Nism Series III A Securities Intermediaries Compliance Non Fund Exam Workbook
Nism Series III A Securities Intermediaries Compliance Non Fund Exam Workbook
Workbook for
NISM-Series-III-A: Securities Intermediaries Compliance (Non-Fund)
Certification Examination
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
This workbook has been developed to assist candidates in preparing for the National Institute of
Securities Markets (NISM) Certification Examination for Securities Intermediaries Compliance, in
particular for those intermediaries who do not involve in any fund based activity and are regis-
tered with SEBI as either Stock Brokers, Sub-Brokers, Depository Participants, Merchant Bank-
ers, Underwriters, Bankers to the Issue, Debenture Trustees and Credit Rating Agencies.
Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2014
Plot 82, Sector 17, Vashi
Navi Mumbai – 400 703, India
All rights reserved. Reproduction of this publication in any form without prior permission of the
publishers is strictly prohibited.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
Disclaimer
The contents of this publication do not necessarily constitute or imply its endorsement, recom-
mendation, or favoring by the National Institute of Securities Market (NISM) or the Securities
and Exchange Board of India (SEBI). This publication is meant for general reading and education-
al purpose only.
The statements/explanations/concepts are of general nature and may not have taken into ac-
count the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/ or-
ganization/ institute. Thus NISM and SEBI do not assume any responsibility for any wrong move
or action taken based on the information available in this publication.
Therefore before acting on or following the steps suggested on any theme or before following
any recommendation given in this publication user/reader should consider/seek professional
advice.
The publication contains information, statements, opinions, statistics and materials that have
been obtained from sources believed to be reliable and the publishers of this title have made
best efforts to avoid any errors. However, publishers of this material offer no guarantees and
warranties of any kind to the readers/users of the information contained in this publication.
Since the work and research is still going on in all these knowledge streams, NISM and SEBI do
not warrant the totality and absolute accuracy, adequacy or completeness of this information
and material and expressly disclaim any liability for errors or omissions in this information and
material herein. NISM and SEBI do not accept any legal liability what so ever based on any in-
formation contained herein.
While the NISM Certification examination will be largely based on material in this workbook,
NISM does not guarantee that all questions in the examination will be from material covered
herein. Candidates taking this examination are advised to go through the SEBI regulations
(which have been discussed in the workbook) in detail as available on the SEBI website
www.sebi.gov.in.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
About NISM
In pursuance of the announcement made by the Finance Minister in his Budget Speech in Feb-
ruary 2005, Securities and Exchange Board of India (SEBI) has established the National Institute
of Securities Markets (NISM) in Mumbai.
SEBI, by establishing NISM, has articulated the desire expressed by the Indian government to
promote securities market education and research.
Towards accomplishing the desire of Government of India and vision of SEBI, NISM has launched
an effort to deliver financial and securities education at various levels and across various seg-
ments in India and abroad. To implement its objectives, NISM has established six distinct schools
to cater the educational needs of various constituencies such as investor, issuers, intermedia-
ries, regulatory staff, policy makers, academia and future professionals of securities markets.
NISM brings out various publications on securities markets with a view to enhance knowledge
levels of participants in the securities industry.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
Acknowledgement
This workbook has been developed by NISM. This version of the workbook has been reviewed
by Ms. Ramadevi Iyer, Empanelled Resource Person, NISM.
This workbook has been developed by the Certification Team of National Institute of Securities
Market.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
The examination seeks to create a common minimum knowledge benchmark for persons en-
gaged in compliance function with any intermediary registered with SEBI as Stock Brokers, Sub-
Brokers, Depository Participants, Merchant Bankers, Underwriters, Bankers to the Issue, Deben-
ture Trustees and Credit Rating Agencies.
The certification aims to enhance the quality of services as rendered by those engaged in com-
pliance activities. It also aims at ensuring that the compliance officers are aware of the different
regulations which govern the Securities Market.
Examination Objectives
This examination is broadly categorised in two parts. Part ‘A’ is generic in the sense that it gives
the candidates a sense of the Financial and Regulatory Structure in India, the different Regula-
tions which the intermediaries should be aware of and Part B specifically deals with the specific
rules and regulations governing the Stock Brokers, Sub-Brokers, Depository Participants, Mer-
chant Bankers, Underwriters, Bankers to the Issue, Debenture Trustees and Credit Rating Agen-
cies. On successful completion of the examination, the candidate should:
• Understand the financial structure in India; know the financial intermediaries and the
types of products available in the Indian market.
• Understand the regulatory framework and the role of the various regulators in the fi-
nancial system.
• Understand the importance of compliance activity and the scope and role of the compli-
ance officer in the Indian securities market.
• Understand the various regulations and rules of the Indian securities market.
• Understand the importance of compliance of the rules and regulations and the penal ac-
tions initiated in case of any default or failure.
Assessment Structure
The examination consists of 100 questions of 1 mark each and should be completed in 2 hours.
The passing score on the examination is 60%. There shall be negative marking of 25% of the
marks assigned to a question.
Examination Structure
The exam covers knowledge competencies related to the understanding of the financial struc-
ture in India and the importance of the different rules and regulations governing the Indian se-
curities market.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
CONTENTS
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
Unit 8: SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities
Market) Regulations, 2003 ........................................................................................ 83
8.1Introduction ......................................................................................................... 83
8.2Prohibition of Fraudulent and Unfair Trade Practices.............................................. 83
8.3Investigation......................................................................................................... 85
Unit 10: SEBI (KYC Registration Agency) Regulations, 2011 ...................................... 103
10.1Introduction ..................................................................................................... 103
10.2Registration as a KRA (Initial and Permanent) ..................................................... 103
10.3Obligations on Surrendering Certificate of Registration....................................... 104
10.4Functions and Obligations of KRA and Intermediary ........................................... 104
10.5Code of Conduct of KRA .................................................................................... 106
10.6Guidelines for Intermediaries, KRAs and In-person Verification ........................... 107
Unit 11: SEBI (Stock Brokers and Sub Brokers) Regulations, 1992............................. 113
11.1 Introduction to SEBI (Stock Brokers and Sub Brokers) Regulations, 1992………....113
11.2 SEBI (Alternate Investment Funds) Regulation, 2012.......................................... 130
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Unit 12: SEBI (Merchant Bankers) Regulations 1992, SEBI (Delisting of Equity Shares)
Regulations, 2009, SEBI (Substantial Acquisition of Shares & Takeovers) Regulations,
2011 & SEBI (BuyBack of Securities) Regulations, 1998 ............................................ 143
12.1Introduction ..................................................................................................... 143
12.2SEBI (Merchant Bankers) Regulations, 1992 ....................................................... 143
12.3SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 .............. 152
12.4SEBI (Delisting of Equity Shares) Regulations, 2009 ............................................. 153
12.5Obligations under the SEBI (Buyback of Securities) Regulations, 1998 ................. 154
Unit 13: SEBI (Issueof Capital and Disclosure Requirements) Regulations 2009 ........ 159
13.1Introduction ..................................................................................................... 159
13.2Allocation of Responsibilities ............................................................................. 159
13.3Role as Advisors ................................................................................................ 160
13.4Due Diligence and Compliances ......................................................................... 162
13.5Role as an Underwriter ..................................................................................... 164
13.6General Obligations of Merchant Bankers with respect to Public and Rights Issue 165
Unit 15: SEBI (Depositories and Participants) Regulations 1996 ............................... 173
15.1Registration of a Depository Participant ............................................................. 173
15.2Rights and Obligations....................................................................................... 173
15.3Action in case of Default.................................................................................... 175
15.4Code of Conduct for Participants ....................................................................... 175
Unit 19: SEBI (Credit Rating Agencies) Regulations, 1999 ......................................... 199
19.1Registration as a Credit Rating Agency ............................................................... 199
19.2General Obligations of Credit Rating Agencies .................................................... 200
19.3Restrictions on Rating of Securities issues by Promoters ..................................... 203
19.4Code of conduct of the Credit Rating Agencies ................................................... 203
19.5Guidelines for Credit Rating Agencies ................................................................ 205
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
The Financial System refers to the entire set of institutionalized arrangements by which funds
are transferred from surplus units to deficit units at terms acceptable to both sides. Households
as a sector represent the surplus unit, whereas corporations and governments collectively rep-
resent deficit units. An efficient financial system plays an important role in the economic devel-
opment and it consists of financial market, financial instruments and financial intermediaries.
The role of the financial system is to gather or pool money from surplus units i.e. people and
businesses that have more than they need currently and transmit or allocate those funds to
deficit units i.e. those who can use them for either consumption or investment. Larger flow of
funds and efficient allocation of them leads to better economic output and welfare of the econ-
omy and society. In addition to this, the financial market should also function efficiently and at a
minimal cost in cooperation with the other constituents of the financial system.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
in the secondary market, the dealings are between two investors and the issuer does not come
into the picture.
The Forex market deals with the multicurrency requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place
in this market. This is one of the most developed and integrated market across the globe.
Credit market is a place where banks, FIs and NBFCs provide short, medium and long-term loans
to corporate and individuals.
Insurance market which facilitate the transfer of various risks from individuals, business houses
and corporates to the insurance companies.
Merchant Bankers are entities that specialize in assisting companies to originate issues of secur-
ities. The range of assistance would cover the following:
1. Advising the client on the timing of an issue
2. Advising the company on the selection of underwriters, brokers, bankers and others, e.g.,
printers to an issue, drafting the prospectus and verifying the accuracy of the claims made
therein.
Bankers to Issues are scheduled banks that are engaged by companies to accept application
moneys, allotment or call moneys, undertake refund of application moneys and pay dividend or
interest warrants.
Registrars are persons registered under the SEBI (Registrars to an Issue) Regulations, 1993. They
provide services relating to a public or rights issue. It includes collating data on subscriptions to
an issue, furnishing alternative bases of allotment and completing allotment by crediting shares
to the demat accounts of the allottees or dispatching refund orders, according to the selected
basis.
Transfer Agents are persons that maintain record of holders of securities and deal with all mat-
ters connected with transfer or redemption of securities or incidental activities of a company, so
that it reflects changes in ownership of shares consequent upon trading and also handle divi-
dend payouts and communications relating to other corporate actions.
Depositories are institutions that hold securities of investors in electronic (dematerialized) form,
for a fee. The investors remain the beneficial owners of the securities. A Depository Participant
(DP) is the registered agent of the Depository concerned and it is through the DP that an inves-
tor gets the services of the depository. It can be compared to a branch of a bank where individ-
uals maintain their savings accounts. The DP interacts with the investor and furnishes the record
pertaining to an investor’s portfolio. The DP also facilitates the release of securities when sold,
or the recording of securities when bought or obtained on allotment.
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Stock Exchanges are an important constituent of the secondary market of Capital Market. Stock
Exchange means a body of individuals or a body incorporated, under the Companies Act, for the
purpose of assisting, regulating or controlling the business of buying, selling or dealing in securi-
ties.
Stock Brokers who are registered with SEBI provide different types of services which include
undertaking of secondary market transactions on behalf of their clients. That is, by executing
buy or sell transactions communicated by investors. For their service, stock brokers earn com-
mission, commonly referred to as brokerage. Stock brokers also play a role in the marketing of
new issues of securities by informing and advising investors of new issues. For their service of
canvassing applications for allotment in new issues, stock brokers earn brokerage from compa-
nies, i.e., the issuers.
Clearing House is the intermediary which performs two important functions: a) aggregating
transactions over a trading period, netting the positions to determine the liabilities of members
and ensures movement of funds and securities to meet respective liabilities; and b) guarantee
those trades, in the event of default by either buyer or seller.
Portfolio Managers are individuals or firms that administer the portfolios of individuals or pro-
vide advice or direction to that effect, for a fee or a share in the profits or a combination of the
two.
Mutual Funds are organizations that mobilize funds from investors by issuing units or shares
and undertake to invest the money in a manner consistent with the specified investment objec-
tive. The objective could be to maximize capital growth or to maximize current income or some
other. There are two types of investment schemes: open-end and closed-end. In the former, a
demand for units is met by a fresh supply, so there is no limit on the number of units that can be
issued. With closed-end funds, there is a limit on the number of units that can be issued and
following issuance, units are traded in the secondary market. Closed-end funds have a specified
maturity unlike open-end funds.
Custodians are entities that hold securities or gold or gold-related instruments on behalf of in-
stitutional investors, e.g., mutual funds and insurance companies. Custodians maintain and re-
concile the records relating to the assets held and also monitor corporate actions such as divi-
dend payments or rights issues on behalf of their clients. In short, custodians are mainly into
trade settlement, safekeeping, benefit collection, reporting and accounting. One point of dis-
tinction is that a Depository has the right to effect transfer of beneficial ownership while a cus-
todian does not.
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Stock means a type of security that signifies ownership in a corporation and represents a claim
on part of the corporation’s assets and earnings.
Equity shares represent ownership interest in a company. The claim of equity shareholders on
earnings and assets (in the event of liquidation) comes last and hence is residual in nature. Eq-
uity shareholders expect to benefit from dividends and price appreciation. They have both col-
lective and individual rights such as right to elect directors, right to sell shares.
Preference shares are securities which have a preferential right to dividend and repayment of
capital. These shares do not carry voting rights except when their rights are affected. These are
hybrid securities as they combine features of equity and debt securities. They are similar to eq-
uity in that they bear dividends, which may or may not be paid, and offer no collateral as secu-
rity. They are similar to debt securities in that the dividend is a stated percent of par value and
they have a finite life.
Debentures are debt securities having a definite life during which they pay coupon, which is in-
terest at a specified rate on the par value, at regular intervals, typically every six months. Bonds
too are debt securities with similar features except that internationally the distinguishing fea-
ture of bonds is that they are secured by specific collateral. In India, long-term debt securities
issued by the Government of India or State Government or partially by any one of them are
called bonds.
Warrants are long-term call options issued by a company, which give the holder the right to buy
equity shares from the company at a specified price known as the subscription price or exercise
price. Typically, warrants originate as a sweetener to an issue of debt securities, to induce inves-
tors into accepting a lower yield. Warrants are separately tradable and their price behaviour is
linked to that of the underlying equity share.
Derivatives are contracts that give the holder the right to buy or sell some underlying asset. For
example, a call option on an equity share gives the holder the right to buy the underlying at a
specific price known as the exercise price or strike price. On the other hand, a put option gives
the holder the right to sell the underlying at a specific price. A call option would be bought if the
buyer expects the price of the underlying to rise, while a put option will be bought if the buyer
expects the underlying to decline. The seller of the option is also known as the writer of the op-
tion. While the holder of the option is under no obligation to perform any action, it is the writer
who is obligated to perform, that is, deliver securities on exercise of a call, or make payment on
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
exercise of a put. For granting the privilege of either buying or selling a stock, the writer receives
a payment known as premium. Option positions can be offset prior to expiration.
Futures contracts guarantee delivery of a specific quantity of a specified asset on a specified fu-
ture date, at the price currently quoted. If an investor anticipates the spot price on the delivery
date to be higher than the quoted futures price today, then he or she may buy the contract hop-
ing to make a profit. But, if an investor anticipates the spot price to be lower than today’s
quoted futures price, then the contract could be sold. Positions in futures contracts can be off-
set prior to the delivery date.
Exchange-traded derivative contracts are standardized in terms of the quantity, quality, time
and place of delivery. They are transacted on an organised futures exchange.
ADR is an acronym for American Depository Receipt which is a security denominated in US Dol-
lars, traded at US exchanges, representing a specific number of equity shares of a foreign com-
pany that are traded in the foreign country.
Mutual Fund (MF) units are the shares issued by an investment company to mobilize funds from
investors. The fund managers will proceed to invest the moneys collected to try and achieve the
specified investment objective.
Exchange-traded Funds (ETFs) are open-ended mutual funds which allow intraday trading of
their units. This facility is in contrast to conventional mutual funds; with the latter, buying and
selling takes place at the closing Net Asset Value (NAV) of the day or of the following day, de-
pending on the precise time at which the investor placed the order.
Currency Derivatives (CDs) are contracts between buyers and sellers, whose values are to be
derived from the underlying assets, i.e. the currency amounts. These are risk management tools
in the forex and money markets. These may be options or futures or swaps, which offer inves-
tors the facility to lock in the rate at which they wish to buy or sell a particular currency. As an
example an Indian exporter with Kuwaiti Dinar receipts who expects an appreciation of the In-
dian Rupee could buy a put option, to sell Dinar. In contrast, an Indian importer with Euro liabil-
ity and expecting the foreign currency to appreciate could buy a call option on Euros. Alterna-
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
tively, the Indian exporter could sell a futures contract in Kuwaiti Dinar and the Indian importer
could buy a futures contract in Euros. Currency Swaps are agreements between parties that fa-
cilitate borrowing in foreign currencies at lower costs. For instance, a British firm may need Eu-
ros while a French firm may require Pounds Sterling. However, taking comparative advantage
into account, it may be a better option for the British and French firms to raise funds in their
respective currencies and then enter into a swap. The principals are also re-exchanged at matur-
ity.
Interest-rate Derivatives are contracts which enable investors or borrowers to hedge against
the risk of adverse interest-rate movement. These include interest-rate futures, interest-rate
swaps, interest-rate options and Forward Rate Agreements (FRAs).
Interest-rate Futures are contracts in which the underlying asset is a debt security, for example
futures on Treasury Bills (T-Bills), Commercial Paper (CP) or Government Securities. An investor
may trade in interest-rate futures with the objective of locking in a certain yield or borrowing
rate. To illustrate, if a corporate treasurer apprehends a fall in interest rates by the time surplus
funds are received, he could lock in the higher yield currently quoted by buying an interest-rate
futures contract. On the other hand, if a banker fears a rise in interest rates by the time he en-
ters the market to raise funds, he could lock in the lower rate currently quoted by selling an in-
terest-rate futures contract.
Interest-rate Swaps are agreements between two or more parties to exchange series of cash
flows in the same currency over an agreed period of time. For instance, two prospective bor-
rowers may have opposite views on the direction of interest rate movement in the future: ‘A’
expects rates to decline while ‘B’ thinks they will rise. On the basis of the comparative advan-
tage enjoyed by one party, say, A, it may be beneficial for A to borrow fixed-rate and for B to
borrow floating-rate and then for the two to enter into a swap. In an interest-rate swap, the
principals are not exchanged.
Forward Rate Agreement (FRA) is a forward contract by which a borrower locks in a specified
rate of interest for a pre-determined time period in the future. For example, assume that a
company is planning to seek a six-month loan after three months. The company expects short-
term rates to rise. So, it could buy a three-month FRA on six-month LIBOR at, say 7 % (using, LI-
BOR, that is, the London Inter-bank Offer Rate as the reference rate in the transaction). At the
end of three months, if the six-month LIBOR is greater than 7 %, the bank which sold the FRA
will pay the excess sum to the company. On the other hand, if the LIBOR turns out to be lower
than 7 %, the company will pay the difference to the bank.
Securities Lending and Borrowing Scheme (SLB)Short Selling means selling of a stock that the
seller does not own at the time of trade. Short selling can be done by borrowing the stock
through Clearing Corporation/Clearing House of a stock exchange which is registered as Ap-
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
proved Intermediaries (AIs). Short selling can be done by retail as well as institutional investors.
The Securities Lending and Borrowing mechanism allows short sellers to borrow securities for
making deliver. SEBI has issued the circular dated August 22, 2008 with a view to providing this
facility in the capital market.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
Review Questions
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
Regulation of the securities market is motivated by the need to safeguard the interests of inves-
tors. What is paramount is to ensure that investors make informed decisions on the basis of
complete transparency and fairness in both primary and secondary market transactions. The
basic objective of SEBI is to:
a. To protect the interest of investors in securities markets
b. To promote the development of securities markets
c. To regulate the securities markets
There are many other issues which warrant regulation. For example, deliberately engineered
speculative activities in the stock market or insider trading are undesirable as they can hurt in-
vestors at large or companies and mutual funds issuing securities and units ought to furnish
adequate disclosures on all relevant facts and that stockbrokers ought to execute transactions in
the most efficient manner and also refrain from charging excessive brokerage. There can be-
come instances of unethical activities which can be detrimental to investors in general such as
insider trading, misusing power of attorney given by investors to brokers, suspicious transaction
reporting, front running, etc.
There are various regulatory institutions which regulate different sectors of the financial system.
For instance, the Securities and Exchange Board of India (SEBI) regulates the Securities industry
(Capital market), the Reserve Bank of India (RBI) regulates the banking sector, the Insurance
Regulatory and Development Authority (IRDA) regulates insurance companies, while the Pension
Fund Regulatory and Development Authority (PFRDA) regulates the pension fund sector. Addi-
tionally, intermediaries representing some segment of the securities market may form a Self-
Regulatory Organization (SRO). For recognition as an SRO by SEBI, certain conditions have to be
met as prescribed under the SEBI (Self Regulatory Organizations) Regulations, 2004. Ideally, an
SRO will seek to uphold investors’ interest by laying out and maintaining high ethical and profes-
sional standards of conduct and encouraging best practices among its members.
The ruling given by a regulator may be challenged by petitioning the prescribed authority. In the
case of SEBI, for example, the appellate authority is the Securities Appellate Tribunal (SAT). Rul-
ings of the SAT can be challenged in the Supreme Court of India. Importantly, no civil court shall
entertain any suit or proceeding relating to a matter which an adjudicating officer appointed
under the SEBI Act, or under a duly constituted SAT, is empowered under the said Act to decide
upon. Further, no injunction can be granted by any court or any other authority with regard to
any action taken or to be taken pursuant to any power conferred by the SEBI Act.
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
As per Section 11(1) of SEBI Act, SEBI is empowered under the various regulations of the SEBI
Act to;
a) Regulate the business in stock exchanges and any other securities markets.
b) Register and regulate the working of stockbrokers, sub-brokers, and share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and others associated
with the securities market. SEBI’s powers also extend to registering and regulating the
working of depositories and depository participants, custodians of securities, foreign in-
stitutional investors, credit rating agencies, and others as may be specified by SEBI.
c) Register and regulate the working of venture capital funds and collective investment
schemes including mutual funds
d) Promote and regulate SROs
e) Prohibit fraudulent and unfair trade practices relating to the securities market.
f) Promote investors’ education and training of intermediaries in the securities market.
g) Prohibit insider trading in securities
h) Regulate substantial acquisition of shares and takeover of companies
i) Require disclosure of information, to undertake inspection, to conduct inquiries and au-
dits of stock exchanges, mutual funds, other persons associated with the securities mar-
ket, intermediaries and SROs in the securities market. The requirement of disclosure of
information can apply to any bank or any other authority or board or corporation
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j) Calling for information from or furnishing information to other authorities within India
or abroad having functions similar to SEBI in matters relating to prevention or detection
of violations in respect of securities laws
k) Perform such functions and to exercise such powers under the Securities Contracts
(Regulation) Act, 1956 as may be delegated to it by the Central Government
l) Levy fees or other charges pursuant to implementation of this regulation
m) Conduct research for the above purposes
n) Calling from or furnishing to such agencies specified by the Board, information as may
be considered necessary for discharge of its functions
o) Performing such other functions as may be prescribed
Section 11(2A): The power to inspect any book of accounts, register or other document or re-
cord of any listed company or a public company which intends to get its securities listed at a
recognized stock exchange if SEBI has reasonable grounds to assume that the concerned com-
pany has been indulging in insider trading or other illegitimate practices such as fraudulent or
unfair trade practices.
Section 11(3): SEBI shall have the same powers as are vested in a civil court under the Code of
Civil Procedure in respect of certain matters, such as the inspection of books and registers and
summoning and enforcing the attendance of persons and examining them on oath.
Section 11(4) empowers SEBI to take the following actions, if it is in the interest of investors or
the Securities Market:
• suspend trading in any security at a recognized stock exchange
• restrain persons from accessing the Securities Markets, and prohibiting any persons as-
sociated with the securities market from buying, selling or dealing in securities
• suspend any office bearer of any stock exchange or SRO from holding the position
• impound and retain the proceeds or securities relating to any transaction which is under
investigation
• direct any intermediary or person associated with the securities market not to dispose
off or alienate an asset constituting a part of any transaction which is under investiga-
tion
Section 11(5): The amount disgorged pursuant to direction issued under Section 11B or 12A of
the Securities Contracts (Regulation) Act, 1956 or section 19 of Depositories Act, 1996, shall be
credited to the Investor Protection and Education Fund.
Section 11A: SEBI is vested with the power to regulate or prohibit issue of prospectus, offer
document or advertisement which solicits money for issue of securities.
Section 11A (1) empowers SEBI to specify regulations with respect to matters relating to issue of
capital, transfer of securities and other incidental matters as well as the manner in which such
matters are required to be disclosed by the Companies. Apart from this, SEBI is empowered to
issue general or special orders prohibiting any company from issuing the prospectus or offer
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NISM Series III-A: Securities Intermediaries Compliance (Non-fund) Certification Examination
document or advertisement soliciting money from the public for issue of securities and specify
the conditions subject to which the prospectus or offer document or advertisement may be is-
sued.
Section 11A (2) empowers SEBI to specify the requirements for listing and transfer of securities
and matters incidental thereto.
Section 11B: SEBI has been vested with the powers to issue direction to any intermediary, if af-
ter making an enquiry it is found that the investor’s interest is at stake or action of the interme-
diary is obstructing the orderly development of the securities market. If need be, SEBI can also in
the interest of the market/investors secure the proper management of any such intermediary or
person against whom enquiry have been made. This power includes the power to direct any
person who made profit or averted loss by indulging in any transaction or activity in contraven-
tion of the provisions of this Act or regulations made thereunder, to disgorge an amount equiva-
lent to the wrongful gain made or loss averted by such contravention.
Section 11C: In cases where SEBI has reasonable ground to believe that the transaction in secu-
rities are being dealt with in a manner detrimental to the investors or the securities market or
that the intermediary or any person associated with the securities market have violated any of
the provisions of the SEBI act or any other rules or regulation, by order in writing may direct any
person to investigate the affairs of such intermediary or person associated with the securities
market and also report to SEBI such investigation.
We would be discussing the SEBI Act in greater detail in Unit 4 of this workbook.
Reserve Bank of India (RBI) is the central bank of the country vested with the responsibility of
administering the monetary policy. Therefore, its key concern is to ensure the adequate growth
of money supply in the economy so that economic growth and financial transactions are facili-
tated, but not so rapidly which may precipitate inflationary trends. This is borne out in its Pre-
amble, in which the basic functions of the Bank are thus defined: “…to regulate the issue of Bank
Notes and keeping of reserves with a view to securing monetary stability in India and generally
to operate the currency and credit system of the country to its advantage”. In addition to the
primary responsibility of administering India’s monetary policy, RBI has other onerous responsi-
bilities, such as financial supervision.
1. As the monetary authority: to formulate, implement and monitor the monetary policy
in a manner as to maintain price stability while ensuring an adequate flow of credit to
productive sectors of the economy.
2. As the regulator and supervisor of the financial system: To prescribe broad parameters
of banking operations within which Indian banking and financial system functions. The
objective here is to maintain public confidence in the system, protect the interest of the
people who have deposited money with the bank and facilitate cost-effective banking
services to the public.
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RBI performs the important function of financial supervision under the guidance of the
Board for Financial Supervision (BFS) which was constituted in 1994 as a committee of the
Central Board of Directors. The primary objective of the BFS is to carry out consolidated su-
pervision of the financial sector consisting of commercial banks, financial institutions and
non-banking finance companies. The BFS oversees the functioning of the Department of
Banking Supervision, the Department of Non-Banking Supervision and Financial Institutions
Division and issues directions on regulatory and supervisory issues. Some of the initiatives
undertaken by the BFS are:
• A restructuring of the system of bank inspections
• Introduction of offsite surveillance
• Strengthening the role of statutory auditors
• Strengthening the internal defences of supervised institutions
RBI’s functions are governed by the Reserve Bank of India Act 1934, whereas the financial sector
is governed by the Banking Regulation Act 1949.
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Insurance Regulatory and Development Authority’s (IRDA’s) mission is to regulate, promote and
ensure orderly growth of the insurance sector, including the re-insurance business, while ensur-
ing protection of the interests of insurance policyholders. IRDA was constituted by an act of par-
liament and according to Section 4 of the IRDA Act 1999 the Authority comprises ten members
who are all government appointees.
PFRDA was first constituted by the Government of India in October 2003 with the following re-
sponsibilities: (a) To promote old age income security by establishing, developing and regulating
pension funds, (b) To protect the interests of subscribers to schemes of pension funds and re-
lated matters.
It is an interim body, under the administrative control of the Ministry of Finance, pending en-
actment of a comprehensive legislation. The Authority consists of a Chairperson and up to five
members.
The new pension system will be based on defined contributions. It will also offer a menu of in-
vestment choices and Fund Managers. Though the new system is voluntary, it would be manda-
tory for new recruits to the Central Government, except the armed forces. It will also be avail-
able on a voluntary basis to all persons including self-employed professionals and others in the
unorganized sector. However, mandatory programmes under the Employees Provident Fund
Organization (EPFO) and other special provident funds will continue to operate according to the
existing system, under the Employees Provident Fund (EPF) and Miscellaneous Provisions Act
1952 and other special acts governing these funds.
Subject to the overall directions and guidelines of the government, the PFRDA shall:
a. Deal with all matters relating to the promotion and orderly growth of the pension market
b. Propose appropriate legislation for the purpose indicated above
c. Carry out such other functions as may be delegated to the authority
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The PFRDA shall be free to determine its own procedures and will have powers to call for re-
cords and other material relevant to its working, from official and non-official bodies and will
also hold discussions with them. The PFRDA will also submit periodical reports to the govern-
ment on various aspects of the pension sector and on matters required by the government.
Forward Markets Commission is the chief regulator of Forwards and Futures market in India. It
was established in 1953 under the provisions of Forward Contract (Regulation) Act, 1952. There
are more than 20 recognised commodity futures exchange in India under the purview of FMC
and they are divided into national and regional exchanges.
Ministry of Finance governs the entire fiscal system of the government of India. It centralizes
around all the issues in India pertaining to economy and finance. It also includes the task of mo-
bilization of resources in terms of execution of developmental programmes. Department of
Economic Affairs (DEA), Department of Expenditure, Department of Revenue, Department of
Financial Services etc are the various departments which are headed by the MoF.
Department of Economic Affairs is the nodal agency of the central government to formulate
and monitor India’s economic policies having a bearing on domestic and international aspects of
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economic management. Main function of the DEA is formulation and monitoring of macroeco-
nomic policies relating to fiscal policy and public finance etc as well as functioning of the capital
market including stock exchanges. Other responsibilities include the mobilization of external
resources, foreign investments and monitoring foreign exchange resources including balance of
payments, production of bank notes and coins of various denominations etc.
Department of Disinvestment oversees, among other things, all matters relating to the disin-
vestment of Central Government equity from Central Public Sector undertakings. The depart-
ment is also concerned with the financial policy relating to the utilization of proceeds of disin-
vestment.
The Ministry of Corporate Affairs is mainly concerned with the administration of the Companies
Act, 1956 and other allied acts, rules and regulations pertaining to the corporate sector. The
Ministry is also responsible for administering the Competition Act 2002 which has replaced the
Monopolies and Restrictive Trade Practices Act, 1969 (MRTP). The Ministry also supervises three
professional bodies, viz., the Institute of Chartered Accountants of India (ICAI), the Institute of
Company Secretaries of India (ICSI) and the Institute of Cost and Works Accountants of India
(ICWAI).The Ministry of Corporate Affairs is also vested with the responsibility of administering
the Partnership Act, 1932, the Companies (Donations to National Funds) Act, 1951 and Societies
Registration Act, 1980.
The ROC also undertakes other important duties, some of which are given below:
Under Section 81, the Registrar has to maintain a register containing particulars of all charges in
respect of each company.
Under Section 83, the Registrar on being given satisfactory evidence with respect to any regis-
tered charge:
a) The debt for which the charge was created has been paid or satisfied wholly or partly, or
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b) The part of the property or undertaking charged has been released from the charge or
has ceased to form a part of the company’s property or undertaking;
the Registrar may enter in the Register of Charges a memorandum of satisfaction in whole or in
part or about the fact that a part of the property or undertaking has been released from the
charge or no longer forms a part of the company’s property or undertaking as the case may be,
even if no intimation is received by him from the company.
Section 206 confers power on the Registrar to call for information or explanation. On perusing
any document which a company is required to submit to him under the Act, if the Registrar de-
termines that any information or explanation pertinent to the document is necessary, the Regis-
trar may by written order call for information in writing from the company. If no information or
explanation is forthcoming within the time specified, or if the information or explanation is in-
adequate, then the Registrar may demand that the company produce for inspection such books
and papers as he deems necessary.
Section 209 spells out the power of the Registrar to seek the seizure of documents and there-
fore, goes a step beyond Section 206, by which the Registrar may only demand the production
of documents. If the Registrar has reasonable grounds to believe that books and papers of, or
relating to, any company or body corporate or managing director or manager of such an entity
may be destroyed, mutilated, altered, falsified or secreted, then the Registrar may make an ap-
plication to a Magistrate having appropriate jurisdiction to obtain authority to search and seize
the books and papers as he deems necessary.
Section 560 confers powers on the Registrar to strike a defunct company off the register, after
completing the formalities prescribed in the section.
Under Section 570, the Registrar is empowered to require evidence, as he deems necessary, to
satisfy himself on whether any company proposing to get registered is or is not a joint stock
company as defined in Section 566 of the Act.
The Economic Offences Wing (EOW) in the Central Bureau of Investigation was created in 1964
to deal with offences under various sections of the Indian Penal Code and notified Special Acts
mainly relating to serious frauds in banks, stock exchanges, financial institutions, joint stock
companies, public limited companies, misappropriation of public funds, criminal breach of trust,
violation of Customs Act, counterfeiting of currency, narcotics, drug trafficking, arms peddling
and offences relating to adulteration, black-marketing and others.
Following the securities and stock market scam of 1992, it was deemed desirable to strengthen
and expand the EOW and accordingly, a full-fledged Economic Offences Division (EOD) was
formed in 1994. The EOD has four zones of which one focuses exclusively on large and compli-
cated security and bank frauds.
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2. Banking frauds
3. Insurance frauds
4. Foreign exchange frauds
5. Frauds involving manipulation of share prices, insider trading and others
6. Smuggling of narcotics and psychotropic substances
7. Forgery of travel documents, identity papers and overseas job rackets
8. Counterfeit currency and fake Government stamps and paper
9. Smuggling of antiques, arts and treasures
10. Cyber crimes
11. Violation of Intellectual Property Rights, audio and video piracy and software piracy
12. Wildlife and environmental offences
State governments have also set up their own EOWs to deal with commercial crimes, thefts of
idols, bogus lottery tickets and other offences.
2.3.3 Financial Intelligence Unit - India (FIU-I)
FIU-I was set up by the Government of India in 2004 as the central nodal agency responsible for
receiving, processing, analyzing and disseminating information regarding suspicious financial
transactions in order to support anti-money laundering efforts. FIU-I is an independent body
reporting directly to the Economic Intelligence Council headed by the Finance Minister. More
specifically, the functions of FIU-I are:
A. To serve as the nerve centre for receiving reports on cash and other suspicious transac-
tions.
B. To analyze the information collected to trace patterns of transactions which could in-
volve money laundering and other crimes.
C. To share information on suspicious transactions with its counterparts and regulatory
bodies in other countries.
D. To establish and maintain a database on cash and suspicious transactions.
E. To co-ordinate and strengthen collection and sharing of financial intelligence through an
effective national, regional and global network to fight money laundering and related
crimes.
F. To undertake research and analysis in order to monitor and identify strategic areas on
money laundering trends and other such developments.
Certain exclusive and concurrent powers under the Prevention of Money Laundering Act (PMLA)
are conferred on the Director, FIU-I. For instance, under Section 13(2) of the PMLA, the Director
may impose a fine on any banking company, financial institution or intermediary for failing to
comply with obligations of maintenance of records or in furnishing information or in verifying
the identities of clients. For the purposes of Section 13, the Director shall have the same powers
as are vested in a civil court under the Court of Civil Procedure 1908, while trying a suit, such as
discovery and inspection, compelling the production of records and so on. Under Section 66 of
the PMLA, the Director or a specified authority may furnish or cause to be furnished any infor-
mation received or obtained, to any officer, authority or body, if it is deemed to be in the public
interest.
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The police authorities are responsible for maintaining law and order and for enabling the en-
forcement of The Indian Penal Code (IPC) which contains laws on crimes of various kinds. The
IPC has 511 sections, some of which contain detailed descriptions of certain crimes. In the con-
text of the securities market, sections which have particular relevance are the ones relating to
specific offences, such as:
a. Giving false evidence and offences against public justice (sections 191 to 229)
b. Offences against property (sections 378 to 462)
c. Offences relating to documents and to property marks (sections 463 to 489E)
d. Attempts to commit offences (section 511)
To illustrate the relevance, some sections from the ones listed above are discussed as follows:
Section 192 relates to fabrication of false evidence. Examples of the same would be making a
false entry in any book or record; or, making a document containing a false statement intending
that such circumstances, false entry or false statement may appear in evidence in a judicial pro-
ceeding or in a proceeding taken by law so as to cause an erroneous opinion to be formed.
Section 403 relates to the criminal misappropriation of property. The offence is committed
when a person dishonestly misappropriates or converts to his own use any movable property.
Section 405 is about criminal breach of trust. The offence is committed when a person who has
been entrusted with property or dominion over property, misappropriates it or converts it to his
own use or disposes off that property in violation of any direction of law or legal contract.
Offences relating to property marks and documents include forgery (sections 463 and 465) and
making a false document (section 464); further, if a clerk, officer or servant wilfully and with in-
tent to defraud destroys, alters, mutilates or falsifies any book, paper, writing, valuable security
or account belonging to or in the possession of his employer, then it is an act of falsification of
accounts, which is an offence under section 477A. Even the abetment of such an Actor of the
omission or alteration of any material is held to be an offence.
Section 511deals with punishment for attempting to commit offences punishable with impris-
onment for life or other imprisonment.
2.4Appellate Authority
2.4.1 Role of Appellate Authority -Securities Appellate Tribunal (SAT)
The Securities Appellate Tribunal has been set up under the SEBI act, which looks into the ap-
peal of any person who has been aggrieved by any order of SEBI. This section elaborates on the
different sections under the SEBI Act which discusses the establishment and the role of SAT. Sec-
tion 15K (1) of the SEBI Act, 1992, empowers the Central Government to establish Securities Ap-
pellate Tribunal (SAT) to exercise jurisdiction, powers and authority under the said act or any
other law in force. A SAT shall consist of a presiding officer and two other members, to be ap-
pointed by the Central Government. The qualification for appointment is that the person should
be a sitting or retired judge of the Supreme Court or a retired Chief Justice of a High Court.
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Any person aggrieved by the following may appeal to the SAT, provided the aggrieved person
had not granted his consent to the order against which the appeal is being made. The appeal
must be filed within a period of 45 days from the date on which a copy of the order is received:
a. An order of SEBI made on or after the commencement of the Securities Laws (Second
Amendment) Act, 1999, under the SEBI Act 1992, or related rules and regulations.
OR
b. By an order made by an adjudicating officer under the Act.
As per Section 15U (1), the SAT shall not be bound by the procedure laid down by the Code of
Civil Procedure, 1908, but shall be guided by the principles of natural justice. Further, subject to
other provisions of the SEBI Act, 1992, and other rules, the SAT shall have powers to regulate its
own procedure.
As per Section 15U (2), the SAT shall have, for discharging its functions, 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:
a) Summoning and enforcing the attendance of any person and examining him on oath
b) Requiring the discovery and production of documents
c) Receiving evidence on affidavits
d) Issuing commissions for the examination of witnesses or documents
e) Reviewing its decisions
f) Dismissing an application for default or deciding it ex-parte
g) Setting aside any order of dismissal of any application for default or any order passed by
it ex-parte
h) Any other matter which may be prescribed
According to Section 15U (3), every proceeding before the SAT shall be deemed to be a judicial
proceeding and SAT shall be deemed to be a civil court. Section 15V states that the appellant
may either appear in person or authorize one or more chartered accountants or company secre-
taries or cost accountants or legal practitioners or any of its officers to present his or its case
before the SAT.
Section 15W states that the provisions of the Limitation Act, 1963 shall apply to an appeal made
to a SAT. Section 15Y specifies that no civil court shall have jurisdiction to entertain any suit or
proceeding in respect of any matter which SAT constituted under the SEBI Act is empowered to
decide upon. Further, no injunction shall be granted by any court or an authority in respect of
any action taken or to be taken in pursuance of any power conferred by or under the SEBI Act.
Section 15Z states that any person aggrieved by any decision or order of the SAT may file an ap-
peal to the Supreme Court within 60 days from the date of communication of the decision or
order of the SAT to him, on any question of law arising out of the order.
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tions pertaining to the securities market. The subsequent chapters in this workbook will delve
deeper into each of the regulations as discussed hereunder.
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• Submission of the annual report and periodical returns by every recognized stock ex-
change
• Requirements with respect to listing of securities on a recognized stock exchange
• Requirements with respect to the listing of units or any other instrument of a Collective
Investment Scheme on a recognized stock exchange
2.5.4 Securities and Exchange Board of India (Prohibition of Insider Trading) Regula-
tions, 1992
The regulations prohibiting insider trading have been made pursuant to Section 30 of the SEBI
Act, 1992.
The regulations define “insider” as any person who is, or was, connected with a 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 the company, or
who has received or has had access to such unpublished price sensitive information. Further, an
explanation is provided of the expression, “person is deemed to be a connected person” in de-
tail. Examples of such a person are:
Similarly, the regulations specify events that will be deemed as price-sensitive information, as
for example:
1
The financial institution specified herewith is regarded as a public financial institution for the purposes of the act,
namely – (i) the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act,
1956 (ii) the Infrastructure Development Finance Company Limited referred to in clause (vi) of sub-section (1) of sec-
tion 4A of the Companies Act, 1956 so repealed under Section 465 of this Act (iii) specified company referred to in the
Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (iv) institutions notified by the Central Government
under sub-section(2) of section 4A of the Companies Act, 1956 so repealed under Section 465 of this Act(v) such other
institution as may be notified by the Central Government in consultation with the Reserve Bank of India Provided that
no institution shall be so notified unless – (A) it has been established or constituted by or under any Central or State
Act or (B) not less than fifty-one per cent of the paid-up share capital is held or controlled by the Central Government
or by any State Government or Governments or partly by the Central Government and partly by one or more State
Governments
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Regulation 12(1) of the SEBI Insider Trading Regulations requires listed companies and organiza-
tions associated with the securities market to frame a code of internal procedures and conduct,
in line with the Model Code specified in Schedule I of the regulations. According to the Model
Code, the compliance officer shall be responsible for setting forth policies, procedures, monitor-
ing adherence to the rules for the preservation of price-sensitive information and other related
critical tasks.
2.5.5 Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003
The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003 prohibit fraudulent, unfair and manipulative
trade practices in securities. These regulations have been made in exercise of the powers con-
ferred by section 30 of the SEBI Act, 1992.
Regulation 2(1) (c) defines fraud as inclusive of any act, expression, omission or concealment
committed to induce another person or his agent to deal in securities. There may or may not be
wrongful gain or avoidance of any loss. However, that is inconsequential in determining if fraud
has been committed. Some of the instances cited are as follows:
a) A wilful misrepresentation of the truth or concealment of material fact in order that an-
other person may act, to his detriment
b) A suggestion as to a fact which is not true, by one who does not believe it to be true
c) An active concealment of a fact by a person having knowledge or belief of the fact
d) A promise made without any intention of performing it
e) A representation, whether true or false, made in a reckless and careless manner
f) Any such act or omission as any other law specifically declares to be fraudulent
g) deceptive behaviour by a person depriving another of informed consent or full partici-
pation
h) false statement made without reasonable ground for believing it to be true
i) the act of an issuer of securities giving out misinformation that affects the market price
of the security resulting in investors being effectively misled even though they did not
rely on the statement itself or anything derived from it other than the market price
Chapter II of the regulations prohibits certain dealings in securities covering buying, selling or
issuance of securities. Further it specifies instances of fraud which includes the following:
a. Indulging in an act which creates a false or misleading appearance of trading in the securi-
ties market
b. Dealing in a security which is not intended to effect a transfer of beneficial ownership but to
serve only as a device to inflate or depress or cause fluctuations in the price of such security
for wrongful gain or avoidance of loss
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c. Advancing or committing to advance any money to any person thus inducing the other to
buy any security in any issue only with the intention of securing the minimum subscription
to such issue
d. Paying, offering or agreeing to do either, directly or indirectly to any person any money or
money’s worth for inducing such person for dealing in any security with the motive of inflat-
ing, depressing, maintaining or causing fluctuation in the price of such security
e. Any act or omission which is tantamount to a manipulation of the price of a security
f. A person dealing in securities, publishing, or causing to publish or reporting or causing to
report any untrue information or information which he does not believe to be true, prior to,
or in the course of dealing in securities
Chapter III relates to investigation of transactions of the nature described above. In particular,
under regulation 8(1), it shall be the duty of every person who is under investigation:
a. To produce books, accounts and documents that may be required by the Investigating
Authority and also to furnish statements and information that is sought.
b. To appear before the Investigating Authority personally when required to do so and to
answer questions posed by the authority.
2.5.6 Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, are spread over five chapters dealing with issues such as disclosures of
shareholding and control, substantial acquisition of shares or voting rights, bailout takeovers
and investigation and action by SEBI.
The regulations begin with an explanation of important terms such as “acquirer”, “control”,
“person acting in concert” and “promoter”. Some of the subsequent regulations are discussed
below, to illustrate the nature and scope of the regulations.
According to regulation 3(1), any acquirer who acquires shares or voting rights, which (taken
together with shares or voting rights, if any held by him) would entitle him to exercise twenty
five percent or more voting rights in a company, in any manner whatsoever, is required to make
a public announcement of an open offer for acquiring shares of the target company
Regulation 3(2) states that no acquirer who together with persons acting in concert with him,
has acquired and holds in accordance with these regulations shares or voting rights in a target
company entitling them to exercise twenty-five per cent or more of the voting rights in the tar-
get company but less than the maximum permissible non-public shareholding, shall acquire
within any financial year additional shares or voting rights in such target company entitling them
to exercise more than five per cent of the voting rights, unless the acquirer makes a public an-
nouncement of an open offer for acquiring shares of such target company in accordance with
these regulations:
Regulation 29(1) states: Any acquirer who acquires shares or voting rights in a target company
which taken together with shares or voting rights, if any, held by him and by persons acting in
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concert with him in such target company, aggregating to five per cent or more of the shares of
such target company, shall disclose their aggregate shareholding and voting rights in such target
company in such form as may be specified.
Regulation 29(2) states: Any person, who together with persons acting in concert with him, olds
shares or voting rights entitling them to five per cent or more of the shares or voting rights in a
target company, shall disclose the number of shares or voting rights held and change in share-
holding or voting rights, even if such change results in shareholding falling below five per cent, if
there has been change in such holdings from the last disclosure made under sub-regulation (1)
or under this sub-regulation; and such change exceeds two per cent of total shareholding or vot-
ing rights in the target company, in such form as may be specified Regulation 29(3) states as un-
der: The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made
within two working days of the receipt of intimation of allotment of shares, or the acquisition of
shares or voting rights in the target company to,—
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
As per Regulation 30, the following continual disclosures are required to be made:
30(1) Every person, who together with persons acting in concert with him, holds shares or vot-
ing rights entitling him to exercise twenty-five per cent or more of the voting rights in a target
company, shall disclose their aggregate shareholding and voting rights as of the thirty-first day
of March, in such target company in such form as may be specified.
(2) The promoter of every target company shall together with persons acting in concert with
him, disclose their aggregate shareholding and voting rights as of the thirty-first day of March, in
such target company in such form as may be specified.
(3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made
within seven working days from the end of each financial year to,—
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
The other Regulations contain directions on various aspects of the public offer such as appoint-
ment of a merchant banker, timing and content of the public announcement of the offer, sub-
mission of letter of offer to SEBI and the offer price. Subsequent regulations deal with matters
such as general obligations of the acquirer, merchant banker, BoD of the target company, provi-
sion of escrow to enable the acquirer to perform his obligations and a substantial acquisition of
shares in a financial weak company.
a. Appointment of a merchant banker for the purpose of causing disinvestment of shares ac-
quired in breach of specified regulations
b. Directing the transfer of any proceeds or securities to the Investor Protection Fund of a rec-
ognized stock exchange
c. Directing the target company or depository to cancel the shares where an acquisition of
shares pursuant to an allotment is in breach of specified regulations
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The Companies Act, 1956/2013 is a legislation to consolidate and amend the law relating to
companies and certain other associations.
This 1956 Act, for the first time, introduced a uniform law pertaining to companies throughout
India. The legislation applies to all trading corporations and to those non-trading corporations
whose objects extend to more than one State of India. Further, other entities not covered by the
scope of the act are corporations whose objects are confined to one state, universities, co-
operative societies and unincorporated trading, literary scientific and other societies and asso-
ciations mentioned in item 32 of the State List in the Seventh Schedule of the Constitution of
India. With some exceptions relating to Jammu & Kashmir, Goa, Daman and Diu and Sikkim, the
act applies to the whole of India.
The voluminous legislation consists of thirteen parts covering 658 sections. A brief description of
the parts is as follows:
Part I: Preliminary: This mentions the title, commencement, extent and also contains definitions
of terms such as “company”, “private company”, “public company” and “officer who is in de-
fault”.
Part I-A has information about the Board of Company Law administration and about appeals
against the Company Law Board.
Part II: Incorporation of a company and incidental matters. The sections cover matters such as
registration of companies, Memorandum of Association, Articles of Association, membership of
a company, private companies, investments of a company and power of company to have an
official seal for use at places outside India.
Part III: Prospectus and Allotment and matters relating to the issue of shares and debentures
Matters covered include the contents of a prospectus, its registration, civil and criminal liabilities
for misstatements in the prospectus, allotment of shares and debentures and issuance and re-
demption of preference shares.
The sections relate to, among other matters, the nature, numbering and certificate of shares,
kinds of share capital, reduction of share capital and transfer of shares and debentures.
The sections explain the term “charge” and also cover various related aspects such as the Regis-
ter of Charges, Certificate of Registration, penalties and so on.
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Matters dealt with herein include the registered office and name, the Register of Members and
debenture holders, Annual Returns, meetings and proceedings, managerial remuneration, pay-
ments of dividend, accounts and audit and the Board of Directors (BoD).
The sections relate to modes of winding up and the legal processes and formalities pertaining to
the same.
Part VIII dwells on the application of the act to companies formed or registered under previous
companies’ laws.
Part IX pertains to companies authorized to register under the act and deal with matters such as
companies capable of being registered, definition of “joint stock company”, requirements for
their registration and notice to customers on registration of banking company with limited liabil-
ity etc.
Part XI relates to the obligations and formalities of companies incorporated outside India.
Part XIII is general in nature and bears sections pertaining to matters such as collection of infor-
mation and statistics from companies, application of the act to companies governed by special
acts or to government companies, penalties for various offences and so on.
The new Companies Act, 2013 is divided into 29 Chapters and 470 sections. Many sections have
been notified as on date and the notified sections will apply and the old Companies Act, 1956
will be repealed to that extent.
The law of contracts represents the most important branch of mercantile law and rests at the
foundation of trade and commerce. It is pervasive as it affects us in our daily lives, often without
our realizing it. The main purpose of the law is to impart credibility about the fulfilment of obli-
gations in mercantile transactions. The contracts become enforceable through the courts of law.
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lawful object and are not hereby expressly declared to be void. Nothing herein contained
shall affect any law in force in India and not hereby expressly repealed by which any contract
is required to be made in writing or in the presence of witnesses, or any law relating to the
registration of documents.”
• There must be at least two parties to a contract, with an offer by one and acceptance
by the other. Such offer and acceptance must be legal.
• The parties to the agreement must intend to create legal relations between them.
Mere social or domestic agreements do not constitute contracts.
• The agreement to be enforceable by law must be supported by valuable consideration.
An agreement to perform for nothing in return is usually not enforceable. The consid-
eration could be an act or abstinence or a promise to do or not to do something.
• The parties must be capable of entering into a valid contract, that is, they should have
attained the age of majority, should be of sound mind and not disqualified from con-
tracting by any law.
• The consent of the parties must be free, that is, it should not have been caused by co-
ercion, undue influence, fraud, misrepresentation or mistake.
• The object of the agreement must be lawful, which implies that it must not be illegal,
immoral or against public policy. Any agreement with an unlawful object is void.
• The terms of the agreement must be definite and certain. A court will not enforce a
contract which contains vague or illusory terms.
• The agreement must be capable of performance. An agreement to perform an act
which is impossible is void.
• The agreement must not have been expressly declared to be void. Examples of such
agreements are:
1. An agreement in restraint of trade
2. An agreement in restraint of legal proceedings
3. An agreement having uncertain meaning
• The agreement may be oral or written. However, those agreements which are required
to be written or even attested and registered must be in the prescribed form. Exam-
ples are mortgage of immovable property and negotiable instruments.
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From the perspective of the securities market, the law of agency is especially important and it
governs the relationship between an investor (principal) and a broker (agent). The function of a
broker is to establish privity of contract between two parties to a transaction for which he earns
a commission, i.e., brokerage. Accordingly, section 226 makes it clear that contracts entered
into through an agent and the resulting obligations may be enforced in the same manner and
will have the same legal consequences as if the contracts had been entered into and the acts
performed by the principal in person.
Section 211 states that an agent is bound to conduct the business of his principal according to
the directions given by the principal
Section 212 makes it clear that an agent is bound to conduct the business of the agency skilfully
(unless the principal is aware of his deficiencies) and with reasonable diligence.
Section 213 requires that an agent render proper accounts to his principal on demand.
Similarly, some regulations lay down the duties of the principal, as for instance, section 222
which lays down that the principal is bound to indemnify the agent against the consequences of
all lawful acts done by such agent in exercise of the authority conferred on him.
The Act confers considerable powers on RBI. As an illustration, section 19 lays down that no rec-
ognition by the bank of a person as the holder of a Government Security, and no order made by
the Bank under the Act shall be called into question by any Court, as far as the recognition or
order affects the relations of the Government or RBI with the person recognized as described
above, or with any person claiming an interest in such security.
A related notification of the Ministry of Finance (MoF), Government of India (GOI) dated May
6th, 2002 lays out the general terms and conditions applicable to all issues of government secu-
rities, as for example:
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The offences are classified under Part A, Part B and Part C of the Schedule. Under Part A, of-
fences include counterfeiting currency notes under the Indian Penal Code to punishment for
unlawful activities under the Unlawful Activities (Prevention) Act, 1967. Under Part B, offences
are considered as money laundering if the total value of such offences is Rs 30 lakh or more.
Such offences include dishonestly receiving stolen property under the Indian Penal Code to
breaching of confidentiality and privacy under the Information Technology Act, 2000. Part C in-
cludes all offences under Part A and Part B (without the threshold) that has cross-border impli-
cations.
The Foreign Exchange Management Act (FEMA), 1999, is an act to consolidate and amend the
law relating to foreign exchange, external trade and payments for promoting the orderly devel-
opment and maintenance of foreign exchange market in India. As a consequence of this enact-
ment, its predecessor, The Foreign Exchange Regulation Act (FERA), 1973 was repealed. FEMA
extends to the whole of India and shall apply to all branches, offices and agencies outside India,
owned or controlled by a person resident in India and also to any violation committed outside
India by any person covered by FEMA. For illustrative purposes, some provisions of the Act are
discussed below.
Section3 states that except as provided in FEMA and allied rules and regulations or under per-
mission of RBI, no person shall:
a) Deal in or transfer any foreign exchange or foreign security to any person not being an au-
thorized person
b) Make any payment to or for the credit of any person resident outside India in any manner
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c) Receive otherwise through an authorized person, any payment by order or on behalf of any
person resident outside India in any manner
d) Enter into any financial transaction in India, as consideration for or in association with the
acquisition or creation or transfer of a right to acquire any asset outside India by any person
Section4 lays down that except as otherwise provided in FEMA, no person resident in India shall
acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India. Section 5 relates to Current Account transactions, while Section
6 pertains to Capital Account transactions.
Section 10 empowers RBI to authorize any person, on any application made to it, to deal in for-
eign exchange or in foreign securities as an authorized dealer, money changer or offshore bank-
ing unit or in any other manner as it considers fit. Further, sub-section (5) stipulates that an au-
thorized person shall, before undertaking any transaction in foreign exchange on behalf of any
person, require that person to make such declaration and to give such information as will rea-
sonably satisfy him that the transaction will not involve and is not meant to contravene or evade
any provisions of the FEMA or of any rule, regulation, notification, direction or order made un-
der the legislation. If the person refuses to comply with any requirement or performs unsatisfac-
tory compliance, the authorized person shall furnish written refusal to undertake the transac-
tion and shall report the matter to RBI, if he has the reason to suspect that any violation or eva-
sion is being contemplated by the person.
FEMA empowers the Central Government to appoint Adjudicating Authorities, Special Directors
(Appeals) and an Appellate Tribunal. The latter two shall have for the purposes of discharging
their functions under the Act, the same powers as are vested in a civil court under the Code of
Civil Procedure, 1908 while trying a suit. Examples of some powers are:
a) Summoning and enforcing the attendance of any person and examining him on oath
b) Requiring the discovery and production of documents
c) Receiving evidence on affidavits
d) Subject to the provisions of regulations 123 and 124 of the Indian Evidence Act, 1872,
requisitioning any public record or document or copy of such record or document from
any office
e) Issuing commissions for the examination of witnesses or documents
Section 34 stipulates that no civil court shall have jurisdiction to entertain any suit or proceeding
in respect of any matter which an Adjudicating Authority or the Appellate Tribunal or the Special
Director (Appeals) is empowered under the FEMA to determine. Further, no injunction shall be
granted by any Court or other authority in respect of any action taken or to be taken in pursu-
ance of any powers conferred by the Act. Section 35 pertains to appeal against any decision or
order of the Appellate Tribunal, to the High Court.
2
Candidates may like to read the different provisions as given under the different bye-laws of the exchanges posted
on the Exchange website.
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Indian stock exchanges such as BSE, NSE, etc. frame their own Bye-Laws which are binding on all
the trading members / brokers registered with the particular exchange. The bye laws framed by
the stock exchanges need to be approved by the SEBI and shall be in conformity with the provi-
sions of the SC(R)A, 1956, SC(R)R, 1957 and the SEBI Act, 1992. The bye laws lay down rules re-
garding the admission of trading members, listing requirements, fees, suspension of admission
to the stock exchange, transaction and settlement, rights and liabilities of members, arbitration
etc. It is the responsibility of the trading member or the compliance officer or any such person
appointed by the trading member to ensure that all the different regulations of the bye-laws are
adhered to.
The Income-Tax Act, 1961, (as amended by the Finance Act, 2008) is an Act to consolidate and
amend the law relating to income-tax and super-tax, and it extends to the whole of India. It
came into force from April 1962. It consists of twenty-three chapters, but the ones that are of
common interest are as follows:
Chapter I: Preliminary
Chapter II: Basis of charge
Chapter III: Incomes which do not form part of Total Income
Chapter IV: Computation of Total Income
Chapter V: Income of other persons, included in total income of person being assessed
Chapter VI: Aggregation of income and set off or carry forward of loss
Chapter VIA: Deductions to be made in computing total income
Chapter VIII: Rebates and Reliefs
Financial securities (mostly shares, but also listed debentures and mutual funds) provide regular
income in the form of dividends on shares and units of mutual funds, and interest on debt secu-
rities. Dividends from shares and mutual funds are totally exempt under section 10 of the In-
come Tax Act. Interest income from debentures, bonds and all forms of deposits are subjected
to Income Tax. An exemption from interest from specific ‘Tax Free Bonds’ is sometimes granted
by the Income Tax authorities.
When securities such as shares, listed debentures and mutual funds are sold, it could result in a
gain or loss, depending on the cost of purchase (acquisition, including brokerage etc). Such secu-
rities, if held for at least 12 months before sale (called a transfer) could result in a Long Term
Capital Gain or Long Term Capital Loss. If the holding period, however, is less than 12 months,
the resultant Gain or Loss is called a Short Term Capital Gain or Short Term Capital Loss.
In addition to Income Tax (which is directly borne by the assessee), there is also a Securities
Transaction Tax (STT), which, like VAT or Sales Tax, is an Indirect Tax. This is levied by the stock-
broker through the contract note and recovered from the customer, and ultimately paid to the
STT authorities. With the introduction of STT, after 2004, Long Term Capital Gain Tax has been
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exempted for equities being traded through recognized Stock Exchanges. Short Term Gains on
equities are taxed at 15% as of December 2012.
Long Term Capital Losses can be set off only against Long Term Capital Gains, if there is any such
income to be taxed.
Short Term Capital Gains can be set off either against Short Term Capital Losses or even Long
Term Capital Gains, if any.
Losses (both Long and Short Term) if not set off in a year due to lack of offsetting income, can be
carried forward for 8 years.
The above provisions apply in respect of securities held as capital assets, not by persons regu-
larly engaged in the Business of buying and selling securities. For persons holding financial secu-
rities as a business asset (inventory or stock) for sale and filing Income Tax returns specifically
under Business Profits, the losses and gains are computed under the income head ‘Business
Profits’.
The Securities Transaction Tax (STT) was introduced by Chapter VII of The Finance (No. 2) Act,
2004. It is a tax applicable on the purchase or sale of equity shares, derivatives, equity-oriented
funds and equity-oriented mutual funds. Examples of transactions done in a recognized stock
exchange on which STT applies are as follows:
• Purchase or sale of equity shares and units of equity-oriented mutual funds (delivery-
based).
• Sale of equity shares and units of equity-oriented mutual funds (non delivery-based).
• Sale of derivatives
Section 100(1) of The Finance (No. 2) Act, 2004 lays down that every recognized stock exchange
shall collect the STT from every person whether a purchaser or seller as the case may be, who
enters into a taxable securities transaction in that stock exchange, at the rates prescribed in the
Act.
Section 100(2) states that the prescribed person in the case of every mutual fund shall collect
the STT from every person who sells a unit to that mutual fund, at the rate specified.
The Service Tax (ST) is a levy on specified services, collected and appropriated by the Union
Government. It was introduced following the necessary Constitutional amendments, notably the
insertion of a new article, 268A. The relevant legislation is Chapter V of The Finance Act, 1994.
The long list of taxable services figures in clause (105) of section 65 of the said Act and includes
service provided or to be provided by a stockbroker in connection with the sale or purchase of
securities listed on a recognized stock exchange. It applies to stock broking services.
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Section 66 lays down that the rate at which the tax is to be levied as a percent of the value of
taxable services. Section 68 relates to the prescribed time within which the tax must be paid.
Section 69 pertains to registration by every person liable to pay the tax, section 70 stipulates
furnishing the returns and section 78 relates to penalty for suppressing the value of taxable ser-
vice(s).
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Review Questions
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Compliance as a function, has been noted as one of the most important functions in the inter-
mediaries across worldwide exchanges, commissions etc. International Organisation of Securi-
ties Commission (IOSCO) had come out with a discussion paper in 2005 3 on ‘Compliance func-
tion at Market Intermediaries’ in which they had defined compliance function as “A function
that, on an on-going basis, identifies, assesses, advises on, monitors and reports on a market
intermediary’s compliance with securities regulatory requirements, including whether there are
appropriate supervisory procedures in place”.
3.1.3 Appointment of CO
As per the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a Compliance Officer is man-
datorily required to be appointed. The relevant extracts of this regulation is given hereunder:
3
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD198.pdf
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Regulation 18A
(1) Every stock broker shall appoint a CO who shall be responsible for monitoring the compli-
ance of the Act, rules and regulations, notifications, guidelines instructions and so on, issued by
the Board or the Central Government and for redress of investors’ grievances
(2) The compliance officer shall immediately and independently report SEBI any non-compliance
observed by him
Regulation 14
(1) An intermediary shall appoint a compliance officer for monitoring the compliance by it, of
the requirements of the act, rules, regulations, notifications, guidelines, circulars and orders
made or issued by SEBI or the Central Government, or the rules, regulations and bye-laws of the
concerned stock exchanges, or the SRO, where applicable:
Provided that the intermediary may not appoint compliance officer if it is not carrying on the ac-
tivity of the intermediary
(2) The compliance officer shall report to the intermediary or to its BoD, in writing, of any mate-
rial non-compliance by the intermediary.
The CO shall be responsible for monitoring the compliance with the SEBI Act, 1992, and more
specifically with the rules and regulations, notifications, guidelines, orders passed and instruc-
tions issued by SEBI or the Central Government or the rules, regulations and bye-laws of the
concerned stock exchanges, or the self regulatory organization (SROs), where applicable, by the
concerned intermediary. The responsibility of the CO also extends to ensure redress of inves-
tors’ grievances.
The specific role of the CO as given under the SEBI (Stock Brokers and Sub-Brokers) Regulations,
1992 and the SEBI (Intermediaries) Regulations, 2008 has been discussed in the above section.
Compliance looks into the different aspects of the culture and ethics of a market intermediary,
and is an important tool in managing the risk of legal or regulatory sanctions, financial loss, or
loss to reputation resulting from violation of regulatory requirements. The CO is responsible for
monitoring the internal standards and policies put in place by the intermediary that also in-
volves protecting the firm from any liability arising from false claims / abuses committed by its
customers.
3.2.2 Reporting Structure
The CO is appointed by an entity or its Board of Directors (BOD) to comply with the SEBI Act and
regulations, rules and so on. As such, the CO is required to report to the BoD of the Intermedi-
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ary. However, where there is a non-compliance of the provisions of the SEBI Act or the allied
regulations and rules, the CO is required to report to the SEBI immediately and independently
any non-compliance of the intermediary.
The gap between regulatory intent and compliance will be minimal if there is a professional
cadre of compliance officers in each organization of intermediaries. This is the rationale for the
independent functioning of the CO, in any intermediary organization. CO shall participate in
preparation of policies and procedures so that internal affairs of the intermediary are aligned
with the regulatory objective than business expediency in case of conflict between the two.
This necessitates the level of reporting by the CO to the BoD/owners and to SEBI and other
competent authorities. It frees the CO from elaborate internal reporting procedures and proto-
col with the delays and inadequate attention to compliance matters.
It is the duty of the CO to immediately and independently report any non-compliance observed
to the BoD and SEBI. The reporting responsibility can be classified into:
As given under Regulation 12 of the SEBI (stock Brokers and Sub brokers) Regulations 1992, the
intermediary is required to:
(1)Provide the SEBI with a certificate of its compliance officer on the 1st April of each year certi-
fying:
a) the compliance by the intermediary with all the obligations, responsibilities and the ful-
filment of the eligibility criteria on a continuous basis under these regulations and the
relevant regulations
b) that all disclosures made in Form A and under the relevant regulations are true and
complete
(2) Prominently display a photocopy of the certificate at all its offices including branch offices
(3) Prominently display the name and contact details of the compliance officer to whom com-
plaint may be made in the event of any investor grievance
(4) Maintain books, accounts and records as specified in the relevant regulations
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External Stakeholders include Central Government, SEBI, Stock Exchanges and other regulatory
authorities like Registrar of Companies, Reserve Bank of India, Income Tax, investors, issuers and
other intermediaries. The exchanges also issue their own circulars and bye laws based underly-
ing being the SEBI Regulations, changes thereof and the circulars issued from time to time. The
CO has to ensure that the intermediary also functions within the guidelines as given by the Ex-
changes, adheres to the monthly, quarterly or annual reporting.
A CO is required to report any non-compliance to the SEBI or the BoD of the Company. The pur-
pose of this reporting is to ensure that the interests of both external and internal stakeholders
are taken care of.
An associated person, who as on the date specified by SEBI, holds a certificate for a category as
recognised by SEBI shall not be required to obtain a fresh certificate for the same category dur-
ing the validity of such certificate.
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A person other than a Principal, who has attained 50 years of age or who has 10 years of expe-
rience, may obtain the certificate by any of the following methods:
(a) Passing the relevant certificate examination, as may be specified by NISM.
(b) Successfully completing a related 2 day CPE Program, as may be specified by NISM.
All other persons may obtain the certificate by the following method:
(a) Passing the relevant certificate examination, as may be specified by NISM.
4
A Principal is a person who is actively engaged in the management of the intermediary’s securities business including
supervision, solicitation, conduct of business, and includes: a) Sole Proprietors, b) Managing Partners and c) Whole
Time Directors
5
The 2 day CPE Program is as per the new NISM communiqué Ref. No. NISM/Certification/ CPE General/2011/1 dated
December 21, 2011.
6
Activity wherein the (a) the associated person as part of his work or operation deals or interacts with the investors,
issuers or clients of intermediaries;(b) the associated person deals with assets or funds of investor or clients; (c) the
associated person handles redressal of investor grievances;(d) the associated person is responsible for internal con-
trol or risk management;(e) the associated person is responsible for compliance of any rules or
regulations;(f) the associated person is engaged in activities that have a bearing on
operational risk of the intermediary.
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date of expiry of the certificate, or by passing the relevant NISM Certification Examination be-
fore the expiry of the existing certificate 7.
The certificate will be revalidated for a period of three years from the date of expiry of the exist-
ing certificate. Different categories of persons may get their certificate revalidated through dif-
ferent methods as follows:
A Principal may get his/her certificate revalidated by any of the following ways:
(a) Passing the relevant certificate examination, as may be specified by NISM.
(b) Successfully completing a related 2 day CPE Program, as may be specified by NISM.
(c) Delivering at least four sessions in specific 2 day CPE program, as may be specified by
NISM.
A person other than a Principal, who has attained 50 years of age or who has 10 years of expe-
rience, may get the certificate revalidated by any of the following methods:
(a) Passing the relevant certificate examination, as may be specified by NISM.
(b) Successfully completing a related 2 day CPE Program, as may be specified by NISM.
All other persons may get their certificate revalidated by any of the following methods:
(a) Passing the relevant certificate examination, as may be specified by NISM.
(b) Successfully completing a related 2 day CPE Program, as may be specified by NISM.
7
See NISM communiqué Ref. No. NISM/Certification/ CPE General/2011/1 dated December 21, 2011.
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Review Questions
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a. Regulating the business in stock exchanges and any other securities markets;
b. Registering and regulating the working of the stock brokers, sub-brokers, share transfer
agents, bankers to an issue, registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers and such other intermediaries who may be associated with
the securities manner in any manner;
c. Registering and regulating the working of the depositories and its participants, custodian of
securities, foreign institutional, credit rating agencies and such other intermediaries as noti-
fied by the SEBI.
d. Registering and regulating the working of Venture Capital Funds and other Collective In-
vestment Schemes.
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. Regulating substantial acquisition of shares and take-over of companies.
j. Calling for information from, undertaking inspection, conducting inquiries and audits of the
intermediaries and other persons associated with the securities market.
k. Performing all such functions and exercising such powers under the provisions of the Securi-
ties Contracts (Regulation) Act, 1956 as maybe delegated to SEBI by the central government.
The Section 11A of the SEBI Act states that without any prejudice to the provisions of the Com-
panies Act 1956, SEBI may for the protection of investors, -
(a) Specify, by Sections –
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i. The matters relating to issue of capital, transfer of securities and other matters in-
cidental thereto; and
ii. The manner in which such matters shall be disclosed by the Companies;
(b) By general or special orders –
i. Prohibit any company from issuing prospectus, any offer document, or advertise-
ment soliciting money from the public for the issue of securities;
ii. Specify the conditions subject to which the prospectus, such offer document or ad-
vertisement, if not prohibited, may be issued.
4.1.2 Penalties and Adjudication
SEBI Act empowers SEBI to impose penalties and initiate adjudication proceedings against in-
termediaries who default on the following grounds such as failure to furnish information, return
etc or failure by any person to enter into agreement with clients etc. In this section we discuss
the various clauses of sub-Sections 15, failing to comply with any of these will lead to penalties
and adjudication proceedings.
Section 15B: Penalty for failure by any person to enter into agreements with clients
Section 15B prescribes the penalty payable by an intermediary for failing to enter into an
agreement with his/her client in violation of such a requirement under the SEBI Act, 1992.
Section 15C prescribes the penalty applicable to a listed company or any person who is regis-
tered as an intermediary, for failing to redress investors’ grievances after having been directed
in writing by SEBI to do so within a specified time period.
Section 15D relates to defaults by mutual funds (MFs) and prescribes penalties in the following
cases:
a) If a person sponsors or carries on any collective investment scheme, including MFs,
without obtaining the required certificate of registration
b) If a person registered with SEBI as a collective investment scheme including mutual
funds, fails to comply with the terms and conditions of the certificate of registration
c) A failure, by a person registered with SEBI as a collective investment scheme including
mutual funds, to submit an application for listing of the collective investment scheme(s),
in accordance with the regulations governing such listing
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Section 15E: Penalty for failure to observe rules and regulations by an asset management com-
pany (AMC)
Section 15E prescribes the penalty payable by an AMC of a mutual fund registered under the
SEBI Act, on failing to comply with any of the regulations that place restrictions on the activities
of asset management companies.
Section 15F prescribes the penalty payable by a stock broker registered under the SEBI Act, un-
der the following cases:
i. A failure to issue contract notes in the form and manner specified by the stock exchange
of which the broker is a member
ii. A failure to deliver any security or to make payment of the amount due to the investor
in the manner and within the period specified in the regulations
iii. Charging an amount of brokerage in excess of that specified in the regulations
Section 15H prescribes the penalty for non-disclosure of acquisition of shares and takeovers. If
any person fails to:
(i) disclose the aggregate of his shareholding in the body corporate before he acquires any
shares of that body corporate; or
(ii) make a public announcement to acquire shares at a minimum price; or
(iii) make a public offer by sending letter of offer to the shareholders of the concerned company;
or
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(iv) make payment of consideration to the shareholders who sold their shares pursuant to
letter of offer,
Section 15HA prescribes a penalty for people indulging in fraudulent and unfair trade practices
relating to securities. Any person indulging in such activities would be liable to a penalty of Rs.
25 crore or three times the amount of profits made out of such practices, whichever is higher.
Section 15HB: Penalty for Contravention where no separate penalty has been provided
Section 15HB states that whoever fails to comply with any provision of the SEBI Act, the rules or
the regulations made or directions issued by SEBI thereunder, for which no separate penalty has
been provided, shall be liable to a penalty which may extend to Rs. 1 crore.
To understand the various statutes of the Securities market, it is also essential to understand the
Jurisdiction, Authority and Procedure adopted by the Appellate Tribunal. Appeal against any rul-
ing of the capital market regulator is petitioned to the appellate tribunal set up for this purpose
i.e. Securities Appellate Tribunal.
Section 15T of the SEBI Act gives the right to “Appeal to the SAT”. It states that any person ag-
grieved by an order –
(i) Of the SEBI Board made, on and after the commencement of the Securities Laws
(Second Amendment) Act, 1999, under the SEBI Act, or the rules and regulations
made thereunder; or
(ii) Made by an adjudicating officer appointed under this Act;
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may prefer an appeal to the SAT having jurisdiction in this matter. Every appeal should be filed
within a period of 45 days from the date on which a copy of the order made by the SEBI Board
or the Adjudicating Officer is received by him in a specified form along with the fee as pre-
scribed.
Section 15Z: Appeal to Supreme Court
Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an
appeal to the Supreme Court within 60 days from the date of communication of the decisions or
order of the SAT to him.
The Section12 also states that no person shall sponsor or cause to be sponsored or carry on or
caused to be carried on any venture capital funds or collective investment schemes including
mutual funds if the same does not obtain a certificate of registration from the SEBI. The applica-
tion for registration and the payment of such feed shall be in accordance with the provisions of
the regulations. SEBI may however by order, suspend or cancel a certificate of registration as
under the provisions in the regulations after giving the person concerned a reasonable opportu-
nity of presenting his/her case.
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As stated in Chapter 3, section 3.1.2 the designated compliance officer in each intermediary
should ensure that the intermediary is functioning in compliance with the provisions of the vari-
ous regulations (as discussed in this chapter) of the SEBI Act. Non-compliance of the rules and
regulations laid down by SEBI will attract a penalty either monetary or suspension.
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Review Questions
1. All of the following are the functions of SEBI under SEBI Act of 1992, EXCEPT:
(a) Regulating the business in other securities markets but not in stock exchanges
Ans: (a)
2. Can SEBI prohibit any company from issuing prospectus, any offer document, or advertise-
ment soliciting money from the public for the issue of securities? State Yes or No?
(a) Yes
(b) No
Ans: (a)
(a) File any return or furnish any information, books or other documents within the time
specified as in the regulations
Ans: (c)
4. Any intermediary can appeal to SAT, if it has been aggrieved by any order passed by SEBI.
State whether True or False?
(a) True
(b) False
Ans: (a)
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SC(R)A covers around 31 Sections. Sections 3 to 12 are specifically related to various aspects of
stock exchange recognition. The Central Government 8 has the powers to prescribe admission
criteria and qualifications for members. The members are required to maintain books and re-
cords in a prescribed manner, which are subject to inspection upon enquiry. The SCRA also
specifies the manner in which derivative contracts and other contracts shall be dealt with in rec-
ognized stock exchanges. Contraventions to any of the provisions of this Act are liable to attract
penalty. Sections 13 to 19 deals with the provisions for contracts and options in securities, Sec-
tion 21 and 22 with listing of securities and Sections 23 to 26 on penalties and procedures im-
posed on non-compliance of the rules and regulations. Sections 27-31 deals with issues such as
the power of SEBI to make regulations, power of Central Government to make rules etc.
In this chapter however, we would be more focussed on the various sections and sub-sections of
this act related directly to the activities of the securities market and which is of importance from
compliance point of view.
5.1.1Call for Periodical Returns
Section 6(2) of SCRA requires every member of a recognized stock exchange to maintain and
preserve for such periods not exceeding 5 years such books of accounts and other documents as
the Central Government may prescribe after consultation with the concerned stock exchange,
and such books of accounts and other documents shall be subject to inspection by SEBI.
Section 6(3) of SCRA provides that SEBI, in the interest of trade or in the public interest, may by
order in writing –
• Call upon any member of a recognized stock exchange to furnish in writing such infor-
mation or explanation relating to the affairs of the member in relation to the stock ex-
change as SEBI may require; or
• Appoint person(s) to make inquiry into the affairs of any member of a stock exchange in
relation to the stock exchange and submit a report of the same to SEBI or it may direct
the governing body of the stock exchange to make the inquiry and submit its report to
SEBI.
8
Powers are exercisable by SEBI also.
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Section 6(4) of SCRA provides that where an inquiry, as mentioned above, has been undertaken,
every member of the concerned stock exchange shall be bound to produce before the inquiring
authority all such books of accounts and other documents in its custody or power, which relates
to or have bearing on the subject matter of such inquiry and shall also furnish such statement or
information relating to the inquiry as the inquiring authority may require.
5.1.2 Contracts and Options in Securities
Section15 of SCRA provides that no member of a recognised stock exchange shall in respect of
any securities enter into any contract as a principal with any person other than a member of a
recognised stock exchange, unless he has secured the consent or authority of such person and
discloses in the note, memorandum or agreement of sale or purchase that he is acting as a prin-
cipal. However, a stock broker may enter into contract, as a principal with any other person only
if written consent is received from such person within 3 days from the date of the contract and a
disclosure to this effect is made on the contract note.
5.1.3Penalties and Procedures
The Section 23 to 26 provides for the different penalties and procedures to be imposed upon
any person /intermediary on non-compliance with any of the provisions given under the various
rules and regulations governing the securities market in India.
9
Section 18A states: Notwithstanding anything contained in any other law for the time being in force, contracts in derivatives shall
be legal and valid if such contracts are (a) traded on a recognized stock exchange, and (b) settled on the clearing house of the recog-
nised stock exchange, in accordance with the rules and bye-laws of such stock exchange.
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Section 23B of SCRA provides that if a broker fails enter into an agreement with its client who is
required to enter as per Act, he it shall be liable to a penalty of Rs.1 lakh for each day during
which such failure continues or Rs.1 crore, whichever is less.
Section 23C of SCRA provides that if a broker fails to redress the grievances of any investor after
having been directed by SEBI or Stock Exchange, in writing, to do so within the stipulated time,
he shall be liable to a penalty of Rs.1 lakh for each day during which such failure continues or
Rs.1 crore, whichever is less.
Section 23D of SCRA provides that if a broker fails to segregate securities or monies of client(s)
from its own securities or funds or uses the securities or monies of client(s) for self or for any
other client(s), he shall be liable to a penalty not exceeding Rs.1 crore.
Section 23JA of SCRA provides for application in writing to the SEBI proposing for settlement of
proceedings initiated or to be initiated for the alleged defaults. The SEBI after taking into con-
sideration the nature, gravity and impact of defaults, may agree to the proposal for settlement,
on payment of such sum by the defaulter or on such other terms as may be determined by SEBI
Section 23JB of SCRA states the procedure to be followed by the Recovery Officer of SEBI in case
of non-payment of the penalty imposed by the adjudicating officer for refund of monies or com-
pliance of disgorgement order issued under Section 12A.
Sections 26A to 26E have been introduced in the SCRA with respect to establishment of Special
Courts. The provisions state that the Central Government may establish or designate as may
Special Courts as may be necessary. It also prescribes the rules for constitution of the Court as
well as the offences triable by the Special Courts, Appeal and Revision, Application of Code to
proceedings before Special Court etc.
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d. has compounded with his creditors unless he has paid sixteen annas in the ru-
pee
e. has been convicted of an offence involving fraud or dishonesty
f. engaged as principal or employee in any business other than that of securities
or commodity derivatives except as a broker or agent not involving any personal
financial liability unless he undertakes on admission to sever his connection with
such business
Provided that no member may conduct business in commodity derivatives, ex-
cept by setting up a separate company which shall comply with the regulatory
requirements, such as, networth, capital adequacy, margins and exposure
norms as may be specified by the Forward Market Commission, from time to
time:
Provided further that nothing herein shall be applicable to any corporations,
bodies corporate, companies or institutions referred to in items (a) to (n)of the
proviso to sub-rule (4)
g. he has been at any time expelled or declared a defaulter by any other stock ex-
change;
h. he has been previously refused admission to membership unless a period of one
year has elapsed since the date of such rejection.
No person eligible for admission as a member under the above mentioned shall be admitted as
a member unless he:
(a) has worked for not less than two years as a partner with, or an authorised assistant
or authorised clerk or remisier or apprentice to, a member
(b) agrees to work for a minimum period of two years as a partner or representative
member with another member and to enter into bargains on the floor of the stock ex-
change and not in his own name but in the name of such other member
(c) succeeds to the established business of a deceased or retiring member who is his fa-
ther, uncle, brother or any other person who is, in the opinion of the governing body, a
close relative
Provided that, the rules of the stock exchange may authorise the governing body to waive com-
pliance with any of the foregoing conditions if the person seeking admission is in respect of
means, position, integrity, knowledge and experience of business in securities, considered by the
governing body to be otherwise qualified for membership.
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5.2.4Books of account
Under Rule 15(1) every member of a recognized stock exchange is required to maintain and pre-
serve the following books of account and documents for a period of 5 years:
• Register of transactions (Sauda book).
• Clients’ ledger.
• General ledger.
• Journals.
• Cash book.
• Bank pass-book.
• Documents register showing full particulars of shares and securities received and deliv-
ered.
Rule 15(2) requires every member of a recognized stock exchange to maintain and preserve the
following documents for a period of 2 years:
• Member’s contract books showing details of all contracts entered into by the member
with other members of the same exchange or counterfoils or duplicates of memos of
confirmation issued to such other members.
• Counterfoils or duplicates of contract notes issued to clients.
• Written consent of clients in respect of contracts entered into as principals.
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Review Questions
1. As per SCRR, the trading members of the stock exchanges are required to maintain the
counterfoils or duplicates of contract notes issued to clients for how many years?
(a) 3
(b) 5
(c) 2
(d) 7
Ans: (c)
2. Members of the stock exchanges are required to preserve which of the following documents
as per the SCRA.
(a) Networth certificate
(b) Books and accounts and other documents for specific period of time
(c) Registration certificate
(d) All of the above
Ans: (b)
3. SCRA provides for a provision that a stock broker of a recognised stock exchange can enter
into a contract in securities with another stock broker after obtaining his consent. State
whether True or False?
(a) True
(b) False
Ans: (a)
4. Manner in which the derivatives contracts and other contracts should be dealt in the securi-
ties market are prescribed in which of the following?
(a) Public Debt Act
(b) Depositories Act
(c) Companies Act
(d) SCRA, 1956
Ans: (d)
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6.1 Introduction
The SEBI (Intermediaries) Regulations, 2008 were notified in the official gazette on 26th May
2008. The provisions contained in Chapter V & VI of the regulations came into effect from the
above date, while the other provisions shall become applicable to different classes of intermedi-
aries as and when notified by SEBI. The provisions contained in Chapter V & VI of the regulations
deal with the procedure for action in case of contravention of securities laws or directions or
instructions or circulars by an intermediary. In this chapter, we have summarized and discussed
some of them. Candidates however, are advised to go through the regulation in detail for better
understanding.
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other person and also provide copies of documents or other material which in the opin-
ion of the inspecting authority are relevant for the purposes of the inspection.
6.3.2 Appointment of Auditor
SEBI may also appoint a qualified auditor to inspect the books of account of the affairs of an in-
termediary. The SEBI may also appoint a qualified valuer or direct a qualified valuer to be ap-
pointed by the intermediary, if so considered necessary.
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(v) Debarring a branch or an office of the noticee from carrying out activities for the
specified period;
(vi) Warning the noticee.
6.4.2 Procedure for action on receipt of the recommendation
o After considering the report of the designated authority, the designated member shall
issue a show-cause notice to the noticee enclosing therewith a copy of the report sub-
mitted by the designated authority calling the noticee to show cause as to why the ac-
tion, including passing of appropriate direction, as the designated member considers
appropriate, should not be taken.
o Noticee shall reply to the above show-cause notice issued by designated member within
21 days of the receipt of the notice.
o The designated member may, after considering the reply, if any, and providing the per-
son with an opportunity of being heard, pass such order as appropriate, as expeditiously
as possible. The designated member shall endeavor to pass the order within 120 days of
the date of receipt of reply to the notice or hearing.
6.4.3 Common Order
The Designated member may pass a common order in respect of a number of notices where the
subject matter in question is substantially the same or similar in nature.
6.4.4 Surrender of certificate of registration
An intermediary may surrender the certificate of registration by making a request to the SEBI.
SEBI, while disposing such request, may require the intermediary to satisfy SEBI as to the factors
it deems fit, including but not limited to the following:
i. the arrangements made by the person for maintenance and preservation of records and
other documents required to be maintained under the relevant regulations;
ii. redress of investor grievances;
iii. transfer of records, funds or securities of its clients;
iv. the arrangements made by it for ensuring continuity of service to the clients;
v. defaults or pending action, if any.
While accepting the surrender, SEBI may also impose such conditions upon the intermediary as
it deems fit for protection of the investors or its clients or the securities market and such inter-
mediary shall comply with such conditions.
6.4.5 Effect of debarment, suspension, cancellation or surrender
On and from the date of debarment or suspension of the certificate, the concerned person
shall -
a) not undertake any new assignment or contract or launch any new scheme and during
the period of such debarment or suspension it shall cease to carry on any activity in re-
spect of which certificate had been granted;
b) allow its clients or investors to withdraw or transfer their securities or funds held in its
custody or withdraw any assignment given to it, without any additional cost to such cli-
ent or investor;
c) make provisions as regards liability incurred or assumed by it;
d) take such other action including the action relating to any records or documents and se-
curities or money of the investors that may be in custody or control of such person,
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within the time period and in the manner, as may be required under the relevant regu-
lations or as may be directed by SEBI while passing order.
On and from the date of surrender or cancellation of the certificate, the concerned person
shall -
a) return the certificate of registration so cancelled to SEBI and shall not represent itself to
be a holder of certificate for carrying out the activity for which such certificate had been
granted;
b) cease to carry on any activity in respect of which the certificate had been granted;
c) transfer its activities to another person holding a valid certificate of registration to carry
on such activity and allow its clients or investors to withdraw or transfer their securities
or funds held in its custody or to withdraw any assignment given to it, without any addi-
tional cost to such client or investor;
d) make provisions as regards liability incurred or assumed by it;
e) take such other action including the action relating to any records or documents and se-
curities or money of the investors that may be in custody or control of such person,
within the time period and in the manner, as may be required under the relevant regu-
lations or as may be directed by SEBI while passing order.
6.4.6 Directions
Without prejudice to any order under the securities laws and the directions, guidelines and cir-
culars issued thereunder, SEBI may, in the interest of the securities market, in the interest of the
investors or for the purpose of securing the proper management of any intermediary, issue,
necessary direction including but not limited to the following -
a) directing the intermediary or other persons associated with securities market to refund
any money or securities collected from the investors under any scheme or otherwise,
with or without interest;
b) directing the intermediary or other persons associated with securities market not to ac-
cess the capital market or not to deal in securities for a particular period or not to asso-
ciate with any intermediary or with any capital market related activity;
c) directing the recognized stock exchange concerned not to permit trading in the securi-
ties or units issued by a mutual fund or collective investment scheme;
d) directing the recognized stock exchange concerned to suspend trading in the securities
or units issued by a mutual fund or collective investment scheme;
e) any other direction which SEBI may deem fit and proper in the circumstances of the
case.
Provided that before issuing any directions, SEBI, shall give a reasonable opportunity of being
heard to the persons concerned. In case of any interim direction, SEBI shall give a reasonable
opportunity of hearing to the persons concerned after passing the direction, without any undue
delay.
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II. Conflict of Interest: An intermediary shall avoid conflict of interest and make adequate dis-
closure of his interest and shall put in place a mechanism to resolve any conflict of interest
situation that may arise in the conduct of its business or where any conflict of interest
arises, shall take reasonable steps to resolve the same in an equitable manner
III. Compliance and Corporate Governance:
An intermediary has to ensure that good corporate policies and corporate governance is in
place. It has to ensure that they do not engage in any fraudulent and manipulative transactions
in the securities listed on the stock exchanges. It shall also ensure that they do not indulge in
any unfair competition which is likely to harm the interests of the other intermediaries or the
investors.
The intermediary has to take adequate and necessary steps to ensure that continuity in data and
record keeping is maintained and that the data and records are not lost or destroyed. It shall
also ensure that for electronic records and data, up-to-date backup is always available with it. It
shall not be a party to or instrumental in or indulge in:
(a) Creation of false market for securities listed or proposed to be listed on any stock ex-
change in India;
(b) Price rigging or manipulation of prices of securities listed or proposed to be listed on any
stock exchange in India; or
(c) Passing of any unpublished price sensitive information in respect of securities which are
listed or proposed to be listed on any stock exchange to any person or intermediary; or
(d) Any activity for distorting market equilibrium or which may affect the smooth functioning
of the market or for personal gain.
The intermediary needs to maintain an appropriate level of knowledge and competency and
abide by the provisions of any Act, regulations, circulars and guidelines of the central govern-
ment, the Reserve Bank of India (RBI), SEBI, the stock exchanges or any other applicable statu-
tory or self regulatory or other body as the case may be and as may be applicable to the inter-
mediary in respect of the business carried on by such intermediary.
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Review Questions
1. SEBI in the interest of the securities market may direct an intermediary to refund the money
or securities collected from the investors with or without interest. State whether True or
False?
(a) True
(b) False
Ans: (a)
2. If an applicant is not found to be a 'fit and proper person' can he get registration certificate
under SEBI (Intermediaries) Regulations 2008?
(a) Yes
(b) No
Ans: (a)
3. All the employees, directors etc of the intermediary need to strictly adhere to the Code of
Conduct as prescribed in the SEBI Regulations. State Whether True or False?
(a) True
(b) False
Ans: (a)
4. Can a common order be passed in respect of a number of noticees where the subject matter
in question is substantially the same or similar in nature?
(a) Yes
(b) No
Ans: (a)
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7.1 Introduction
The SEBI (Prohibition of Insider Trading) Regulations, 1992 seek to govern the conduct of the
person(s), defined as ‘Insider’, in respect of securities of a company listed on a stock exchange.
The objective of this regulation is to prevent insider trading in securities by prohibiting deal-
ing, communicating or counseling on matters relating to insider trading.
The regulations defines an ‘Insider’ as any person who is or was a ‘Connected Person’ or a
‘Deemed to be Connected Person’ and who is reasonably expected to have access to unpub-
lished price sensitive information in respect of securities of a company or who has received or
has had access to such unpublished price sensitive information;
A Connected Person 10 as defined in the regulation is any person who -
i. is a director of a company, or is deemed to be a director of that company; or
ii. occupies the position as an officer or an employee of the company or holds a position
involving a professional or business relationship between himself and the company
(whether temporary or permanent) and who may reasonably be expected to have an
access to unpublished price sensitive information in relation to that company;
Further, as per the regulations a person is deemed to be a connected person if such per-
son –
(i) is a company under the same management or group, or any subsidiary company
thereof;
(ii) is an intermediary as specified in regulation 12 of the Act, Investment company, Trus-
tee 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 a member of the Board of Trustees of a MF or a member
of the Board of Directors of the AMC of a MF or is an employee thereof who has a fi-
duciary relationship with a 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;
(v) is an official or an employee of a SRO recognized or authorised by the Board of a regu-
latory body;
(vi) is a relative of any of the aforementioned persons;
(vii) is a banker of a company;
(viii) relatives of the connected person; or
(ix) is a concern, firm, trust, Hindu undivided family, company or association of persons
wherein any of the connected persons or any of the persons mentioned in sub-clause
(vi), (vii) or (viii) of Regulation 2(h) of the SEBI (Insider Trading) Regulations, 1992 have
more than 10 per cent of the holding or interest;
For the purpose of the definition, the words ‘connected person’ shall mean any person who is a con-
10
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Regulation 3A prohibits a company from dealing in the securities of another company or associ-
ate of that other company while in possession of any unpublished price sensitive information.
Regulation 4 states that any insider who deals in securities in contravention of the provisions of
regulation 3 or 3A shall be guilty of insider trading.
Price sensitive information is any information which relates directly or indirectly to a company
and which if published, is likely to materially affect the price of securities of that company. The
following are deemed to be price sensitive information:
Periodic financial results of the company.
Intended declaration of dividends (both interim and final).
Issue of securities or buy back of securities.
Any major expansion plans or execution of new projects.
Amalgamation, mergers or takeovers.
Disposal of the whole or substantial part of the undertaking.
Any significant changes in policies, plans or operations of the company.
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The Price Sensitive Information is to be handled on a “need to now” basis i.e. such information
should be disclosed only to those within the organisation/firm who need the information to dis-
charge their duty and whose possession of such information will not rise to a conflict of interest
or appearance of misuse of the information.
The Price Sensitive Information kept in the files should be secured and computer files must have
adequate security of login and password etc.
7.3.1.2Chinese Wall
To prevent the misuse of confidential information the organisation / firm shall adopt a “Chinese
Wall” policy which separates those areas of the organisation/firm which routinely have access to
confidential information, considered “insider areas” from those areas which seal with sale/ mar-
keting/investment advice or other departments providing support services considered “public
areas”.
The employees in the insider area shall not communicate any Price Sensitive Information to
anyone in the public area. The employees in the inside area may also be physically segregated
from the employees in the public area. The demarcation of the various departments as inside
area may be implemented by the organisation / firm. However, in exceptional situations, em-
ployees from the public areas may be brought “over the wall” and given confidential informa-
tion on the basis of “need to know” criteria. Such cases should necessarily be intimated to the
Compliance Officer.
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In order to monitor Chinese wall procedures and trading in client securities based on inside in-
formation, the organisation/firm shall restrict trading in certain securities and designate such list
as restricted/grey list. If the intermediary is handling any assignment of any listed company or is
handling credit rating assignment and is privy to Price Sensitive Information, the securities of
that company would be put on the restricted/grey list. Even when the security is being pur-
chased or sold or is being considered for purchase or sale by the organisation/firm on behalf of
its clients/schemes of mutual funds, the same shall be put on the restricted/grey list.
When the securities are on the restricted list, trading in these securities by designated employ-
ees/directors/partners may be blocked or may be disallowed at the time of pre-clearance.
The SEBI Insider Trading Regulation also provides for several other miscellaneous restrictions
which are as given below:
(c) Directors/designated employees/partners shall execute order within one week after ap-
proval of pre-clearance is given. If the order is not executed within one week after approval
is given, the employee/director/partners must pre clear the transaction again.
(d) Directors/designated employees/partners shall hold their investments for a minimum pe-
riod of 30 days in order to be considered as being held for investment purposes. The holding
period shall also apply to purchases in the primary market. In case of IPOs, the holding pe-
riod would commence when the securities are actually allotted.
(e) Where the securities are sold off before the holding period due to some personal emer-
gency, the Compliance officer shall waive off that period and make a record in writing with
the valid reason.
(f) Analysts, if any, employed with the organisation/firm while preparing research reports of a
client company shall disclose their shareholdings /interest in such company(s) to the Com-
pliance Officer. Analysts who prepare research report of a listed company shall not trade in
securities of that company for thirty days from preparation of such report.
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Review Questions
1. As per SEBI Insider Trading Regulations, what is the minimum period of holding for any in-
vestment made by the Directors/partners to be considered as being held for Investment
purpose?
(a) 60 days
(b) 45 days
(c) 30 days
(d) 15 days
Ans: (c)
2. Does 'Price Sensitive Information' include disposal of whole/substantial part of the under-
taking?
(a) Yes
(b) No
Ans: (a)
3. The restrictions on communication under insider trading do not include communications
under ordinary course of law. State whether True or False?
(a) True
(b) False
Ans: (a)
4. The objective of the SEBI (Prohibition of Insider Trading) Regulation is to prohibit insider
from ___________ on matters relating to insider trading?
(a) Dealing
(b) Communicating
(c) Counselling
(d) All of the above
Ans: (d)
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8.1 Introduction
The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003 prohibit fraudulent, unfair and manipulative
trade practices in securities. These regulations have been made in exercise of the powers con-
ferred by section 30 of the SEBI Act, 1992.
Regulation 2(1) (c) defines fraud as inclusive of any act, expression, omission or concealment
committed to induce another person or his agent to deal in securities. There may or may not be
wrongful gain or avoidance of any loss. However, that is inconsequential in determining if fraud
has been committed. Some of the instances cited are as follows:
a) A wilful misrepresentation of the truth or concealment of material fact in order that an-
other person may act, to his detriment
b) A suggestion as to a fact which is not true, by one who does not believe it to be true
c) An active concealment of a fact by a person having knowledge or belief of the fact
d) A promise made without any intention of performing it
e) A representation, whether true or false, made in a reckless and careless manner
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b) dealing in a security not intended to effect transfer of beneficial ownership but intended
to operate only as a device to inflate, depress or cause fluctuations in the price of such
security for wrongful gain or avoidance of loss;
c) advancing or agreeing to advance any money to any person thereby inducing any other
person to offer to buy any security in any issue only with the intention of securing the
minimum subscription to such issue;
d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any
money or money’s worth for inducing such person for dealing in any security with the
object of inflating, depressing, maintaining or causing fluctuation in the price of such se-
curity;
e) any act or omission amounting to manipulation of the price of a security;
f) publishing or causing to publish or reporting or causing to report by a person dealing in
securities any information which is not true or which he does not believe to be true
prior to or in the course of dealing in securities;
g) entering into a transaction in securities without intention of performing it or without in-
tention of change of ownership of such security;
h) selling, dealing or pledging of stolen or counterfeit security whether in physical or de-
materialized form;
i) an intermediary promising a certain price in respect of buying or selling of a security to a
client and waiting till a discrepancy arises in the price of such security and retaining the
difference in prices as profit for himself;
j) an intermediary providing his clients with such information relating to a security as can-
not be verified by the clients before their dealing in such security;
k) an advertisement that is misleading or that contains information in a distorted manner
and which may influence the decision of the investors;
l) an intermediary reporting trading transactions to his clients entered into on their behalf
in an inflated manner in order to increase his commission and brokerage;
m) an intermediary not disclosing to his client transactions entered into on his behalf in-
cluding taking an option position;
n) circular transactions in respect of a security entered into between intermediaries in or-
der to increase commission to provide a false appearance of trading in such security or
to inflate, depress or cause fluctuations in the price of such security;
o) encouraging the clients by an intermediary to deal in securities solely with the object of
enhancing his brokerage or commission;
p) an intermediary predating or otherwise falsifying records such as contract notes;
q) an intermediary buying or selling securities in advance of a substantial client order or
whereby a futures or option position is taken about an impending transaction in the
same or related futures or options contract;
r) planting false or misleading news which may induce sale or purchase of securities.
s) mis-selling of units of a mutual fund scheme. Mis-selling means sale of units of a mutual
fund scheme by any person, directly or indirectly by making false or misleading state-
ment or concealing or omitting material facts of a scheme or concealing the associated
risk factors of the scheme or not taking reasonable care to ensure suitability of the
scheme to the buyer.
t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or
causing to be carried on any collective investment scheme by any person.
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Explanation– For the purposes of this sub-regulation, for the removal of doubts, it is
clarified that the acts or omissions listed in this sub-regulation are not exhaustive and
that an act or omission is prohibited if it falls within the purview of regulation 3, not-
withstanding that it is not included in this sub-regulation or is described as being com-
mitted only by a certain category of persons in this sub-regulation.
8.3 Investigation
Chapter III of the Regulations relates to investigation of transactions of the nature described
above. In particular, under regulation 8(1), it shall be the duty of every person who is under in-
vestigation:
a) To produce books, accounts and documents that may be required by the Investigating
Authority and also to furnish statements and information that is sought.
b) To appear before the Investigating Authority personally when required to do so and to
answer questions posed by the authority.
SEBI may without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) of
section 11 and section 11B of the SEBI Act, by an order in the interests of the investors and the
securities market issue or take any of the following actions or directions either pending investi-
gation or enquiry or on completion of the investigation or enquiry namely –
(a) Restrain persons from accessing the securities market,
(b) Impound and retain the proceeds or securities in respect of any transaction which is in
violation or prima facie in violation of these regulations,
(c) Direct an intermediary or any person associated with the securities market in any man-
ner not to dispose of or alienate an asset forming part of a fraudulent and unfair trans-
action.
SEBI may even take the following action against an intermediary:
i. Issue a warning or censure;
ii. Suspend the registration of the intermediary;
iii. Cancel the registration of the intermediary.
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Review Questions
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9.1 Introduction
The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework
put in place by India to combat money laundering. The provisions of PMLA came into force on
July 1 2005. The objective of PMLA is, “to prevent money-laundering and to provide for confis-
cation of property derived from, or involved in, money-laundering and for matters connected
therewith or incidental thereto.”
Provisions of the PMLA stipulates that every banking company, financial institution and inter-
mediary shall maintain a record of all transactions, the nature and value of which may be pre-
scribed, whether such transactions comprise a single transaction or a series of transactions inte-
grally connected to each other, and where such series of transactions take place within a month
and furnish information of transactions and verify and maintain the records of the identity of all
its clients. Such transactions include:
• All cash transactions of the value of more than Rs. 10 lakh or its equivalent in foreign
currency.
• All series of cash transactions integrally connected to each other which have been val-
ued below Rs. 10 lakh or its equivalent in foreign currency where such series of transac-
tions take place within one calendar month and the aggregate value of such transaction
exceeds Rs. 10 lakh.
• All suspicious transaction whether or not made in cash. For the purpose of suspicious
transactions apart from ‘transactions integrally connected’, ‘transactions remotely con-
nected or related’ shall also be considered.
The records which have been referred to in the above paragraphs have to be maintained for a
period of 10 years from the date of cessation of the transactions between the clients and the
banking company or financial institution or intermediary, as the case may be.
In the following section, we will discuss the highlights of the PMLA, 2002 and thereafter the
master circular of on Anti-Money Laundering issued by SEBI.
Any person found indulging in any offence of money laundering as defined in section 3 of
the PMLA, shall be punished as per provisions mentioned in section 4 of the Act.
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In cases , where the Director, or any other officer authorized by the Director, has reason to
believe on the basis of the material in his possession that (a) any person is in possession of
any proceeds of crime; (b) such person has been charged of having committed scheduled
offence; and (c) such proceeds of crime are likely to be concealed, transferred or dealt with
in any manner which may result in frustrating any proceedings relating to confiscation of
such proceeds of crime, then he may order to attach such property for a period not exceed-
ing 90 days from the date of such order.
The Central Government shall appoint one or more Adjudicating Authorities to exercise ju-
risdiction, powers and authority conferred by or under this Act. On receipt of a complaint if
the Adjudicating Authority has reason to believe that any person has committed an offence
as per section 3, it may serve a notice of not less than 30 days on such person calling upon
him to indicate the sources of his income, earning or assets, out of which or by means of
which he has acquired the property which has been attached , or, seized, and to show cause
why all or any of such properties should not be declared to be the properties involved in
money-laundering and confiscated by the Central Government.
The Obligations on banking companies, financial institutions and intermediaries has been speci-
fied in section 12 of the PMLA 2002:
(b) Furnish to the Director within such time as may be prescribed, information
relating to such transactions , whether attempted or executed the nature and
value of which may be prescribed;
(c) verify the identity of all its clients, in such manner and subject to such condi-
tions, as may be prescribed.
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(d) identify the beneficial owner, if any, of such of its clients, as may be prescribed
(e) maintain record of documents evidencing identity of its clients and beneficial own-
ers as well as account files and business correspondence relating to its clients
To ensure compliance, the Director has been conferred with the following powers as given in
the Section 12 A and section 13 of the PMLA 2002.
Section 12A:
(1)The Director may call for from any reporting entity any of the records referred to in sub-
section (1) of section 12 and any additional information as he considers necessary for the pur-
poses of this Act
(2)Every reporting entity shall furnish to the Director such information as may be required by
him under sub-section(1) within such time and in such manner as he may specify
(3) Save as otherwise provided under any law for the time being in force, every information
sought by the Director under sub-section (1) shall be kept confidential
Section 13:
“(1)The Director may, either of his own motion or on an application made by any au-
thority, officer or person, call for records as referred to in sub-section (1) of section 12
and may make such inquiry or cause such inquiry to be made, as he thinks fit to be ne-
cessary, with regard to the obligations of the reporting entity under this Chapter.
(1A) If at any stage of inquiry or any other proceedings before him, the Director having
regard to the nature and complexity of the case, is of the opinion that it is necessary
to do so, he may direct the concerned reporting entity to get its records, as may be
specified, audited by an accountant from amongst a panel of accountants maintained
by the Central Government for this purpose
(1B) The expenses of and incidental to any audit under sub-section (1A) shall be borne
by the Central Government
(2) If the Director, in the course of any inquiry, fids that a reporting entity or its desig-
nated director on the Board or any of its employees has failed to comply with the ob-
ligations under this Chapter, then, without prejudice to any other action that may be
taken under any other provision of this Act, he may issue a warning in writing or direct
such reporting entity or its designated director on the Board or any of its employees
to comply with specific instructions or direct such reporting entity or its designated di-
rector on the Board or any of its employees to send reports as such interval as may be
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(3) The Director shall forward a copy of the order so passed to every banking compa-
ny, financial institution or intermediary or person who is a party to the proceeding.
Explanation- For the purposes of this section, accountant shall mean a Chartered ac-
countant within the meaning of the Chartered Accountants Act, 1949."
Any person aggrieved by the order passed by the Director or the Adjudicating Officer under
the PMLA, 2002 may prefer to appeal to the Appellate Tribunal.
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knowledge of the customer, its business and risk profile, taking into account, where
necessary, the customer’s source of funds;
(f) Understand the ownership and control structure of the client; and
(g) Registered intermediaries shall periodically update all documents, data or information
of all clients and beneficial owners collected under the CDD process.
All registered intermediaries should develop customer acceptance policies and procedures that
aim to identify the types of customers that are likely to pose a higher than the average risk of
money laundering or terrorist financing. By establishing such policies and procedures, the in-
termediaries will be in a position to apply CDD on a risk sensitive basis depending on the type of
customer business relationship or transaction. In a nutshell, the following safeguards are to be
followed while accepting the clients:
i. No account should be opened in a fictitious / benami name or on an anonymous basis.
ii. Factors of risk perception of the client should be clearly defined having regard to clients’
location, nature of business activity, trading turnover etc. and manner of making pay-
ment for transactions undertaken. The parameters should enable classification of clients
into low, medium and high risk.
iii. It should be ensured that an account is not opened where the intermediary is unable to
apply appropriate CDD / KYC policies. The market intermediary should not continue to
do business with such a person and file a suspicious activity report. It should also evalu-
ate whether there is suspicious trading in determining in whether to freeze or close the
account. The market intermediary should be cautious to ensure that it does not return
securities of money that may be from suspicious trades. However, the market interme-
diary should consult the relevant authorities in determining what action it should take
when it suspects suspicious trading.
iv. The circumstances under which the client is permitted to act on behalf of another per-
son / entity should be clearly laid down. It should be specified in what manner the ac-
count should be operated, transaction limits for the operation, additional authority re-
quired for transactions exceeding a specified quantity / value and other appropriate de-
tails. Further the rights and responsibilities of both the persons (i.e. the agent- client
registered with the intermediary, as well as the person on whose behalf the agent is act-
ing should be clearly laid down). Adequate verification of a person’s authority to act on
behalf the customer should also be carried out.
v. Necessary checks and balances should be put into place before opening an account so
as to ensure that the identity of the client does not match with any person having
known criminal background or is not banned in any other manner, whether in terms of
criminal or civil proceedings by any enforcement agency worldwide.
vi. The CDD process shall necessarily be revisited when there are suspicions of money
laundering of financing of terrorism.
9.3.5 Client Identification Procedure (CIP)
The ‘Know your Client’ (KYC) policy should clearly spell out the client identification procedure to
be carried out at different stages i.e. while establishing the intermediary – client relationship,
while carrying out transactions for the client or when the intermediary has doubts regarding the
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veracity or the adequacy of previously obtained client identification data. Intermediaries should
comply with the following requirements while putting in place CIP:
(a) All registered intermediaries shall proactively put in place appropriate risk management sys-
tems to determine whether their client or potential client or the beneficial owner of such
client is a politically exposed person.
(b) All registered intermediaries are required to obtain senior management approval for estab-
lishing business relationships with Politically Exposed Persons (PEPs).
(c) Registered intermediaries should also take reasonable measures to verify the sources of
funds as well as wealth of clients and beneficial owners identified as PEP.
(d) The client should be identified by the intermediary by using reliable sources including
documents / information. The intermediary should obtain adequate information to satisfac-
torily establish the identity of each new client and the purpose of the intended nature of the
relationship.
(e) The information should be adequate enough to satisfy competent authorities (regulatory /
enforcement authorities) in future that due diligence was observed by the intermediary in
compliance with the Guidelines. Each original document should be seen prior to acceptance
of a copy.
SEBI has prescribed the minimum requirements relating to KYC for certain class of the regis-
tered intermediaries from time to time. Taking into account the basic principles enshrined in
the KYC norms which have already been prescribed or which may be prescribed by SEBI
from time to time, all registered intermediaries should frame their own internal guidelines
based on their experience in dealing with their clients and legal requirements as per the es-
tablished practices. Further, the intermediary should also maintain continuous familiarity
and follow-up where it notices inconsistencies in the Information provided. The underlying
principle should be to follow the principles enshrined in the PML Act, 2002 as well as the
SEBI Act, 1992 so that the intermediary is aware of the clients on whose behalf it is dealing.
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In cases where there is any suspected drug related or other laundered money or terrorist prop-
erty, the competent investigating authorities would need to trace through the audit trail for re-
constructing a financial profile of the suspect account. To enable this reconstruction, registered
Intermediaries should retain the following information for the accounts of their customers in
order to maintain a satisfactory audit trail: (a) the beneficial owner of the account; (b) the vol-
ume of the funds flowing through the account; and (c) for selected transactions the origin of the
funds; the form in which the funds were offered or withdrawn, e.g. cash, cheques, etc.; the
identity of the person undertaking the transaction; the destination of the funds; the form of in-
struction and authority.
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Intermediaries shall ensure that appropriate steps are taken to enable suspicious transac-
tions to be recognized and have appropriate procedures for reporting suspicious transactions.
While determining suspicious transactions, intermediaries shall be guided by the definition of a
suspicious transaction contained in PML Rules as amended from time to time. SEBI in its master
circular has given an illustrative list of circumstances, which may be in the nature of suspi-
cious transactions. The same is reproduced below:
o Clients whose identity verification seems difficult or clients that appear not to cooperate;
o Asset management services for clients where the source of the funds is not clear or not in
keeping with clients apparent standing /business activity;
o Clients based in high risk jurisdictions;
o Substantial increases in business without apparent cause;
o Clients transferring large sums of money to or from overseas locations with instructions for
payment in cash;
o Attempted transfer of investment proceeds to apparently unrelated third parties;
Any suspicious transaction shall be immediately notified to the Money Laundering Control Offi-
cer or any other designated officer within the intermediary. The notification maybe done in the
form of a detailed report with specific reference to the clients, transactions and the nature
/reason of suspicion. However, it shall be ensured that there is continuity in dealing with the
client as normal until told otherwise and the client shall not be told of the report/suspicion. In
exceptional circumstances, consent may not be given to continue to operate the account,
and transactions may be suspended, in one or more jurisdictions concerned in the transaction,
or other action taken. The Principal Officer/Money Laundering Control Officer and other ap-
propriate compliance, risk management and related staff members shall have timely access to
client identification data and CDD information, transaction records and other relevant informa-
tion.
9.3.10 Reporting to Financial Intelligence Unit-India
The Cash Transactions Reports for cases which have been discussed in bullet points 1 and 2 in
section 9.1 for each month should be submitted to FIU-IND by 15th of the succeeding month.
The Suspicious Transaction Report (STR) shall be submitted within 7 days of arriving at a conclu-
sion that any transaction, is of suspicious nature. The Principal Officer is responsible for timely
submission of the CTR and STR and these reports should be maintained with utmost secrecy.
In terms of the PML Rules, intermediaries are required to report information relating to cash
and suspicious transactions to the
Director, FIU-IND,
Financial Intelligence Unit-India,
6th Floor, Hotel Samrat, Chanakyapuri,
New Delhi-110021
Website: http://fiuindia.gov.in
As per the SEBI (Foreign Portfolio Investors) Regulations, 2014, the Foreign Portfolio Investors is
a person who satisfies the eligibility criteria as provided under the Regulation 4 of the said SEBI
regulations.
As per the SEBI (Foreign Portfolio Investors), the designated depository participant shall not
consider an application for grant of certificate of registration as a foreign portfolio investor
unless the applicant satisfies the following conditions, namely-
a. The applicant is a person not resident in India
b. The applicant is resident of a country whose securities market regulator is a signatory to In-
ternational Organisation of Securities Commissions Multilateral Memorandum of Under-
standing or a signatory to bilateral MoU with SEBI
c. The applicant being a bank, is a resident of a country whose central bank is a member of
Bank for International Settlements
d. The applicant is not resident in a country identified in the public statement of Financial Ac-
tion Task Force as:
i. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing
of Terrorism deficiencies to which counter measures apply; or
ii. 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;
e. The applicant is not a non-resident Indian
f. The applicant is legally permitted to invest in securities outside the country of its incorpora-
tion or establishment or place of business
g. The applicant is authorised by its Memorandum of Association and Articles of Association or
equivalent document(s) or the agreement to invest on its own behalf or on behalf of its cli-
ents
h. The applicant has sufficient experience, good track, is professionally competent, financially
sound and has a generally good reputation of fairness and integrity
i. The grant of certificate to the applicant is in the interest of the development of the securi-
ties market
j. The applicant is a fit and proper person based on the criteria specified in Schedule II of the
SEBI (Intermediaries) Regulations, 2008, and
k. Any other criteria specified by SEBI from time to time.
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• Units of schemes floated by domestic mutual funds, whether listed on a recognised stock
exchange or not;
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• Perpetual debt instruments and debt capital instruments, as specified by the Reserve Bank
of India from time to time;
• Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the
infrastructure sector, where ‘infrastructure’ is defined in terms of the extant External Com-
mercial Borrowings (ECB) guidelines;
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(a) such offshore derivative instruments are issued only to persons who are regulated by an ap-
propriate foreign regulatory authority;
(b) such offshore derivative instruments are issued after compliance with ‘Know Your Client’
norms Provided that those unregulated broad based funds, which are classified as Category II
foreign portfolio investor by virtue of their investment manager being appropriately regulated
shall not issue, subscribe or otherwise deal in offshore derivatives instruments directly or indi-
rectly:
Provided further that no Category III foreign portfolio investor shall issue, subscribe to or other-
wise deal in offshore derivatives instruments directly or indirectly.
(2) A foreign portfolio investor shall ensure that further issue or transfer of any offshore deriva-
tive instruments issued by or on behalf of it is made only to persons who are regulated by an
appropriate foreign regulatory authority.
(3) Foreign portfolio investors shall fully disclose to SEBI any information concerning the terms
of and parties to off-shore derivative instruments such as participatory notes, equity linked
notes or any other such instruments, by whatever names they are called, entered into by it re-
lating to any securities listed or proposed to be listed in any stock exchange in India, as and
when and in such form as the Board may specify.
(4) Any offshore derivative instruments issued under the SEBI (Foreign Institutional Investors)
Regulations, 1995 before commencement of these regulations shall be deemed to have been
issued under thecorresponding provision of these regulations.
Review Questions
1. Record of transactions to be maintained under the Prevention of Money Laundering Act in-
cludes Cash transactions of the value of more than ________.
(a) Rs.10 lakh
(b) Rs. 20 lakh
(c) Rs. 25 lakh
(d) Rs. 1 crore
Ans: (a)
2. Fine in case of money laundering shall extend to Rs _________ and rigorous imprisonment.
(a) Rs. 5 lakh
(b) Rs. 10 lakh
(c) Rs. 15 lakh
(d) Rs. 20 lakh
Ans: (a)
3. A foreign portfolio investor shall invest only in which of the following securities:
(a) Domestic Mutual Fund Schemes
(b) Derivatives traded on a recognised stock exchange
(c) Rupee denominated credit enhanced bonds
(d) All of the above
Ans: (d)
4. In respect of investments in the debt securities, the foreign portfolio investors need not
comply with any conditions or directions given by Reserve Bank of India, as long as it is
meeting the restrictions and conditions as specified by SEBI in its SEBI (FPI) Regulations?
(a) True
(b) False
Ans: (b)
10.1 Introduction
The provisions of The Prevention of Money Laundering Act, 2002 (PMLA), has made it mandato-
ry for all Intermediaries to comply with the 'Know Your Client' (KYC) norms of the applicants de-
sirous of trading / investing / dealing in the securities market. KYC means the procedure pre-
scribed by SEBI for identifying and verifying the proof of address and identity and compliance
with rules, regulations, guidelines and circulars issued by SEBI or any other authority for Preven-
tion of Money Laundering from time to time.
SEBI on December 1, 2011 has notified the SEBI (KYC Registration Agency) Regulations, 2011.
SEBI further issued the guidelines on December 23, 2011 11 to effectively implement the Regula-
tions.
The SEBI (KYC Registration Agency) Regulations, 2011, hereinafter referred as SEBI KRA Regula-
tions provides that the KRA agency be registered with SEBI. The KRA is a centralized agency
which will maintain and make available the information provided by a client to an intermediary
to comply with the KYC norms.
10.2Registration as a KRA (Initial and Permanent)
SEBI shall consider the application for grant of certificate of initial registration as a KRA from an
applicant who is fit and proper person 12 and who belongs to one of the following categories as
given below provided that any conflict of interest does not exist between the role of the appli-
cant as KRA and other commercial activities of the applicant, its associates and group compa-
nies, namely:
(a) A wholly owned subsidiary of a recognized stock exchange, having nation-wide network of
trading terminals, or;
(b) A wholly owned subsidiary of a depository or any other intermediary registered with the
Board or;
(c) A wholly owned subsidiary of a Self Regulatory Organization (SRO) registered under SEBI (Self
Regulatory Organization) Regulations, 2004.
The applicant also has to ensure SEBI about the organizational capabilities, technology and sys-
tems and safeguards for maintaining data privacy and also measures undertaken for preventing
unauthorized data sharing. Further the applicant should also have a networth of atleast Rs. 25
crore on a continuous basis.
SEBI shall grant an initial registration which shall be valid for a period of 5 years from the initial
date of its issue to the applicant. The KRA three months before the expiry of the initial registra-
tion shall make an application for grant of certificate of permanent registration to SEBI. If any
information has changed which was submitted during the initial registration, all those de-
tails/information should be submitted along with the application for permanent registration.
11
SEBI Circular Ref. No. MIRSD/Cir- 26 /2011 December 23, 2011.
12
As per the SEBI Intermediaries Regulations
SEBI may grant the permanent registration after being satisfied of the information submitted by
the KRA. The KRA applicant shall pay non-refundable application fees of Rs. 50,000, Rs. 1 lakh for
initial and permanent registration. An annual fee of Rs. 1 lakh is also required to be paid by the
KRA.
10.3Obligations on Surrendering Certificate of Registration
A KRA who wishes to surrender the certificate of registration may do so after requesting for
such surrender to SEBI. SEBI may require the KRA to satisfy SEBI about the factors, as it may
deem fit, but not limited to the following:
• Arrangements made by KRA for maintenance and preservation of records and other
documents required to be maintained under these regulations;
• Redressal of investor grievances;
• Transfer of records of its clients;
• Arrangements made by it for ensuring continuity of service to the clients;
• Defaults or pending action, if any.
On and from the date of the surrender or cancellation of the certificate, the KRA shall-
• return the certificate of registration which has been cancelled, to SEBI and shall not repre-
sent itself to be a holder of the certificate for carrying out the activity for which such certifi-
cate had been granted;
• cease to carry on any activity in respect of which the certificate had been granted;
• transfer its activities to another entity holding a valid certificate of registration to carry on
such activity and allow its clients to withdraw any assignment given to it, without any addi-
tional cost to such client;
• make provisions as regards liability incurred or assumed by it;
• take such other action including the action relating to any records or documents that may
be in custody or control of such person, within the time period and in the manner, as may
be required under the these regulations, or as may be directed by SEBI.
10.4Functions and Obligations of KRA and Intermediary
The KRA shall obtain the KYC documents of the client from the intermediary. The documents
shall be as prescribed by SEBI and in terms of the rules, regulations, guidelines and circulars is-
sued by SEBI or any other authority for Prevention of Money Laundering, from time to time.
10.4.1 Functions and Obligations of KRA
KRA shall:
a) Prepare the Operating Instructions in co-ordination with other KRA(s) and issue the same to
implement the requirements of these regulations.
b) Have electronic connectivity in order to establish interoperability 13with KRAs.
c) Have a secure data transmission link with other KRA(s) and with each intermediary that up-
loads the KYC documents on its system and relies upon its data.
13
Inter-operability means the ability of the KRA to determine whether the KYC documents of the client are in the cus-
tody of another KRA.
d) Be responsible for storing, safeguarding and retrieving the KYC documents and submit to
SEBI or any other statutory authority as and when required.
e) Retain the KYC documents of the client, in electronic form for the period specified by Rules,
as well as ensuring that retrieval of KYC information is facilitated within stipulated time pe-
riod.
f) Any information updated about a client shall be disseminated by KRA to all intermediaries
that avail of the services of the KRA in respect of that client.
g) Ensure that the integrity of the automatic data processing systems for electronic records is
maintained at all times.
h) Take all precautions necessary to ensure that the KYC documents/records are not lost, de-
stroyed or tampered with and that sufficient back up of electronic records is available at all
times at a different place.
i) Have adequate mechanisms for the purposes of reviewing, monitoring and evaluating its
controls, systems, procedures and safeguards.
j) Cause an audit of its controls, systems, procedures and safeguards to be carried out periodi-
cally and take corrective actions for deficiencies, if any and report to SEBI.
k) Take all reasonable measures to prevent unauthorized access to its database and have audit
of its systems and procedures at regular intervals as prescribed by SEBI.
l) Have checks built in its system so that an intermediary can access the information only for
the clients who approach him.
m) 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 client’s grievances. The compliance officer shall
immediately and independently report to SEBI any non-compliance observed by him.
n) Send a letter to each client after receipt of the KYC documents from the intermediary, con-
firming the client’s details thereof.
o) Take adequate steps for redressal of the grievances of the clients within one month of the
date of receipt of the complaint and keep the client and SEBI informed about the number,
nature and other particulars of the complaints from such investors. KRAs are also required
to develop the monitoring mechanism through internal audit and inspections and encourage
investor to use SCORES for lodging their grievances.
10.4.2 Functions and Obligations of the Intermediary
The Intermediary has the following functions and obligations –
a) The intermediary shall perform the initial KYC/due diligence of the client, upload the KYC
information with proper authentication on the system of the KRA, furnish the scanned im-
ages of the KYC documents to the KRA, and retain the physical KYC documents:
Provided that in the case of clients of a mutual fund, the Registrar to an Issue and Share
Transfer Agent appointed by the mutual fund may perform the initial KYC/due diligence of
the client, upload the KYC information with proper authentication on the system of the KRA,
and furnish the scanned images of KYC documents to the KRA.
b) The intermediary or the mutual fund, as the case may be, shall furnish the physical KYC
documents or authenticated copies thereof to the KRA, whenever so desired by the KRA.
c) When the client approaches another intermediary subsequently, intermediary shall verify
and download the client’s details from the system of KRA:.
Provided that upon receipt of information on change in KYC details and status of the clients
by the intermediary or when it comes to the knowledge of the intermediary, at any stage,
the intermediary shall be responsible for uploading the updated information on the system
of KRA and retaining the physical documents
d) An intermediary shall not use the KYC data of a client obtained from the KRA for purposes
other than it is meant for; nor shall it make any commercial gain by sharing the same with
any third party including its affiliates or associates.
e) The intermediary shall have the ultimate responsibility for the KYC of its clients, by under-
taking enhanced KYC measures commensurate with the risk profile of its clients.
10.5 Code of Conduct of KRA
1. A KRA shall make all efforts to protect the interest of its clients.
2. It should maintain high standards of integrity, dignity and fairness in the conduct of its busi-
ness and fulfill its obligations in a prompt, ethical and professional manner.
3. A KRA shall at all times exercise due diligence, ensure proper care and exercise independent
professional judgment. It should ensure that any change in registration status/any penal ac-
tion taken by SEBI or any material change in financial position which may adversely affect
the interests of clients is promptly displayed on its website.
4. A KRA shall not divulge to anybody either orally or in writing, directly or indirectly, any con-
fidential information about the clients which has come to its knowledge, without taking
prior permission of its clients, except where such disclosures are required to be made in
compliance with any law for the time being in force.
5. A KRA shall not indulge in any unfair competition. It shall display on its website adequate
and appropriate information about its business, including contact details of persons and
services available to clients.
6. All investor grievances should be redressed in a timely and appropriate manner. A KRA shall
make reasonable efforts to avoid misrepresentation and ensure that the information pro-
vided to the clients and intermediaries is not misleading.
7. A KRA shall abide by the provisions of the Act and the rules, regulations issued by the Gov-
ernment and SEBI, from time to time, as may be applicable. It shall not make untrue state-
ment or suppress any material fact in any documents, reports, papers or information fur-
nished to SEBI.
8. A KRA shall ensure that SEBI is promptly informed about any action, legal proceeding, etc.,
initiated against it in respect of any material breach or non-compliance by it, of any law,
rules, regulations and directions of SEBI or of any other regulatory body.
9. (a) A KRA or any of his employees shall not render, directly or indirectly, any investment ad-
vice about any security in the publicly accessible media; (b) A KRA shall not make a recom-
mendation to any client who might be expected to rely thereon to acquire, dispose of or re-
tain any securities.
10. A KRA shall ensure that any person it employs or appoints to conduct business is fit and
proper and otherwise qualified to act, in the capacity so employed or appointed including
having relevant professional training or experience.
11. A KRA shall have internal control procedures and financial and operational capabilities which
can be reasonably expected to protect its operations, its clients from financial loss arising
from theft, fraud, and other dishonest acts, professional misconduct or omissions. The KRA
shall be responsible for the acts or omissions of its employees in respect to the conduct of
its business.
12. A KRA shall provide adequate freedom and powers to its compliance officer for the effective
discharge of its duties.
13. A KRA shall ensure that the senior management, particularly decision makers have access to
all relevant information about the business on a timely basis.
14. A KRA shall ensure that good corporate policies and corporate governance are in place.
15. A KRA should have adequately trained staff and arrangements to render fair, prompt and
competence services to its clients.
16. A KRA shall develop its own internal code of conduct for governing its internal operations
and laying down its standards of appropriate conduct for its employees and officers in the
carrying out of their duties. Such a code may extend to the maintenance of professional ex-
cellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of inter-
ests, disclosure of shareholdings and interests, etc.
17. KRA shall not be party to (a) creation of false market;(b) price rigging or manipulation;(c)
passing of unpublished price sensitive information in respect of securities which are listed
and proposed to be listed in any stock exchange to any person or intermediary.
18. A KRA shall maintain proper inward and outward system for all types of mail received and
dispatched in all forms.
19. A KRA shall follow maker-checker concept in its activities to ensure accuracy of data.
20. A KRA shall not indulge in manipulative, fraudulent practices in the process of identification,
verification and updation of a Client’s KYC information with a view to distort market equilib-
rium or making personal gains.
i. Once the initial KYC of the new clients are done, the intermediary shall immediately upload
the KYC information on the system of the KRA and send the KYC documents (KYC application
form and supporting documents of the clients) to the KRA within 10 working days from the
date of execution of documents by the client and maintain the proof of dispatch.
ii. In case a client’s KYC documents which have been sent to KRA is incomplete, the same shall
be communicated to the intermediary who shall forward the required information / docu-
ments promptly to KRA.
iii. While uploading the clients’ data the intermediary shall ensure that there is no duplication
of data in the KRA system.
iv. The intermediary shall carry out KYC when the client chooses to trade/ invest / deal through
it.
v. The intermediary is also required to follow the risk based due diligence approach. Also they
are required to conduct ongoing client due diligence based on risk profile and financial posi-
tion of the clients as prescribed by SEBI.
vi. The intermediaries shall also maintain electronic records of KYCs of clients and keeping
physical records would not be necessary. It shall promptly provide KYC related information
to KRA, as and when required.
vii. The intermediary shall have adequate internal controls to ensure the security /authenticity
of data uploaded by it.
For KRAs:
i. KRA system shall provide KYC information in data and image form to the intermediary.
ii. KRA shall send a letter to the client within 10 working days of the receipt of the initial/updated
KYC documents from intermediary, confirming the details thereof and maintain the proof of
dispatch.
iii. KRA(s) shall develop systems, in co-ordination with each other, to prevent duplication of entry
of KYC details of a client and to ensure uniformity in formats of uploading / modification /
downloading of KYC data by the intermediary.
iv. KRA shall maintain an audit trail of the upload / modifications / downloads made in the KYC
data, by the intermediary in its system.
v. KRA shall ensure that a comprehensive audit of its systems, controls, procedures, safeguards
and security of information and documents is carried out annually by an independent auditor.
The Audit Report along with the steps taken to rectify the deficiencies, if any, shall be placed
before its Board of Directors. Thereafter, the KRA shall send the Action Taken Report to SEBI
within 3 months.
vi. KRA systems shall clearly indicate the status of clients falling under PAN exempt categories.
vii. A client can start trading/investing/dealing with the intermediary and its group/subsidiary/
holding company as soon as the initial KYC is done and other necessary information is ob-
tained. The remaining process of KRA can still be in progress at that time.
viii. KRA is also required to follow the risk based due diligence approach. Also they are required to
conduct ongoing client due diligence based on risk profile and financial position of the clients
as prescribed by SEBI.
To bring in uniformity in the KYC procedure across intermediaries, the IPV requirements for all
the intermediaries have been streamlined by SEBI. Intermediaries registered with SEBI as Stock
Brokers, KRAs, Depository Participants, Mutual Funds, Portfolio Managers, Venture Capital
Funds and Collective Investment Schemes need to mandatorily carry out IPV for all their clients.
The intermediary has to ensure that the details of the person carrying out the IPV are recorded
on the KYC form at the time of IPV. The IPV carried out by one SEBI registered intermediary shall
be relied upon by another intermediary. For Stock Brokers, their Sub-brokers or Authorised per-
sons may perform the IPV.
Review Questions
11.1 Introduction to SEBI (Stock Brokers and Sub Brokers) Regulations, 1992
The SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 is prescribed for anyone who wishes
to register as a stock broker or its sub-broker for doing any transaction or business in the securi-
ties market. Stock brokers and sub-brokers shall ensure that they comply at all times with the
various sections as given under this regulation.
11.1.1 Registration of Stock Brokers and Sub-brokers
The stock brokers shall ensure that they comply at all times with the conditions of registration
under regulation 9 as follows:
• the stock broker holds the membership of the stock exchange;
• the stock broker shall abide by the rules, regulations and bye-laws of the stock exchange;
• where the stock broker proposes change in control, he shall obtain prior approval of the
Board for continuing to act as such after the change;
• he shall pay fees charged by the SEBI; and
• he shall take adequate steps to redress investors’ grievances within 1 month of the date of
receipt of the complaint and keep SEBI informed about such complaints.
• he shall at all times abide by the Code of Conduct as specified in Schedule II; and
• he shall at all times maintain the minimum networth as specified in Schedule VI.
The sub brokers shall ensure to comply at all times the conditions of registration under the regu-
lation 11 and 11A as follows:
• No sub-broker shall act as such unless he holds a certificate granted by SEBI under these
regulations.
• The application for registration shall be accompanied by a recommendation letter from a
stock broker of a recognised stock exchange with whom he is to be affiliated along with two
references including one from his banker.
• The application form shall be submitted to the stock exchange of which the stock broker
with whom he is to be affiliated is a member.
As per regulation 12A, any registration granted to a Sub-broker shall be subject to the following
conditions, namely:
o he shall abide by the rules, regulations and bye-laws of the stock exchange which are appli-
cable to him;
o he shall obtain prior approval of the SEBI when it proposes to change its status or constitu-
tion;
o he shall pay the fees charged by the SEBI in the manner as specified by the regulations;
o he shall take adequate steps to redress the grievances of the investors within one month of
the date of the receipt of the complaint and keep the SEBI informed of the number, nature
and other particulars of the complaints received from such investors; and
o the stock broker is authorised in writing by a stock broker being a member of a stock ex-
change for affiliating himself in buying, selling or dealing in securities.
It is also provided in regulation 15A that a director of a stock broker shall not act as a sub-broker
to the same stock broker.
Regulation 17(2) states that every stock-broker shall intimate to SEBI the place where the books
of accounts, records and documents are maintained. Additionally, regulation 18, also states that
every stock broker shall preserve the books of account and other records maintained under
regulation 17 for a minimum period of 5 years. Under the stock broker regulation the require-
ment of compliance officer is also mandated under the regulation 18A which states that 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. and for
redress of investors’ grievances. The compliance officer shall immediately and independently
report to SEBI any non-compliance observed by him. Under regulation 18B, the stock broker
shall not deal with any person as a sub-broker unless such person has been granted certificate of
registration by the SEBI.
SEBI has been issuing circulars and master circulars for registered trading members with respect
to these regulations. These circulars include, inter alia, requirement of base minimum capital.
Whenever any such inspection (as per Regulation 19) is initiated, the stock-broker has the fol-
lowing obligations under regulation 21:
o It shall be the duty of every director, officer and employee of the stock-broker, to produce
to the inspecting authority such books, accounts and other documents in his custody or con-
trol and furnish him with the statements and information relating to the transactions in se-
curities market within such time as the inspecting authority may require.
o The stock-broker shall allow the inspecting authority to have reasonable access to the prem-
ises occupied by the stock- broker or by any other person on his behalf and also extend rea-
sonable facility for examining any books, records, documents and computer data in the pos-
session of the stock-broker or any other person and also provide copies of documents or
other materials which, in the opinion of the inspecting authority are relevant.
o The inspecting authority, in the course of inspection, shall be entitled to examine or record
statements of any member, director, and employee of the stock- broker.
o It shall be the duty of every director, officer and employee of the stock broker to give to the
inspecting authority all assistance in connection with the inspection, which the stock broker
may be reasonably expected to give.
The inspecting authority shall submit the inspection report to SEBI and based on the same, SEBI
may take such action as it may deem fit and appropriate. SEBI may also appoint a qualified audi-
tor under regulation 24, to investigate into the books of account or affairs of any stock-broker.
The auditor so appointed shall have the same powers of the inspecting authority and the stock
broker shall have the same obligations as mentioned in the point above.
(b) Penalties as specified under the SEBI (Intermediaries) Regulations, 2008 14 including sus-
pension or cancellation of certificate of registration as a stock broker or sub-broker
(c) Prosecution under regulation 24 of the Act.
14
Chapter V of the SEBI (Intermediaries) Regulations, 2008 which would be discussed in the later section of this work-
book.
i. The affiliating stock broker shall issue a public advertisement in a local newspaper with
wide circulation where the sub-broker’s place of work is situated, informing the inves-
tors/general public about the surrender of registration of his sub-broker and not to deal
with such sub-broker.
ii. Further, in case of transition from sub broker to Authorized Person (AP)(where the sub
broker surrenders registration while seeking approval as AP)with the same stock broker
and the same stock exchange, issue of advertisement in newspaper regarding surrender
of sub broker registration shall not be required. However, the affiliating stock broker
shall furnish an undertaking/ confirmation to the stock exchanges at the time of surren-
der of sub broker registration that he has sent communication to the clients of the sub
broker individually about the surrender of sub brokership and also the fact of approval
as AP.
iii. The affiliating stock broker and/or stock exchange shall publish the details of sub-
brokers whose registration has been surrendered or their new status as AP, as the case
may be on their respective websites for the information of the investors.
11.1.4.3 Prosecution
Under regulation 28, a stock broker is liable for prosecution as per regulation 24 of the SEBI Act
for any of the following violations –
a. Dealing in securities without obtaining certificate of registration from SEBI as a stock
broker.
b. Dealing in securities or providing trading floor or assisting in trading outside the recog-
nized stock exchange in violation of provisions of the SCRA or rules made or notifica-
tions issued thereunder.
c. Market manipulation of securities or index.
d. Indulging in insider trading in violation of SEBI (Prohibition of Insider Trading) Regula-
tions, 1992.
e. Violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Secu-
rities Market) Regulations, 2003.
f. Failure without reasonable cause –
o to produce to the investigating authority or any person authorized by him in this
behalf, any books registers, records or other documents which are in his custody or
power; or
o to appear before the investigating authority personally or to answer any question
which is put to him by the investigating authority; or
o to sign the notes of any examination taken down by the investigating authority.
g. Failure to pay penalty imposed by the adjudicating officer or failure to comply with any
of his directions or orders.
1) Integrity: A stock-broker, must maintain high standards of integrity, promptitude and fair-
ness in the conduct of all its business.
2) Exercise of Due Skill and Care: A stock-broker, must act with due skill, care and diligence in
the conduct of all its business.
3) Manipulation: A stock-broker should not indulge in manipulative, fraudulent or deceptive
transactions or schemes or spread rumours with a view to distorting market equilibrium or
making personal gains.
4) Malpractices: A stock-broker should not create false market either singly or in concert with
others or indulge in any act detrimental to the investors’ interest or which leads to interfer-
ence with the fair and smooth functioning of the market. A stock-broker should not involve
itself in excessive speculative business in the market beyond reasonable levels not commen-
surate with its financial soundness.
5) Compliance with Statutory Requirements: A stock-broker should abide by all the provisions
of the Act and the rules, regulations issued by the Government, the SEBI and the stock ex-
change from time to time as may be applicable to him.
1) Execution of Orders: A stock-broker, in its dealings with the clients and the general investing
public, should faithfully execute the orders for buying and selling of securities at the best
available market price and not refuse to deal with a small investor merely on the ground of
the volume of business involved. A stock-broker also should promptly inform its client about
the execution or non-execution of an order, and make prompt payment in respect of securi-
ties sold and arrange for prompt delivery of securities purchased by clients.
2) Issue of Contract Note: A stock-broker should issue without delay to its client or client of the
sub-broker, as the case may be a contract note for all transactions in the form as specified
by the stock exchange.
3) Breach of Trust: A stock-broker should not disclose or discuss with any other person or make
improper use of the details of personal investments and other information of a confidential
nature of the client which it comes to know in its business relationship.
4) Business And Commission:
a) A stock-broker should not encourage sales or purchases of securities with the sole ob-
ject of generating brokerage or commission.
b) A stock-broker should not furnish false or misleading quotations or give any other false
or misleading advice or information to the clients with a view of inducing him to do
business in particular securities and enabling itself to earn brokerage or commission
thereby.
5) Business of Defaulting Clients: A stock-broker should not deal or transact business know-
ingly, directly or indirectly or execute an order for a client who has failed to carry out his
commitments in relation to securities with another stock-broker.
6) Fairness to Clients: A stock-broker, when dealing with a client, must disclose whether it is
acting as a principal or as an agent and should ensure at the same time that no conflict of in-
terest arises between him and the client. In the event of a conflict of interest, he should in-
form the client accordingly and should not seek to gain a direct or indirect personal advan-
tage from the situation and also not consider clients’ interest inferior to his own.
7) Investment Advice: A stock-broker should not make a recommendation to any client who
might be expected to rely thereon to acquire, dispose of, retain any securities unless it has
reasonable grounds for believing that the recommendation is suitable for such a client upon
the basis of the facts, if disclosed by such a client as to his own security holdings, financial
situation and objectives of such investment. The stock-broker should seek such information
from clients, wherever it feels it is appropriate to do so.
7A) Investment Advice in publicly accessible media –
(a) A stock broker or any of its employees shall not render, directly or indirectly, any invest-
ment advice about any security in the publicly accessible media, whether real time or non
real-time, unless a disclosure of his interest including the interest of his dependent family
members and the employer including their long or short position in the said security has
been made, while rendering such advice.
(b) In case, an employee of the stock broker is rendering such advice, he shall also disclose
the interest of his dependent family members and the employer including their long or short
position in the said security, while rendering such advice.
8) Competence of Stock Broker: A stock-broker should have adequately trained staff and ar-
rangements to render fair, prompt and competent services to its clients.
1) Conduct of Dealings: A stock-broker shall co-operate with the other contracting party in
comparing unmatched transactions. A stock-broker should not, knowingly and wilfully de-
liver documents which constitute bad delivery and shall cooperate with other contracting
party for prompt replacement of documents which are declared as bad delivery.
2) Protection of Clients Interests: A stock-broker shall extend fullest cooperation to other
stock-brokers in protecting the interests of its clients regarding their rights to dividends, bo-
nus shares, right shares and any other right related to such securities.
3) Transactions with Stock-Brokers: A stock-broker should carry out its transactions with other
stock-brokers and shall comply with its obligations in completing the settlement of transac-
tions with them.
4) Advertisement and Publicity: A stock-broker should not advertise its business publicly unless
permitted by the stock exchange.
5) Inducement of Clients: A stock-broker should not resort to unfair means of inducing clients
from other stock- brokers.
6) False or Misleading Returns: A stock-broker shall not neglect or fail or refuse to submit the
required returns and not make any false or misleading statement on any returns required to
be submitted to SEBI and the stock exchange.
D.
1) A stock broker should always enter into an agreement as specified by SEBI with its client.
2) A stock broker should also enter into an agreement as specified by SEBI with the client of
the sub-broker.
1. Integrity: A sub-broker should maintain high standards of integrity, promptitude and fair-
ness in the conduct of all investment business.
2. Exercise of Due Skill and Care: A sub-broker should act with due skill, care and diligence in
the conduct of all investment business.
1. Execution of Orders: A sub-broker in his dealings with the clients and the general investing
public must faithfully execute the orders for buying and selling of securities at the best
available market price. A sub-broker shall promptly inform his client about the execution or
non-execution of an order and also assist its client in obtaining the contract note from the
stock broker.
2. Breach of Trust: A sub-broker should not disclose or discuss with any other person or make
improper use of the details of personal investments and other information of a confidential
nature of the client which he comes to know in his business relationship.
3. Business and Commission:
o A sub-broker shall not encourage sales or purchases of securities with the sole ob-
ject of generating brokerage or commission.
o A sub-broker shall not furnish false or misleading quotations or give any other false
or misleading advice or information to the clients with a view of inducing him to do
business in particular securities and enabling himself to earn brokerage or commis-
sion thereby.
o A sub-broker shall not charge from his clients a commission more than one and one
half of one percent of the value mentioned in the respective sale or purchase notes.
4. Business of Defaulting Clients: A sub-broker shall not deal or transact business knowingly,
directly or indirectly or execute an order for a client who has failed to carry out his commit-
ments in relation to securities and is in default with another broker or sub-broker.
5. Fairness to clients: A sub-broker when dealing with a client should disclose that it is acting as
an agent ensuring at the same time, that no conflict of interest arises between him and the
client. In the event of conflict of interest, the sub-broker should inform the client accord-
ingly. He should not seek to gain any direct or indirect personal advantage from the situa-
tion and shall not consider client’s interest inferior than his own.
6. Investment advice: A sub-broker shall not make a recommendation to any client who might
be expected to rely thereon to acquire, dispose of, retain any securities unless he has rea-
sonable grounds for believing that the recommendations is suitable for such a client upon
the basis of the facts, if disclosed by such a client as to his own security holdings, financial
situation and objectives of such investment.
7. Investment advice in publicly accessible media-
(a) A sub-broker or any of his employees shall not render, directly and indirectly any in-
vestment advice about any security in the publicly accessible media, whether real time
or non-real time, unless a disclosure of his interest including his long or short position
in the said security has been made, while rendering such advice.
(b) In case an employee of the sub-broker is rendering such advice, he shall disclose the in-
terest of his independent family members and the employer including their long or
short position in the said security, while rendering such advice.
8. Competence of Sub-broker: A sub-broker should have adequately trained staff and ar-
rangements to render fair, prompt and competence services to his clients and continuous
compliance with the regulatory system.
9. Conduct of Dealings: A sub-broker shall cooperate with his broker in comparing unmatched
transactions. Sub-broker shall not knowingly and wilfully deliver documents which consti-
tute bad delivery. A sub-broker shall cooperate with other contracting party for prompt re-
placement of documents which are declared as bad delivery.
10. Protection of client’s interest: A sub-broker shall extend fullest co-operation to his stock-
broker in protecting the interests of their clients regarding their rights to dividends, right or
bonus shares, or any other rights relatable to such securities.
11. Transactions with Brokers: A sub-broker should not fail to carry out his stock broking trans-
actions with his brokers nor shall he fail to meet his business liabilities or show negligence in
completing the settlement of transactions with them.
12. Agreement between sub-broker, client of the sub-broker and main broker: A sub-broker
shall enter into a tripartite agreement with his client and the main stock broker indicating
the rights and obligations of the stock broker, sub-broker and such client of the stock bro-
ker.
13. Advertisement and Publicity: A stock broker shall not advertise his business publicly unless
permitted by the stock exchange.
14. Inducement of Clients: A stock broker shall not resort to unfair means of inducing clients
from other brokers.
commencing from the sixth financial year after the date of grant of initial registration to
keep his registration in force.
Every remittance of fees as referred to in (a) and (b) above should be accompanies by a certifi-
cate as to the authenticity of turnover on the basis of which fees have been computed duly
signed by the stock exchange of which the stock broker is a member or by a qualified auditor 15
or as defined under section 141 of the Companies Act, 2013.
Every sub-broker shall pay fees in the manner as given below:
i. Where a sub-broker has been granted certificate of registration by SEBI before August 1,
2006;
i. He shall pay a sum of ten thousand rupees for the block of five financial years
commencing from April 1, 2007; and
ii. After the expiry of the said block of five financial years, he shall pay a sum of
five thousand rupees for every subsequent block of five financial years.
ii. Where a sub-broker is granted certificate of registration by SEBI on or after August 1,
2006;
i. He shall pay a sum of ten thousand rupees for the block of five financial years
commencing from April 1, 2007; and
ii. After the expiry of the said block of five financial years, he shall pay a sum of
five thousand rupees for every subsequent block of five financial years.
15
A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within
the meaning of the Chartered Accountants Act, 1949 (38 of. 1949); Provided that a firm whereof all the partners prac-
tising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a com-
pany, in which case any partner so practising may act in the name of the firm.
The member brokers need to make the payment to their clients or deliver the securities pur-
chased within two working days of payout unless the client has requested otherwise. It is also
compulsory for the member broker to issue the contract note to the client for its purchase or
sale within 24 hours of the execution of the contract. We will here further discuss the other
things which fall under the ambit of the client-broker relationship.
16
SEBI circular Ref. No. MIRSD/SE/Cir-19/2009 dated December 3, 2009
SEBI has made filing of the ‘Know Your Client (KYC)’ form mandatory for the clients vide its circu-
lar. The broker is required to ensure that the client fills up the KYC, along with the ‘Client
Agreement and the Risk Disclosure Document’. In the KYC, the broker should ensure complete
details of client information, bank and depository account details, financial details of the con-
stituent, investment / trading experience, references, financial documents and signature of the
client are provided. The photograph, proof of address and identity and the Board resolution for
corporate clients permitting trading in derivative products are also required as a part of the KYC.
Clients should also indicate the segments in which they would like to transact.
SEBI has issued guidelines in pursuance of the SEBI KYC Registration Agency (KRA) Regulations,
2011 and In-Person verification which have been discussed in chapter 10. The KRA system shall
be applicable for all new client accounts opened from January 1, 2012.
17
The Risk Disclosure Document (RDD) should be read by each and every client before entering into derivatives trad-
ing and a signed copy of the same should be obtained by the broker from all its clients.
18
SEBI circular Ref. No. SMD/Policy/Cir./11-97 dated May 21, 1997.
19
SEBI circular Ref. No. SEBI/MRD/SE/Cir-37/2003 dated September 30, 2003.
The requirement of obtaining the client registration form may be waived for SEBI registered
Foreign Institutional Investors (FIIs), Mutual Funds (MFs), Venture Capital Funds (VCFs) and
Foreign Venture Capital Investors (FVCIs), Scheduled Commercial Banks (SCBs) etc .
1. Securities
i. Transfer of securities held in the beneficial owner account(s) of the client(s) towards
stock exchange related margin /delivery obligations arising out of trades executed
by the client(s) on the stock exchange through the same broker.
ii. Pledge the securities in favour of the stock broker for the limited purpose of meet-
ing the margin requirements of the client(s) in connection with the trades executed
by the clients on the stock exchange through the same broker. Audit trail should be
available with the stock broker for such transactions.
iii. To apply for various products like MFs, public issues etc pursuant to the instructions
of the client. However necessary audit trail should be maintained by the stock bro-
ker to prove that the necessary application /act was made /done pursuant to receipt
of instruction from client.
2. Funds
iv. Transfer of funds from the bank account(s) of the clients for the following:
a. For meeting the settlement obligations of the client(s)/margin requirements of
the client(s) in connection with the trades executed by the clients on the stock
exchange through the same stock broker.
b. For recovering any outstanding amount due from the client(s) arising out of cli-
ents trading activities on the stock exchanges through the same stock broker.
c. For meeting obligations arising out of the client subscribing to such other prod-
ucts/facilities/services through the stock broker like MFs, public issues etc.
d. Towards monies/fees/charges etc due to the stock broker /depository partici-
pant payable by virtue of the client using /subscribing to any of the facili-
ties/services availed by the client at his/her instance.
All necessary audit trail should be available with the stock broker for any such transaction.
It is mandatory for the broker to use the unique client code for all its clients. For this purpose
the broker shall collect and maintain in their back office the Permanent Account Number (PAN)
allotted by the Income Tax Department for all their clients. In case of other entities –
• Brokers shall verify the documents with respect to the unique code retain a copy of the
document.
• The brokers shall also be required to furnish the above particulars of their clients to the
stock exchanges /clearing corporations and the same would be updated on a monthly
basis. Such information for a particular month should reach the exchange within 7
working days of the following month.
• The statement should account for all the receipts and deliveries/ payments during the rele-
vant period and not only the details of the holding as at end of the period.
• Maintain proof of despatch of such account statements.
• An error reporting clause giving 30 days time to revert back also should be incorporated in
the account statement.
The broker shall be fully responsible and liable for all orders emanating through their DMA sys-
tems. It shall be the responsibility of the broker to ensure that only clients who fulfil the eligibil-
ity criteria are permitted to use the DMA facility.
Any person wanting to commence business as an AIF should make an application to SEBI in the
format as prescribed by SEBI.
Alternative Investment Funds shall seek registration in one of the categories mentioned in the
Regulations and in case of Category I Alternative Investment Fund, in one of the sub-categories
thereof
a. the memorandum of association in case of a company; or the Trust Deed in case of a Trust;
or the Partnership deed in case of a limited liability partnership permits it to carry on the ac-
tivity of an Alternative Investment Fund;
b. the applicant is prohibited by its memorandum and articles of association or trust deed or
partnership deed from making an invitation to the public to subscribe to its securities;
c. in case the applicant is a Trust, the instrument of trust is in the form of a deed and has been
duly registered under the provisions of the Registration Act, 1908;
d. in case the applicant is a limited liability partnership, the partnership is duly incorporated
and the partnership deed has been duly filed with the Registrar under the provisions of the
Limited Liability Partnership Act, 2008;
e. in case the applicant is a body corporate, it is set up or established under the laws of the
Central or State Legislature and is permitted to carry on the activities of an Alternative In-
vestment Fund;
f. the applicant, Sponsor and Manager are fit and proper persons based on the criteria speci-
fied in Schedule II of the SEBI (Intermediaries) Regulations, 2008;
g. the key investment team of the Manager of Alternative Investment Fund has adequate ex-
perience, with at least one key personnel having not less than five years experience in advis-
ing or managing pools of capital or in fund or asset or wealth or portfolio management or in
the business of buying, selling and dealing of securities or other financial assets and has
relevant professional qualification;
h. the Manager or Sponsor has the necessary infrastructure and manpower to effectively dis-
charge its activities;
i. the applicant has clearly described at the time of registration the investment objective, the
targeted investors, proposed corpus, investment style or strategy and proposed tenure of
the fund or scheme;
j. whether the applicant or any entity established by the Sponsor or Manager has earlier been
refused registration by the Board.
c. The Alternative Investment Fund shall forthwith inform the Board in writing, if any informa-
tion or particulars previously submitted to the Board are found to be false or misleading in
any material particular or if there is any material change in the information already submit-
ted.
(2) An Alternative Investment Fund which has been granted registration under a particular cate-
gory cannot change its category subsequent to registration, except with the approval of the
Board.
(1) All Alternative Investment Funds shall state investment strategy, investment purpose and its
investment methodology in its placement memorandum to the investors.
(2) Any material alteration to the fund strategy shall be made with the consent of atleast two-
thirds of unit holders by value of their investment in the Alternative Investment Fund.
Investment in all categories of Alternative Investment Funds shall be subject to the following
conditions:-
a. The Alternative Investment Fund may raise funds from any investor whether Indian, foreign
or non-resident Indians by way of issue of units;
b. Each scheme of the Alternative Investment Fund shall have corpus of atleast twenty crore
rupees;
c. The Alternative Investment Fund shall not accept from an investor, an investment of value
less than one crore rupees. Provided that in case of investors who are employees or direc-
tors of the Alternative Investment Fund or employees or directors of the Manager, the
minimum value of investment shall be twenty five lakh rupees.
d. The Manager or Sponsor shall have a continuing interest in the Alternative Investment
Fund of not less than two and half percent of the corpus or five crore rupees, whichever is
lower, in the form of investment in the Alternative Investment Fund and such interest shall
not be through the waiver of management fees. Provided that for Category III Alternative
Investment Fund, the continuing interest shall be not less than five percent of the corpus or
ten crore rupees, whichever is lower.
e. The Manager or Sponsor shall disclose their investment in the Alternative Investment Fund
to the investors of the Alternative Investment Fund;
f. No scheme of the Alternative Investment Fund shall have more than 1000 investors;
g. The fund shall not solicit or collect funds except by way of private placement.
Placement Memorandum
1. Alternative Investment Fund shall raise funds through private placement by issue of in-
formation memorandum or placement memorandum, by whatever name called.
2. Such information or placement memorandum as specified in point no. 1 shall contain all ma-
terial information about the Alternative Investment Fund and the Manager, background of
key investment team of the Manager, targeted investors, fees and all other expenses pro-
posed to be charged, tenure of the Alternative Investment Fund or scheme, conditions or
limits on redemption, investment strategy, risk management tools and parameters em-
ployed, key service providers, conflict of interest and procedures to identify and address
them, disciplinary history, the terms and conditions on which the Manager offers invest-
ment services, its affiliations with other intermediaries, manner of winding up of the Alter-
native Investment Fund or the scheme and such other information as may be necessary for
the investor to take an informed decision on whether to invest in the Alternative Investment
Fund.
Schemes
1. The Alternative Investment Fund may launch schemes subject to filing of placement memo-
randum with the Board.
2. Such placement memorandum shall be filed with the SEBI atleast 30 days prior to launch of
scheme along with the fees as specified in the regulations, provided that payment of
scheme fees shall not apply in case of launch of first scheme by the Alternative Investment
Fund.
3. The Board may communicate its comments, if any, to the applicant prior to launch of the
scheme and the applicant shall incorporate the comments in placement memorandum prior
to launch of scheme.
Tenure
1. Category I Alternative Investment Fund and Category II Alternative Investment Fund shall be
close ended and the tenure of fund or scheme shall be determined at the time of application
subject to sub-regulation (2) of this regulation.
2. Category I and II Alternative Investment Fund or schemes launched by such funds shall have
a minimum tenure of three years.
3. Category III Alternative Investment Fund may be open ended or close ended.
4. Extension of the tenure of the close ended Alternative Investment Fund may be permitted
up to two years subject to approval of two-thirds of the unit holders by value of their in-
vestment in the Alternative Investment Fund.
5. In the absence of consent of unit holders, the Alternative Investment Fund shall fully liqui-
date within one year following expiration of the fund tenure or extended tenure.
Listing
1. Units of close ended Alternative Investment Fund may be listed on stock exchange subject
to a minimum tradable lot of one crore rupees.
2. Listing of Alternative Investment Fund units shall be permitted only after final close of the
fund or scheme.
General Investment Conditions.
Investments by all categories of Alternative Investment Funds shall be subject to the following
conditions:-
(a) Alternative Investment Fund may invest in securities of companies incorporated outside
India subject to such conditions or guidelines that may be stipulated or issued by the Re-
serve Bank of India and the Board from time to time;
(b) Co-investment in an investee company by a Manager or Sponsor shall not be on terms
more favourable than those offered to the Alternative Investment Fund;
(c) Category I and II Alternative Investment Funds shall invest not more than twenty five
percent of the corpus in one Investee Company;
(d) Category III Alternative Investment Fund shall invest not more than ten percent of the
corpus in one Investee Company
(e) Alternative Investment Fund shall not invest in associates except with the approval of
seventy five percent of investors by value of their investment in the Alternative Investment
Fund;
(f) Un-invested portion of the corpus may be invested in liquid mutual funds or bank depos-
its or other liquid assets of higher quality such as Treasury bills, CBLOs, Commercial Papers,
Certificates of Deposits, etc. till deployment of funds as per the investment objective;
(g) Alternative Investment Fund may act as Nominated Investor as specified in clause (b) of
sub-regulation (1) of regulation 106N of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009.
Notwithstanding the conditions as specified in sub-regulation (1), SEBI may specify additional
requirements or criteria for Alternative Investment Funds or for a specific category thereof.
1. The following investment conditions shall apply to all Category I Alternative Investment
Funds:-
(a) Category I Alternative Investment Fund shall invest in investee companies or venture
capital undertaking or in special purpose vehicles or in limited liability partnerships or in
units of other Alternative Investment Funds as specified in these regulations;
(b) Fund of Category I Alternative Investment Funds may invest in units of Category I Alter-
native Investment Funds of same sub-category, Provided that they shall only invest in such
units and shall not invest in units of other Fund of Funds.
(c) Category I Alternative Investment Funds shall not borrow funds directly or indirectly or
engage in any leverage except for meeting temporary funding requirements for not more
than thirty days, on not more than four occasions in a year and not more than ten percent
of the corpus.
2. The following investment conditions shall apply to venture capital funds in addition to con-
ditions laid down in sub-regulation (1):-
(a) At least two-thirds of the corpus shall be invested in unlisted equity shares or equity
linked instruments of a venture capital undertaking or in companies listed or proposed to be
listed on a SME exchange or SME segment of an exchange;
(b) Not more than one-third of the corpus shall be invested in:
• subscription to initial public offer of a venture capital undertaking whose shares are
proposed to be listed;
• debt or debt instrument of a venture capital undertaking in which the fund has already
made an investment by way of equity or contribution towards partnership interest;
• preferential allotment, including through qualified institutional placement, of equity
shares or equity linked instruments of a listed company subject to lock in period of one
year;
• the equity shares or equity linked instruments of a financially weak company 20 or a sick
industrial company whose shares are listed.
• special purpose vehicles which are created by the fund for the purpose of facilitating or
promoting investment in accordance with these regulations, Provided that the invest-
ment conditions and restrictions stipulated in clause (a) and clause (b) of sub-regulation
(2) shall be achieved by the fund by the end of its life cycle.
(c) such funds may enter into an agreement with merchant banker to subscribe to the un-
subscribed portion of the issue or to receive or deliver securities in the process of market
making as stated in the SEBI (ICDR) Regulations, 2009 and the provisions of clause (a) and
clause (b) of sub-regulation (2) shall not apply in case of acquisition or sale of securities pur-
suant to such subscription or market making.
(d) such funds shall be exempt from regulation 3 and 3A of SEBI (Prohibition of Insider Trad-
ing) Regulations, 1992 in respect of investment in companies listed on SME Exchange or
SME segment of an exchange pursuant to due diligence of such companies subject to the
following conditions:
• The fund shall disclose any acquisition or dealing in securities pursuant to such due-
diligence, within two working days of such acquisition or dealing, to the stock exchanges
where the investee company is listed;
• Such investment shall be locked in for a period of one year from the date of investment.
3. The following conditions shall apply to SME Funds in addition to conditions laid down in sub-
regulation (1):-
(a) atleast 75 percent of the corpus shall be invested in unlisted securities or partner-ship in-
terest of venture capital undertakings or investee companies which are SMEs or in compa-
nies listed or proposed to be listed on SME exchange or SME segment of an exchange;
20
A financially weak company means a company, which has at the end of the previous financial year ac-
cumulated losses, which has resulted in erosion of more than fifty percent but less than hundred percent
of its net worth as at the beginning of the previous financial year.
(b) such funds may enter into an agreement with merchant banker to subscribe to the un-
subscribed portion of the issue or to receive or deliver securities in the process of market
making under stated in the SEBI (ICDR) Regulations, 2009;
(c) such funds shall be exempt from regulation 3 and 3A of SEBI (Prohibition of Insider Trad-
ing) Regulations, 1992 in respect of investment in companies listed on SME Exchange or
SME segment of an exchange pursuant to due diligence of such companies subject to the
following conditions:
• The fund shall disclose any acquisition or dealing in securities pursuant to such due-
diligence, within two working days of such acquisition or dealing, to the stock exchanges
where the investee company is listed;
• Such investment shall be locked in for a period of one year from the date of investment.
4. The following conditions shall apply to social venture funds in addition to the conditions laid
down in sub-regulation (1):-
(a) atleast seventy five percent of the corpus shall be invested in unlisted securities or part-
nership interest of social ventures.
(b) such funds may accept grants, provided that such utilization of such grants shall be re-
stricted to clause (a).
(c) such funds may give grants to social ventures, provided that appropriate disclosure is
made in the placement memorandum.
(d) such funds may accept muted returns for their investors i.e. they may accept returns on
their investments which may be lower than prevailing returns for similar investments.
5. The following conditions shall apply to Infrastructure Funds in addition to conditions laid
down in sub-regulation (1):-
(a) atleast seventy five percent of the corpus shall be invested in unlisted securities or units
or partnership interest of venture capital undertaking or investee companies or special pur-
pose vehicles, which are engaged in or formed for the purpose of operating, developing or
holding infrastructure projects;
(b) notwithstanding clause (a) of sub-regulation (5), such funds may also invest in listed se-
curitized debt instruments or listed debt securities of investee companies or special purpose
vehicles, which are engaged in or formed for the purpose of operating, developing or hold-
ing infrastructure projects.
b) Fund of Category II Alternative Investment Funds may invest in units of Category I or Cate-
gory II Alternative Investment Funds. Provided that they shall only invest in such units and
shall not invest in units of other Fund of Funds.
c) Category II Alternative Investment Funds may not borrow funds directly or indirectly and
shall not engage in leverage except for meeting temporary funding requirements for not
more than thirty days, not more than four occasions in a year and not more than ten per-
cent of the corpus;
d) Notwithstanding clause (c), Category II Alternative Investment Funds may engage in hedg-
ing, subject to guidelines as specified by the Board from time to time;
e) Category II Alternative Investment Funds may enter into an agreement with merchant
banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securi-
ties in the process of market making under Chapter XB of the Securities and Exchange Board
of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
f) Category II Alternative Investment Funds shall be exempt from regulation 3 and 3A of Secu-
rities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 in re-
spect of investment in companies listed on SME Exchange or SME segment of an exchange
pursuant to due diligence of such companies subject to the following conditions:
• the fund shall disclose any acquisition or dealing in securities pursuant to such due-
diligence, within two working days of such acquisition or dealing, to the stock exchanges
where the investee company is listed;
• such investment shall be locked in for a period of one year from the date of investment.
The following investment conditions shall apply to Category III Alternative Investment Funds:-
a) Category III Alternative Investment Funds may invest in securities of listed or unlisted inves-
tee companies or derivatives or complex or structured products;
b) Fund of Category II Alternative Investment Funds may invest in units of Category I or Cate-
gory II Alternative Investment Funds, Provided that they invest solely in such units and shall
not invest in units of other Fund of Funds.
c) Category III Alternative Investment Funds may engage in leverage or borrow subject to con-
sent from the investors in the fund and subject to a maximum limit, as may be specified by
the Board. Provided that such funds shall disclose information regarding the overall level of
leverage employed, the level of leverage arising from borrowing of cash, the level of lever-
age arising from position held in derivatives or in any complex product and the main source
of leverage in their fund to the investors and to the Board periodically, as may be specified
by the SEBI
d) Category III Alternative Investment Funds shall be regulated through issuance of directions
regarding areas such as operational standards, conduct of business rules, prudential require-
ments, restrictions on redemption and conflict of interest as may be specified by the Board.
The Board may lay down framework for Alternative Investment Funds other than the Funds fal-
ling in the categories specified in these regulations.
General Obligations
• All Alternative Investment Funds shall review policies and procedures, and their implemen-
tation, on a regular basis, or as a result of business developments, to ensure their continued
appropriateness.
• The Sponsor or Manager of Alternative Investment Fund shall appoint a custodian registered
with the Board for safekeeping of securities if the corpus of the Alternative Investment Fund
is more than five hundred crore rupees. Provided that the Sponsor or Manager of a Category
III Alternative Investment Fund shall appoint such custodian irrespective of the size of cor-
pus of the Alternative Investment Fund.
• All Alternative Investment Funds shall inform the Board in case of any change in the Spon-
sor, Manager or designated partners or any other material change from the information
provided by the Alternative Investment Fund at the time of application for registration.
• In case of change in control of the Alternative Investment Fund, Sponsor or Manager, prior
approval from the Board shall be taken by the Alternative Investment Fund.
• The books of accounts of the Alternative Investment Fund shall be audited annually by a
qualified auditor.
Conflict of Interest
• The Sponsor and Manager of the Alternative Investment Fund shall act in a fiduciary capac-
ity towards its investors and shall disclose to the investors, all conflicts of interests as and
when they arise or seem likely to arise.
• Manager shall establish and implement written policies and procedures to identify, monitor
and appropriately mitigate conflicts of interest throughout the scope of business.
• Managers and Sponsors of Alternative Investment Fund shall abide by high level principles
on avoidance of conflicts of interest with associated persons, as may be specified by the
Board from time to time.
Transparency
• All Alternative Investment Funds shall ensure transparency and disclosure of information to
investors on the following:
a. financial, risk management, operational, portfolio, and transactional information regard-
ing fund investments shall be disclosed periodically to the investors;
b. any fees ascribed to the Manager or Sponsor; and any fees charged to the Alternative In-
vestment Fund or any investee company by an associate of the Manager or Sponsor shall
be disclosed periodically to the investors;
c. any inquiries/ legal actions by legal or regulatory bodies in any jurisdiction, as and when
occurred;
d. any material liability arising during the Alternative Investment Fund‘s tenure shall be dis-
closed, as and when occurred;
e. any breach of a provision of the placement memorandum or agreement made with the
investor or any other fund documents, if any, as and when occurred;
f. change in control of the Sponsor or Manager or Investee Company.
g. Alternative Investment Fund shall provide at least on an annual basis, within 180 days
from the year end, reports to investors including the following information, as may be
applicable to the Alternative Investment Fund:-
A. Financial information of investee companies.
B. Material risks and how they are managed which may include:
(i) concentration risk at fund level;
(ii) foreign exchange risk at fund level;
(iii)leverage risk at fund and investee company levels;
(iv) realization risk (i.e. change in exit environment) at fund and investee company lev-
els;
(v) strategy risk (i.e. change in or divergence from business strategy) at investee com-
pany level;
(vi) reputation risk at investee company level;
(vii) extra-financial risks, including environmental, social and corporate governance risks,
at fund and investee company level.
h. Category III Alternative Investment Fund shall provide quarterly reports to investors in
respect of clause (g) within 60 days of end of the quarter;
i. Any significant change in the key investment team shall be intimated to all investors;
j. Alternative Investment Funds shall provide, when required by the Board, information for
systemic risk purposes (including the identification, analysis and mitigation of systemic
risks).
Valuation
• The Alternative Investment Fund shall provide to its investors, a description of its valuation
procedure and of the methodology for valuing assets.
• Category I and Category II Alternative Investment Funds shall undertake valuation of their
investments, atleast once in every six months, by an independent valuer appointed by the
Alternative Investment Fund. Provided that such period may be enhanced to one year on
approval of atleast seventy-five percent of the investors by value of their investment in the
Alternative Investment Fund.
• Category III Alternative Investment Funds shall ensure that calculation of the net as-set
value (NAV) is independent from the fund management function of the Alternative Invest-
ment Fund and such NAV shall be disclosed to the investors at intervals not longer than a
quarter for close ended Funds and at intervals not longer than a month for open ended
funds.
Obligation of Manager
Dispute Resolution
An Alternative Investment Fund, by itself or through the Manager or Sponsor, shall lay down
procedure for resolution of disputes between the investors, Alternative Invest-ment Fund, Man-
ager or Sponsor through arbitration or any such mechanism as mutually decided between the
investors and the Alternative Investment Fund.
(1) The Board may at any time call for any information from an Alternative Investment Fund or
its Manager or Sponsor or trustee or investor with respect to any matter relating to its activity
as an Alternative Investment Fund or for the assessment of systemic risk or prevention of fraud.
(2) Where any information is called for under sub-regulation (1) it shall be furnished within the
time specified by the Board.
Maintenance of Records
(1) The Manager or Sponsor shall be required to maintain following records describing:
(a) the assets under the scheme/fund;
(b) valuation policies and practices;
(c) investment strategies;
(d) particulars of investors and their contribution;
(e) rationale for investments made.
(2) The records under sub-regulation (1) shall be maintained for a period of five years after the
winding up of the fund.
The Board may at any time call upon the Alternative Investment Fund to file such reports, as the
Board may desire, with respect to the activities carried on by the Alternative Investment Fund.
(1) It shall be the duty of every officer of the Alternative Investment Fund in respect of whom an
inspection has been ordered under regulation 30 and any other associated person who is in pos-
session of relevant information pertaining to conduct and affairs of such Alternative Investment
Fund including Manager, if any, to produce to the Inspecting Authority such books, accounts and
other documents in his custody or control and furnish him with such statements and informa-
tion as the said Authority may require for the purposes of the inspection.
(2) It shall be the duty of every officer of the Alternative Investment Fund and any other associ-
ated person who is in possession of relevant information pertaining to conduct and affairs of the
Alternative Investment Fund including the manager to give to the Inspecting Authority all such
assistance and shall extend all such co-operation as may be required in connection with the in-
spection and shall furnish such information as sought by the Inspecting Authority in connection
with the inspection.
(3) The Inspecting Authority shall, for the purposes of inspection, have power to examine on
oath and record the statement of any employees, directors or person responsible for or con-
nected with the activities of Alternative Investment Fund or any other associated person having
relevant information pertaining to such Alternative Investment Fund.
(4) The Inspecting Authority shall, for the purposes of inspection, have power to obtain authen-
ticated copies of documents, books, accounts of Alternative Investment Fund, from any person
having control or custody of such documents, books or accounts
Review Questions
(c) SEBI
Ans: (b)
2. Is the Stock broker required to pre-intimate SEBI about shifting the location where it keeps
its books of accounts. State Yes or No?
(a) Yes
(b) No
Ans: (b)
3. A stock Broker when dealing with a client must disclose whether it is acting as a Principal
/agent. State whether True or False?
(a) True
(b) False
Ans: (a)
4. Category I and II Alternative Investment Funds shall invest what portion of the corpus in one
Investee Company?
Ans: (d)
12.1 Introduction
The primary activity of Merchant Banks is to provide fee-based advice to corporations and gov-
ernments on the issue of securities. Merchant banks these days however perform a variety of
other activities such as financing foreign trade, underwriting of equity issues, portfolio man-
agement and undertaking foreign security business as well as foreign loan business, project ap-
praisal etc.
Since the functions are very similar to those of Investment Bankers, they are often thought to be
the same. The term ‘Investment Banking’ has a much wider connotation and is gradually becom-
ing more of an inclusive term to refer to all types of capital market activity, both fund-based and
non-fund based. Besides the above, the investment banks also provide a host of specialized cor-
porate advisory services in the areas of project advisory, business and financial advisory and
mergers and acquisitions 21.
In this chapter we will also discuss briefly the role of merchant banker and the compliances so
required in case of takeovers and buy-backs of securities as given in the SEBI (Substantial Acqui-
sition of Shares & Takeovers) Regulations, 1997 and SEBI (BuyBack of Securities) Regulations,
1998 respectively and in the Delisting of securities from stock exchanges as per provisions given
under the SEBI (Delisting of Equity Shares) Regulations, 2009 and the certain compliances as giv-
en in the Model Listing Agreement.
21
Reference: Investment Banking – An Odyssey in High Finance by Pratap Subramanyam.
plication for registration made under this regulation shall be accompanied by a non-refundable
application fee of Rs. 25,000/- and can be made only for Category I Merchant Banker.
However, an applicant can carry on the activity as portfolio manager only if he obtains separate
certificate of registration under the SEBI (Portfolio Manager) Regulations, 1993.
As per Regulation 6 of the regulation, SEBI shall consider grant of a certificate of merchant
banker to an applicant who complies with the following requirements as mentioned below:
(a) An applicant shall be a body corporate other than NBFC, provided that the merchant banker
who has been granted registration by the RBI to act as Primary or Satellite Dealer may carry
on such activity subject to the condition that it shall not accept or hold public deposit.
(b) The applicant should have the necessary infrastructure like adequate office space, equip-
ments and manpower to effectively discharge his activities.
(c) The applicant should have in his employment minimum of two persons who have the expe-
rience to conduct the business of merchant banker.
(d) A person directly or indirectly connected with the applicant has not been granted registra-
tion by SEBI.
(e) The applicant, his partner, director or principal officer are not involved in any litigation con-
nected with the securities market which has an adverse bearing on the business of the ap-
plicant;
(f) The applicant, his director, partner or principal officer have not been at any time been con-
victed for any offence involving moral turpitude or has been found guilty of any economic
offence;
(g) The applicant has the professional qualification from an institution recognized by the Gov-
ernment in finance, law or business management;
(h) Grant of certificate to the applicant is in the interest of investors;
(i) The applicant satisfies the capital adequacy requirements and is Fit and proper person.
worth of not less than five crore rupees. Net worth here means the paid-up capital and free re-
serves of the applicant at the time of making application.
Every Merchant Banker is required to pay an initial fee of Rs. 10 lakhs as registration fees and to
keep the registration in force subsequent renewal fees of Rs. 5 lakhs every three years from the
fourth year from the date of initial registration. The renewal fee has to pay to SEBI within 15
days of the receipt of such information from SEBI.
The certificate of registration and the renewal granted under the SEBI MB regulations shall be
valid for a period of 3 years from the date of its issue to the applicant.
The application for renewal is treated by SEBI in the same manner as if it were a fresh applica-
tion and shall be accompanied by a non-refundable application fee of Rs. 25,000. SEBI on being
satisfied about the eligibility of the applicant for renewal of certificate shall grant the certificate
of registration to the merchant banker.
a) Where the merchant banker proposes to change its status or constitution, it shall obtain
prior approval of SEBI for continuing to act as such after the change;
b) The merchant banker shall pay the fees for registration or renewal, as the case may be, in
the manner as provided in these regulations;
c) The merchant banker shall take adequate steps for redress of investor grievances within
one month of the date of the receipt of the complaint and keep SEBI informed about the
number, nature and other particulars of the complaints received;
d) It shall maintain capital adequacy requirements at all times during the period of the certifi-
cate or renewal thereof;
e) It shall abide by the regulations made under the SEBI Act, 1992 in respect of the activities
carried on by it as merchant banker.
i. Where an application for grant of a certificate or for renewal of certificate does not sat-
isfy the conditions as laid down in the Regulation 6 of this Regulation, SEBI may reject
the application after giving an opportunity of being heard.
ii. SEBI should communicate the refusal to grant registration within thirty days of such re-
fusal to the applicant stating therein the grounds on which the application has been re-
jected.
iii. Applicant who is aggrieved by the decision of SEBI to not grant or renew registration
may apply to SEBI, within a period of thirty days from the date of receipt of such intima-
tion from SEBI, for reconsideration of its decision.
iv. SEBI shall reconsider an application made as per the provisions laid down in the SEBI
(Merchant Bankers) Regulations and communicate its decision as soon as possible in
writing to the applicant.
Regulation 11 states that any merchant banker whose application for a certificate has been re-
fused by SEBI shall on and from the date of the receipt of the communication from SEBI should
cease to carry on any activity as merchant banker.
12.2.9.1Code of Conduct
The regulation 13 provides that each merchant banker registered with SEBI should follow the
prescribed code of conduct as given under the schedule III of the SEBI (Merchant Bankers),
Regulation. The code of conduct impresses heavily the importance of integrity, honesty and
ethical behaviour expected from merchant bankers. As a client and investor driven business,
merchant bankers are expected to keep in mind the interests of the investors at all times and
redress any grievances immediately while keeping SEBI informed of the same. The code of con-
duct prescribes that a merchant banker shall:
2. maintain high standards of integrity, dignity and fairness in the conduct of its business.
4. at all times exercise due diligence, ensure proper care and exercise independent professional
judgment.
5. endeavour to ensure that (a) Inquiries from investors are adequately dealt with; (b) Griev-
ances of investors are redressed in a timely and appropriate manner; (c) Where a complaint is
not remedied promptly, the investor is advised of any further steps which may be available to
the investor under the regulatory system.
6. ensure that adequate disclosures are made to the investors in a timely manner in accordance
with the applicable regulations and guidelines so as to enable them to make a balanced and in-
formed decision.
7. endeavour to ensure that the investors are provided with true and adequate information
without making any misleading or exaggerated claims or any misrepresentation and are made
aware of the attendant risks before taking any investment decision.
22
Refer to section 11.2.4 of this chapter OR Schedule II of the SEBI (Merchant Banking) Regulations, 1992.
8. endeavour to ensure that copies of the prospectus, offer document, letter of offer or any
other related literature is made available to the investors at the time of issue or the offer.
9. not discriminate amongst its clients, save and except on ethical and commercial considera-
tions.
10. not make any statement, either oral or written, which would misrepresent the services that
the merchant banker is capable of performing for any client or has rendered to any client.
11. avoid conflict of interest and make adequate disclosure of its interest.
12. put in place a mechanism to resolve any conflict of interest situation that may arise in the
conduct of its business or where any conflict of interest arises, shall take reasonable steps to
resolve the same in an equitable manner.
13. make appropriate disclosure to the client of its possible source or potential areas of conflict
of duties and interest while acting as merchant banker which would impair its ability to render
fair, objective and unbiased services.
14. always endeavour to render the best possible advice to the clients having regard to their
needs.
15. not divulge to anybody either orally or in writing, directly or indirectly, any confidential in-
formation about its clients which has come to its knowledge, without taking prior permission of
its clients, except where such disclosures are required to be made in compliance with any law
for the time being in force.
16. ensure that any change in registration status/any penal action taken by SEBI or any material
change in the merchant banker’s financial status, which may adversely affect the interests of
clients/investors is promptly informed to the clients and any business remaining outstanding is
transferred to another registered intermediary in accordance with any instructions of the af-
fected clients.
17. shall not indulge in any unfair competition, such as weaning away the clients on assurance of
higher premium or advantageous offer price or which is likely to harm the interests of other
merchant bankers or investors or is likely to place such other merchant bankers in a disadvanta-
geous position while competing for or executing any assignment.
18. maintain arms length relationship between its merchant banking activity and any other ac-
tivity.
19. have internal control procedures and financial and operational capabilities which can be rea-
sonably expected to protect its operations, its clients, investors and other registered entities
from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct
or omissions.
20. not make untrue statement or suppress any material fact in any documents, reports or in-
formation furnished to SEBI.
21. maintain an appropriate level of knowledge and competence and abide by the provisions of
the Act, regulations made there under, circulars and guidelines, which may be applicable and
relevant to the activities carried on by it. The merchant banker shall also comply with the award
of the Ombudsman passed under the SEBI (Ombudsman) Regulations, 2003.
22. ensure that SEBI is promptly informed about any action, legal proceedings, etc., initiated
against it in respect of material breach or non-compliance by it, of any law, rules, regulations,
and directions of SEBI or of any other regulatory body.
23. (a) A merchant banker or any of its employees shall not render, directly or indirectly, any
investment advice about any security in any publicly accessible media, whether real-time or
non-real-time, unless a disclosure of his interest including a long or short position, in the said
security has been made, while rendering such advice.
(b) In the event of an employee of the merchant banker rendering such advice, the merchant
banker shall ensure that such employee shall also disclose the interests, if any, of himself, his
dependent family members and the employer merchant banker, including their long or short
position in the said security, while rendering such advice.
25. provide adequate freedom and powers to its compliance officer for the effective discharge
of the compliance officer’s duties.
26. develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in carrying out their
duties. Such a code may extend to the maintenance of professional excellence and standards,
integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure
of shareholdings and interests, etc.
27. ensure that good corporate policies and corporate governance are in place.
28. ensure that any person it employs or appoints to conduct business is fit and proper and oth-
erwise qualified to act in the capacity so employed or appointed (including having relevant pro-
fessional training or experience).
29. ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it in the conduct of its business, in respect of dealings in se-
curities market.
30. be responsible for the acts or omissions of its employees and agents in respect of the con-
duct of its business.
“No merchant banker, other than a bank or a public financial institution, who has been granted
a certificate of registration under these regulations, shall after June 30th, 1998 carry on any
business other than that in the securities market.
However, notwithstanding anything contained above, a merchant banker who prior to the date
of notification of the SEBI (Merchant Bankers) Amendment Regulations, 1997, has entered into
a contract in respect of a business other than that of the securities market may, if so desires dis-
charge his obligations under such contract.
Provided that a merchant banker who has been granted certificate of registration to act as pri-
mary or satellite dealer by Reserve Bank of India, may carry on such business as may be permit-
ted by Reserve Bank of India.
Provided further that a merchant banker, who has been granted certificate of registration under
these regulations, may ensure market making in accordance with SEBI (ICDR) Regulations, 2009.
In cases, where there are more than one lead merchant banker’s to the issue, the responsibili-
ties of each of such lead merchant bankers shall be furnished to SEBI, atleast one month prior to
opening of the issue for subscription.
A merchant banker as per regulation 21and 21A, should not be associated with any issue, if a
merchant banker who is not holding a certificate of registration is associated with the issue. It
shall further not lead or manage any issue or be associated with any activity undertaken under
any regulations made by SEBI, if the merchant banker is himself the promoter or a director or an
associate of the issuer of securities or of any person making the offer to sell or purchase securi-
ties in terms of any regulations made by SEBI.
The merchant banker shall under regulation 27, submit to SEBI complete particulars of any
transaction for acquisition of securities of any corporate whose issue is being managed by that
`merchant banker within 15 days from the date of entering into such transaction. Further the
complete particulars of any transaction for acquisition of securities made in pursuance of un-
derwriting or market making obligations in accordance with the provisions as mentioned in the
SEBI ICDR Regulations, 2009 also should be submitted to SEBI on quarterly basis.
i. The merchant banker’s responsibilities with regard to the management of the issuer;
ii. Any change in the information or particulars previously furnished, which have a bearing
on the certificate granted to it;
iii. The names of the body corporate whose issues the merchant banker has managed or
has been associated with;
iv. The particulars relating to the breach of the capital adequacy requirements as men-
tioned in the regulation;
v. Any information relating to the merchant banker’s activities as a manager, underwriter,
consultant or adviser to an issue.
The merchant banker is required to submit a periodic report in such manner as may be specified
by SEBI from time to time. SEBI has prescribed the following:
The Boards of Merchant Bankers are required to review the report and record its observations
on (i) the deficiencies and non-compliances, (ii) corrective measures initiated to avoid such in-
stances in future, (iii) pre-issue and post-issue due diligence process followed and whether they
are satisfied and (iv) track record of past issues managed. The Compliance Officer of the Mer-
chant Banker is required to send a report in the revised format to SEBI on a half yearly basis
within 3 months of the expiry of the half year.
ii. The merchant banker should also allow the inspecting authority to have reasonable ac-
cess to the premises occupied by such merchant banker or by any other person on his
behalf. It also shall extend reasonable facility for examining any books, records, docu-
ments and computer data in the possession of the merchant banker or any such other
person. Further, it should also provide copies of documents or other materials which, in
opinion of the inspecting authority are relevant for the purposes of the inspection.
iii. The merchant banker shall render to the inspecting authority any kind of assistance that
may be required in the course of inspection.
23
Acquirer means any person who, directly or indirectly, acquirer or agrees to acquire shares or voting rights in the
target company, or acquires or agrees to acquire control over the target company, either by himself or with any per-
son acting in concert with the acquirer.
2. Furnish to SEBI a due diligence certificate which shall be attached to the draft letter of offer.
3. Ensure that the public announcement and the letter of offer is filed with SEBI, target com-
pany and also sent to all the stock exchanges on which the shares of the target company are
listed in accordance with the regulations.
4. Ensure that the contents of the public announcement of offer as well as the letter of offer
are true, fair and adequate and based on reliable sources, quoting the source wherever nec-
essary.
5. Ensure compliance of the regulations and any other laws or rules as may be applicable in
this regard.
6. Not deal in the shares of the target company during the period commencing from the date
of his appointment till the expiry of the 15 days from the date of closure of the offer.
7. Make sure that upon the fulfilment of all obligations by the acquirer, the bank with whom
the escrow amount has been deposited, releases the balance amount to the acquirers.
8. Send a final report to the SEBI within 45 days from the date of closure of the offer.
The promoters of the company after receiving the in-principle approval for delisting from the
recognised stock exchange shall make a public announcement in English and Hindi national dai-
lies each which has a wide circulation. Before making the public announcement, however, the
promoter has to appoint a merchant banker registered with SEBI and such other intermediaries
as is considered necessary. The promoter shall ensure that no person is appointed as a mer-
chant banker if he is an associate of the promoter.
The appointed merchant banker and the promoter have to ensure compliance of the provisions
as is discussed hereunder:
Escrow Account
• Before making the public announcement, the promoter shall open an escrow account and
deposit therein the total estimated amount of consideration calculated on basis of floor
price and number 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 pro-
moter 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, and the amount in such deposit (if any) after payment of consideration for equity
shares tendered in the offer.
• The merchant banker shall take necessary steps to ensure compliance to the fact that a
promoter or a person acting in concert with any of the promoters shall not make a bid in the
offer.
• Any holder of depository receipts issued on the basis of underlying shares held by a custo-
dian and any such custodian shall not be entitled to participate in the offer.
• The offer price shall be determined through book building after the floor price has been
fixed and the same shall be disclosed in the public announcement and the letter of offer.
• The shareholders holding securities in demat form and desirous of availing the exit opportu-
nity should deposit the equity shares in respect of which bids have been made, with the
special depositories account opened by the merchant banker for the purpose prior to
placement of orders or, alternately, may mark a pledge for the same to the merchant
banker in favour of the said account.
• The merchant banker shall ensure that the equity shares in the said special depositories ac-
count are not transferred to the account of the promoter unless the bids in respect thereof
are accepted and payments made.
• The investor holding the physical equity shares shall send the bidding form together with
the share certificate and transfer deed to the trading member appointed for the purpose,
who shall after entering the bids into the system send them to the company or the share
transfer agent for confirming their genuineness. The certificates which are found genuine
shall then be delivered to the merchant banker. The merchant banker will make it over to
the promoter after the bids in respect of those certificates have been accepted and pay-
ment made.
Bidding Period
The date of the opening of the offer should not be later than 45 days from the date of the public
announcement. The offer shall remain open for a minimum period of 3 working days and a
maximum period of 5 working days, during which the public shareholders have to tender their
bids.
The appointed merchant banker also has to ensure compliance of the provisions as in discussed
hereunder:
Escrow Account
a) The company on or before opening the offer, shall deposit in an escrow account some por-
tion of the payable amount which shall depend upon the total consideration.
b) The escrow account shall consists of (i) cash deposited with a scheduled commercial bank,
or (ii) bank guarantee in favour of the merchant banker by any scheduled commercial bank,.
c) For such part of the escrow account as is in the form of a cash deposit with a scheduled
commercial bank, the company shall while opening the account, empower the merchant
banker to instruct the bank to make payment of the amounts lying to the credit of the es-
crow account, to meet the obligations arising out of the buy-back.
d) For such part of the escrow account as is in the form of a bank guarantee:
(a) the same shall be in favour of the merchant banker and shall be kept valid for a period of
thirty days after the closure of the offer or till the completion of all obligations under these
regulations, whichever is later.
(b) the same shall not be returned by the merchant banker till completion of all obligations
under the regulations.
e) The escrow amount may be released for making payment to the shareholders subject to
atleast 2.5% of the amount earmarked for buy-back as specified in the resolutions referred
to in regulation 5 or regulation 5A remaining in the escrow account at all points of time.
f) On fulfilling the obligation specified at sub regulation (3) of Regulation 14, the amount and
the guarantee remaining in the escrow account, if any, shall be released to the company.
Extinguishing Certificates
The company shall complete the verification of acceptances within fifteen days of the payout.
The company shall extinguish and physically destroy the security certificates so bought back
during the month in the presence of a Merchant Banker and the Statutory Auditor, on or before
the fifteenth day of the succeeding month. Provided that the company shall ensure that all the
securities bought-back are extinguished within seven days of the last date of completion of buy-
back.
The shares held with the depository in dematerialised mode shall be extinguished in the manner
as given in the SEBI (Depositories and Participants) Regulations, 1996.
Review Questions
Ans: (d)
2. The applicant for merchant banker should have necessary infrastructure like _________.
Ans: (d)
3. The applicant for merchant banker should necessarily fulfil the capital adequacy require-
ment as specified in the SEBI (Merchant Bankers) Regulation. State whether True or False?
(a) True
(b) False
Ans: (a)
4. In case of buy-back, the company shall ensure that all the securities bought back are extin-
guished within ____ days of the last date of completion of buy-back.
(a) 4
(b) 7
(c) 10
(d) 15
Ans: (b)
13.1 Introduction
SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 hereinafter referred as
ICDR Regulations were notified in August 2009, in place of the SEBI (Disclosure and Investor Pro-
tection) Guidelines, 2000.
The ICDR Regulations, lays down general conditions for capital market issuances like public and
rights issuances; eligibility requirements; general obligations of the issuer and intermediaries in
public and rights issuances; regulations governing preferential issues, qualified institutional
placements and bonus issues by listed companies; Issue of IDRs. ICDR regulations also have de-
tailed requirements laid out with respect to disclosure and process requirements for capital
market transactions by listed and unlisted companies.
While the eligibility and disclosure obligations are applicable to the Issuer, in capital market
transactions, the role of the merchant banker/ lead manager/ book runner is extremely impor-
tant since they perform the role of agents in capital market transactions and are registered enti-
ties with SEBI. In fact, SEBI holds the merchant banker responsible and accountable for any defi-
ciencies/ lapses in such capital market transactions. The various compliances which are required
to be adhered to and are of high importance from regulatory perspective are discussed in the
subsequent sections
The lead merchant bankers are required to make inter-se allocation of responsibilities pertaining
to the activities or sub-activities to be carried out under these regulations and disclose the same
in the offer document. These are notified under Schedule I of the ICDR regulations which is as
given below:
(a) The merchant banker (lead) shall delineate the activity-wise allocation of responsibilities
and intimate SEBI about the name of the lead merchant banker responsible for each set
of the activities or sub-activities at the time of filing the draft offer document with SEBI.
This intimation is required to be signed by all the lead merchant bankers to the issue.
(b) Where the circumstances warrant joint and several responsibilities of the lead merchant
bankers for any particular activity, a coordinator designated from among the lead mer-
chant bankers shall furnish to SEBI, when called for any information, report, comments
etc on matters relating to such activity.
(c) The activities or sub-activities can be grouped on the following lines:
i. Capital structuring with the relative components and formalities such as compo-
sition of debt and equity, type of instruments, etc.
ii. Drafting and design of the offer document and of the advertisement or publicity
material including newspaper advertisement and brochure or memorandum
containing salient features of the offer document.
iii. Selection of various agencies connected with issue, such as registrars to the is-
sue, printers, advertising agencies, etc.
iv. Marketing of the issue, which shall cover, inter alia, formulating marketing
strategies, preparation of publicity budget, arrangements for selection of (i) ad-
media, (ii) centres for holding conferences of stock brokers, investors, etc., (iii)
bankers to the issue, (iv) collection centres as per schedule III, (v) brokers to the
issue, and (vi) underwriters and underwriting arrangement, distribution of pub-
licity and issue material including application form, prospectus and brochure
and deciding upon the quantum of issue material.
v. Post-issue activities, which shall involve essential follow-up steps including fol-
low-up with bankers to the issue and Self Certified Syndicate Banks to get quick
estimates of collection and advising the issuer about the closure of the issue,
based on correct figures, finalisation of the basis of allotment or weeding out of
multiple applications, listing of instruments, despatch of certificates or demat
credit and refunds and coordination with various agencies connected with the
post-issue activity such as registrars to the issue, bankers to the issue, Self Certi-
fied Syndicate Banks, etc.
f) The co-ordinator designated from among the lead merchant shall be responsible for ensur-
ing compliance with these regulations and other requirements and formalities specified by
the RoC, SEBI, recognised stock exchanges where specified securities being offered are pro-
posed to be listed.
In cases, where the post-issue activities are handled by other intermediaries, the designated
lead merchant banker responsible for ensuring that these intermediaries fulfil their functions
and enable him to discharge this responsibility through suitable agreement with the issuer.
In case of issues which are under-subscribed, the lead merchant banker responsible for under-
writing arrangements shall be responsible for invoking underwriting obligations and ensuring
that the notice for devolvement containing the obligation of the underwriters is issued in terms
of these regulations . The underwriting obligations will be discussed in section 13.5.
The merchant banker(s) advises the Issuer Company on all matters related to the public issue,
including but not limited to the activities mentioned in the inter-se allocation of responsibilities.
It is the responsibility of the issuer company to appoint one or more merchant bankers, at least
one of whom is the lead merchant banker and also appoint other intermediaries in consultation
with the lead merchant banker, to carry out the obligations relating to the issue.
The merchant banker is responsible for carrying out due diligence on the issuer company and
ensure that the disclosures made in the offer document are true, fair, accurate and complete.
The merchant banker(s) also files due diligence certificates with SEBI at various stages during the
issue process to confirm that due diligence has been carried out by the merchant banker(s) on
the issuer company, its promoters, directors, group entities and relates to all aspects including
business, legal and financial diligence. The formats of the due diligence certificates at each stage
are given as Forms in the regulations 24. Some of the key activities, where the merchant banker
has to exercise its due diligence are listed below:
• Provide the Issuer Company with a detailed due diligence checklist based on ICDR
requirements and information that is important for investors to receive through the
prospectus (using his own judgement and also as required by the SEBI ICDR Regula-
tions). It includes inputs from the legal counsels and other experts, if any, assisting
in the process of diligence. It also includes formats of certificates that the merchant
banker(s) seeks from the Company, formats of consents from all intermediaries in-
volved, details from group and associate companies, promoters, directors etc. The
due disclosure requirements in the offer document, abridged prospectus and
abridged letter of offer are given in the Schedule VIII of the ICDR.
• The merchant banker(s) is also required to keep a tab on the public communica-
tions, publicity materials, advertisements and any research report by the issuer
company. Any issuer company intending to come out with a public issue needs to
adhere to the publicity restrictions as given under Regulation 60 of the ICDR and the
merchant banker to the issue has to confirm that the same has been adhered to. All
publicity material, public communications etc need to be approved by the lead mer-
chant banker responsible for marketing of the issue. The idea is that all advertise-
ments should be truthful and fair and should not be manipulative or deceptive or
distorted and should not contain any statement, promise or forecast which is untrue
or misleading. There should be no “conditioning” of the market. All advertising by
the issuer company should be consistent with past practices.
• As an integral part of the financial due diligence, the merchant banker(s) meet with
the auditors of the issuer company and discuss information required to be disclosed
in the offering document. In accordance with requirements under Regulations 68
and note IX under Schedule VIII of the ICDR, the information required includes au-
dited consolidated or unconsolidated financial statements prepared in accordance
with Indian GAAP standards:
o Standalone financial statements for Issuer company [Audited and restated]
for last 5 years and stub period (not older than six months from the date of
the offering document)
o Standalone financial statements for each of subsidiaries; associate compa-
nies/ JVs [Audited and restated] for the last 5 years and stub period (not
older than six months from the date of the offering document)
o Consolidated financial statements for the Issuer company, subsidiaries and
associate companies [Audited and restated], for the applicable period.
o Other Requirements include statement of tax benefit; significant accounting
policies; changes in accounting policies in the last five years and effect to be
reflected as if a uniform accounting policy has been followed; notes to ac-
counts; qualifications to accounts, if any; break up of significant transactions
with the promoter/ promoter group/ group companies of promoters; break
up of other income giving the recurring and non-recurring other income
separately; accounting ratios; capitalization statement; taxation statement;
break up of loans and advances; related party transactions, statement of
dividend paid; Basis on Issue Price and any other financial information re-
24
Schedule VI of the SEBI (ICDR) Regulations, 2009 gives the format of the form.
quired while providing description of the business of the Company/ RBI re-
lated disclosures etc.
• A site visit, if relevant, is also generally undertaken by the merchant banker(s) at the
beginning of the diligence process. The objectives of the site visit are to get an ap-
preciation of the business of the company, the manufacturing process, machinery
and equipment, plant layout, environment issues etc.
• Based on the documents compiled by the Issuer and perusal of key documents such
as board minutes, shareholder meeting minutes, land and property agreements,
forms 29 and 32 of the directors, loan documents, agreements with shareholders,
agreements with customers, litigation related documents, documents filed with the
ROC etc; discussions with the promoters and management, the drafting of the draft
Prospectus is undertaken.
As per SEBI circular CIR/MIRSD/1/2012 dated January 10, 2012, the merchant bankers shall dis-
close the track record of the performance of the public issues managed by them. The track re-
cord shall be disclosed for a period of three financial years from the date of listing for each pub-
lic issue managed by the merchant banker. This information should be made available on the
website and a reference to the same should be made in the offer document.
SEBI has vide Circular CIR/MRD/DP/18/2012 dated July 18, 2012, comprehensive guidelines on
offer for sale of shares by promoters through Stock Exchange mechanism.
SEBI has issued a General Order – SEBI (Framework for rejection of Draft Offer Documents) Or-
der), 2012 vide Circular No. CIR/CFD/DIL/15/2012 dated October 15, 2012 notifying the broad
framework followed by SEBI for rejection of Offer Documents. It is necessary for Merchant
Bankers to take note of the same and take due care before filing the draft offer document with
SEBI.
In order to maintain maximum possible transparency in the issue process and to safeguard the
interests of the investors, SEBI requires the lead merchant banker to submit documents regard-
ing the issue process and the issuer’s financial health.
Regulation 8 of the SEBI ICDR Regulations provides the details of the documents which are re-
quired to be submitted to SEBI before the opening of the issue. The lead merchant banker shall
submit the following to SEBI along with the draft offer document:
• Copy of the agreement entered into between the issuer and the lead merchant bankers;
• Copy of inter-se allocation of responsibilities of each merchant banker, in case the issue is
managed by more than one merchant banker;
• Due diligence certificate as per the format prescribed in the SEBI ICDR Regulation;
• Due diligence certificate from the debenture trustee in case of an issue of convertible debt
instruments as per the prescribed format provided in the Regulations.
• Certificate confirming compliance of the conditions mentioned therein as format specified in
the Regulations.
Once SEBI has made its observations on the draft offer document or even after the expiry of the
stipulated period, if SEBI has not issued any observation, the lead merchant banker is required
to submit the following documents to SEBI:
• Statement certifying that all changes, suggestions and observations made by SEBI have been
incorporated in the offer document;
• Due diligence certificate at the time of registering the prospectus with the Registrar of Com-
panies;
• Copy of the resolution passed by the board of directors of the issuer for allotting specified
securities to promoters towards amount received against promoters’ contribution, before
opening of the issue;
• Certificate from a Chartered Accountant, before opening of the issue, certifying that pro-
moters’ contribution has been received in accordance with these regulations, accompanying
therewith the names and addresses of the promoters who have contributed to the promot-
ers’ contribution and the amount paid by each of them towards such contribution;
• Due diligence certificate as per the prescribed format immediately before the opening of
the issue, certifying that necessary corrective action, if any, has been taken;
• Due diligence certificate as per format provided in the Regulation after the issue has opened
but before it closes for subscription.
The issuer while filing draft offer document with the recognized stock exchange where the
specified securities are proposed to be listed, submit the Permanent Account Number (PAN),
bank account number and passport number of its promoters to such stock exchange.
The post issue merchant banker shall be responsible for the post issue activities till the subscrib-
ers have received the securities certificates, credit to their demat account / refund of the appli-
cation money and till the listing agreement is entered into by the issuer with the stock exchange
and the listing / trading permission is obtained.
The responsibility of the lead merchant banker shall continue even after the completion of the
issue process. The issuer is required to appoint a compliance officer, who shall in addition to the
compliance officer of the merchant banker be responsible for monitoring the compliance of the
securities law and investor grievances redressal.
The draft offer document submitted to SEBI has to be made public, for comments if any, by
hosting it on the website of SEBI, the recognized Stock Exchanges on which the issue is to be
listed and the website of the merchant bankers associated with the issue for at least 21 days
from the date of the filing.
The lead merchant bankers shall, after expiry of the stipulated period, file with SEBI a statement
giving information of the comments received by them or the issuer on the draft offer document
during that period and the consequential changes, if any, to be made in the draft offer docu-
ment.
The lead merchant bankers are responsible for the dispatch of the issue material to all the par-
ties concerned. This involves the dispatch of the offer document and other material like forms
for ASBA (Application Supported by Blocked Amount) to the designated stock exchanges, syndi-
cate members, underwriters, bankers to the issue, investors’ associations and Self Certified Syn-
dicate Banks in advance
One of the most important roles of the merchant banks involved in the process of issue man-
agement is that of underwriting of the issue. Underwriting is an agreement with or without con-
ditions to subscribe to the securities of an issuer when the existing shareholders of such issuer
or the public do not subscribe to the securities offered to them and Underwriters are person
who engages in the business of underwriting of an issue of securities of a body corporate. When
the issuer makes a public issue (other than through the book building process) or rights issue,
and desires to have the issue underwritten, it has to appoint the underwriters in accordance
with SEBI (Underwriters) Regulations, 1993. In case the issuer makes a public issue through the
book building process, such issue shall be underwritten by book runners or syndicate members,
provided that seventy five per cent of the net offer to public proposed to be compulsorily allot-
ted to qualified institutional buyers (QIBs) for the purpose of compliance of the eligibility condi-
tions as specified in the Regulation cannot be underwritten.
The issuer company shall enter into underwriting agreement with the book runner, who in turn
shall enter into underwriting agreement with the syndicate members, indicating therein the
number of specified securities which they shall subscribe to at the predetermined price in the
event of under-subscription in the issue. In case where the syndicate member fails to fulfill its
underwriting obligation, the lead book runner shall fulfill the underwriting obligations. The book
runners and syndicate members shall not subscribe to the issue in any manner except for fulfill-
ing their underwriting obligations.
A copy of the syndicate agreement is required to be filed with SEBI before the opening of bids.
In case of every underwritten issue, the lead merchant banker or the lead book runner shall un-
dertake minimum underwriting obligations as specified in the Securities and Exchange Board of
India (Merchant Bankers) Regulations, 1992. Where hundred per cent of the offer through offer
document is underwritten, the underwriting obligations shall be for the entire hundred per cent
of the offer through offer document and shall not be restricted up to the minimum subscription
level.
In order to prevent any wrong doing in the issue of securities and to safeguard the interests of
the investors SEBI ICDR has issued some minimum subscription limits for every issue as per
Regulation 14.
25
The SEBI (Underwriters) Regulations, 1993 have been discussed in Unit 17 of this workbook.
(1) The minimum subscription to be received in an issue shall not be less than ninety per cent of
the offer through offer document. The minimum subscription to be received in terms of mini-
mum number of specified securities is required to be as per SCRR 1957. (2) In the event of non-
receipt of minimum subscription as referred to in above, all application moneys received shall
be refunded to the applicants forthwith, but not later than:
(a) fifteen days of the closure of the issue, in case of a non-underwritten issue; and
(b) seventy days of the closure of the issue, in the case of an underwritten issue where mini-
mum subscription including devolvement obligations paid by the underwriters is not received
within sixty days of the closure of the issue.
The offer document must contain adequate disclosures regarding minimum subscription as
specified the SEBI ICDR Regulations. The above mentioned Regulation 14 provisions shall not
apply to the sale of specified securities except the requirement related to allotment of minimum
number of specified securities.
The Regulation 15 of the SEBI ICDR states that the issuer company cannot make allotment in
excess of the specified securities offered through the offer document. However, in case of over-
subscription, an allotment of not more than 10% of the net offer to the public can be made for
the purpose of making allotment in minimum lots.
13.6 General Obligations of Merchant Bankers with respect to Public and Rights
Issue
ICDR Regulations prescribes general obligations of Issuers and other intermediaries who are re-
lated with the process of issue management. However, we will here only discuss those obliga-
tions which are pertaining to Merchant Bankers only.
1. Prohibition of payment of incentives: No person connected with the issue shall offer any
incentive, whether direct or indirect, in any manner, whether in cash or kind or services or oth-
erwise to any person for making an application for allotment of specified securities.
2. Public Communications / Research reports: Any intermediary concerned with the issue
shall not issue any public communication including advertisement, research report and publicity
material which contains projections, estimates, conjectures etc or any matter extraneous to the
contents of the offer document. Any advertisement or research report issued by an issuer, any
intermediary concerned with the issue or their associates shall comply with the following:
(a) It shall be truthful, fair and shall not be manipulative or deceptive or distorted and it shall
not contain any statement, promise or forecast which is untrue or misleading.
(b) Reproduction of information given in the offer document should be done in such a manner
that all information and relevant facts are disclosed in clear, concise and understandable lan-
guage and not restricted to select extracts relating to that information.
(c) Slogans and brand names for the issue should not be used except the normal commercial
name of the issuer or commercial brand names of its products already in use.
(d) In cases where the financial data is used, the data should be for last three years and shall
also include the particulars relating to sales, gross profit, net profit, share capital, reserves, earn-
ing per share, dividends and the book values.
(e) Advertisements shall not use extensive technical, legal terminology or complex language
and excessive details which may distract the investors. Also the advertisements shall not contain
statements which promise or guarantee rapid increase in profits.
(f) Advertisements of issues shall not display models, celebrities, fictional characters, land-
marks or caricatures or the likes. It shall not contain slogans, expletives or non-factual and un-
substantiated titles.
(g) The advertisements shall not appear in the form of crawlers on television. The risk factors
pertaining to the issues in case of advertisements of issues on television screens should not be
scrolled but viewers should be advised to refer to the red herring prospectus or other offer
document for details.
(h) The advertisement regarding any issue on billboards should not contain information other
than what is specified in the SEBI ICDR Regulations.
No advertisement shall be issued giving any impression that the issue has been fully subscribed
or oversubscribed during the period the issue is open for subscription. An announcement re-
garding the closure of issue should be made only after the lead merchant banker is satisfied that
atleast 90% of the offer through the offer document have been subscribed and a certificate re-
garding that have been obtained from the registrar to the issue. However, such announcement
should not be made before the issue closure date.
3. Publicly available documents: The lead merchant banker along with the issuer shall ensure
that the contents of offer documents hosted on the websites as required in the Regulation is
same as that of the printed copies filed with the RoC, SEBI and the stock exchanges. As and
when required by any investor, the lead merchant and the stock exchange should furnish a copy
of the draft offer document. However, a reasonable sum of money can be charged by the mer-
chant banker or the stock exchange for the same.
4. Investor Grievances: The post-issue lead merchant bankers should look into the post-issue
activities such as allotment, refund, dispatch and giving instructions to the syndicate members,
Self-Certified Syndicate Banks and other intermediaries. The lead merchant banker is required to
also look into and monitor the redress of the investor grievances if any.
5. Post-issue Reports: The lead merchant banker is required to submit the post-issue reports
to SEBI as specified in the Regulations. The initial post-issue report shall be submitted within 3
days of closure of the issue in specified formats and the final post issue reports within 15 days of
the date of finalization of basis of allotment or within 15 days of refund of money in case of fail-
ure of issue. The lead merchant banker has to submit a due diligence certificate as per format
specified in the Regulations along with the post-issue report.
6. Post-issue Advertisements: The merchant banker related to the post-issue activities shall
ensure that advertisements giving details relating to over subscription, basis of allotment, num-
ber, value and percentage of all applications, number, value and percentage of successful allot-
tees for all applications, date of completion of dispatch of refund orders or instructions to Self-
Certified Syndicate Banks by the Registrar, date of dispatch of certificates and date of filing of
listing applications, etc is released within ten days from the date of completion of the various
activities in atleast one English national daily newspaper and one Hindi national daily newspaper
at a place where the issuer company has its registered office.
It is the responsibility of the post-issue merchant banker to ensure that the issuer company, ad-
visors, brokers or any other entity connected with the issue does not publish any advertise-
ments which state that issue has been over-subscribed. The advertisement should also not indi-
cate the investor’s response to the issue, during the period when the public issue is open for
subscription by the public.
8. Co-ordination with other Intermediaries: The post-issue merchant banker has to maintain
close coordination with the registrars to the issue and arrange to depute its officers to the of-
fices of various intermediaries at regular intervals after the closure of the issue. This would en-
able the post-issue merchant banker to monitor (a) the flow of application from collecting bank
branches; (b) processing of the applications including the application form for ASBA; (c) other
related matters till the basis of allotment is finalized; (d) dispatch of security certificates and re-
fund orders are completed and securities are listed.
In cases, where there is a devolvement on underwriters, the merchant banker has to ensure that
the notice for devolvement containing the obligation of the underwriters is issued within a pe-
riod of ten days from the date of closure of the issue. It is also the responsibility of the post-
issue merchant banker to confirm to the bankers to issue that all formalities in connection with
the issue have been completed and that the banker is free to release the money to the issuer or
release the money for refund in case of failure of the issue.
9. Miscellaneous responsibilities: The merchant banker has to ensure that all the information
contained in the offer document and the particulars as per the audited financial statements in
the offer document are not more than 6 months old from the issue opening date. The post-issue
merchant banker has to:
• Ensure that the dispatch of refund orders, allotment letters and share certificates are
done by way of registered post or certificate of posting, whichever is applicable.
• Ensure payment of interest to the applicants for delayed dispatch of allotment letters,
refund orders, etc as per the disclosures made in the offer document.
Review Questions
1. Post issue activities, generally co-ordinated by Lead Merchant Banker, include which of the
following?
(a) Deciding on centres for holding conferences of stock brokers, investors, etc.
(b) Processing rematerialisation requests
(c) Finalisation of the basis of allotment
(d) All of the above
Ans: (c)
2. As per SEBI (ICDR) Regulation, only audited and consolidated financial statements need to
be prepared in accordance to GAAP. State whether True or False.
(a) True
(b) False
Ans: (b)
3. As per SEBI (ICDR) Regulations, the minimum subscription to be received in an issue must be
atleast _____ of the offer through offer document.
(a) 65%
(b) 75%
(c) 80%
(d) 90%
Ans: (d)
4. As per SEBI (ICDR) Regulation, an advertisement may be issued giving any impression that
the issue has been fully subscribed or oversubscribed during the period the issue is open for
subscription, with prior intimation to SEBI. State whether the above statement is true or
false?
(a) True
(b) False
Ans: (b)
14.1 Introduction
The Depositories Act, 1996 provides for the establishment of depositories in securities with the
objective of ensuring free transferability of securities with speed, accuracy and security by (a)
making securities freely transferable subject to certain exceptions; (b) dematerialization of the
securities in the depository mode; and (c) providing for maintenance of ownership records in a
book entry form. In order to streamline the settlement process, the Act envisages transfer of
ownership of securities electronically by book entry. The Act has made the securities of all com-
panies freely transferable in the depository mode, restricting the company’s right to use discre-
tion in effecting the transfer of securities. The other procedural and the transfer deed require-
ments stated in the Companies Act have also been dispensed with.
SEBI may call upon any issuer, depository, depository participant or beneficial owner to furnish
in writing such information relating to the securities held in a depository as it may require or it
may authorize any person to make an enquiry or inspection in relation to the affairs of the issu-
er, beneficial owner, depository participant who shall submit a report of such enquiry or inspec-
tion to it within such period. Every director, partner, manager, officer, employee or secretary of
the depository or beneficial owner or issuer or participant shall produce all information and
documents as per the requirement of the person conducting the enquiry or inspection. After
making or causing to be made an enquiry, SEBI can issue appropriate directions to the deposito-
ry participant as may be appropriate in the interest of investors or securities market. It is hereby
declared that the power to issue directions under this section shall include and always be
deemed to have been included the power to direct any person, who made profit or averted loss
by indulging in any transaction or activity in contravention of the provisions of this Act or regula-
tions made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss
averted by such contravention.
14.3.1 Penalties
Section 19A of the Depositories Act lays down the penalties to be imposed for failure to furnish
information, return etc. by any person who is required under this Act or any rules or regulation
or bye-laws made thereunder;
1. Failure in furnishing any information, document, books, returns or report to SEBI or fil-
ing any return within the time specified thereof, shall make him liable to a penalty of
one lakh rupees for each day during which such failure continue or one crore rupees
which is less for each such failure.
2. For failure to maintain books of account or records – Rs.1 crore or Rs.1 lakh for each day
of default, whichever is less;
3. For failure to enter into agreement either by intermediary or any issuer – Rs. 1 crore or
Rs.1 lakh for each day of default, whichever is less;
4. For failure to redress investors’ grievances after having been called upon to do so by
SEBI within the specified time period– Rs. 1 crore or Rs.1 lakh for each day of default,
whichever is less;
5. For delay in dematerialization or issue of certificate of securities – Rs. 1 crore or Rs.1
lakh for each day of default, whichever is less;
6. For failure by any person to comply as per the directions of section 19 issued by SEBI
within specified time - Rs. 1 crore or Rs.1 lakh for each day during such failure, which-
ever is less;
Without prejudice to the above penalties by adjudicating officer, if any person contravenes
or attempts to contravene or abets the contravention of the Depositories Act or rules or
regulations or bye-laws made thereunder or fails to pay the penalty imposed by the adjudi-
cating officer or to comply with any of his directions or orders, then such person shall be
punishable with imprisonment up to 10 years, or with fine up to Rs. 25 crores, or with both.
Notwithstanding anything contained in the Code of Criminal Procedures, any offence punishable
under this Act, not being an offence punishable with imprisonment only, or with imprisonment
and also with fine, may either before or after the institution of any proceeding, be compounded
by the Securities Appellate Tribunal (SAT) or a court before which such proceedings are pending.
14.4.2 Power to Grant Immunity
Central Government may, on recommendation by SEBI and if satisfied, grant immunity from
prosecution or penalty to a person, who is alleged to have violated Depositories Act or the rules
or regulations made thereunder, if such person has made full and true disclosure of such alleged
violation. This is provided that no such immunity may be granted where the prosecution pro-
ceedings have already been initiated before the receipt of application for grant of immunity. The
recommendation of board under this sub-section is not binding upon the Central Government.
The government may also withdraw immunity given to a person if it is satisfied that such person
had given false evidence and hence may be tried for the offence.
14.4.3 Appeals
Any person aggrieved by an order of the SEBI made under this Act or the regulations made
thereunder may prefer an appeal to the Central Government within such time as may be pre-
scribed.
Review Questions
• Depository Participant should not delegate its functions to any other person without prior
approval of the Depository.
• In case of a request for dematerialization, Depository Participant should, within 7 days of
receipt of security certificate, furnish the same to the Issuer, who then within 15 days shall
cancel the security certificate and substitute in its records the name of the Depository as the
registered owner and shall send the details of the same to the Depository and to every stock
exchange where the security is listed.
• A Depository Participant, on receiving the request for pledge or hypothecation from a bene-
ficial owner/client, shall after satisfaction that the securities are available for pledge or hy-
pothecation, forward the application to the Depository after necessary notings.
15.2.1 Record of Services
• Depository participant should maintain the following records:
Records of all transactions entered into with the Depository and with clients (beneficial
owners).
Details of securities dematerialized and rematerialized on behalf of clients with whom it
has entered into an agreement;
Records of instructions received from clients and statements of account provided to cli-
ents;
Records of approval, notice, entry and cancellation of pledge or hypothecation, as the
case may be.
• Records and documents should be:
Preserved by the Depository Participant for a minimum of 5 years. However, if any en-
forcement agency has taken copy of any documents and records, then the originals of
such records (whether electronic or physical) should be maintained for such period till
the trial or investigation proceedings are over.
Maintained separately for each Depository, if a Depository Participant enters into an
agreement with more than one Depository.
Reconciled by the Depository Participant with the Depository on a daily basis.
• The location of the records and documents should be intimated to SEBI.
• Where records are kept electronically, the depository participant should ensure that the
integrity of the data processing systems is maintained and take adequate precautions
against the records being lost, destroyed or tampered with and in the event of loss or de-
struction, ensure the availability of sufficient back up of records at all times at a different
place.
• A depository participant should make available all records to the depository for inspection
matters relating to transfer of securities, maintenance of records of holders, handling of
physical securities.
15.2.2 Redress of Investor Grievances
Depository Participant should redress the grievances of the investors within 30 days of the re-
ceipt of complaint and keep the depository informed about the number and nature of griev-
ances redressed by it and number of grievances pending before it.
15.2.3 Investment Advice
A depository participant or any of its employees shall not render directly or indirectly, any in-
vestment advice about any security in the publicly accessible media, whether real-time or non-
real-time, unless a disclosure of his interest including long or short position in the said security
has been made, while rendering such advice.
In case the depository participant is rendering such advice, he shall also disclose the interest of
his dependent family members and the employer including their long or short position in the
said security, while rendering such advice.
15.2.4 Appointment of Compliance Officer
A depository participant shall appoint a compliance officer, who shall be responsible for moni-
toring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc
issued by SEBI or the central government and for redress of investor grievances. The Compliance
Officer should immediately and independently report to SEBI any non-compliance observed by
him.
15.2.5 Inspection
It shall be the duty of the depository participant whose affairs are being inspected or investi-
gated to produce to the inspecting authority such books, accounts, securities, records and other
documents in its custody or control and furnish him with such statements and information relat-
ing to his activities within a specified time period as the inspecting officer may specify.
15.3 Action in case of Default
A depository or a depository participant who –
o contravenes any of the provisions of the SEBI Act, the Depositories Act, the bye-laws,
agreements or SEBI (Depositories and Participants) Regulations;
o fails to furnish any information relating to its activity as a depository or participant as re-
quired under these regulations;
o does not furnish the information called for by SEBI under the Depositories Act or furnishes
false or misleading information;
o does not co-operate in any inspection or investigation or enquiry conducted by SEBI;
o fails to comply with any direction of SEBI issued under regulation 18 of the Depositories Act;
o fails to pay the annual fee;
shall be dealt with in the manner provided under Chapter V of the SEBI (Intermediaries) Regula-
tions, 2008 26.
26
See section 7.4, Unit 7 of this workbook or refer to the regulation for more details.
• A Participant shall be responsible for the acts or omissions of its employees and agents in
respect of the conduct of its business.
• A Participant shall ensure that the senior management, particularly decision makers have
access to all relevant information about the business on a timely basis.
• A Participant shall ensure that good corporate policies and corporate governance are in
place.
Review Questions
1. For an entity to function as a Depository Participant, it is mandatory for it to be registered
with SEBI as a Depository Participant. State True or False?
(a) True
(b) False
Ans: (a)
2. Every Depository Participant should put in place an adequate mechanism for __________
the internal accounting controls.
(a) Reviewing
(b) Monitoring
(c) Evaluating
(d) All of the above
Ans: (d)
3. As per the SEBI (Depositories and Participants) Regulations, the records and documents
should be reconciled by the Depository Participant with each depository on a _______ basis.
(a) Daily
(b) Two-day
(c) Weekly
(d) Fortnightly
Ans: (a)
4. As per the SEBI (Depositories and Participants) Regulations, a Depository Participant shall
not increase charges / fees for the services rendered without proper advance notice to the
Beneficial Owners. State whether True or False?
(a) True
(b) False
Ans: (a)
Bankers to an Issue mean a scheduled bank which carries out all or any of the following activi-
ties, namely:
• Acceptance of application and application monies;
• Acceptance of allotment or call monies;
• Refund of application monies;
• Payment of dividend or interest warrants.
A scheduled bank making an application to SEBI for grant of certificate as Banker to an Issue
needs to do the same in the format as specified in the Regulations and grant of certificate by
SEBI would be subject to fulfilment of the following requirements:
(a) The applicant has the necessary infrastructure, communication and data processing facili-
ties and manpower to effectively discharge its activities;
(b) The applicant or any of its directors is not involved in any litigation connected with the
securities market and which has an adverse bearing on the business of the applicant or
has not been convicted of any economic offence;
(c) The applicant is a fit and proper person;
(d) Grant of certificate to the applicant is in the interest of investors.
Once the certificate of registration as Banker to an Issue is granted, it is valid for a period of 3
years. Every Banker to an Issue is required to pay a sum of Rs. 10 lakh as registration fees at the
time of the grant of certificate by SEBI. Application for renewal should be given three months
before the expiry of the period of certificate, alongwith the non-refundable application fee of
Rs. Twenty Five Thousand. To keep the registration in force, the renewal fee is Rs. 5 lakhs every
three years from the date of initial registration.
Each banker to an issue shall also keep SEBI informed about the place where the records and
documents mentioned above are kept.
The Board of Directors of the Bankers to an Issue are required to review the periodic report to
be submitted to SEBI and record its observations on the deficiencies and non-compliances and
corrective measures initiated to avoid such instances in future. The Compliance Officer of the
Bankers to an Issue is required to send the report in the prescribed format on a half yearly basis
within 3 months of the expiry of the half year.
• Not (a) allow blank application forms bearing brokers stamp to be kept at the bank premises
or peddled anywhere near the entrance of the premises;(b) accept applications after office
hours or after the date of closure of the issue or on bank holidays;(c) after the closure of the
public issue accept any instruments such as cheques/demand drafts/stock invests from any
other source other than the designated Registrar to the Issue;(d) part with the issue pro-
ceeds until listing permission is granted by the stock exchange to the body corporate;(e) de-
lay in issuing the final certificate pertaining to the collection figures to the Registrar to the
Issue, the lead manager and the body corporate and such figures should be submitted
within seven working days from the issue closure date.
• Be prompt in disbursing dividends, interests, or any such accrual income received or col-
lected by him on behalf of his clients.
• Not make any exaggerated statement, whether oral or written to the client, either about its
qualification or capability to render certain services or its achievements in regard to services
rendered to other clients.
• Always endeavour to render the best possible advice to the clients having regard to the cli-
ents’ needs and the environments and his own professional skill.
• Not divulge to anybody either orally or in writing, directly or indirectly, any confidential in-
formation about its clients which has come toots knowledge, without taking prior permis-
sion of its clients except where such disclosures are required to be made in compliance with
any law for the time being in force.
• Avoid conflict of interest and make adequate disclosure of his interest.
• Put in place a mechanism to resolve any conflict of interest situation that may arise in the
conduct of its business or where any conflict of interest arises, shall take reasonable steps to
resolve the same in an equitable manner.
• Make appropriate disclosure to the client of its possible source or potential areas of conflict
of duties and interest while acting as a banker to an issue which would impair its ability to
render fair, objective and unbiased services.
• Not indulge in any unfair competition, which is likely to harm the interests of other bankers
to an issue or investors or is likely to place such other bankers to an issue in a disadvanta-
geous position while competing for or executing any assignment.
• Not discriminate amongst its clients, save and exception ethical and commercial considera-
tions.
• Ensure that any change in registration status/any penal action taken by SEBI or any material
change in financials which may adversely affect the interests of clients/investors is promptly
informed to the clients and any business remaining outstanding is transferred to another
registered person in accordance with any instructions of the affected clients/investors.
• Maintain an appropriate level of knowledge and competency and abide by the provisions of
the Act, regulations, circulars and guidelines of SEBI. The banker to an issue shall also com-
ply with the award of the Ombudsman passed under the Securities and Exchange Board of
India (Ombudsman) Regulations, 2003.
• Ensure that SEBI is promptly informed about any action, legal proceedings, etc., initiated
against it in respect of any material breach or non-compliance by it, of any law, rules, regu-
lations, and directions of SEBI or of any other regulatory body.
• Not make any untrue statement or suppress any material fact in any documents, reports,
papers or information furnished to SEBI.
• Not neglect or fail or refuse to submit to SEBI or other agencies with which it is registered,
such books, documents, correspondence, and papers or any part thereof as may be de-
manded/requested from time to time.
• Abide by the provisions of such acts and rules, regulations, guidelines, resolutions, notifica-
tions, directions, circulars and instructions as may be issued from time to time by the Cen-
tral Government, the Reserve Bank of India, the Indian Banks Association or SEBI and as may
be applicable and relevant to the activities carried on by the banker to an issue.
• Not render, directly or indirectly, any investment advice about any security in the publicly
accessible media, whether real-time or non-real-time, unless a disclosure of its interest in-
cluding longer short position in the said security has been made, while rendering such ad-
vice, (b) In case, an employee of the banker to an issue is rendering such advice, the banker
to an issue shall ensure that he discloses his interest, the interest of his dependent family
members and that of the employer including employer’s long or short position in the said
security, while rendering such advice.
• A banker to an issue or any of its directors, or employee having the management of the
whole or substantially the whole of affairs of the business, shall not, either through its ac-
count or their respective accounts or through their family members, relatives or friends in-
dulge in any insider trading.
• Have internal control procedures and financial and operational capabilities which can be
reasonably expected to protect its operations, its clients, investors and other registered en-
tities from financial loss arising from theft, fraud, and other dishonest acts, professional
misconduct or omissions.
• Provide adequate freedom and powers to its compliance officer for the effective discharge
of its duties.
• Develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying out
of their duties as a banker to an issue and as a part of the industry. Such a code may extend
to the maintenance of professional excellence and standards, integrity, confidentiality, ob-
jectivity, avoidance of conflict of interests, disclosure of shareholdings and interests, etc.
• Ensure that any person it employs or appoints to conduct a business is fit and proper and
otherwise qualified to act in the capacity so employed or appointed (including having rele-
vant professional training or experience).
• Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on its behalf.
• Be responsible for the acts or omissions of its employees and agents in respect to the con-
duct of its business.
• Ensure that the senior management, particularly decision makers have access to all relevant
information about the business on timely basis.
• If the banker to an issue is registered with SEBI in other capacity shall endeavour to ensure
that arms-length relationship is maintained in terms of both manpower and infrastructure
between the activities carried out as banker to an issue and other permitted activities.
• Not be a party to or instrumental for (a) creation of false market;(b) price rigging or manipu-
lation; or(c) passing of unpublished price sensitive information in respect of securities which
are listed and proposed to be listed in any stock exchange to any person or intermediary.
On inspection by RBI, it shall be the duty of every director, proprietor, partner, officer and em-
ployee of the banker to an issue, to produce such books, accounts and other documents and
information relating to its activities as a banker to an issue within such time as the Reserve Bank
may require.
The banker to an issue shall allow the inspecting authority to have reasonable access to the
premises occupied by it or by any other person on his behalf and also extend reasonable facility
for examining any books, records, documents and computer data in the possession of the
banker to an issue or any such other person and also provide copies of documents or other ma-
terials which, in the opinion of the Reserve Bank of India are relevant for the purposes of the
inspection.
It shall be the duty of every director, proprietor, partner, officer or employee of the banker to an
issue to give to the inspecting authority all assistance in connection with the inspection which
the banker to an issue may reasonably be expected to give.
Review Questions
Every underwriter shall pay Rs. Ten lakh as registration fees at the time of grant of certificate
and renewal fee of Rs. 5 lakh every three years from the fourth year from the date of initial reg-
istration
17.1.1 Capital Adequacy Requirements
The capital adequacy requirement should not be less than the networth of Rs. 20 lakh. A stock
broker who acts as an underwriter shall also fulfil the capital adequacy requirements as speci-
fied by the stock exchange of which he is a member.
Without prejudice to anything as mentioned in “A” and “B” above, the underwriter shall after
the close of each financial year, provide to SEBI, if so required, the copies of balance sheet,
profit and loss account, statement of capital adequacy requirement and such other documents
as may be required by SEBI. These may be made available to SEBI within 6 months from the
close of the said period.
The underwriters also need to maintain the following records with respect to –
(i) Details of agreements entered into with the corporates;
(ii) Total amount of securities subscribed of each body corporate;
(iii) Statement of capital adequacy requirements;
(iv) Such other records as may be specified by SEBI for underwriting.
The underwriter should also inform SEBI about the place where the books of account, records
and documents are maintained. These documents, books of account and other records shall be
preserved for a minimum period of 5 years as in provided in the SEBI (Underwriters) Regula-
tions, 1993.
SEBI regulations prescribe for certain code of conduct for all its intermediaries. The following are
the Code of conduct as given under Regulation 13 of the SEBI (Underwriters) Regulations, 1993.
An underwriter shall:
• Not indulge in any unfair competition, which is likely to be harmful to the interest of other
underwriters carrying on the business of underwriting or likely to place such other under-
writers in a disadvantageous position in relation to the underwriter while competing for, or
carrying out any assignment.
• Have internal control procedures and financial and operational capabilities which can be
reasonably expected to protect its operations, its clients and other registered entities from
financial loss arising from theft, fraud and other dishonest acts, professional misconduct or
omissions.
• Provide adequate freedom and powers to its compliance officer for effective discharge of
his duties.
• Develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying out
of their duties. Such code may help maintain professional excellence and standards, integ-
rity, confidentiality, objectivity, avoidance of conflict of interest, disclosure of shareholdings
and interest etc.
• Ensure good corporate policies and corporate governance is in place.
• Ensure that it has resources to supervise diligently and does supervise diligently persons or
appointed by it to conduct business on its behalf.
• Be responsible for the acts or omissions of its employees and agents in respect to the con-
duct of its business.
• Not be a party to or instrumental for (i) creation of false market; (ii) price rigging or manipu-
lation; (iii) passing of unpublished price sensitive information in respect of securities which
are listed and proposed to be listed in any stock exchange to any person or intermediary.
Review Questions
SEBI shall take into account the following while considering the application of grant of registra-
tion to Debenture Trustees. The debenture trustee should-
• have the necessary infrastructure like adequate office space, equipment’s and manpower to
effectively discharge his activities;
• have any past experience as a debenture trustee or has in his employment minimum two
persons who had the experience in matters which are relevant to a debenture trustee;
• not have any person who is directly or indirectly is connected with the applicant who has
already been granted registration by SEBI;
• have in his employment atleast one person who possesses the professional qualification in
law from an institution recognised by the Government;
• not have any of its director or principal officer convicted for any offence involving moral
turpitude or have been found guilty of any economic offence;
• be fit and proper person as defined in the SEBI (Intermediaries) Regulations, 2008;
• fulfil the capital adequacy requirements.
The certificate of registration and its renewal shall be valid for a period of three years from the
date of its issue. The debenture trustee if so desires can make an application for renewal of cer-
tificate before three months of the expiry of the period of certificate.
Every debenture trustee shall pay a sum of Rs. 10 lakhs as registration fees at the time of the
grant of certificate by SEBI and shall pay renewal fee of Rs. 5 lakh every three years from the
fourth year from the date of initial registration. The renewal fee shall be paid within 15 days of
being intimated by SEBI.
The capital adequacy requirement shall not be less than the networth of one crore rupees, pro-
vided that a debenture trustee holding certificate of registration as on the date of commence-
ment of the SEBI (Debenture trustees) (Amendment) Regulations, 2003 shall fulfil the networth
requirements within two years from the date of such commencement.
18.3.3 Obligation of the Debenture Trustees towards content of the trust deed
Every debenture trustee shall ensure that the trust deed executed between a body corporate
and debenture trustee shall amongst other things provide for the following matters namely-
1. Preamble: shall state the rights of the debenture holders and the manner in which these
rights are vested in the trustee.
2. Description of Instruments: shall state the purpose of raising finance and the details of
the debentures eg, tenure, interest/coupon, periodicity of payment etc.
3. Details of Charged Securities (existing or future): shall contain the details with reference
to Nature of charge, rank of charge of assets, charging of future assets, time limit within
which the future security for the issue of debentures shall be created, enforceability of
securities, circumstances when the security will become enforceable etc.
4. Events of Defaults: shall define the event of default which if occurs shall invite the ac-
tions by debenture trustee.
5. Rights of Debenture Trustees
6. Obligations of body corporate
7. Miscellaneous issues such as procedure for appointment and removal of trustee includ-
ing appointment of new trustees, provision that the debenture trustee shall not relin-
quish from its assignment unless another debenture trustee has been appointed etc .
(c) obtain a certificate from the issuer's auditors with respect to (i) utilisation of funds during
the implementation period of the project; and(ii) cases of debentures issued for financing
working capital, at the end of each accounting year.
A debenture trustee shall call or cause to be called by the body corporate a meeting of all the
debenture holders on—
(a) a requisition in writing signed by at least one-tenth of the debenture holders in value
for the time being outstanding;
(b) the happening of any event, which constitutes a default or which in the opinion of the
debenture trustees affects the interest of the debenture holders.
No debenture trustee shall relinquish its assignments as debenture trustee in respect of the de-
benture issue of any body corporate, unless and until another debenture trustee is appointed in
its place by the body corporate.
A debenture trustee may inspect books of account, records, registers of the body corporate and
the trust property to the extent necessary for discharging its obligations.
18.3.5 Maintenance of books of account, records, documents etc.
Every debenture trustee shall keep and maintain proper books of account, records and docu-
ments, relating to the trusteeship functions for a period of not less than five financial years pre-
ceding the current financial year. Every debenture trustee shall intimate to SEBI, the place
where the books of account, records and documents are maintained.
sion of its clients, except where such disclosures are required to be made in compliance with
any law for the time being in force.
9. Put in place a mechanism to resolve any conflict of interest situation that may arise in the
conduct of its business or where any conflict of interest arises, shall take reasonable steps to
resolve the same in an equitable manner.
10. Make appropriate disclosure to the client of its possible source or potential areas of conflict
of duties and interest while acting as debenture trustee which would impair its ability to
render fair, objective and unbiased services.
11. Not indulge in any unfair competition, which is likely to harm the interests of other trustees
or debenture holders or is likely to place such other debenture trustees in a disadvanta-
geous position while competing for or executing any assignment nor shall it wean away the
clients of another trustee on assurance of lower fees.
12. Not discriminate among its clients, except and save on ethical and commercial considera-
tions.
13. Share information available with it regarding client companies, with registered credit rating
agencies.
14. Provide clients and debenture holders with adequate and appropriate information about its
business, including contact details, services available to clients, and the identity and status
of employees and others acting on its behalf with whom the client may have to contact.
15. Ensure that adequate disclosures are made to the debenture holders, in a comprehensible
and timely manner so as to enable them to make a balanced and informed decision.
16. Endeavour to ensure that (a) inquiries from debenture holders are adequately dealt with;
(b) grievances of debenture holders are redressed in a timely and appropriate manner;(c)
where a complaint is not redressed promptly, the debenture holder is advised of any further
steps which may be available to the debenture holder under the regulatory system.
17. Make reasonable efforts to avoid misrepresentation and ensure that the information pro-
vided to the debenture holders is not misleading.
18. Maintain required level of knowledge and competency and abide by the provisions of the
Act, regulations and circulars and guidelines. The debenture trustee shall also comply with
the award of the Ombudsman passed under the Securities and Exchange Board of India
(Ombudsman) Regulations, 2003.
19. Not make untrue statement or suppress any material fact in any documents, reports, papers
or information furnished to SEBI.
20. A Debenture Trustee or any of its directors, partners or manager having the management of
the whole or substantially the whole of affairs of the business, shall not either through its
account or their respective accounts or through their associates or family members, rela-
tives or friends indulge in any insider trading.
21. Ensure that SEBI is promptly informed about any action, legal proceeding, etc., initiated
against it in respect of any material breach or non-compliance by it, of any law, rules, regu-
lations, directions of SEBI or of any other regulatory body.
22. Not render, directly or indirectly, any investment advice about any security in the publicly
accessible media, whether real-time or non-real-time unless a disclosure of his interest in-
cluding long or short position in the said security has been made, while rendering such ad-
vice; (b) In case, an employee of the Debenture Trustee is rendering such advice, the deben-
ture trustee shall ensure that he discloses his interest, the interest of his dependent family
members and that of the employer, including their long or short position in the said security,
while rendering such advice.
23. Ensure that any person it employs or appoints to conduct business is fit and proper and oth-
erwise qualified to act in the capacity so employed or appointed (including having relevant
professional training or experience.
24. Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on its behalf.
25. Have internal control procedures and financial and operational capabilities which can be
reasonably expected to protect its operations, its clients, debenture holders and other regis-
tered entities from financial loss arising from theft, fraud, and other dishonest acts, profes-
sional misconduct or omissions.
26. Be responsible for the acts or omissions of its employees and agents in respect to the con-
duct of its business.
27. Provide adequate freedom and powers to its compliance officer for the effective discharge
of its duties.
28. Ensure that the senior management, particularly decision makers have access to all relevant
information about the business on a timely basis.
29. Ensure that good corporate policies and corporate governance is in place.
30. Develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying out
of their duties. Such a code may extend to the maintenance of professional excellence and
standards, integrity, confidentiality, objectivity, avoidance of conflict of interests, disclosure
of shareholdings and interests, etc.
31. Not be party to (i) creation of false market;(ii) price rigging or manipulation;(iii) passing of
unpublished price sensitive information in respect of securities which are listed and pro-
posed to be listed in any stock exchange to any person or intermediary.
Debenture trustees shall disclose the information to the investors and the general public by issu-
ing a press release in any of the following events:
The aforementioned information need to be placed on the website of the debenture trustee.
Further all information/reports on debentures issued including compliance reports filed by the
companies and the debenture trustees shall be made public by disseminating on the websites of
the companies and the debenture trustees.
Review Questions
1. As per SEBI (Debenture Trustees) Regulations, which of the following can apply to register a
Debenture Trustee?
(a) Scheduled Bank
(b) Public Finance Institution
(c) Insurance Company
(d) All of the above
Ans: (d)
2. As per the SEBI (Debenture Trustee) Regulations, the certificate of registration as Debenture
Trustee is valid for a period of _____ years.
(a) 1
(b) 2
(c) 3
(d) 4
Ans: (c)
3. As per the SEBI (Debenture Trustees) Regulations, debenture trustee shall communicate to
the debenture holders on _______________ basis regarding compliance, defaults, etc and
the action taken by it.
(a) Monthly
(b) Quarterly
(c) Half yearly
(d) Annually
Ans: (c)
4. The debenture trustee shall comply with the award of Ombudsman passed under the Secu-
rities and Exchange Board of India(Ombudsman) Regulations, 2003. State whether True or
False?
(a) True
(b) False
Ans: (a)
Credit rating agencies are 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. Any person wanting to
commence business as a credit rating agency should make an application to SEBI in the format
as prescribed by SEBI.
SEBI shall not consider the application, unless the applicant is promoted by a person belonging
to any one of the following categories, namely:
(a) a public financial institution, as defined in section 2(72) of the Companies Act, 2013;
(b) a scheduled commercial bank included for the time being in the second schedule to the
Reserve Bank of India Act, 1934;
(c) a foreign bank operating in India with the approval of the Reserve Bank of India;
(d) a foreign credit rating agency recognised by or under any law for the time being in force
in the country of its incorporation, having at least 5 years of experience in rating securi-
ties;
(e) any company or a body corporate, having continuous net worth of minimum Rs.one
hundred crores as per its audited annual accounts for the previous five years prior to fil-
ing of the application with SEBI for the grant of certificate under these regulations.
Further, the applicant shall also satisfy the following conditions, for SEBI to consider the applica-
tion for grant of certificate:
a) the applicant is set up and registered as a company under the Companies Act, 1956;
b) the applicant has, in its Memorandum of Association, specified rating activity as one of its
main objects;
c) the applicant has a minimum net worth of Rs.5 crores, provided that a credit rating agency
existing at the commencement of these regulations, with a net worth of less than Rs. 5
crores, shall be deemed to have satisfied this condition, if it increases its net worth tithe said
minimum within a period of three years of such commencement.
d) the applicant has adequate infrastructure, to enable it to provide rating services in accor-
dance with the provisions of the Act and these regulations;
e) the applicant and the promoters of the applicant, have professional competence, financial
soundness and general reputation of fairness and integrity in business transactions, to the
satisfaction of SEBI;
f) neither the applicant, nor its promoter, nor any director of the applicant or its promoter, is
involved in any legal proceeding connected with the securities market, which may have an
adverse impact on the interests of the investors;
g) neither the applicant, nor its promoters, nor any director, of its promoter has at any time in
the past been convicted of any offence involving moral turpitude or any economic offence;
h) the applicant has, in its employment, persons having adequate professional and other rele-
vant experience to the satisfaction of SEBI;
i) neither the applicant, nor any person directly or indirectly connected with theapplicant has
in the past been (i) refused by SEBI a certificate under these regulations or (ii) subjected to
any proceedings for a contravention of the Act or of any rules or regulations made under the
Act.
j) the applicant, in all other respects, is a fit and proper person for the grant of a certificate;
k) grant of certificate to the applicant is in the interest of investors and the securities market.
19.1.2 Certificate Renewal and Validity
The period of validity of the certificate granted to the Credit Rating Agency is three years. The
Credit Rating Agency on being granted the registration certificate shall pay to SEBI the registra-
tion fee of Rs. 20 lakh. Application for renewal can be made to SEBI three months prior to the
expiry of the certificate accompanied with the renewal fees. The renewal fee is Rs. 10 lakh.
provided simultaneously to the concerned regional stock exchange and to all the stock ex-
changes where the said securities are listed.
A credit rating agency shall not withdraw a rating so long as the obligations under the security
rated by it are outstanding, except where the company whose security is rated is wound up or
merged or amalgamated with another company.
19.2.4 Internal procedures to be framed
Every credit rating agency shall frame appropriate procedures and systems for monitoring the
trading of securities by its employees in the securities of its clients, in order to prevent contra-
vention of;
(a) The Securities and Exchange Board of India (Insider Trading) Regulations,1992;
(b) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Prac-
tices relating to the Securities Market) Regulations,1995; and
(c) Other laws relevant to trading of securities.
Every credit rating agency shall, at the close of each accounting period, furnish to SEBI copies of
its balance sheet and profit and loss account.
19.2.7 Maintenance of Books of Accounts, records, etc.
Regulation 21 of the SEBI (Credit Rating Agencies), 1999 provides that every credit rating agency
shall keep and maintain, for a minimum period of five years, the following books of accounts,
records and documents, namely:
Every credit rating agency shall, within two month’s from the date of the auditor’s report, take
steps to rectify the deficiencies if any, made out in the auditor’s report.
19.2.9 Confidentiality
Every credit rating agency shall treat, as confidential, information supplied to it by the client and
no credit rating agency shall disclose the same to any other person, except where such disclo-
sure is required or permitted by under or any law for the time being in force.
Every credit rating agency shall specify the rating process and file a copy of the same and any
modifications or additions made therein from time to time with SEBI for record. The credit rat-
ing agency shall, in all cases, follow a proper rating process. They should have professional rating
committees, comprising members who are adequately qualified and knowledgeable to assign a
rating.
All rating decisions, including the decisions regarding changes in rating, shall be taken by the
rating committee. Every credit rating agency shall have qualified analysts to carry out a rating
assignment. Every credit rating agency shall inform SEBI about new rating instruments or sym-
bols introduced by it.
Every credit rating agency, shall, while rating a security, exercise due diligence in order to ensure
that the rating given by the credit rating agency is fair and appropriate. A credit rating agency
shall not rate securities issued by it.
Rating definition, as well as the structure for a particular rating product, shall not be changed by
a credit rating agency, without prior information to SEBI.A credit rating agency shall disclose to
the concerned stock exchange through press release and websites for general investors, the rat-
ing assigned to the securities of a client, after periodic review, including changes in rating, if any.
No credit rating agency shall rate a security issued by its promoters. Where the promoter is a
leading institution, its Chairman, director or employee shall not be a Chairman, director or em-
ployee of the credit rating agency or its rating committee.
The credit rating agency shall not rate a security issued by an entity, which is a borrower of its
promoter, or a subsidiary of its promoter, or an associate of its promoter if there are common
Chairman, Directors between credit rating agency and these entities, there are common em-
ployees, there are common chairman, Directors, Employees on the rating Committee.
No credit rating agency shall rate a security issued by its associate or subsidiary, if the credit rat-
ing agency or its rating committee has a Chairman, director or employee who is also a Chairman,
director or employee of any such entity.
7. Not indulge in any unfair competition nor shall it wean away the clients of any other rating
agency on assurance of higher rating.
8. Keep track of all important changes relating to the client companies and shall develop effi-
cient and responsive systems to yield timely and accurate ratings. Further a credit rating
agency shall also monitor closely all relevant factors that might affect the creditworthiness
of the issuers.
9. Disclose its rating methodology to clients, users and the public.
10. Disclose to the clients, possible sources of conflict of duties and interests, which could im-
pair its ability to make fair, objective and unbiased ratings. Further it shall ensure that no
conflict of interest exists between any member of its rating committee participating in the
rating analysis, and that of its client.
11. Not make any exaggerated statement, whether oral or written, to the client either about its
qualification or its capability to render certain services or its achievements with regard to
the services rendered to other clients.
12. Not make any untrue statement, suppress any material fact or make any misrepresentation
in any documents, reports, papers or information furnished to SEBI, stock exchange or pub-
lic at large.
13. Ensure that SEBI is promptly informed about any action, legal proceedings etc., initiated
against it alleging any material breach or non-compliance by it, of any law, rules, regulations
and directions of SEBI or of any other regulatory body.
14. Maintain an appropriate level of knowledge and competence and abide by the provisions of
the Act, regulations and circulars, which may be applicable and relevant to the activities car-
ried on by the credit rating agency. The credit rating agency shall also comply with award of
the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman)
Regulations, 2003.
15. Ensure that there is no misuse of any privileged information including prior knowledge of
rating decisions or changes.
16. Not render, directly or indirectly any investment advice about any security in the publicly
accessible media. They shall not offer fee-based services to the rated entities, beyond credit
ratings and research.
17. Ensure that any change in registration status/any penal action taken by SEBI or any material
change in financials which may adversely affect the interests of clients/investors is promptly
informed to the clients and any business remaining outstanding is transferred to another
registered person in accordance with any instructions of the affected clients/investors.
18. Maintain an arm’s length relationship between its credit rating activity and any other activ-
ity.
19. Develop its own internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying out
of their duties within the credit rating agency and as a part of the industry. Such a code may
20. Extend to the maintenance of professional excellence and standards, integrity, confidential-
ity, objectivity, avoidance of conflict of interests, disclosure of shareholdings and interests,
etc. Such a code shall also provide for procedures and guidelines in relation to the estab-
lishment and conduct of rating committees and duties of the officers and employees serving
on such committees.
21. Provide adequate freedom and powers to its compliance officer for the effective discharge
of his duties.
22. Ensure that the senior management, particularly decision makers have access to all relevant
information about the business on a timely basis.
23. Ensure that good corporate policies and corporate governance are in place.
24. Not generally and particularly in respect of issue of securities rated by it, be party to or in-
strumental for (a) creation of false market;(b) price rigging or manipulation; or (c) dissemi-
nation of any unpublished price sensitive information in respect of securities which are
listed and proposed to be listed in any stock exchange, unless required, as part of rationale
for the rating accorded
SEBI has issued further guidelines for Credit Rating Agencies on 1st March, 2012. As per this
guideline, according to SEBI (Credit Rating Agencies) Regulations, 1999 (the Regulations), a
credit rating agency (CRA) has been defined as a body corporate which is engaged in the busi-
ness of rating of securities offered by way of public or rights issues. The term “securities” has
been defined in Clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The
CRAs registered with SEBI also carry out rating of other securities / instruments and loans / fa-
cilities provided by banks which are not regulated by SEBI. Such ratings are being used by the
other regulators or their regulated entities for the specified purposes. Therefore, all ratings
have now been brought within the purview of the CRA Regulations irrespective of whether it is
within the meaning of the term ‘securities’ or otherwise.
Review Questions
1. For SEBI to consider the application of registration as a credit rating agency of an entity
promoted by a company, the promoter shall have a continuous networth of minimum
__________ for the previous five year.
(a) Rs. 1 crore
(b) Rs. 10 crore
(c) Rs. 100 crore
(d) Rs. 1000 crore
Ans: (c)
2. As per the SEBI (Credit Rating Agencies) Regulations, the certificate of registration as credit
rating agency is valid for a period of _____ years.
(a) 1
(b) 2
(c) 3
(d) 4
Ans: (c)
3. What is the renewal fee to keep the registration in force as credit rating agency?
(a) Rs. 10 lakh
(b) Rs. 50 lakh
(c) Rs. 20 lakh
(d) Rs. 25 lakh
Ans: (a)
4. A credit rating agency encouraged its client-facing employees to assure a higher rating to
the clients than the competitors. Is it a violation as per the SEBI code of conduct of credit
rating agencies?
(a) Yes
(b) No
Ans: (a)
i. maintaining accounts of securities or gold or gold related instruments or title deeds of real
estate assets of a client;
ii. undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian
Depository Receipts) Rules, 2004;
iii. collecting the benefits or rights accruing to the client in respect of securities or gold or gold
related instruments or title deeds of real estate assets;
iv. keeping the client informed of the actions taken or to be taken by the issuer of securities,
having a bearing on the benefits or rights accruing to the client; and
v. maintaining and reconciling records of the services as have been referred to in the above
points(i) to (iii).
g. whether the applicant, his director, his principal officer or any of his employees is involved
in any litigation connected with the securities market;
h. the grant of certificate should be in the interest of investors;
i. the applicant should be fit and proper person as defined in the SEBI (Intermediaries) Regula-
tions, 2008.
An applicant for the Custodian of Securities should have a networth of minimum of Rs. 50
crores.
Every certificate grated to the applicant as a Custodian of Securities shall be valid for a period of
three years from the date of registration or its renewal. Application of renewal shall be made to
SEBI atleast three months prior to the expiry of its certificate.
On being granted the certificate of registration, the Custodian of securities need to pay registra-
tion fee of Rs. 15 lakh to SEBI, and an annual fee of Rs. 10 lakh or 0.00025% of the ‘assets under
custody’ of the custodian of securities, whichever is higher. The annual fee shall be payable with
reference to each financial year, within one month of completion of the financial year.
• the custodian of securities shall remain responsible in all respects to its client for safekeep-
ing of the gold kept with such other person, including any associated risks;
• all books, documents and other records relating to the gold so kept with the other person
shall be maintained in the premises of the custodian or if they are not so maintained, they
shall be made available therein, if so required by SEBI;
• the custodian of securities shall continue to fulfil all duties to the clients relating to the gold
so kept with the other person, except for its physical safekeeping.
c. records containing details of rights or entitlements of each client arising from the securities
held on behalf of the client;
d. records containing details of registration of securities in respect of each client;
e. ledger for each client;
f. records containing details of instructions received from and sent to clients; and
g. records of all reports submitted to SEBI.
Further the custodian of securities shall also inform SEBI the place where the records and docu-
ments as mentioned above are maintained.
also disclose the interest of his dependent family members and employer including their
long or short position in the said security, while rendering such advice.
Review Questions
1. A person who carries on or proposed to carry on the business of providing custodial services
is called _________________.
(a) Depository
(b) Custodian
(c) Debenture trustee
(d) Underwriter
Ans: (b)
2. The certificate of registration as custodian is valid for a period of _____ years as per the SEBI
(Custodian of Securities) Regulations.
(a) 1
(b) 2
(c) 3
(d) 4
Ans: (c)
3. The custodian should segregate his custodial activities from his other activities. State
whether True or False?
(a) True
(b) False
Ans: (a)
4. As per the SEBI (Custodian of Securities) Regulations, every custodian shall maintain the re-
cords and documents for a minimum period of ________ years.
(a) 3
(b) 5
(c) 7
(d) 10
Ans: (b)