting investor education and awareness
initiatives, in terms of clause F of SEBI circular dated September 13, 2012.
 Prior approval of SEBI shall be required for issuance of any endorsement of Mutual
Funds as a financial product, which features a celebrity for the purpose of increasing
awareness of Mutual Funds.

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Question
Short note on - Escrow Account
Answer
Escrow Account means an account in which money is held until a specified duty is
performed. Escrow account is opened by the issuing company in case of public issue of
securities, buy back of securities, take over etc. A sum prescribed under the
Regulations/Guidelines is transferred to the Escrow Account unless the said formalities
regarding the event are over. The Escrow Account may consist of cash deposited with a
schedule commercial bank, bank guarantee, deposit of acceptable securities with
appropriate margin.

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SUMS
1 A mutual fund has a NAV of Rs 11.50 at the beginning of the year. At the end of the
year NAV increases to Rs 12.10. Meanwhile the fund distributes Rs 0.80 as dividend
and Rs 0.70 as capital gains.
a. What is the fund’s return during the year ?
b. Had these distributions been re-invested at an average NAV of Rs 11.80, what is
the return for 200 units? (5 marks)

2 A Mutual Fund having 300 units has shown Net Asset Value (NAV) of Rs 8.75 and Rs
9.45 at the beginning and at the end of the year respectively. The Mutual Fund has
given two options:
a. Pay Rs 0.75 per unit as dividend and Rs 0.60 per unit as capital appreciation; or
b. These distributions are to be reinvested at an average NAV of Rs 8.65 per unit.
What difference it would make in terms of return available and which option is
preferable? (5 marks)

3 A Mutual fund has shown Net Asset Value (NAV) of Rs. 11.60 at the commencement of
the year. At the end of the year NAV increases to Rs. 12.50. Meanwhile the Fund
distributes Rs. 0.75 as dividend and Rs. 0.85 as capital gains.
a. Calculate the funds return during the year.
b. Had these distributions been re-invested at an average NAV of Rs. 12.20, what is
the return for 400 units. (5 marks)

4 Orange purchased 200 units of Oxygen Mutual Fund at Rs 45 per unit on 31 st

December, 2009. In 2010, he received Re 1 as dividend per unit and a capital gains
distribution of Rs 2 per unit.
Required:
Calculate the return for the period of one year assuming that the NAV as on
31st December 2010 was Rs 48 per unit
5
Stock No. of Shares Current Market Price Value of Portfolio
L&T 1,10,000 2,685.45
Cipla 3,12,000 259.95
Wipro 4,50,000 523.10
HDFC 3,90,000 883.30

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Tata Steel 2,99,000 502.75

Total
The fund has not borrowed any money, but its accrued management fee with the
portfolio manager currently total Rs 30,00,000. The number of units outstanding is
10,75,73,000.
Compute the value of the portfolio and NAV

6 Super mutual fund has launched a scheme named 'Super Bonanza'. The net asset value
(NAV) of the scheme is 12.00 per unit. The redemption price is 11.65 per unit and offer
price is 12.50 per unit. You are required to calculate —
(a) Front-end load; and
(b) Back-end load. (6 marks)

7 The redemption price of a mutual fund unit is 48 while the front-end load and
backend load charges are 2% and 3% respectively. You are required to calculate —
(a) Net asset value per unit; and
(b) Public offer price of the unit. (5 marks)

8 Safal Mutual Fund provides the following information related to one of its schemes :
(a) Size of the scheme : Rs.2,000 crore.
(b) Face value of the units : Rs.10 per unit.
(c) Number of outstanding units : 200 crore.
(d) Market value of funds’ portfolio : Rs.4,200 crore.
(e) Receivables : Rs.100 crore.
(f) Accrued income : Rs.100 crore.
(g) Liabilities : Rs.150 crore.
(h) Accrued expenses : Rs.275 crore.
You are required to calculate net asset value (NAV) (5 marks)

9 Calculate value of 'rights' from the following information —

(a) Number of rights shares offered 2,500
(b) Number of shares held 1,000
(c) Ex-rights price 18
(d) Rights offer price 15
(e) Face value of a share 10 (4 marks)

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10 The following information is given :

(a) No. of rights shares offered : 6,000
(b) No. of shares held : 3,000
(c) Ex-right price : 32
(d) Rights offer price : 25
(e) Face value of share : 10
You are required to compute the value of rights. (4 marks)

11 Somnath Ltd. has a share capital of 50,000 equity shares of 100 each. Market value is
250 per share. The company decides to make a rights issue to the existing shareholders
in proportion of one new rights share of 100 at a premium of 30 per share for every 5
shares held. Calculate the value of rights. (6 marks)

12 Manish owns 250 preference shares of Amaze Ltd. which currently sells for 77 per
share and pays annual dividend of 13 per share —
(a) What is Manish's expected return?
(b) If Manish requires 13% return, should he sell or buy more preference shares
at the current price? (4 marks)

13 Jai Ltd. announced issue of bonus shares in the ratio of 1:3 (i.e., one share for every
three shares held). At present the face value of share is 10, current market price is 621.
In addition, it announced split of shares by reducing the face value from 10 to 2.
Calculate the share price if all other things remain constant. What would have been
the situation if split would have been done before the issue of bonus shares?
(5 marks)

14 The following information has been collected regarding two shares, Share-A and
Share-B, trading at BSE on 18th September, 2014 :
Share-A
Date Time Price No. of shares traded
18th September, 2014 14:45:10 385.60 550
18th September, 2014 14:55:35 382.78 1,575
18th September, 2014 15:00:20 380.99 1,514
18th September, 2014 15:01:30 381.79 1,625
18th September, 2014 15:05:40 380.38 1,025
18th September, 2014 15:10:20 381.51 1,390
18th September, 2014 15:20:25 381.42 800
18th September, 2014 15:22:20 384.07 600

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Yeshas Academy Securities Law & Capital Market

18th September, 2014 15:25:55 383.74 1,200

Share-B
Date Time Price No. of shares traded
18th September, 2014 14:07:30 50.60 250
18th September, 2014 14:11:40 52.10 585
18th September, 2014 14:16:20 49.85 700
18th September, 2014 14:26:25 51.25 425
18th September, 2014 14:45:10 50.75 450
18th September, 2014 14:55:35 49.95 500
You are required to determine the closing prices and last traded prices for both the
shares for 18th September, 2014.

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