STUDY MATERIAL

EXECUTIVE PROGRAMME

SECURITIES LAWS
AND CAPITAL MARKETS

MODULE 2
PAPER 6

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 © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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 EXECUTIVE PROGRAMME
SECURITIES LAWS AND CAPITAL MARKETS
The securities markets are vital to the growth, development and strength of market economies and
the maturity of an economy are decided based on the robustness of securities market of an economy.
Considering that the Securities market is the core area of practice for the Company Secretaries, it
becomes very important for the professionals to be fully aware of various laws and regulations, both
for practice and guiding the Board of Directors on securities laws related matters. The securities
market is governed by various regulations enacted in the course of time by the competent legislative
body and regulating bodies. This study is divided into two Parts, Part I deals with Securities Laws and
Part II deals with Capital Market & Intermediaries.

Part I of the Study provides an in depth analysis of the legal principles applicable to listed companies
in addition to the Companies Act, 2013. The Regulatory Body Securities Exchange Board of India
(SEBI) having extended SEBI’s jurisdiction over corporates in the issuance of capital and transfer of
securities, during the course of time has come out with several regulations for smooth functioning of
the market, thereby also giving paramount importance to the stakeholders. Therefore, this study
discusses various legislative and regulatory guidance such as Securities Contracts (Regulation) Act,
1956, Depositories Act, 1996, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018,
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Prohibition of
Insider Trading) Regulations, 2015, etc.

Part II of the study deals with analyses of the secondary market or the capital market, which is the
bridge between the investors and the corporates. There are several intermediaries and institutions
involved in dealing with the capital market. SEBI has also jurisdiction over all such intermediaries
and persons associated with the securities market. In connection with the same, SEBI has regulated
their functioning through various regulations, which have been discussed in this part.

In the era of plethora of legislations, rules, and regulations, a Company Secretary professional is
expected to be well aware of these rules and principles, as these compliances make the functioning of
the markets smooth while violations leads to severe penalties.

This study material is published to aid the students in preparing the paper on Securities Laws and
Capital Markets for Executive Programme. It is part of the educational kit and takes the students step
by step through each phase of preparation emphasizing key concepts, principles, legal fundamentals
and procedures. Company Secretaryship being a professional course, the examination standards are
set very high, with focus on knowledge of concepts, their application, procedures and case laws, for
which sole reliance on the contents of this study material may not be enough. This study material
may, therefore, be regarded as the basic material and must be read alongwith the Bare Acts, Rules,
Regulations, Case Law.

The legislative changes made upto July, 2021 have been incorporated in the study material. The
students to be conversant with the amendments to the laws made upto six months preceding the date
of examination. It may happen that some developments might have taken place during the printing of
the study material and its supply to the students. The students are therefore advised to refer to the
updations at the Regulator’s website, Supplement relevant for the subject issued by ICSI and ICSI
Journal Chartered Secretary and other publications for updation of study material.

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In the event of any doubt, students may write to the Directorate of Academics of the Institute for
clarification at academics@[Link].

Although due care has been taken in publishing this study material, the possibility of errors, omissions
and/or discrepancies cannot be ruled out. This publication is released with an understanding that
the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action
taken in that behalf.

Should there be any discrepancy, error or omission noted in the study material, the Institute shall be
obliged if the same is brought to its notice for issue of corrigendum in the e-bulletin ‘Student Company
Secretary’.

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 LEGAL AND REGULATORY FRAMEWORK
The Legal and Regulatory Framework of Securities Laws and Capital Markets in India is given below :

Legal Framework

Securities Contracts
Depositories Act, 1996
(Regulation) Act, 1956

Securities and Exchange

Board of India Act, 1992
SEBI (Depositories and
Securities Contracts
Participants) Regulations
(Regulations) Rules, 1957
2018
• Circulars
• Master Circulars
Regulations Governing Regulations Governing
• General Orders
Issue and Listing of Intermediaries
Securities • Guidelines
• Rules

• SEBI (Issue of Capital and • Regulations

Disclosure Requirements) • SEBI (Intermediaries)
Regulations, 2018 Regulations, 2008
• SEBI (Bankers to an Issue)
• SEBI (Listing Obligations and Regulations, 1994
Disclosure Requirements)
Regulations, 2015 • SEBI (Debenture Trustee)
Regulations, 1993
• SEBI (Share Based Employee
Benefits) Regulations, 2014 • SEBI (Portfolio Managers)
Regulations, 2020
• SEBI (Issue of Sweat Equity)
Regulations, 2002 • SEBI (Registrars to an Issue and
Share Transfer Agents)
• SEBI (Buy Back of Securities) Regulations, 1993
Regulations, 2018 • SEBI (Merchant Bankers)
Regulations, 1992
• SEBI (Prohibition of Insider
Trading) Regulations, 2015 • SEBI (Stock Brokers)
Regulations, 1992
• SEBI (Substantial Acquisition of
Shares and Takeovers) • SEBI (Mutual Funds)
Regulations, 2011 Regulations, 1996

• SEBI (Delisting of Equity

Shares) Regulations, 2021

• SEBI (Issue and Listing of Debt

Securities) Regulations, 2008 • SEBI (Foreign Portfolio Investors)
Other Regulations Regulations, 2019
• SEBI (Ombudsman) Regulations, 2003
• SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to
Securities Market) Regulations, 2003
• SEBI (Collective Investment Schemes)
Regulations, 1999

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 EXECUTIVE PROGRAMME
Module 2
Paper 6
SECURITIES LAWS AND CAPITAL MARKETS (Max Marks 100)
Syllabus
Objective:

Part I: To provide expert knowledge in the legislations, rules and regulations governing the entities
listed on the stock exchanges.
Part II: To provide the basic understanding of the working of capital markets in India.

PART I : SECURITIES LAWS (70 MARKS)

Detailed Contents
1. Securities Contracts (Regulation) Act, 1956 : Objectives of the SCR Act, Rules and Regulations
made there under; Important Definitions; Recognized Stock Exchange, Clearing Corporation;
Public issue and listing of securities; Rules relating to Public Issue and Listing of Securities under
Securities Contracts (Regulation) Rules, 1957.
2. Securities and Exchange Board of India Act, 1992: Objective; Powers and functions of SEBI;
Securities Appellate Tribunal; Penalties and appeals.
3. Depositories Act, 1996 : Depository System in India; Role & Functions of Depositories; Depository
Participants; Admission of Securities; Dematerialization & Re-materialisation; Depository Process;
Inspection and Penalties; Internal Audit and Concurrent Audit of Depository Participants.
4. An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 rechristened as SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018.
5. An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
6. An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
7. SEBI (Buyback of Securities) Regulations, 1998 : Conditions of buy-back; Buy back Methods:
Tender Offer, Open Market (Book building and Stock Exchange); General obligations; Penalties.
SEBI (Buyback of Securities) Regulations, 1998 rechristened as SEBI (Buyback of Securities)
Regulations, 2018.
8. SEBI (Delisting of Equity Shares) Regulations, 2009 : Delisting of Equity Shares; Voluntary
Delisting; Exit Opportunity; Compulsory Delisting.
SEBI (Delisting of Equity Shares) Regulations, 2009 rechristened as SEBI (Delisting of Equity
Shares) Regulations, 2021.
9. An Overview of SEBI (Share Based Employee Benefits) Regulations, 2014.
10. An Overview of SEBI (Issue of Sweat Equity) Regulations, 2002.
11. SEBI (Prohibition of Insider Trading) Regulations, 2015 : Unpublished price sensitive
information (UPSI); Disclosures; Codes of fair disclosure and conduct; Penalties and Appeals.
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12. Mutual Funds : Types of Mutual Funds and Schemes; Key players in Mutual Funds: Sponsor,
Asset Management Company, Trustee, Unit holder, Evaluating performance of Mutual funds- Net
Asset Value, Expense Ratio, Holding Period Return.
13. Collective Investment Schemes : Regulatory Framework; Restrictions on Business Activities;
Submission of Information and Documents; Trustees and their Obligations.
14. SEBI (Ombudsman) Regulations, 2003 : Procedure for Redressal of Grievances; Implementation
of the Award; Display of the particulars of the Ombudsman, SCORES, SEBI (Informal Guidance)
Scheme, 2003.
This Lesson has renamed as "Resolution of Complaints and Guidance".
Case Laws, Case Studies & Practical Aspects
PART II: CAPITAL MARKET & INTERMEDIARIES (30 MARKS)

15. STRUCTURE OF CAPITAL MARKET

i. Primary Market

(a) Capital Market Investment Institutions-Domestic Financial Institutions (DFI), Qualified

Institutional Buyers (QIB), Foreign Portfolio Investors (FPI), Private Equity, Angel Funds, HNIs,
Venture Capital, Pension Funds, Alternative Investment Funds.

(b) Capital Market Instruments-Equities, Preference Shares, Shares with Differential Voting Rights,
Corporate Debt, Non-Convertible Debentures (NCD), Partly, Fully and Optionally Convertible
Debentures, Bonds, Foreign Currency Convertible Bonds (FCCB), Foreign Currency Exchangeable
Bonds (FCEB) Indian Depository Receipts (IDR), Derivatives, Warrants;

(c) Aspects of Primary Market- Book Building, ASBA, Green Shoe Option.

ii. Secondary Market

Development of Stock market in India; Stock market & its operations, Trading Mechanism, Block and
Bulk deals, Grouping, Basis of Sensex, Nifty; Suspension and Penalties; Surveillance Mechanism; Risk
management in Secondary market, Impact of various Policies on Stock Markets such as Credit Policy
of RBI, Fed Policy, Inflation index, CPI, WPI, etc.

16. Securities Market intermediaries : Primary Market and Secondary Market Intermediaries: Role and
Functions, Merchant Bankers, Stock Brokers, Syndicate Members, Registrars and Transfer Agents,
Underwriters, Bankers to an Issue, Portfolio Managers, Debenture Trustees, Investment Advisers, Research
Analysts, Market Makers, Credit Rating Agencies; Internal Audit of Intermediaries by Company Secretary
in Practice.

Case Laws, Case Studies & Practical Aspects.

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 LESSON WISE SUMMARY
SECURITIES LAWS AND CAPITAL MARKETS
PART I – SECURITIES LAWS

Lesson 1 – Securities Contracts (Regulation) Act, 1956

Stock Market plays a significant role in the development of Economy. Stock Market facilitates mobilization of
funds from small investors and channelizes these resources into various development needs of various sectors
of the economy. The Securities Contracts (Regulation) Act, 1956 (“SCRA”) is an important piece of legislation
which regulates the stock exchanges and contracts in securities.
The SCRA was enacted to prevent undesirable exchanges in securities and to control the working of stock
exchange in India. It came into force on February 20, 1957. This Act gives powers to regulate and govern the
stock exchanges and their working. There are certain powers which are delegated to SEBI under this Act.
The Government of India promulgated the Securities Contracts (Regulations) Rules, 1957 (“SCRR”) for carrying
into effect the objects of the SCRA.
The SCRA and SCRR also prescribes the conditions for listing of securities on the stock exchanges. It also
provides for amount of public holding required in every public company seeking listing.
This lesson will give an insight into the various Powers of Central Government, Stock Exchange and SEBI under
the SCRA Act, the penal provisions, procedures, offences, the procedure for appeal to SAT, Right of Investors and
various listing and delisting provisions under Securities Contract (Regulations) Rules, 1957 etc. At the end of
this lesson, the student will able to understand:
• Registration of stock exchange(s);
• Powers of Central Government in various cases;
• Powers of Recognised Stock Exchange to make rules and bye-laws;
• Powers of SEBI under SCRA;
• Clearing Corporation and its functions;
• Issue of securities to the Public;
• Delisting of securities from recognised stock exchange;
• Procedure to file an appeal to Securities appellate tribunal;
• Various penalties for various offences as prescribed under the Act; and
• Requirements for listing of securities with recognised stock exchange;

Lesson 2 – Securities and Exchange Board of India Act, 1992

With an aim to regulate the securities market in India, the Govt. of India set up a regulatory body i.e. Securities
and Exchange Board of India (‘SEBI’) in 1988. It became an autonomous body by the Government of India on 12
April 1992 and given statutory powers in 1992 with SEBI Act, 1992 being passed by the Indian Parliament. The
Preamble of the Securities and Exchange Board of India is “to protect the interests of investors in securities and
to promote the development of, and to regulate the securities market and for matters connected therewith or
incidental thereto”.
The SEBI Act is the main Act from which several other Rules and Regulations have originated. The Act constitutes
a Board (“the SEBI”) to protect the investors’ interest in securities and to promote the development and to
regulate the securities market. The SEBI replaces the erstwhile Controller of Capital Issues. The SEBI has
various powers under the Act including to issue various Regulations to better regulate the securities market

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and for better investor protection. It governs and regulates the market intermediaries. It has wide powers of
investigation, survey, search and seizure, powers to impound documents, take statements on oath, etc. Thus, the
powers enshrined in the SEBI are of a very wide amplitude. It also has powers to issue “directions, e.g., cease
and desist” orders, by virtue of which, it can prohibit any person or intermediary from carrying out certain
operations. The Act provides for stringent penalties for different types of offences and violations.
The objective of this lesson, is to provide a broader information regarding various powers and functions of
SEBI, various stringent penalties for protecting the interest of investors and and inspection of various regulated
entities, etc. to the students. At the end of this lesson, the student will able to understand :
• Powers and functions of SEBI;
• Conditions for offer of collective investment scheme by a company;
• Investigations procedure by the SEBI;
• Various penalties imposed by the SEBI for various failures, default, non-disclosure and other offenses;
• Procedure & Conditions for registration of an intermediaries; and
• Formation of the Securities Appellant Tribunal, its compositions, tenure, requirements for appeal
and its powers.

Lesson 3 – Depositories Act, 1996

A Depository is an organization like a Central Bank where the securities of a shareholder are held in the
electronic form at the request of the shareholder through the medium of a Depository Participant. A DP can be
a bank, financial institution, a broker, or any entity eligible as per SEBI norms and is responsible for the final
transfer of shares from the depository to investors. The investor, at the end of a transaction receives a
confirmation from the depository.
In India, there is Depository System for securities trading in which book entry is done electronically and no
paper work is involved. The physical form of securities is extinguished and shares or securities are held in an
electronic form. Before the introduction of the depository system through the Depository Act, 1996, the process
of sale, purchase and transfer of securities was a huge problem, and there was no safety at all.
The Depositories Act, 1996 provides a legal framework for establishment of depositories to facilitate holding of
securities including shares in the demat form (electronic form) and to effect transfer of securities through book
entry. The Act establishes the depository system in India by providing for setting up of one or more depositories
to enable the investors to hold securities in non-physical form (known as dematerialized form) and to affect
transfer of securities by way of book entries in accounts maintained by the depository.
Every depository is required to be registered with SEBI and will have to obtain a Certificate for commencement
of business on fulfillment of the prescribed conditions. There are two types of depositories in India, namely
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The functioning
of Depository and its constituents in India is primarily governed by the Depository Act 1996, SEBI (Depository
& Participant) Regulations, 2018, Bye-laws and business rules of respective depositories.
The operational and functional issues relating to depository system have been discussed in this lesson to give
an idea of the practical implications of various statutory and regulatory provisions. Further, a Practising
Company Secretary has been recognised by SEBI for various types of Audit of Depository participants. At the
end of this lesson, the student will able to understand :
• Basics of depository and its benefits;
• Models of depository and its functions;
• Process of dematerialisation and rematerialisation of securities;
• Securities which are eligible to be issue in depository mode;
• The concept of fungibility and rights of depository & beneficial owner;

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 • The applicability of SEBI (Depositories and Participants) Regulations, 2018;
• Audit of depositories i.e., Internal Audit and Concurrent Audit by a Practising Company Secretary; and
• Audit of Reconciliation of Share Capital by a Practising Company Secretary.

Lesson 4 – An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations) were
notified with the objective to bring more clarity to the provisions of the rescinded SEBI DIP Guidelines by
removing the redundant provisions and modifying certain provisions on account of changes necessitated due
to market design.
The SEBI in order to align its provisions under ICDR Regulations with the Companies Act, 2013 and allied
regulations, had come with its consultation paper on May, 04, 2018 detailing the suggestive changes under
various fund raising options by listed issuers. The SEBI constituted a committee named “ICDR Committee”
under the chairmanship of Sri Prithvi Haldea in June, 2017 to review the ICDR Regulations which suggested
certain policy changes in continuation to the same, the SEBI on September, 11, 2018 notified the SEBI (ICDR)
Regulations, 2018 effective from the 60th day of its publication in official Gazette. SEBI (ICDR) Regulations,
2018, lay down various provisions and procedures for various types of issue including public and rights issue.
SEBI’s emphasis on disclosure based regulation has witnessed a proliferation of disclosure norms for various
types of capital raising activities by Indian companies. SEBI has gradually expanded the disclosure norms and
prospectus requirements, culminating in the presently applicable SEBI ICDR Regulations. It lay down guidelines
relating to conditions for various kinds of issues including public and rights issue. The ICDR Regulations provide
detailed provisions relating to public issue such as conditions relating to an IPO and Further Public Offer (FPO),
conditions relating to pricing in public offerings, conditions governing promoter’s contribution, restriction on
transferability of promoter’s contribution, minimum offer to public, reservations, manner of disclosures in offer
documents, etc.
At the end of this lesson, the student will able to understand:
• Types of Issue;
• Concept of draft offer document, letter of offer and red herring prospectus;
• Contribution of promoters in case of Public Issue & exemption from the same;
• Concept of underwriting, Opening of Public issue & Minimum Subscription;
• Minimum number of share applications and application money;
• Pre-issue advertisement & Post issue advertisement;
• Restriction on further issue of capital & Reservation on competitive basis; and
• Detailed procedure for issue of securities by companies.

Lesson 5 – An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations,

2015

Listing agreement means where the securities are listed on the application of any person in any recognised
stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.
It is a basic document which is executed between companies and the stock exchange when companies are listed
on the stock exchange. Listing Agreement entered into by listed companies with the stock exchanges prescribes
initial and continuous disclosure norms. The modifications to provisions of Listing Agreement are prescribed
by SEBI. The Listing Agreement has been modified from time to time to align with the regulatory requirements
arising out of the dynamic changes in the capital market.
With a view to consolidate and streamline the provisions of existing listing agreements for different segments
of the capital market and to align the provision relating to listed entities with the Companies Act 2013, SEBI has
notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 hereinafter referred as
‘Listing Regulations’.
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The SEBI Listing Regulations lay down the broad principles for periodic disclosures to be given by the listed
entities operating in different segments of the capital markets. The Listing Regulations have been structured to
provide ease of reference by consolidating into one single document across various types of securities listed on
the Stock Exchanges.
This lesson will give an overview of :
• Obligations of listed entities;
• Various compliances & disclosures required to be made by the listed entities;
• Types of Board committee under listing regulations;
• Concept of Vigil Mechanism and Related Party Transactions; and
• Role of Company Secretary as a compliance officer as per listing regulations.

Lesson 6 – An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

2011

One of the most popular modes of corporate expansion is by the acquisition of an existing company. However,
when the company being acquired is a listed company, then along with the promoters’ stake, there are a lot of
other interests, such as, public shareholders, financial institutions, foreign shareholders, etc. It is essential that
all these shareholders also get a fair deal in case of an acquisition. To address all such concerns, SEBI has framed
the SEBI (Substantial Acquisition of Shares and Takeover) Regulations,1997 which have evolved significantly
over the years and notified the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST
Regulations’) repealing the old regulation, providing for Acquisition of shares and takeover of listed companies
popularly known as “Takeover Code”.
Takeover code prescribes a systematic framework for acquisition of stake in listed companies. By these laws the
regulatory system ensures that the interests of the shareholders of listed companies are not compromised in
case of an acquisition or takeover. It also protect the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle.
After going through this lesson, the students will have the knowledge about the various procedural aspects of
takeover by an acquirer and target company with respect to acquisitions and takeover. At the end of this lesson,
the student will have the conceptual clarity about the following aspects of SEBI Takeover Code:
• Triggering point while making an open offer by an acquirer;
• Open offer to the public;
• Concept of Public announcement i.e., timing of Public announcement & Detailed Public announcement;
• Procedural compliances related to letter of offer, opening of the offer etc.;
• Obligations of the acquirer and target company;
• Various disclosures requirements;
• Exemptions available to the acquirer in case of open offer; and
• Practical aspects of takeover.
Lesson 7 – SEBI (Buy-Back of Securities) Regulations, 2018

Buy-back of securities is a corporate financial strategy which involves capital restructuring and is resorted by
companies to achieve the varied objectives of increasing earnings per share, averting hostile takeovers,
improving returns to stakeholders and realigning the capital structure.
Buy-back of securities, like any other transaction of corporate restructuring, brings into play several issues,
both financial and non-financial, and the process of buy-back needs to be structured in a way that all the issues
are taken care of favourably.
The concept of buy-back was introduced in the Companies Act, 1956 by the Companies (Amendment) Act, 1999
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by the insertion of Sections 77A, 77AA and 77B. Consequently, SEBI also issued the SEBI (Buy-Back of Securities)
Regulations, 1998 (“Old Regulation”) on 14th November 1998 with an objective of simplyfying the language,
removing redundant provisions and inconsistencies updating the references to the Companies Act, 2013/other
new SEBI Regulations and incorporating the relevant circulars, FAQ’s informal guidance in the regulations, the
SEBI notified the SEBI (Buyback of Securities) Regulations, 2018 on September 11, 2018 repeal the old
Regulation. These regulations are applicable to the buyback of securities of a company listed on a stock exchange.
Under the Companies Act, 2013 buyback is governed by sections 68, 69 and 70 and listed companies are
governed by the SEBI (Buy-Back of Securities) Regulations, 2018.
This lesson will give an insight to the students into various methods of buy back available, prohibitions,
objectives and process of buy back etc. At the end of this lesson, the student will able to understand:
• Methods of buy back of securities;
• Procedure for buyback of securities from existing or security shareholders, from open market and
from odd-lot holders;
• Compliances related to extinguishing of bought back securities; and
• Obligations of the company and Merchant Banker.
Lesson 8 – SEBI (Delisting of Equity Shares) Regulations, 2021

With the new trends towards regulatory simplification to facilitate growth of businesses, barriers to free entry
and exit to companies could ultimately prove to be prohibitive in terms of loss of Capital, resources and expertise.
Internationally, stock exchanges do not impose any restriction on delisting and allow delisting subject to certain
conditions such as minimum notice period for the company, exit offers to investors, etc.
Similarly in India, SEBI (Delisting of Equity Shares) Regulations, 2009 (“the delisting regulations”) gives an
option to the listed company to either get itself delisted from all the recognised stock exchanges where it is
listed through reverse book building or only from some of the stock exchanges and continue to be listed on the
exchanges having nationwide terminals through a simplified process. Additionally, these regulations provide
simplified procedure for delisting of shares of smaller companies.
In order to provide a statutory backing for the delisting framework, the Government has also notified delisting
rules under Rule 21 of Securities Contract (Regulations) Rules, 1957 (the SCR Rules) dealing primarily with
substantive aspect on delisting. The Delisting Regulations deal with the delisting of equity shares exclusively, as
against the erstwhile Delisting Guidelines which dealt with securities generally.
This lesson will make the student acquainted with the various provisions of delisting, reasons for delisting and
the various requirements to be complied with. At the end of this lesson, the student will able to understand:
• Agencies involved in delisting process and their Role;
• Concept of voluntary delisting and its different modes;
• Comprehensive procedure for delisting of equity shares from all the stock exchanges or few stock
exchange;
• Meaning of small companies and how it can voluntary delist its equity shares;
• Compulsory delisting of shares and its detailed procedure; and
• Special powers of the recognised stock exchange in case of delisting of equity shares.
Lesson 9 – SEBI (Share Based Employee Benefits) Regulations, 2014 – An Overview

In this very dynamic era, most of the organisations are faced with a persistent challenge of attracting and
retaining talented employees. Equity based compensation or stock based incentive schemes are widely used by
the organisations in India and across the globe for their perceived benefits to both employer and employees in
the long run.
The SEBI, in the year 1999, had framed “the SEBI (Employee Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines, 1999” (hereinafter “existing guidelines”) which provides for the stock based incentive
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schemes to employees. On 28th October, 2014, the SEBI had notified the SEBI (Share Based Employee
Benefits) Regulations, 2014 (hereinafter “Regulations”) repealing the existing guidelines. These Regulations
apply to ESOS, ESPS, General Employee Benefit Schemes (GEBS), Retirement Benefit Schemes (RBS) and SAR
Schemes of the listed companies.
This lesson will enable the students to learn the various provisions of SEBI (Share Based Employee Benefits)
Regulations, 2014. At the end of this lesson, the student will able to:
• Understand the provisions of Companies Act, 2013 with respect to Employee stock option;
• Specify the companies eligible to issue ESOP/ESPS/GEBS/RBS/SARS;
• Familiarize with the types of schemes offered by the listed company;
• Understand the full procedure for issue of fresh shares for ESOPs;
• Determine the implementation of scheme through trust;
• Understand the concept of compensation committee & cases where shareholders’ approval required;
• Explain the administration of specific schemes like ESOS/ESPS/GEBS/RBS/SARS;
• Specify the provisions of SEBI LODR which is applicable to ESOP/ESPS; and
• Role of company secretary in issue of ESOP/ESPS/GEBS/RBS/SARS.
Lesson 10 – SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview

Sweat equity shares refers to equity shares given to the company’s employees on favourable terms, in recognition
of their work. Sweat equity shares is one of the modes of making share based payments to employees of the
company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for
their services.
Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it
encourages the employees to contribute more towards the company in which they feel they have a stake.
Issue of sweat equity is governed by the provisions of section 54 of the Companies Act, 2013, relevant rules and
SEBI (Issue of Sweat Equity) Regulations, 2002. These regulations applicable to issue of sweat equity shares by
the listed companies. At the end of this lesson, the student will able to:
• Correlate the provision of Companies Act with SEBI Issue of Sweat Equity Regulations;
• Specify the eligible person for issue of sweat equity shares;
• Understand the requirement of shareholders’ approval by passing special resolution;
• Determine the pricing of sweat equity shares and its accounting treatment & valuation IPRs; and
• Enumerate the ceiling on Managerial remuneration & Lock-in of sweat equity shares.

Lesson 11 – SEBI (Prohibition of Insider Trading) Regulations, 2015

In India, insider trading is not only a tort i.e. a civil wrong but also a crime. The SEBI Act does not define the term
by itself although it refers to the term “insider trading” in many provisions. However, using the powers to make
regulations and in discharge of its functions, SEBI has made regulations prohibiting insider trading in the form
of the PIT Regulations, 1992. The PIT Regulations, 1992 have had their challenges in their drafting, interpretation
and reach. So, SEBI notified and issued SEBI (Prohibition of Insider Trading) Regulations, 2015 repealing the
SEBI (Prohibition of Insider Trading) Regulations, 1992. The objective of these regulations is to strengthen the
legal and enforcement framework, align Indian regime with international practices, provide clarity with respect
to the definitions and concepts, and facilitate legitimate business transactions.
At present, insider trading of securities by directors and key managerial personnel shall be administered by the
SEBI Regulations. These regulations are comprehensive and covering all the provisions of insider trading of
securities. At the end of this lesson, the student will be able to:

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 • Understand the important definitions i.e., Connected person, Person deemed to be connected person,
Insider, Unpublished price sensitive information;
• Explain the information/communication related to company which shall not be provide to any
person;
• Elucidate trading when in possession of Unpublished price sensitive information;
• Understand the concept of trading plans;
• Specify the disclosures of trading and interest by certain persons;
• Familiarize with the code of Fair disclosure and conduct; and
• Understand the various penalties for violations under SEBI Act.
Lesson 12 – Mutual Funds

A mutual fund allows a group of investors to pool their money together with a predetermined investment
objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into
specific securities (stocks or bonds). When an investor, invest in a mutual fund, buying units or portions of the
mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost
efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase
stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage
to mutual funds is diversification, by minimizing risk & maximizing returns. A mutual fund is the most suitable
investment scope for common people as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively lower cost.
The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an
initiative of the Government of India and Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became
the first non-UTI mutual fund in India. In 1996, SEBI had formulated the regulation on Mutual Fund i.e., SEBI
(Mutual Fund) Regulations, 1996, which for the first time, established a comprehensive regulatory framework
for the mutual fund industry. Since then, several mutual funds have been set up by the private and joint sectors.
Mutual fund provides the information about the investment particulars of the corpus (company and sector-
wise), credit ratings, market value of investments, NAVs, returns, repurchase and sale price of the schemes. At
the end of this lesson, the student will able to:
• Familiarize with the structure of mutual fund and understand the risks associated with Mutual fund;
• Specify the types of Mutual fund in India;
• Determine the key players of the Mutual Fund;
• Understand the concept of Sponsor, Asset Management Company (AMC), Trustee and Unit Holder;
• Meaning of Net Asset Value, Expense Ratio and Holding Period Return; and
• Correlate the compliances of SEBI Mutual Funds Regulations with SEBI LODR.
Lesson 13 – Collective Investment Schemes

A CIS is any scheme or arrangement which pools funds from investors and involves a corpus amount of ₹100
crore or more. Every CIS has to compulsorily register itself with SEBI, file offer documents for its schemes and
obtain a credit rating from a recognised rating agency, before it launches a scheme.
Collective Investment Scheme are regulated by SEBI (Collective Investment Scheme) Regulations, 1999 which
was notified on October 15, 1999. These regulations defines Collective Investment Management Company to
mean a company incorporated under the Companies Act, 2013 and registered with SEBI under these regulations,
whose object is to organize, operate and manage a collective investment.

xiv
This lesson will give an overview of collective investment scheme, listing of schemes and its winding up etc. At
the end of this lesson, the student will able to:
• Understand the business activities which is restrictions under CIS regulation;
• Understand the compliances related to quarterly report of CIS;
• Determine the obligations of collective investment management company(CIMC), trustee;
• Understand the conditions of the termination of the agreement with the CIMC; and
• Specify the procedure for allotment, transfer of units and winding up of scheme.
Lesson 14 – Resolution of Complaints and Guidance
SCORES is a web based centralized grievance redress system of SEBI which enables investors to lodge and
follow up their complaints and track the status of redressal of such complaints online from the above website
from anywhere.
Ombudsman in its literal sense is an independent person appointed to hear and act upon citizen’s complaint
about government services. In this regard, SEBI had notified the SEBI (Ombudsman) Regulations, 2003 on
August 21, 2003 which deals with establishment of office of Ombudsman, powers and functions of Ombudsman,
procedure for redressal of Grievances and implementation of the award. This lesson also covers provisions
related to SEBI Complaints Redress System (SCORES), and SEBI (Informal Guidance) Scheme, 2003.
SEBI (Informal Guidance) Scheme, 2003 deals with various aspects such as the nature of request fees to be
accompanied along with letter disposal of requests, SEBI discretion not request and certain types of request
and confidentiality of requests, etc.
In this lesson, a student will be able to know about SCORES, SEBI Ombudsman Regulations and Informal
Guidance Scheme, etc. At the end of this lesson, the student will able to know:
• How to file a complaint in SCORES site;
• When a case can be referred for arbitration;
• Concept of Ombudsman and its powers & functions;
• Procedure for redressal of grievance; and
• Concept of Informal Guidance.

PART II – CAPITAL MARKET AND INTERMEDIARIES

Lesson 15 – Structure of Capital Market

Capital is one of the important factors of production in any economy. A well organized financial system provides
adequate capital formation through savings, finance and investments. An investment depends upon Savings
and in turn Savings depends upon earnings of an individual or profits of the organization. This system may be
viewed as a set of sub-systems with so many elements which are interdependent and interlinking with each
other to produce the purposeful result within the boundary. Hence, the term system in the context of finance
means a set of complex and closely connected financial institutions, instruments, agents, markets and so on
which are interdependent and interlinking with each other to produce the economic growth within the country.
In any economy, financial Institutions play an important role because all the financial dealings and matters are
handled and monitored by such Institutions. In the primary market, there are four key players: corporations,
institutions, investment banks, and public accounting firms. Institutions invest capital in corporations that seek
to expand and grow their businesses, while corporations issue debt or equity to the institutions in return for
their capital investment. Investment banks are hired to match institutions and corporations based on their risk
profile and investment style. Finally, public accounting firms are responsible for the preparation, review, and
auditing of financial statements, tax work, consulting on accounting systems, M&A, and capital raising.

xv
A second important division falls between the stock markets is capital market instruments. Capital Market
Instruments are responsible for generating funds for companies, corporations and sometimes governments.
These are used by the investors to make a profit out of their respective markets.
Secondary Market refers to a market where securities are traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the debt markets. There are many other factors also such
as integration with global financial market, policy decision which affect the working of stock markets.
At the end of this lesson, the student will able to understand:
– Different categories of Investment Institutions in detail;
– Various Capital Markets Instruments;
– Book building, Application Supported by Block Amount, Green Shoe Option etc.; and
– Concept of Secondary Market & its trading mechanism etc.
Lesson 16 – Securities Market Intermediaries

Intermediaries are service providers and are an integral part of any financial system. The objective of these
intermediaries is to smoothen the process of investment and to establish a link between the investors and the
users of funds. The Market Regulator, i.e., SEBI regulates various intermediaries in the primary and secondary
markets through its Regulations for these respective intermediaries. These Regulations also empower SEBI to
inspect the functioning of these intermediaries and to collect fees from them and to impose penalties on erring
entities.
At the end of this lesson, the student would have an overview about various types of intermediaries operating
in Capital Market and its role & responsibility, Internal Audit of Intermediaries by Company Secretary in
Practice, etc.

xvi
 LIST OF RECOMMENDED BOOKS
PAPER 6 : SECURITIES LAWS AND CAPITAL MARKETS

READINGS

1. Sanjeev Aggarwal : Guide to Indian Capital Market; Bharat Law House, 22, Tarun
Enclave,Pitampura, New Delhi – 110034.
2. M.Y. Khan : Indian Financial Systems; Tata McGraw Hill, 4/12, Asaf Ali Road, New
Delhi – 110002.
3. S. Suryanarayanan & : SEBI – Law, Practice & Procedure; Commercial Law Publishers (India)
V. Varadarajan Pvt. Ltd., 151, Rajindra Market, Opp. Tis Hazari Court, Delhi - 110054
4. Taxmann : SEBI Manual
5. Shashi K Gupta : Financial Institutions and Markets ; Kalyani Publishers, 4863/2B,
Nishja Aggarwal Bharat Ram Road, 24, Daryaganj, New Delhi -110002
Neeti Gupta
REFERENCES

1. SEBI Annual Report : SEBI, Mumbai.

2. Website : [Link]
[Link]
[Link]
[Link]
[Link]
JOURNALS

1. SEBI and Corporate : Taxmann, 59/32, New Rohtak Road, New Delhi-110005.
Laws
2. Corporate Law Adviser : Corporate Law Adviser, Post Bag No. 3, Vasant Vihar, New Delhi-110052.
3. SEBI Monthly Bulletin : SEBI, Mumbai.
4. NSE News : National Stock Exchange of India Ltd., Exchange Plaza, Bandra Kurla
Complex, Bandra (E), Mumbai-400051.
Note : Students are advised to read relevant Bare Acts and Rules and Regulations relating thereto. E-Bulletin
‘Student Company Secretary’, ‘Monthly Updates’, ‘Regulatory Updates’ and ‘Chartered Secretary’ should also be
read regularly for updating the knowledge.

xvii
 ARRANGEMENT OF STUDY LESSONS
Module-2 Paper-6
Securities Laws and Capital Markets

PART I – SECURITIES LAWS

Sl. No. Lesson Title
1. Securities Contracts (Regulations) Act, 1956

2. Securities and Exchange Board of India Act, 1992

3. Depositories Act, 1996

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

5. An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

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

7. SEBI (Buy-Back of Securities) Regulations, 2018

8. SEBI (Delisting of Equity Shares) Regulations, 2021

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

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

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

12. Mutual Funds

13. Collective Investment Schemes

14. Resolution of Complaints and Guidance

PART II – CAPITAL MARKET AND INTERMEDIARIES

15. Structure of Capital Market

16. Securities Market Intermediaries

xviii
 CONTENTS
SECURITIES LAWS (PART I)

LESSON 1
SECURITIES CONTRACTS (REGULATION) ACT, 1956

Securities Contracts (Regulation) Act, 1956  2

Key Definitions  3
Non-Applicability  5
Recognition of Stock Exchanges  6
Powers of Central Government  7
Powers of Recognised Stock Exchange  11
Punishments for Contraventions  13
Case Laws  13
Clearing Corporation  15
Powers of the SEBI  16
Additional Trading Floor  18
Licensing Of Dealers in Certain Areas  19
Public Issue and Listing of Securities  19
Contracts in Derivatives  19
Stock Exchanges other than recognised Stock Exchanges prohibited  19
Listing of Securities  20
Delisting of Securities  20
Right to Appeal  20
Procedure and powers of Securities Appellate Tribunal  21
Appeal to Supreme Court  22
Penalties and Procedures  22
Case Laws  24
Factors to be taken into account while adjudging the quantum of penalty by the Adjudicating Officer  24
Settlement of Administrative and Civil Proceedings  25
Recovery of Amounts  25
Continuance of Proceedings  26
Crediting sum realised by way of penalties to consolidated fund of India  26
Appeal to Securities Appellate Tribunal  26
Offences  27
Composition of certain Offences  28
xix
Contravention by Companies  28
Certain offences to be Cognizable  28
Cognizance of Offences by Courts  28
Establishment of Special Courts  28
Offences Triable by Special Courts  28
Appeal and Revision  29
Application of Code to Proceeding before Special Court  29
Transitional Provisions  29
Miscellaneous Provisions  29
Securities Contracts (Regulation) Rules, 1957  31
Requirements of Listing of Securities with Recognised Stock Exchanges  32
Conditions precedent to submission of application for listing by Stock Exchange  34
Application for listing of new securities  36
Suspension or withdrawal of admission to dealings in securities on stock exchange  36
Minimum Shareholding  37
Delisting of Securities  37
Role of Company Secretary  38
Lesson Round up  39
Glossary  39
Test Yourself  40

LESSON 2
SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

Introduction  42
Objective of SEBI  42
SEBI Act, 1992  42
Establishment of the Securities and Exchange Board of India (SEBI)  43
Management of the SEBI  43
Functions and powers of the SEBI  43
Case Laws  50
Registration of Intermediaries  51
Prohibition of Manipulative and Deceptive Devices, Insider Trading etc.  52
Penalties and Adjudication  52
Adjudication  55
Case Laws  56
Settlement of Administrative and Civil Proceedings  57
Case Snippets  58

xx
Securities Appellate Tribunal  58
Appeal to the Securities Appellate Tribunal  62
Powers of Securities Appellate Tribunal  62
Right to Legal Representation  63
Appeal to Supreme Court  63
Powers of Central Government  64
Returns and Reports  66
Delegation of Powers  66
Appeal to the Central Government  66
Bar of Jurisdiction  66
Public Servants  66
Offences  67
Cognizance of Offences by Courts  67
Contravention by Companies  68
Recovery of Amounts  69
Role of Company Secretary  70
Lesson Round Up  71
Glossary  71
Test Yourself  72

LESSON 3
DEPOSITORIES ACT, 1996

Introduction  74
Legal Framework  74
Depository System – An Overview  75
Bank–Depository - an Analogy  76
Depository Functions  76
Benefits of Depository System  76
Models of Depository  77
Legal Linkage  77
Depository Participant  78
Issuer  78
Dematerialisation  78
Rematerialisation  79
Electronic credit in New Issues  80
Trading System  80
Corporate Actions  80
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Depositories Act, 1996  80
Power of the SEBI  84
Penalties and Adjudication  85
Offences and Cognizance  86
Power of Central Government to make Rules  88
Power of Depositories to make Bye-Laws  89
SEBI (Depositories and Participants) Regulations, 2018  89
Reconciliation  90
Audit under SEBI (Depositories and Participants) Regulations, 2018  90
Internal Audit of Operations of Depository Participants  90
Concurrent Audit  91
Role of Company Secretary  92
Case Laws  92
Lesson Round Up  93
Glossary  93
Test Yourself  94

LESSON 4
AN OVERVIEW OF SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2018

Introduction  96
Genesis  96
Types of Issues  97
Applicability of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 [Regulation 3] 98
Meaning of Draft Offer Document, Letter of Offer and Red Herring Prospectus  98
Initial Public Offer / Further Public Offer  99
Eligibility requirements to be complied with for IPO  99
General Conditions [Regulation 7]  102
Additional conditions for an offer for sale [Regulation 8]  103
Issue of Warrants [Regulation 13]  104
Eligibility Criteria for Further Public Offer (FPO)  105
General Conditions for FPO [Regulation 104]  105
Issue of Warrants [Regulation 111]  106
Promoters’ Contribution [Regulation 113]  106
Lock-in Requirements  109
Other Requirements for IPO & FPO  111
Appointment of Lead Managers, Other Intermediaries and Compliance Officer [Regulation 23 & 121]  111
Disclosures in draft offer document and offer document [Regulation 24 & 122]  111
xxii
Filing of offer Document [Regulations 25 & 123]  112
Draft offer document and offer document to be available to the public [Regulations 26 & 124]  113
Pricing [Regulations 28 & 126]  113
Minimum Offer to Public [Regulation 31]  114
Reservation on Competitive Basis [Regulations 33 & 130]  114
Underwriting [Regulations 40 & 136]  115
Monitoring Agency [Regulations 41 & 137]  116
Public Communications, Publicity Materials, Advertisements and Research Reports [Regulations 42 & 138]  116
Opening of the Issue [Regulations 44 & 140]  117
Minimum Subscription [Regulations 45 & 141]  117
Period of Subscription [Regulations 46 & 142]  117
Application and Minimum Application Value [Regulations 47 & 143]  117
Allotment Procedure and Basis of Allotment [Regulations 49 & 145]  118
Oversubscription [Proviso to Regulations 49(2) & 145(2)]  118
Allotment, Refund and Payment of Interest [Regulations 50 & 146]  120
Post-issue Advertisements [Regulations 51 & 147]  120
Post-issue responsibilities of the lead manager(s) [Regulations 52 & 148]  121
Release of subscription money [Regulations 53 & 149]  121
Post-issue reports [Regulations 55 & 151]  121
Restriction on Further Capital Issues [Regulation 152]  122
Fast track FPO  122
Exit Opportunity to Dissenting Shareholders [Scheduled xx]  123
Rights Issue  125
Preferential Issue  126
Qualified Institutions Placement  127
Initial Public Offer of Indian Depository Receipts  128
Rights Issue of Indian Depository Receipts  129
Initial Public Offer by Small and Medium Enterprises  130
Innovators Growth Platform  131
Bonus Issue  132
Power to Relax Strict Enforcement of the Regulations  133
Procedure for Issue of Securities  133
Role of Company Secretary  136
Lesson Round Up  136
Glossary  137
Test Yourself  138

xxiii
 LESSON 5
AN OVERVIEW OF SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS)
REGULATIONS, 2015

Introduction  142
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015  142
Regulatory Framework  142
Key Definitions  144
Applicability  145
Obligations of Listed Entities  145
Common Obligations of Listed Companies  146
Compliances under SEBI (LODR) Regulations  147
Corporate Governance under SEBI (LODR) Regulations, 2015  152
Key Provisions pertaining to Corporate Governance  154
Composition of Board of Directors  154
Maximum age of non-executive directors  155
Minimum Directors Requirement  156
Meetings of Board  156
Quorum of board meeting  156
Key Compliance Requirements for Board  156
Maximum Number of Directorships / Committee Membership & Chairpersonship  156
Board Committees  157
Vigil Mechanism  161
Related Party Transactions  161
Corporate Governance requirements related to Subsidiary  163
Secretarial Audit and Secretarial Compliance Report  164
Obligations in Respect of Independent Directors  164
Obligation in Respect of Employees including senior Management, key Managerial persons,
Directors and Promoters  165
Prior Intimations [Regulation 29]  165
Disclosure of Events or Information [Regulation 30]  166
Meetings of Shareholders and Voting [Regulation 44]  167
Regulations applicable on Top 500, Top 1000 And Top 2000 Listed Entities  167
Compliances under SEBI Listing Regulations for the Listed Entity which has listed its non- 
convertible debt Securities or Non- Convertible Redeemable Preference Shares or both  168
Policies covered under SEBI (LODR) Regulations  169
Liability of a Listed Entity for Contravention.  170
Role of Company Secretary  170
xxiv
Case Laws  171
Case Studies  171
Lesson Round Up  176
Glossary  177
Test Yourself  177

LESSON 6
AN OVERVIEW OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 2011

Introduction  180
Genesis  181
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011  182
Important Definitions  182
Applicability & Exemptions  185
Trigger Point for making an Open Offer by an Acquirer  186
Open Offer  186
Mandatory Open Offer  187
Delisting Offer  189
Voluntary Offer  190
Minimum Offer Size  192
Conditional Offer  192
Public Announcement  192
Offer Price  194
Filing of Letter of Offer with the SEBI  197
Dispatch of Letter of Offer  197
Opening of the Offer  198
Completion of Requirements  198
Process at Glance  198
Obligations on further Acquisition  199
Completion of Acquisition  200
Disclosures for Acquisition during Offer Period  200
Payment of Interest in Case of Delay  200
Provision of Escrow  200
Mode of Payment  202
Competing Offer  203
Withdrawal of Open Offer  203
Obligations of the Target Company  204

xxv
Obligations of the Acquirer  206
Obligations of the Manager to the Open Offer  206
Disclosures  207
Exemptions  209
Power of SEBI to relax Strict Enforcement of the Regulations  215
Case Laws  216
Lesson Round Up  218
Glossary  219
Test Yourself  219

LESSON 7
SEBI (BUY-BACK OF SECURITIES) REGULATIONS, 2018

Introduction  222
Objectives of Buy-Back  223
Provisions of the Companies Act, 2013  224
SEBI (Buy-Back) Regulations, 2018  224
Applicability  225
Important Definitions  225
Conditions for Buyback of Shares or Other Securities  226
Methods of Buyback  227
Sources of Buyback  228
Prohibitions for Buy-back  228
Authorisation for Buy-back  228
Explanatory Statement  229
Additional Disclosures  229
Buy-back Process  230
Buy-back through Tender Offer  231
Additional Disclosures  231
Offer Procedure  232
Escrow Account  233
Closure and Payment to Securities holders  234
Extinguishment of Certificate and Other Closure Compliances  234
Odd-lot Buy-back  235
Buy-back from the Open Market  235
Buy-back of Shares through Stock Exchange  235
Buy-back through Book Building  237
Obligations for all buy-back of Shares or other Specified Securities 238

xxvi
Power of SEBI to relax strict enforcement of the Regulations  240
Buyback vis-a-vis compliance under SEBI (SAST) Regulations, 2011  240
Role of Company Secretary  241
Lesson Round Up  241
Glossary  242
Test Yourself  243

LESSON 8
SEBI (DELISTING OF EQUITY SHARES) REGULATIONS, 2021

Introduction  246
Genesis  246
Regulatory Framework of SEBI (Delisting of Equity Shares) Regulations, 2021 247
Applicability  247
Non-Applicability  248
Conditions for Delisting  248
Voluntary Delisting  249
Appointment of peer reviewer Company Secretary to carry out the Due-Diligence  251
Obligations of the Company (Regulation 28)  257
Obligations of the Acquirer (Regulation 30)  257
Procedure for Voluntary delisting from all the stock exchanges  258
Compulsory Delisting  259
Consequences of Compulsory Delisting  261
Procedure for Compulsory Delisting  261
Special Provisions for Delisting  262
Power of SEBI to relax strict enforcement of the Regulations  263
Role of Company Secretary in Delisting  264
Lesson Round Up  264
Glossary  265
Test Yourself  265

LESSON 9
SEBI (SHARE BASED EMPLOYEE BENEFITS) REGULATIONS, 2014 – AN OVERVIEW

Introduction  268
Genesis  268
Provisions under Companies Act, 2013  269
SEBI (Share Based Employee Benefits) Regulations, 2014  269
Applicability  270
Companies Covered  270
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Non-Applicability  270
Important Definitions  270
Schemes - Implementation and Process  272
Eligibility Criteria  276
Compensation Committee  276
Shareholders Approval  277
Variation of Terms of the Schemes  277
Winding up of the Schemes  278
Non-Transferability  278
Listing  278
Schemes Implemented By Unlisted Companies  278
Compliances and Conditions  279
Certificate from Auditors  279
Disclosures  279
Accounting Policies  279
Administration of Specific Schemes  280
Employee Stock Option Scheme (ESOS)  280
Employee Stock Purchase Scheme (ESPS)  280
Stock Appreciation Rights Scheme (SARS)  281
General Employee Benefits Scheme (GEBS)  281
Retirement Benefit Scheme (RBS)  282
Power of SEBI to relax strict enforcement of the Regulations  282
Directions by the SEBI and action in case of default  282
SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 for ESOP/ESPS  283
SEBI (Prohibition of Insider Trading) Regulations, 2015 for ESOP/ESPS  283
Procedure for Issuing ESOP by a Listed Company  284
Role of Company Secretary  285
Lesson Round Up  285
Glossary  286
Test Yourself  286

LESSON 10
SEBI (ISSUE OF SWEAT EQUITY) REGULATIONS, 2002 – AN OVERVIEW

Introduction  290
Sweat Equity Shares Provisions as under Companies Act, 2013  290
SEBI (Issue of Sweat Equity) Regulations, 2002  291
Applicability  291

xxviii
Sweat Equity Shares may be issued to Employee and Directors  292
Special Resolution  292
Issue of Sweat Equity Shares to Promoters  292
Pricing of Sweat Equity Shares  293
Valuation of Intellectual Property  293
Accounting Treatment  294
Placing of Auditors before Annual General Meeting  294
Ceiling on Managerial Remuneration  294
Lock-in  294
Listing  294
Applicability of Takeover  294
Power to relax strict enforcement of the Regulations  294
Lesson Round Up  295
Glossary  295
Test Yourself  296

LESSON 11
SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015

Introduction  298
Regulatory Framework  299
Key Definitions  300
Restriction on Communication or Procurement of Unpublished Price Sensitive Information (UPSI)
(Regulations 3)  303
Trading when in Possession of Unpublished Price Sensitive Information (UPSI): Permission & Limitation  305
Trading plans  306
Disclosure Requirements  308
Informant incentives and Rewards  310
Codes of Fair Disclosure and Conduct  311
Penalty provisions for violations of the Regulations  317
Appeal to Securities Appellate Tribunal  317
Role of Company Secretary as Compliance Officer  318
Checklists under SEBI (Prohibition of Insider Trading) Regulations 2015  319
Judgments and Developments  321
Major Case Studies on Insider Trading  321
Lesson Round Up  322
Glossary  323
Test Yourself  323

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 LESSON 12
MUTUAL FUNDS

Introduction  326
Structure of a Mutual Fund 327
Overview of Mutual Funds Industry in India 329
Types of Mutual Funds  329
Schemes according to Investment Objective 330
Advantages of Mutual Funds 331
Risks involved in Mutual Funds 332
Key Players in Mutual Fund 332
Net Asset Value 337
Expense Ratio 339
Holding Period Return 340
Evaluating Performance of Mutual Fund 340
SEBI (Mutual Funds) Regulations, 1996 – Overview 340
Registration of Mutual Funds 341
Constitution and Management of Asset Management Company and Custodian 343
Schemes of Mutual Fund 344
Code of Conduct of Mutual Funds 345
Advertisement of Conduct of Mutual Funds 345
Restriction on Investment by Mutual Funds 345
Pricing of Units of Mutual Fund 346
Facilitating transaction in Mutual Fund Schemes through the Stock Exchange Infrastructure 347
Power to relax strict enforcement of the Regulations 347
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 347
Case Laws 348
Lesson Roundup 349
Glossary349
Test Yourself  350

LESSON 13
COLLECTIVE INVESTMENT SCHEMES

Meaning of Collective Investment Schemes (CIS) 352

Genesis  352
SEBI (Collective Investment Schemes) Regulations, 1999 – An Overview 353
Registration of Collective Investment Management Company  355

xxx
Business Activities and Obligations of Collective Investment Management Company 357
Trustees and their Obligations  358
Collective Investment Schemes of Collective Investment Management Company 362
General Obligations of Collective Investment Management Company 366
Procedure for Action in case of Default 367
Penal Provisions 369
Key Aspects for Launching Collective Investment Scheme 370
Role of Company Secretary 370
Case Laws 371
Lesson Round Up 374
Glossary374
Test Yourself  375

LESSON 14
RESOLUTION OF COMPLAINTS AND GUIDANCE

Introduction  378
Matters not considered as Complaints in SCORES 378
Type of Companies not covered under SCORES  379
Timeline for lodging Complaint on SCORES  379
Process for lodging Complaint Online on SCORES by Investors  380
Handling of the Complaints by Listed Entities and SEBI registered Intermediaries  380
Handling of SCORES Complaints by Stock Exchange  381
When are Investor Complaints Disposed of?  383
When can SEBI take Action for Non-Resolution of Investor Complaints?  384
When can a case be referred for Arbitration?  384
SEBI Mobile Application: Recent Development  384
Case Laws 385
Ombudsman386
Powers and Functions of Ombudsman  387
Procedure for filing a complaint  388
Evidence Act not to apply in the Proceedings before Ombudsman  390
SEBI (Informal Guidance) Scheme, 2003 391
Lesson Round Up 393
Glossary393
Test Yourself  394

xxxi
 CAPITAL MARKET & INTERMEDIARIES (PART II)

LESSON 15
STRUCTURE OF CAPITAL MARKET

Financial Markets in India 396

Money Market  397
Capital Market  397
Securities Market  397
Need for Regulators in Capital Market 399
Capital Market Investment Institutions 402
National Level Institutions 403
State Level Institutions 404
Participants of Capital Market 405
Foreign Portfolio Investor  406
Alternative Investment Funds  406
Venture Capital  408
Areas of Investment 408
Private Equity 408
Types of Private Equity 409
Angel Fund 409
Anchor Investors 409
High net worth Individuals 410
Pension Fund 410
Legislations411
Atal Pension Yojana (APY) 411
Government pension 411
Capital market Instruments 411
Equity Shares 411
Shares with Differential Voting Rights 413
Preference Shares 413
Debentures414
Categories of Debentures 415
Optionally Fully Convertible Debenture (OFCD) 415
Bonds415
Characteristics of a Bond 415
Types of Bond 416
Foreign Currency Convertible Bonds (FCCBS) 416
xxxii
Foreign Currency Exchangeable Bonds (FCEBS) 417
Indian Depository Receipts 417
Derivatives418
Future419
Options420
Warrant421
Real Estate Investment Trust (‘REIT’) 421
Infrastructure investment trusts (‘INVITS’) 422
Securitized Debt Instruments 422
Municipal Bonds 422
Exchange Traded Funds (ETF) 423
Mechanism for Issuance of Securities in Primary Market 423
Book Building 423
Application Supported by Block Amount (ASBA) 425
Self-Certified Syndicate Bank 425
ASBA Process 425
Use of Unified Payments Interface (UPI) with ASBA in Public Issue Process 426
Green Shoe Option 428
Stock Exchange 432
Trading Mechanism 433
Types of Securities 434
Market Participants  434
Margins437
Book Closure and Record Date 437
Block Deal 437
Bulk Deal 438
Stock Market Index 438
Basis of Sensex 438
Nifty439
Basics of Investing – A Guidance to Budding Investors  439
Market Surveillance 441
Grievance Redressal in Securities Market 442
Risk Management in Secondary Market 443
Impact of various Policies on Stock Markets 443
Lesson Round Up 448
Glossary449
Test Yourself  450

xxxiii
 LESSON 16
SECURITIES MARKET INTERMEDIARIES

Introduction454
Securities and Exchange Board of India (Intermediaries) Regulations, 2008 455
Registration of Intermediaries 456
General Obligations of Intermediaries 458
Regulatory Framework of Intermediaries 459
Merchant Banker  459
Registrars and Share Transfer Agents  460
Bankers to an issue  462
Debenture Trustees  462
Stockbrokers  465
Portfolio managers  465
Custodians  467
Investment Advisers  468
Research Analysts  469
Credit Rating Agencies  470
Depository Participant (DP)  471
Foreign Portfolio Investor  472
Case Laws 474
Internal Audit of Intermediaries by Company Secretary in Practice 476
Role of Company Secretary 476
LESSON ROUND UP  477
GLOSSARY  477
TEST YOURSELF 478
TEST PAPER  479

xxxiv
 Securities Contracts
Lesson 1 (Regulation) Act, 1956
Key Concepts One Learning Objectives
Should Know
To understand:
• Securities
• The genesis of introducing the law in India
• Derivatives
• The Powers of Central Government, Stock Exchange and SEBI under
• Recognised Stock the Securities Contracts (Regulation) Act, 1956
Exchange
• The contracts in Securities and how does the listing of securities take place?
• Listing
• The penal provisions, procedures or offences under the Securities
• Delisting Contracts (Regulations) Act, 195
• Securities • The procedure for appeal to Securities Appellate Tribunal
Appellate
Tribunal • Right of Investors, and

• Clearing • The provisions of Securities Contracts (Regulations) Rules, 1957

Corporation
• Recovery Lesson Outline
• Penalties I. Securities Contracts • Miscellaneous Provisions
• Minimum (Regulation) Act, 1956
II. Securities Contracts
Shareholding • Introduction (Regulations) Rules,1957
• Key Definitions • Requirements of Listing of
• Non-applicability of Securities with recognised
Securities Contracts Stock Exchanges
(Regulation) Act, 1956 • Conditions precedent to
• Recognition of Stock submission of application
Exchanges for listing by Stock Exchange

• Grant of Recognition to • Application for listing of new

Stock Exchange securities

• Withdrawal of Recognition • Suspension or withdrawal of

admission to dealings in
• Powers of Central securities on stock exchange
Government
• Minimum Shareholding
• Powers of Recognised Stock
Exchange • Delisting of securities

• Clearing Corporation • Role of Company Secretary

• Powers of SEBI • LESSON ROUND-UP

• Listing & Delisting of • GLOSSARY

Securities • TEST YOURSELF
• Right Appeal • LIST OF FURTHER
• Penalties and Procedures READINGS
• OTHER REFERENCES
 2  Lesson 1 • EP-SLCM

Regulatory Framework
• Securities Contracts (Regulation) Act, 1956
• Securities Contracts (Regulation) Rules, 1957

SECURITIES CONTRACTS (REGULATION) ACT, 1956

INTRODUCTION
Stock Market plays a significant role in development of a country’s Economy. The stock market helps in the
mobilization of the funds from the small savings of the investors and channelizes such resources into different
development needs of various sectors of the economy. In order to prevent undesirable transactions in securities by
regulating the business of dealing therein, and by providing for certain other matters connected therewith, the
Securities Contracts (Regulation) Act, 1956 was enacted by Parliament.
The stock market is the platform of securities trading. The stock exchanges also suffer from certain limitations and
require strict control over their activities in order to ensure safety in dealings thereon. Hence, in 1956, the Securities
Contracts (Regulation) Act (‘SCRA’) was passed which provided for recognition of stock exchanges by the Central
Government. The provisions of this Act came into force with effect from February 20, 1957.
The Government promulgated the Securities Contracts (Regulations) Rules, 1957 for carrying into effect the objects
of the Securities Contracts (Regulation) Act.

The Securities Contracts (Regulation) Act, 1956, extends to the whole of India and came into force on February 20,
1957. The Act defines various terms in relation to securities and provides the detailed procedure for the stock
exchanges to get recognition from Government/SEBI, procedure for listing of securities of companies and
operations of the brokers in relation to purchase and sale of securities on behalf of investors.

The Securities Contracts (Regulation) Act, 1956, provides for direct and indirect control of all aspects of the
securities trading including the running of stock exchanges which aims to prevent undesirable transaction in
securities by regulating the business of dealing therein. It gives the Central Government regulatory jurisdiction
over:
(a) Stock exchanges through a process of recognition and continued supervision,
(b) contracts in securities, and
(c) listing of securities on stock exchanges.

As a condition of recognition, a stock exchange complies with the requirements prescribed by the Central
Government. The stock exchanges frame, their own listing regulations in consonance with the minimum listing
criteria set out in Securities Contracts (Regulations) Rules, 1957.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 3

Securities Contracts (Regulation) Act, 1956 (SCRA) – A Birds Eye View (Regulation) Act, 1956

Recognition/
Derecognition/
Corporatisation/
Demutualisation of
Stock Exchange
Right of appeal to
Securities Appellate Prescribe Powers of
Tribunal against refusal Stock Exchanges,
of stock exchange to list SEBI and Central
securities of public Government
companies

SCRA Right of appeal

against refusal of
Public issue and
stock exchanges to
listing of securities
list securities of
public companies

Penalties and Delisting of

Procedure securities

KEY DEFINITIONS
Section 2 of this Act contains definitions of various terms used in the Act. Some of the important definitions are
given below:
Securities
Securities include
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in
or of any incorporated company or a pooled investment vehicle or other body corporate;
(ii) derivative;
(iii) units or any other instrument issued by any Collective Investment Scheme to the Investors in such schemes;
(iv) security receipt as defined in clause (zg) of Section 2 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002;
(v) units or any other such instrument issued to the investors under any mutual fund scheme;
 4  Lesson 1 • EP-SLCM

(vi) units or any other instrument issued by any pooled investment vehicle;
(vii) any certificate or instrument (by whatever name called) issued to an investor by any issuer being a special
purpose distinct entity which possess any debt or receivable, including mortgage debt, assigned to such
entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage
debt, as the case may be;
(viii) government securities;
(ix) such other instruments as may be declared by the Central Government to be securities; and
(x) rights or interests in securities.

Contract
“Contract” means a contract for or relating to the purchase or sale of securities.
Spot Delivery Contract
Spot delivery contract means a contract which provides for –
(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the
contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of
money therefor through the post being excluded from the computation of the period aforesaid if the parties
to the contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of another
beneficial owner when such securities are dealt with by a depository.

Stock Exchange
Stock Exchange means –
(a) any body of individuals, whether incorporated or not, constituted before corporatisation and
demutualisation under Sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 2013 (erstwhile Companies Act, 1956) whether
under a scheme of corporatisation and demutualisation or otherwise,

for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

Recognised Stock Exchange

Recognised Stock Exchange means a stock exchange which is for the time being recognised by the Central
Government.
Government security
Government security means a security created and issued whether before or after the commencement of this Act,
by the Central Government or a State Government for the purpose of raising a public loan and having one of the
forms specified in clause (2) of section 2 of the Public Debt Act, 1944.

Derivative
Derivative includes –
(a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or
contract for differences or any other form of security;
(b) a contract which derives its value from the prices or index of prices, of underlying securities;
(c) commodity derivatives; and
(d) such other instruments as may be declared by the Central Government to be derivatives.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 5

“commodity derivative” means a contract –

(i) for the delivery of such goods, as may be notified by the Central Government in the Official Gazette, and which
is not a ready delivery contract; or
(ii) for differences, which derives its value from prices or indices of prices of such underlying goods or activities,
services, rights, interests and events, as may be notified by the Central Government, in consultation with the
SEBI, but does not include securities as referred to in sub-clauses (A) and (B) above.

Currency
Derivatives
Equity
Derivatives
Deriv
Der

Commodity
Deriva ves

DERIVATIVES

Securities Appellate Tribunal

Securities Appellate Tribunal means a Securities Appellate Tribunal established under sub-section (1) of section
15K of the Securities and Exchange Board of India Act, 1992.
Member
Member means a member of a recognised stock exchange;

NON-APPLICABILITY

Section 28 provides that the

provisions of SCRA shall not
apply to -

the Government, the Reserve any convertible bond or share the Central Government, in the
Bank of India, any local authority warrant or any option or right, interest of trade and commerce
or any corporation set up by a in so far as it entitles the person or the economic development of
special law. in whose favour any of the the country, may specify any
foregoing has been issued, class of contracts as contracts to
whether by conversion of the which this Act or any provision
bond or warrant or otherwise, contained therein shall not apply.
on the basis of the price agreed
upon when the same was issued.
 6  Lesson 1 • EP-SLCM

RECOGNITION OF STOCK EXCHANGES

Section 3 Section 4 Section 5

Application for recognition of Grant of recognition of stock Withdrawl of recognition
stock exchanges exchanges

Application for recognition of stock exchange

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

Grant of recognition to stock exchange

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

It may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such
form as may be prescribed.
The conditions which the Central Government (powers are exercisable by SEBI also) may prescribe for the grant of
recognition to the stock exchanges may include, among other matters, conditions relating to-
(i) the qualifications for membership of stock exchanges;
(ii) the manner in which contracts shall be entered into and enforced as between members;
(iii) the representation of the Central Government on each of the stock exchange by such number of persons not
exceeding three as the Central Government may nominate in this behalf; and
(iv) the maintenance of accounts of members and their audit by chartered accountants whenever such audit is
required by the Central Government.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 7

Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also
in the Official Gazette of the State in which the principal office of the stock exchange is situated, and such recognition
shall have effect as from the date of its publication in the Gazette of India.
No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange
concerned to be heard in the matter; and the reasons for such refusal shall be communicated to the stock exchange
in writing.
Withdrawal of recognition
Section 5 lays down that if the Central Government is of opinion that the recognition granted to a stock exchange
should in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the
governing body of the stock exchange a written notice that the Central Government is considering the withdrawal
of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be
heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition
granted to the stock exchange.
However, the withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and the Central Government may, after consultation with the stock exchange, make such provision as it
deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due
performance of any contracts outstanding on that date.
Where the recognized stock exchange has not been corporatized or demutualised or it fails to submit the scheme
within the specified time therefore or the scheme has been rejected by the SEBI, the recognition granted to such
stock exchange, shall, stand withdrawn and the Central Government shall publish, by notification in the Official
Gazette, such withdrawal of recognition.
However, such withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and SEBI may, after consultation with the stock exchange, make such provisions as it deems fit in the
order rejecting the scheme published in the Official Gazette.

It is to be noted that the powers under Section 4 and Section 5 have been delegated concurrently to SEBI also.
Hence, SEBI may exercise these powers.

POWERS OF CENTRAL GOVERNMENT

 8  Lesson 1 • EP-SLCM

To call for periodical returns and make direct enquiries

Every recognised stock exchange shall furnish to the SEBI, such periodical returns relating to its affairs as may be
prescribed.
Every recognised stock exchange and every member thereof shall maintain and preserve for not exceeding five
years such books of accounts, and other documents as the Central Government, after consultation with the stock
exchange concerned, may prescribe in the interest of the trade or in the public interest, and such books of account,
and other documents shall be subject to inspection to all reasonable times by SEBI.
The Securities and Exchange Board of India, if it is satisfied that it is in the interest of the trade or in the public
interest so to do, may, by order in writing,–
(a) call upon a recognised stock exchange or any member thereof to furnish in writing such information or
explanation relating to the affairs of the stock exchange or of the member in relation to the stock exchange as
the SEBI may require; or
(b) appoint one or more persons to make an inquiry in the prescribed manner in relation to the affairs of the
governing body of a stock exchange or the affairs of any of the members of the stock exchange in relation to
the stock exchange and submit a report of the result of such inquiry to the SEBI within such time as may be
specified in the order or, in the case of an inquiry in relation to the affairs of any of the members of a stock
exchange, direct the governing body to make the inquiry and submit its report to the SEBI;
Where an inquiry in relation to the affairs of a recognised stock exchange or the affairs of any of its members in
relation to the stock exchange has been undertaken:
(a) every director, manager, secretary or other officer of such stock exchange;
(b) every member of such stock exchange;
(c) if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm; and
(d) every other person or body of persons who has had dealings in the course of business with any of the persons
mentioned in clauses (a), (b) and (c), whether directly or indirectly;

shall be bound to produce before the authority making the inquiry all such books of account, and other documents
in his custody or power relating to or having a bearing on the subject-matter of such inquiry and also to furnish the
authorities within such time as may be specified with any such statement or information relating thereto as may be
required of him.

To Direct Rules or make Rules

Section 8 deals with the power of Central Government to make rules or direct rules to be made in respect of
recognised stock exchange. Where, after consultation with the governing bodies of stock exchanges generally or
with the governing body of any stock exchange in particular, the Central Government is of opinion that it is necessary
or expedient so to do, it may, by order in writing together with a statement of the reasons therefor, direct the
recognised stock exchanges generally or any recognised stock exchange in particular, as the case may be, to make
any rules or to amend any rules already made in respect of all or any of the matters or to amend any rules already
made in respect of all or any of the matters as specified, within a period of two months from the date of the order.
If any recognised stock exchange fails or neglects to comply with any order, within the period specified therein, the
Central Government may make the rules for, or amend the rules made by, the recognised stock exchange, either in
the form proposed in the order or with such modifications thereof as may be agreed to between the stock exchange
and the Central Government.
Where in pursuance of this section any rules have been made or amended, the rules so made or amended shall be
published in the Gazette of India and also in the Official Gazette or Gazettes of the State or States in which the
principal office or offices of the recognised stock exchange or exchanges is or are situate, and, on the publication
thereof in the Gazette of India, the rules so made or amended shall, notwithstanding anything to the contrary
contained in the Companies Act, 2013 or in any other law for the time being in force, have effect as if they had been
made or amended by the recognised stock exchange or stock exchanges, as the case may be.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 9

To Supersede governing bodies of a recognised stock exchange

Without prejudice to any other powers vested in the Central Government under this Act, where the Central
Government is of opinion that the governing body of any recognised stock exchange should be superseded, then, the
Central Government may serve on the governing body a written notice that the Central Government is considering
the super session of the governing body for the reasons specified in the notice and after giving an opportunity to the
governing body to be heard in the matter, it may, by notification in the Official Gazette, declare the governing body
of such stock exchange to be superseded, and may appoint any person or persons to exercise and perform all the
powers and duties of the governing body, and, where more persons than one are appointed, may appoint one of
such persons to be the chairman and another to be the vice-chairman thereof.
On the publication of a notification in the Official Gazette, the following consequences shall ensure, namely –
(a) the members of the governing body which has been superseded shall, as from the date of the notification of
super session, cease to hold office as such members;
(b) the person or persons appointed may exercise and perform all the powers and duties of the governing body
which has been superseded;
(c) all such property of the recognised stock exchange as the person or persons appointed may, by order in
writing, specify in this behalf as being necessary for the purpose of enabling him or them to carry on the
business of the stock exchange, shall vest in such person or persons.

The governing body of which is superseded, the person or persons appointed shall hold office for such period as
may be specified in the notification published and, the Central Government may from time to time, by notification,
vary such period.
The Central Government, may at any time before the determination of the period of office of any person or persons
appointed call upon the recognised stock exchange to reconstitute the governing body in accordance with its rules
and on such re-constitution all the property of the recognised stock exchange which has vested in, or was in the
possession of, the person or persons appointed, shall vest or re-vest, as the case may be, in the governing body so
re-constituted;
However, until a governing body is so re-constituted, the person or persons appointed, shall continue to exercise
and perform their powers and duties.
To Suspend business of Recognised Stock Exchange
If in the opinion of the Central Government, an emergency has arisen and for the purpose of meeting the emergency,
the Central Government considers it expedient so to do, it may, by notification in the Official Gazette, for reasons to
be set out therein, direct a recognised stock exchange to suspend such of its business for such period not exceeding
seven days and subject to such conditions as may be specified in the notification, and if, in the opinion of the Central
Government, the interest of the trade or the public interest requires that the period should be extended, may, by like
notification extend the said period from time to time.
However, where the period of suspension is to be extended beyond the first period, no notification extending the
period of suspension shall be issued unless the governing body of the recognised stock exchange has been given an
opportunity of being heard in the matter.

To Prohibit Contracts in Certain Cases

Section 16 stipulates that if the Central Government is of opinion that it is necessary to prevent undesirable
speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no
person in the State or area specified in the notification shall, save with the permission of the Central Government,
enter into any contract for the sale or purchase of any security specified in the notification except to the extent and
in the manner, if any, specified therein.
All contracts in contravention of the above provisions entered into after the date of the notification issued thereunder
shall be illegal.
 10  Lesson 1 • EP-SLCM

To Grant Immunity
Section 23-O deals with the power to grant immunity. The Central Government may, on recommendation by the
SEBI, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this
Act or the rules or the regulations made thereunder, has made a full and true disclosure in respect of alleged violation,
grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence
under this Act, or the rules or the regulations made thereunder or also from the imposition of any penalty under this
Act with respect to the alleged violation.
However, no such immunity shall be granted by the Central Government in cases where the proceedings for the
prosecution for any such offence have been instituted before the date of receipt of application for grant of such
[Link] further that the recommendation of the SEBI are not binding upon the Central Government.
An immunity granted to a person as mentioned above may, at any time, be withdrawn by the Central Government,
if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the
immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with
respect to which the immunity was granted or for any other offence of which he appears to have been guilty in
connection with the contravention and shall also become liable to the imposition of any penalty under this Act to
which such person would have been liable, had not such immunity been granted.
To Delegate or to Make Rules
Power to Delegate
Section 29A stipulates that the Central Government may, by order published in the Official Gazette, direct that the
powers (except the power under section 30) exercisable by it under any provision of this Act shall, in relation to
such matters and subject to such conditions, if any, as may be specified in the order, be exercisable also by the
Securities and Exchange Board of India or the Reserve Bank of India constituted under section 3 of the Reserve
Bank of India Act, 1934.
Power to Make Rules
Section 30 empowers the Central Government to make rules for the purpose of carrying into effect the objects of
this Act by notification in the Official Gazette.
In particular, such rules may provide for,–
(a) the manner in which applications may be made, the particulars which they should contain and the levy of a
fee in respect of such applications;
(b) the manner in which any inquiry for the purpose of recognising any stock exchange may be made, the
conditions which may be imposed for the grant of such recognition, including conditions as to the admission
of members if the stock exchange concerned is to be the only recognised stock exchange in the area; and the
form in which such recognition shall be granted;
(c) the particulars which should be contained in the periodical returns and annual reports to be furnished to the
Central Government;
(d) the documents which should be maintained and preserved under section 6 and the periods for which they
should be preserved;
(e) the manner in which any inquiry by the governing body of a stock exchange shall be made under section 6;
(f) the manner in which the bye-laws to be made or amended under this Act shall before being so made or
amended be published for criticism;
(g) the manner in which applications may be made by dealers in securities for licences under section 17, the fee
payable in respect thereof and the period of such licences, the conditions subject to which licences may be
granted, including conditions relating to the forms which may be used in making contracts, the documents to
be maintained by licensed dealers and the furnishing of periodical information to such authority as may be
specified and the revocation of licences for breach of conditions;
(h) the requirements which shall be complied with—
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 11

(A) by public companies for the purpose of getting their securities listed on any stock exchange;
(B) by collective investment scheme for the purpose of getting their units listed on any stock exchange;
(ha) the grounds on which the securities of a company may be delisted from any recognised stock exchange under
sub-section (1) of section 21A;
(hb) the form in which an appeal may be filed before the Securities Appellate Tribunal under sub-section (2) of
section 21A and the fees payable in respect of such appeal;
(hc) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 22A and the
fees payable in respect of such appeal;
(hd) the manner of inquiry under sub-section (1) of section 23-I;
(he) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 23L and the
fees payable in respect of such appeal;
(i) any other matter which is to be or may be prescribed.

Every rule made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session, for a total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule
should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case
may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything
previously done under that rule.
POWERS OF RECOGNISED STOCK EXCHANGE

To make Rules restricting voting rights etc.

Section 7A of the Act stipulates that a recognised stock exchange may make rules or amend any rules made by it to
provide for all or any of the following matters, namely: –
(a) the restriction of voting rights to members only in respect of any matter placed before the stock exchange at
any meeting;
(b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so
that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital
of the stock exchange;
(c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a
meeting of the stock exchange; and
(d) such incidental, consequential and supplementary matters as may be necessary to give effect to any of the
matters specified in clauses (a) (b) and (c).

Powers have been delegated concurrently to SEBI also.

No rules of a recognised stock exchange made or amended in relation to any matter referred to in clauses (a) to (d)
shall have effect until they have been approved by the Central Government (Powers are exercisable by SEBI also)
and published by that Government in the Official Gazette.
 12  Lesson 1 • EP-SLCM

To make Bye-laws
Section 9 of the Act provides that any recognised stock exchange may, subject to the previous approval of the SEBI,
make bye-laws for the regulation and control of contracts.
In particular, such bye-laws may provide for :
(a) the opening and closing of markets and the regulation of the hours of trade;
(b) a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and
payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing
house;
(c) the submission to the Securities and Exchange Board of India by the clearing house as soon as may be after
each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of
India may, from time to time, require, namely:—
(i) the total number of each category of security carried over from one settlement period to another;
(ii) the total number of each category of security, contracts in respect of which have been squared up
during the course of each settlement period;
(iii) the total number of each category of security actually delivered at each clearing;
(d) the publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange
Board of India under clause (c) subject to the directions, if any, issued by the Securities and Exchange Board
of India in this behalf;
(e) the regulation or prohibition of blank transfers;
(f) the number and classes of contracts in respect of which settlements shall be made or differences paid through
the clearing house;
(g) the regulation, or prohibition of budlas or carry-over facilities;
(h) the fixing, altering or postponing of days for settlements;
(i) the determination and declaration of market rates, including the opening, closing highest and lowest rates for
securities;
(j) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any,
and conditions relating thereto, and the forms of contracts in writing;
(k) the regulation of the entering into, making, performance, rescission and termination, of contracts, including
contracts between members or between a member and his constituent or between a member and a person
who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or
intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members
who are not parties to such contracts;
(l) the regulation of taravani business including the placing of limitations thereon;
(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and
the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any
specified securities;
(n) the method and procedure for the settlement of claims or disputes, including settlement by arbitration;
(o) the levy and recovery of fees, fines and penalties;
(p) the regulation of the course of business between parties to contracts in any capacity;
(q) the fixing of a scale of brokerage and other charges;
(r) the making, comparing, settling and closing of bargains;
(s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering
or otherwise, and the exercise of powers in such emergencies, including the power to fix maximum and
minimum prices for securities;
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 13

(t) the regulation of dealings by members for their own account;

(u) the separation of the functions of jobbers and brokers;
(v) the limitations on the volume of trade done by any individual member in exceptional circumstances;
(w) the obligation of members to supply such information or explanation and to produce such documents relating
to the business as the governing body may require.

PUNISHMENTS FOR CONTRAVENTIONS

Section 9(3) of the Act provides that the bye-laws made may :
(a) specify the bye-laws, the contravention of which shall make a contract entered into otherwise than in
accordance with the bye- laws void.
(b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or
more of the following punishments, namely;
(i) fine,
(ii) expulsion from membership,
(iii) suspension from membership for a specified period,
(iv) any other penalty of a like nature not involving the payment of money.

Any bye-laws shall be subject to such conditions in regard to previous publication as may be prescribed, and, when
approved by the SEBI, shall be published in the Gazette of India and also in the Official Gazette of the State in which
the principal office of the recognised stock exchange is situated, and shall have effect as from the date of its
publication in the Gazette of India.
However, if the SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made immediately, it may, by order in writing specify the reasons therefor, dispense with the condition of
previous publication.

CASE LAWS
1. 21.02.2020 Pacific Finstock Ltd. (Appellant) vs. BSE Securities Appellate
Ltd. (Respondent) Tribunal
For listing of a security, the listing norms as on date of Application filed alone is required to be consider
but status of the directors/ promoters of the company are required to be considered on the date of the
passing of the order on the listing application.
Facts of the case
The appellant has filed the present appeal being aggrieved by the BSE Limited (BSE) order dated August 02,
2019 (“BSE”) rejecting the listing application. The facts leading to the filing of the present appeal are:
• The appellant was a listed company on the Vadodara Stock Exchange and Ahmedabad Stock Exchange but
subsequently it came on the Dissemination Board* of the BSE and remained on the Dissemination Board
for the last several years.
Dissemination Board -
BSE  has launched a  Dissemination Board  mechanism on  BSE  India website ([Link])
enabling dissemination of bids/Offer placed by buyers and sellers of securities of companies that are
listed exclusively on exiting or de-recognised Regional Stock Exchanges using the services of the Trading
Members of BSE.

• SEBI Circular for Exclusively listed companies of De-recognized/Non-operational/exited Stock

Exchanges placed in the Dissemination Board (DB)
14  Lesson 1 • EP-SLCM

SEBI issued a Circular dated October 10, 2016 by which the companies which were on the Dissemination
Board were required to get their company listed on nationwide stock exchange or provide an exit
opportunity to existing shareholders.
• In terms of this Circular, the appellant submitted a plan of action to BSE for direct listing.
• In the meanwhile, the promoters/ directors of the appellant company were debarred from accessing the
securities market vide SEBI’s order dated September 28, 2019 passed in the matter of Kavit Industries
Ltd. This fact was brought to the notice of the appellant and sought clarification as to how the company is
required to comply with the requirements for direct listing of its securities. It transpires that the company
vide letter dated May 18, 2019 intimated that two of its directors have resigned with effect from April 15,
2019.
• BSE after considering the aforesaid response, found that one of its promoters continued to remain as the
promoter of the company inspite of being debarred by SEBI and therefore, the direct listing requirements
norms had not been complied with. Accordingly, the listing application was rejected.
SAT ORDER
The appeal fails and is dismissed.
In the instant case, the debarment was in direct conflict when the norms stipulated for considering the listing
agreement. Such order of SEBI of debarment of one of the promoters was brought to the knowledge of the
company. The said listing requirements norms were not rectified and consequently the BSE had no option but
to reject the listing application. The said order does not suffer from any manifest error of law and requires no
interference.
There is no dispute on this proposition namely that the listing norms that was in force on the date when the
application was filed was alone required to be considered. Subsequent norms or amended norms or regulations
are not required to be considered. However, the status of the directors/ promoters of the company are required
to be considered on the date of the passing of the order on the listing application. If on the date when the listing
application was being considered the promoters/ directors of the company committed default and thereby
incurred a debarment from accessing the securities market then it was imperative upon the authority to consider
such debarment while considering the listing application.
2. 03.12.2019 Karvy Stock Broking Limited (Appellant) vs. National Securities Appellate Tribunal
Stock Exchange of India (Respondent)
Facts of the case
• The present appeal was filed by the appellant seeking quashment of the NSE order/circular dated
December 2, 2019. Vide the said circular respondent NSE had suspended the present appellant from its
membership due to the alleged non compliance of the regulatory provisions of the Exchange.
• Learned counsel for the respondent raised objection on the maintainability of the present appeal on the
ground that the equally efficacious remedy is available to the appellant under National Stock Exchange of
India Ltd. Rules. He therefore submitted that the appeal be not entertained.
SAT ORDER
The Rules are framed by respondent NSE in exercise of the powers of the Section 9 of the SCRA. The appellant
has equally efficacious remedy to challenge the impugned order before the relevant authority of the respondent
NSE. SAT did not find any reason to entertain the appeal.
Learned Senior counsel for the respondent submitted that the appeal, if any, filed by the appellant with the
respondent, they would be heard expeditiously by convening meeting of the relevant authority. There is no need
to bypass the statutory Rules. At this stage, learned counsel for the appellant submitted that the appellant may
be provided with liberty to seek documents from the respondent. SAT did not find any hitch in acceding to the
said request. The respondent shall supply the documents or grant inspection of the same relevant to the dispute.
For the reasons stated above, the appeal is disposed of. Appellant would be at liberty to file an appeal as provided
by Rule 13A(d) of the NSE Rules.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 15

CLEARING CORPORATION
Role of Clearing Corporation
Clearing Corporation is responsible:-
• for clearing and settlement of all trades executed on Stock Exchange and deposit and collateral management
and risk management functions;
• to bring and sustain confidence in clearing and settlement of securities;
• to promote and maintain, short and consistent settlement cycles;
• to provide counter-party risk guarantee, and
• to operate a tight risk containment system.
Section 8A(1) provides that a recognised stock exchange may, with the prior approval of the SEBI, transfer the
duties and functions of a clearing house to a clearing corporation, being a company incorporated under the
Companies Act, 2013, for the purpose of –
(a) the periodical settlement of contracts and differences thereunder;
(b) the delivery of, and payment for, securities;
(c) any other matter incidental to, or connected with, such transfer.

Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a
clearing corporation, make bye-laws and submit the same to the SEBI for its approval.
SEBI may, on being satisfied that it is in the interest of the trade and also in the public interest to transfer the duties
and functions of a clearing house to a clearing corporation, grant approval to the bye-laws submitted to it and
approve transfer of the duties and functions of a clearing house to a clearing corporation.

India
International
Clearing National
Corporation Commodity
(IFSC) Limited Clearing Ltd.

Metropolitan
Clearing
Corporation
of India Ltd. Indian Clearing
Clearing Corporation
Corporations Ltd.

Multi
Commodity
Exchange National
Clearing Securities
Corporation Ltd. Clearing
Corporation
NSE IFSC Ltd.
Clearing
Corporation
Limited
 16  Lesson 1 • EP-SLCM

POWERS OF THE SEBI

To make or amend Bye- laws To Issue directions Power to adjudicate To make Regulations
of Recognised Stock Exchanges [Section 12A] [Section 23 -I] [Section 31]
[Section 10]

To make or amend Bye-laws of Recognised Stock Exchanges

The SEBI may, either on a request in writing received by it in this behalf from the governing body of a recognised
stock exchange or on its own motion, if it is satisfied after consultation with the governing body of the stock exchange
that it is necessary or expedient so to do and after recording its reasons for so doing, make bye-laws, for all or any
of the matters specified in section 9 or amend any bye-laws made by such stock exchange under that section.
Where in pursuance of this section any bye-laws have been made or amended, the bye-laws so made or amended
shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of
the recognised stock exchange is situated, and on the publication thereof in the Gazette of India, the bye-laws so
made or amended shall have effect as if they had been made or amended by the recognised stock exchange
concerned.
Where the governing body of a recognised stock exchange objects to any bye-laws made or amended by SEBI on its
own motion, it may, within two months of the publication thereof in the Gazette of India apply to SEBI for revision
thereof and SEBI may, after giving an opportunity to the governing body of the stock exchange to be heard in the
matter, revise the bye-laws so made or amended, and where any bye-laws so made or amended are revised as a
result of any action taken under this sub-section, the bye-laws so revised shall be published and shall become
effective.
The making or the amendment or revision of any bye-laws shall in all cases be subject to the condition of previous
publication.
However, if the SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made, amended or revised immediately, it may, by order in writing specifying the reasons therefor,
dispense with the condition of previous publication.
To Issue Directions
Section 12A provides that if, after making or causing to be made an inquiry, the SEBI is satisfied that it is necessary–
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing corporation, or such other agency or
person, providing trading or clearing or settlement facility in respect of securities, being conducted in a
manner detrimental to the interests of investors or securities market; or
(c) to secure the proper management of any such stock exchange or clearing corporation or agency or person,
referred to in clause(b).
it may issue such directions –
(i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or
class of persons associated with the securities market; or
(ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange, as may
be appropriate in the interests of investors in securities and the securities market.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 17

Explanation : 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 regulations made there under, to disgorge an amount
equivalent to the wrongful gain made or loss averted by such contraventions.
Without prejudice to the provisions of section 12 A(1) and section 23-I, the SEBI may, by an order, for reasons to be
recorded in writing, levy penalty under sections 23A, 23B, 23C, 23D, 23E, 23F, 23G, 23GA and 23H after holding an
inquiry in the prescribed manner.
To make Regulations
The SEBI may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and
the rules made thereunder to carry out the purposes of this Act.
In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or
any of the following matter namely :
(a) the manner, in which at least fifty-one percent of equity share capital of a recognised stock exchange is held,
within twelve months from the date of publication of the order under sub-section (7), of Section 4B by the
public other than shareholders having trading rights under sub-section (8) of that section;
(b) the eligibility criteria and other requirements under Section 17A;
(c) the terms determined by the SEBI Board for settlement of proceeding under sub-section (2) of section 23JA and
(d) any other matter which is required to be, or may be, specified by regulations or in respect of which provision
is to be made by regulation.
Every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session for a total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the regulation or both Houses agree that the
regulation should not be made, the regulation shall thereafter have effect only in such modified form or be of no
effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the
validity of anything previously done under that regulation.
 18  Lesson 1 • EP-SLCM

To adjudicate
Section 23-I deals with power to adjudicate by the SEBI.
The SEBI may appoint any officer not below the rank of a Division Chief of SEBI to be an adjudicating officer for
holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being
heard for the purpose of imposing any penalty.
While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case to give evidence or to produce any document, which
in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on
such inquiry, he is satisfied that the person has failed to comply with the provisions, he may impose such penalty as
he thinks fit in accordance with the provisions of this Act.
The SEBI may call for and examine the record of any proceedings under this section and if it considers that the order
passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may,
after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of
penalty, if the circumstances of the case so justify. However, no such order shall be passed unless the person
concerned has been given an opportunity of being heard in the matter.
Further, nothing contained in this sub-section shall be applicable after an expiry of a period of three months from
the date of the order passed by the adjudicating officer or disposal of the appeal, whichever is earlier.

Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals Development Co. Ltd.
[ADJUDICATION ORDER NO. Order/GR/KG/2020-21/8680-8682]
SEBI Adjudication Order:
SEBI, in exercise of the powers conferred under Section 15-I of the SEBI Act read with Rule 5 of the Adjudication
Rules,1995 and Section 23-I of the SC(R) Act, 1956 read with Rule 5 of the Adjudication Rules, 2005, imposed a
total penalty of Rs. 2,00,000/- (Rupees Two Lacs only) under Section 15HB of the SEBI Act, 1992 and Section 23A(a)
of the Securities Contracts (Regulation) Act, 1956, on the Noticees i.e. The Orissa Minerals Development Co. Ltd., Dr.
Satish Chandra and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate Disclosure Practice for
Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the PIT Regulations, 1992 and also
against The Orissa Minerals Development Co. Ltd for violation of Clause 36 of Listing Agreement read with Section
21 of SCRA.

Powers of Board not to apply to International Financial Services Centre.

The powers exercisable by the Board under this Act,—
(a) shall not extend to an International Financial Services Centre set up under subsection (1) of section 18 of
the Special Economic Zones Act, 2005;
(b) shall be exercisable by the International Financial Services Centres Authority established under sub-section
(1) of section 4 of the International Financial Services Centres Authority Act, 2019, in so far as regulation of
financial products, financial services and financial institutions that are permitted in the International Financial
Services Centres are concerned.
_________________________________________________
ADDITIONAL TRADING FLOOR
Section 13A stipulates that a stock exchange may establish additional trading floor with the prior approval of the
Securities and Exchange Board of India in accordance with the terms and conditions stipulated by the SEBI.

“Additional Trading Floor” means a trading ring or trading facility offered by a recognised stock exchange outside
its area of operation to enable the investors to buy and sell securities through such trading floor under the
regulatory framework of that stock exchange.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 19

LICENSING OF DEALERS IN CERTAIN AREAS

Section 17 provides that no person shall carry on or purport to carry on, whether on his own or on behalf of any
other person, the business of dealing in securities, except under the authority of a license granted by the SEBI in this
behalf.
PUBLIC ISSUE AND LISTING OF SECURITIES
Section 17A provides for public issue and listing of securities referred to in sub-clause (ie) of clause (h) of section 2.

Section 2(h)(ie) provides that any certificate or instrument (by whatever name called), issued to an investor by
any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage
debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be.

• No securities of the nature referred to in sub-clause (ie) of clause (h) of section 2 shall be offered to the public
or listed on any recognized stock exchange unless the issuer fulfil such eligibility criteria and complies with
such other requirements as may be specified by regulations made by the SEBI.
• Every issuer intending to offer the certificates or instruments referred therein to the public shall make an
application, before issuing the offer document to the public, to one or more recognized stock exchanges for
permission for such certificates or instruments to be listed on the stock exchange or each such stock exchange.
• Where the permission applied for listing has not been granted or refused by the recognized stock exchanges
or any of them, the issuer shall forthwith repay all moneys, if any, received from applicants in pursuance of
the offer document, and if any such money is not repaid within 8 days after the issuer becomes liable to repay
it, the issuer and every director or trustee thereof, as the case may be, who is in default shall, on and from the
expiry of the eighth day, be jointly and severally liable to repay that money with interest at the rate of fifteen
percent per annum.

In reckoning the eighth day after another day, any intervening day which is a public holiday under the Negotiable
Instruments Act, 1881, shall be disregarded, and if the eighth day (as so reckoned) is itself such a public holiday,
there shall for the said purposes be substituted the first day thereafter which is not a holiday.

• All the provisions of this Act relating to listing of securities of a public company on a recognized stock
exchange shall, mutatis mutandis, apply to the listing of the securities of the nature referred to in sub-clause
(ie) of clause of section 2 by the issuer, being a special purpose distinct entity.

CONTRACTS IN DERIVATIVES
Section 18A stipulates that notwithstanding anything contained in any other law for the time being in force,
contracts in derivative shall be legal and valid if such contracts are –
(a) traded on a recognised stock exchange;
(b) settled on the clearing house of the recognised stock exchange, or in accordance with the rules and bye-laws
of such stock-exchange;
(c) between such parties and on such terms as the Central Government may, by notification in the official Gazette,
specify.

STOCK EXCHANGES OTHER THAN RECOGNISED STOCK EXCHANGES PROHIBITED

Section 19 of the Act stipulates that no person shall, except with the permission of the Central Government, organise
or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the
purpose of assisting in, entering into or performing any contracts in securities.
This section shall come into force in any State or area on such date as the Central Government may, by notification
in the Official Gazette, appoint.
 20  Lesson 1 • EP-SLCM

LISTING OF SECURITIES
Conditions for Listing
Section 21 of the Act provides that where securities are listed on the application of any person in any recognised
stock exchange, such person shall comply with the conditions of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations.

Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals Development Co. Ltd.
[ADJUDICATION ORDER NO. Order/GR/KG/2020-21/8680-8682]
SEBI conducted investigation into the alleged delayed disclosure of the price sensitive information by The Orissa
Minerals Development Company Ltd., (“OMDC/Company”), in the scrip of OMDC, to the Stock Exchanges (“BSE” and
“NSE”) for alleged violation of provisions of the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations,
1992 during the investigation period July 02, 2012 to August 10, 2012.
The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company Secretary) has made belated
disclosure to the stock exchanges of the important price sensitive information. Therefore, SEBI hold that they have
violated the provisions of Clause 2.1 of the Code of Corporate Disclosure Practice for Prevention of Insider Trading
contained in Schedule II read with Regulation 12(2) of the PIT Regulations, 1992. Further, OMDC, also violated
Clause 36 of the Listing Agreement read with Section 21 of Securities Contracts (Regulation) Act, 1956

DELISTING OF SECURITIES
Section 21A provides that a recognised stock exchange may delist the securities, after recording the reasons therefor,
from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.
The securities of a company shall not be delisted unless the company concerned has been given a reasonable
opportunity of being heard.
A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal (SAT) against
the decision of the recognised stock exchange delisting the securities within fifteen days from the date of the
decision of the recognized stock exchange delisting the securities and the provisions of Sections 22B to 22E of this
Act, shall apply, as far as may be, to such appeals.
The Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from
filing the appeal within the said period, allow it to be filed within a further period not exceeding one month.
A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal (SAT) against
the decision of the recognised stock exchange as per the procedure laid down under the Securities Contracts
(Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.

RIGHT TO APPEAL
Right of appeal to Central Government against refusal of stock exchanges to list securities of
public companies
Where a recognised stock exchange refuses to list the securities of any public company or collective investment
scheme, the company or scheme shall be entitled to be furnished with reasons for such refusal, and may, –
(a) within fifteen days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the
Companies Act, 2013 (hereafter in this section referred to as the “specified time”), the application for
permission for the shares or debentures to be dealt with on the stock exchange, within fifteen days from the
date of expiry of the specified time or within such further period, not exceeding one month, as the Central
Government may, on sufficient cause being shown, allow,
appeal to the Central Government against such refusal, omission or failure, as the case may be, and thereupon
the Central Government may, after giving the stock exchange an opportunity of being heard,–
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 21

(i) vary or set aside the decision of the stock exchange, or

(ii) where the stock exchange has omitted or failed to dispose of the application within the specified time, grant
or refuse the permission,
and where the Central Government sets aside the decision of the recognised stock exchange or grants the permission,
the stock exchange shall act in conformity with the orders of the Central Government.
Right of appeal to Securities Appellate Tribunal (SAT) against refusal to list securities of public
companies by Stock exchanges
Where a recognised stock exchange, acting in pursuance of any power given to it by its bye-laws, refuses to list the
securities of any company, the company shall be entitled to be furnished with reasons for such refusal, and may, –
(a) within fifteen days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the
Companies Act, 2013, the application for permission for the shares or debentures to be dealt with on the
stock exchange, within fifteen days from the date of expiry of the specified time or within such further period,
not exceeding one month, as the Securities Appellate Tribunal may, on sufficient cause being shown, allow
appeal to the Securities Appellate Tribunal having jurisdiction in the matter against such refusal, omission or
failure, as the case may be, and thereupon the Securities Appellate Tribunal may, after giving the stock
exchange, an opportunity of being heard, –
(i) vary or set aside the decision of the stock exchange; or
(ii) where the stock exchange has omitted or failed to dispose of the application within the specified time,
grant or refuse the permission,

and where the Securities Appellate Tribunal sets aside the decision of the recognised stock exchange or grants the
permission, the stock exchange shall act in conformity with the orders of the Securities Appellate Tribunal.
Every appeal shall be in such form and be accompanied by such fee as may be prescribed. The Securities Appellate
Tribunal shall send a copy of every order made by it to SEBI and parties to the appeal. The appeal filed before the
Securities Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by
it to dispose off the appeal finally within six months from the date of receipt of the appeal.
The appeal filed before the Securities Appellate Tribunal is as per the procedure laid down under the Securities
Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.
Procedure and Powers of Securities Appellate Tribunal
Section 22B stipulates that the Securities Appellate Tribunal 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 and, subject to the other
provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own
procedure including the places at which they shall have their sittings.
The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same
powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the
following matters, namely :–
(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; and
(h) any other matter which may be prescribed.
 22  Lesson 1 • EP-SLCM

Right to Legal Representation

The appellant may either appear in person or authorise one or more chartered accountants or company secretaries
or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate
Tribunal.

“Company Secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the
Company Secretaries Act, 1980 and who has obtained a certificate of practice under sub-section (1) of section 6
of that Act.

Limitation
The provisions of the Limitation Act, 1963 shall, as far as may be, apply to an appeal made to a Securities Appellate
Tribunal.
Civil Court not to have jurisdiction
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Securities
Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court
or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.
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 decision or order of the Securities Appellate Tribunal
to him on any question of law arising out of such order.
However the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the
appeal within the said period, allow it to be filed within a further period not exceeding sixty days.
PENALTIES AND PROCEDURES
Any person who –
(a) without reasonable excuse (the burden of proving which shall be on him) fails to comply with any requisition
made under sub-section (4) of section 6; or
(b) enters into any contract in contravention of any of the provisions contained in section 13 or section 16; or
(c) contravenes the provisions contained in section 17 or section 17A or section 19; or
(d) enters into any contract in derivative in contravention of section 18A or the rules made under section 30; or
(e) owns or keeps a place other than that of a recognised stock exchange which is used for the purpose of entering
into or performing any contracts in contravention of any of the provisions of this Act and knowingly permits
such place to be used for such purposes; or
(f) manages, controls, or assists in keeping any place other than that of a recognised stock exchange which is
used for the purpose of entering into or performing any contracts in contravention of any of the provisions of
this Act or at which contracts are recorded or adjusted or rights or liabilities arising out of contracts are
adjusted, regulated or enforced in any manner whatsoever; or
(g) not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-
laws of such stock exchange or not being a dealer in securities licensed under section 17 willfully represents
to or induces any person to believe that contracts can be entered into or performed under this Act through
him; or
(h) not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-
laws of such stock exchange or not being a dealer in securities licensed under section 17, canvasses, advertises
or touts in any manner either for himself or on behalf of any other person for any business connected with
contracts in contravention of any of the provisions of this Act; or
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 23

(i) joins, gathers or assists in gathering at any place other than the place of business specified in the byelaws of
a recognised stock exchange any person or persons for making bids or offers or for entering into or performing
any contracts in contravention of any of the provisions of this Act.
shall, without prejudice to any award of penalty by the Adjudicating Officer or the SEBI under this Act, on
conviction, be punishable with imprisonment for a term which may extend to ten years or with fine, which
may extend to twenty five crore rupees or with both.
Any person who enters into any contract in contravention of the provisions contained in section 15 or who fails to
comply with the provisions of section 21 or section 21A or with the orders of or the Central Government under
section 22 or with the orders of the Securities Appellate Tribunal shall, without prejudice to any award of penalty
by the Adjudicating Officer under this Act, on conviction, be punishable with imprisonment for a term which may
extend to ten years or with fine which may extend to twenty five crore rupees, or with both.
The Act prescribes various penalties against persons who might be found guilty of offences under section 23 the
Act.

Section Contravention Penalty

23A(a) Any person who fails to furnish any information, Fine of at least 1 lakh rupees but may
document, books, returns or report to the recognised extend to 1 lakh rupees per day during
stock exchange or to the SEBI, fails to furnish the same which such failure continues, subject to a
within the time specified therefor in the listing agreement maximum of 1 crore rupees
or conditions or bye-laws of the recognised stock
exchange or the Act or rules made thereunder, or who
furnishes false, incorrect or incomplete information,
document, books return or report.
23A(b) Any person who fails to maintain books of account or Fine of at least 1 lakh rupees but may
records, as per the listing agreement or conditions, or extend to 1 lakh rupees per day during
bye-laws of a recognised stock exchange which such failure continues, subject to a
maximum of 1 crore rupees
23B Any person who fails to enter into an agreement with Fine of at least 1 lakh rupees but may
clients extend to 1 lakh rupees per day during
which such failure continues, subject to a
maximum of 1 crore rupees
23C Failure by a stock broker or sub-broker or a listed Fine of at least 1 lakh rupees but may
company or proposed listed company to redress extend to 1 lakh rupees per day during
investors’ grievances within the time stipulated by which such failure continues, subject to a
SEBI or recognised stock exchange maximum of 1 crore rupees
23D Failure to segregate securities or money of client or At least 1 lakh rupees but may extend to
clients or using the securities or money of client for rupees 1 crore
self-use or for any other client
23E Failure to comply with the provisions of listing conditions Liable for at least 5 lakh rupees which
or delisting conditions or grounds or breach thereof is may extend to rupees 25 crores
committed, by a company or a person managing collective
investment scheme or mutual fund or real estate
investment trust or infrastructure investment trust or
alternative investment fund.
23F If any issuer make an excess dematerialisation or At least 5 lakh rupees which may extend
delivery of unlisted securities to 25 crores rupees
23G Failure by recognised stock exchange to furnish At least 5 lakh rupees which may extend
periodical return or furnish false, incorrect or incomplete to 25 crores rupees
periodical returns to SEBI or fails or neglects to make or
amend its rules or bye-laws as directed by SEBI or fails to
comply with the directions of SEBI
 24  Lesson 1 • EP-SLCM

23GA Where a stock exchange / a clearing corporation fails Penalty at least 5 crore rupees which may
to conduct its business with its members /any issuer/ extend to 25 crore rupees or three times
its agent/ any person associated with the securities the amount of gains made out of such
markets in a manner not in accordance with the rules/ failure, whichever is higher.
regulations made by the SEBI and the directions issued
by it under this Act
23H Whoever fails to comply with any provision of this Act, At least 1 lakh rupees which may extend
the rules of articles or bye-laws or the regulations of to rupees 1 crore
recognised stock exchange or directions issued by
SEBI for which no separate penalty has been provided

CASE LAWS
1 20.08.2020 Dr. Satish Chandra, Ms. Sucharita Das Adjudicating Officer, Securities and
and The Orissa Minerals Development Co. Exchange Board of India
Ltd. (collectively known as “Noticees”) vs.
SEBI

The disclosures were made by The Orissa Minerals Development Co. Ltd. to stock exchanges belatedly
each after a period of more than 24 hours since the time of their receipt by OMDC.
Facts of the case:
SEBI conducted investigation into the alleged delayed disclosure of the price sensitive information (hereinafter
referred to as “PSI”) by The Orissa Minerals Development Company Ltd., (hereinafter referred to as “OMDC/
Company”), in the scrip of OMDC, to the Stock Exchanges ( “BSE” and “NSE”) for alleged violation of provisions
of the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 1992 during the investigation
period July 02, 2012 to August 10, 2012.
The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company Secretary) has made
belated disclosure to the stock exchanges of the important price sensitive information. Therefore, SEBI hold that
the Noticees have violated the provisions of Clause 2.1 of the Code of Corporate Disclosure Practice for Prevention
of Insider Trading contained in Schedule II read with Regulation 12(2) of the PIT Regulations, 1992. Further,
OMDC, also violated Clause 36 of the Listing Agreement read with Section 21 of Securities Contracts (Regulation)
Act, 1956 (“SCRA”).
By not making the disclosures on time, the Noticee has failed to comply with the mandatory statutory obligation.
Order:
In view of the foregoing, considering the facts and circumstances of the case, the material on record, SEBI
imposed a total penalty of Rs. 2,00,000/- (Rupees Two Lacs only) under Section 15HB of the SEBI Act, 1992 and
Section 23A(a)* of the Securities Contracts (Regulation) Act, 1956, on the Noticees i.e. The Orissa Minerals
Development Co. Ltd., Dr. Satish Chandra and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate
Disclosure Practice for Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the PIT
Regulations, 1992 and also against The Orissa Minerals Development Co. Ltd for violation of Clause 36 of Listing
Agreement read with Section 21 of SCRA.
* Section 23A(a) deals with Penalty for failure to furnish information, return, etc

Factors to be taken into account while adjudging the quantum of penalty by the Adjudicating
Officer

Section 23J provides for the factors to be taken into account by the adjudicating officer. While adjudging the quantum
of penalty under section 12A and section 23-I, the SEBI or adjudicating officer shall have due regard to the following
factors, namely –
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 25

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the
default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.

Settlement of administrative and civil proceedings

Section 23JA states that any person, against whom any proceedings have been initiated or may be initiated under
section 12A or section 23-I, may file an application in writing to SEBI proposing for settlement of the proceedings
initiated or to be initiated for the alleged defaults.
The SEBI may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for
settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the SEBI in
accordance with the regulations made under the SEBI Act, 1992.
For the purpose of settlement under this section, the procedure as specified by the SEBI under the SEBI Act, 1992
shall apply. No appeal shall lie under section 23L against any order passed by the SEBI or adjudicating officer, as the
case may be, under this section. All settlement amounts, excluding the disgorgement amount and legal costs,
realised under this Act shall be credited to the Consolidated Fund of India.
Recovery of amounts
Section 23JB deals with recovery of amounts. If a person fails to pay the penalty imposed under this act or fails to
comply with any direction of SEBI for refund of monies or fails to comply with a direction of disgorgement order
issued under Section 12A or fails to pay any fees due to SEBI, the Recovery Officer may draw up under his signature
a statement in the specified form specifying the amount due from the person (such statement being hereafter in this
Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the
certificate by one or more of the following modes, namely:-

Modes of recovery
Appointing a
Attachment and receiver for the
Attachment & Arrest of the
Attachment of sale of the management of
sale of person's person & his
the person's person's the person's
movable detention in
bank accounts; immovable movable and
property prison
property immovable
properties

and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232 the second and third schedule to the
Income Tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time in so
far as may be, apply with necessary modifications as of the said provisions and the rules thereunder were the
provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-Tax
Act, 1961.
Explanation 1. – For the purposes of this sub-section, the person’s movable or immovable property or monies held
in bank accounts shall include any property or monies held in bank accounts which has been transferred, directly
or indirectly on or after the date when the amount specified in certificate had become due, by the person to his
spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and which is
held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property or
monies held in bank accounts so transferred to his minor child or his son’s minor child is concerned, it shall, even
after the date of attainment of majority by such minor child or son’s minor child, as the case may be, continue to be
included in the person’s movable or immovable property or monies held in bank accounts for recovering any
amount due from the person under this Act.
 26  Lesson 1 • EP-SLCM

Explanation 2. – Any reference under the provisions of the Second and Third Schedules to the Income-tax Act, 1961
and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a reference to the
person specified in the certificate.
Explanation 3. – Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act, 1961,
shall be construed as a reference to appeal before the Securities Appellate Tribunal under section 23L of this Act.
The Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising
the powers under sub-section (1).
Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a
Recovery Officer, pursuant to non-compliance with any direction issued by the SEBI under section 12A, shall have
precedence over any other claim against such person.

The expression “Recovery Officer” means any officer of the Board who may be authorised, by general or special
order in writing to exercise the powers of a Recovery Officer.

Continuance of Proceedings
Section 23 JC provides that where a person dies, his legal representative shall be liable to pay any sum which the
deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased:
However, in case of any penalty payable under this Act, a legal representative shall be liable only in case the penalty
has been imposed before the death of the deceased person.
Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, initiated against the deceased before his death shall be deemed to have been
initiated against the legal representative, and may be continued against the legal representative from the stage at
which it stood on the date of the death of the deceased and all the provisions of this Act shall apply accordingly;
Any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, which could have been initiated against the deceased if he had survived, may
be initiated against the legal representative and all the provisions of this Act shall apply accordingly.
Every legal representative shall be personally liable for any sum payable by him in his capacity as legal representative
if, while his liability for such sum remains undischarged, he creates a charge on or disposes of or parts with any
assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited
to the value of the asset so charged, disposed of or parted with.
The liability of a legal representative under this section shall, be limited to the extent to which the estate of the
deceased is capable of meeting the liability.
Explanation.—For the purposes of this section ‘‘Legal representative” means a person who in law represents the
estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where
a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the
party so suing or sued.
Crediting sum realised by way of penalties to Consolidated Fund of India
As per Section 23K all sums realised by way of penalties under this Act shall be credited to the Consolidated Fund
of India.
Appeal to Securities Appellate Tribunal
Section 23L stipulates that any person aggrieved, by the order or decision of the recognized stock exchange or the
adjudicating officer or any order made by the Securities and Exchange Board of India under or sub-section of section
23-I, may prefer an appeal before the Securities Appellate Tribunal.
Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order or decision
is received by the appellant and it shall be in such form and be accompanied by such fee as may be prescribed.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 27

However the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty- five
days if it is satisfied that there was sufficient cause for not filing it within that period.
On receipt of an appeal the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity
of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed
against.
The Securities Appellant Tribunal shall send a copy of every order made by it to the parties to the appeal and to the
concerned adjudicating officer. The appeal filed before the Securities Appellate Tribunal shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from
the date of receipt of the appeal.
The appeal may be prefer before the Securities Appellate Tribunal as per the procedure laid down under the
Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.

Person Appeal to be SAT shall give SAT to send a Every appeal

aggrieved by filed within an copy of every filed before
the order of 45 days opportunity order to the SAT to be
stock (unless of being parties to disposed of
exchange/ further heard and appeal and to within 6
adjudicating extension pass an concerned months from
officer/order granted by order- adjudicating the date of
of SEBI may SAT) confirming/ officer receipt of
appeal to SAT modifying appeal.
setting aside
the appealed
order

Extracts from SAT Order dated 25th February 2019 in the matter of Synergy Cosmetics (Exim) Limited vs. BSE Limited
[Appeal No. 469 of 2018]
Synergy Cosmetics (Exim) Limited (Company) is a listed company and its securities got delisted on the platform of
the BSE Limited. The BSE Limited vide its notice dated 18.10.2016 suspended the trading in securities of the
company for non-compliance of listing requirements. Since no steps were taken by the company for revocation of
the suspension, a show cause notice dated 26.04.2018 was issued calling upon the company to show cause as to
why the securities of the company should not be compulsorily delisted from the platform of the BSE Limited. The
BSE Limited by the impugned order dated 26.06.2018 issued an order compulsorily delisting the securities of the
company. The appellant being aggrieved by the computation of the fair value of the shares has filed the appeal under
Section 23L of the Securities Contracts (Regulation) Act, 1956.

Offences

Section 23M provides that if any person contravenes or attempts to contravene or abets the contravention of the
provisions of this Act or of any rules or regulations or byelaws made thereunder, for which no punishment is
provided elsewhere in this Act, he shall be punishable with imprisonment for a term which may extend to ten years,
or with fine, which may extend to twenty-five crore rupees or with both.
If any person fails to pay the penalty imposed by the adjudicating officer or the SEBI or fails to comply with the
direction or order , he shall be punishable with imprisonment for a term which shall not be less than one month but
which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.
 28  Lesson 1 • EP-SLCM

Composition of certain offences

As per Section 23N, notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence
punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also
with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate
Tribunal or a court before which such proceedings are pending.
Contravention by companies
Section 24 provides that, where a contravention of any of the provisions of this Act or any rule, regulation, direction
or order made thereunder has been committed by a company, every person who, at the time when the contravention
was committed, was in charge of, and was responsible to, the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the contravention, and shall be liable to be
proceeded against and punished accordingly.
However, any such person shall not be liable to any punishment provided in this Act, if he proves that the
contravention was committed without his knowledge or that he exercised all due diligence to prevent the commission
of such contravention .
Where a contravention of any of the provisions of this Act or any rule, regulation, direction or order made thereunder
has been committed by a company and is proved that the contravention has been committed with the consent or
connivance of, or is attributable to any gross negligence on the part of any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer of the company shall also be deemed to be
guilty of that contravention and shall be liable to be proceeded against and punished accordingly.
The provisions of this section shall be in addition to and not in derogation of, the provisions of section 22A of the Act.
Certain offences to be cognizable
As per Section 25, notwithstanding anything contained in the Code of Criminal Procedure, 1898, any offence
punishable under section 23 shall be deemed to be cognizable offence within the meaning of that Code.
Cognizance of offences by courts
Section 26 provides that no court shall take cognizance of any offence punishable under this Act or any rules or
regulations or bye-laws made thereunder, save on a complaint made by the Central Government or State Government
or the SEBI or a recognised stock exchange or by any person.
Establishment of Special Courts
Section 26A lays down the provisions for establishment of Special Courts by Central Government for the purpose of
speedy trial.
(a) The Central Government may, for the purpose of providing speedy trial of offences under this Act, by
notification, establish or designate as many Special Courts as may be necessary.
(b) A Special Court shall consist of a single judge who shall be appointed by the Central Government with the
concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is
working.
(c) A person shall not be qualified for appointment as a judge of a Special Court unless he is, immediately before
such appointment, holding the office of a Sessions Judge or an Additional Sessions Judge, as the case may be.
Offences triable by Special Courts
Section 26B provides that all offences committed under this Act, shall be taken cognizance of and tried by the
Special Court established for the area in which the offence is committed or where there are more Special Courts
than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 29

Appeal and Revision

As per Section 26C, the High Court may exercise, so far as may be applicable, all the powers conferred by Chapters
XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits
of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of
the High Court.
Application of code to proceeding before Special Court
Section 26D provides that the Code of Criminal Procedure, 1973 shall apply to the proceeding before a special court
and for the purposes of the said provisions, the special court shall be deemed to be Court of Session and the person
conducting prosecution before a special court shall be deemed to be a public prosecutor within the meaning of the
Code of Criminal Procedure, 1973. The persons conducting prosecution should have been in practice as an Advocate
for not less than seven years or shall have held a post, for a period of not less than seven years, under the Union or
a State, requiring special knowledge of law.
Transitional provisions
Section 26E stipulates that, any offence committed under this Act, which is triable by a Special Court shall, until a
Special Court is established, be taken cognizance of and tried by a Court of Session exercising jurisdiction over the
area, notwithstanding anything contained in the Code of Criminal Procedure, 1973.
However, nothing contained in this section shall affect the powers of the High Court under section 407 of the Code
to transfer any case or class of cases taken cognizance by a Court of Session under this section.
MISCELLANEOUS PROVISIONS
Entitlement of the Investors to Dividend declared by the Company
It shall be lawful for the holder of any security whose name appears on the books of the company issuing the said
security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding
that the said security has already been transferred by him for consideration, unless the transferee who claims the
dividend from the transferor has lodged the security and all other documents relating to the transfer which may be
required by the company with the company for being registered in his name within fifteen days of the date on which
the dividend became due.

Explanation. – The period specified in this section shall be extended –

(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his
claim to the dividend;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the
actual period taken for the replacement thereof; and
(iii) in case of delay in the lodging of any security and other documents relating to the transfer due to causes
connected with the post, by the actual period of the delay.

Nothing contained in above paragraph shall affect –

(a) the right of a company to pay any dividend which has become due to any person whose name is for the time
being registered in the books of the company as the holder of the security in respect of which the dividend
has become due; or
(b) the right of the transferee of any security to enforce against the transferor or any other person his rights, if
any, in relation to the transfer in any case where the company has refused to register the transfer of the
security in the name of the transferee.

Right to Receive Income from Collective Investment Scheme

It shall be lawful for the holder of any securities, being units or other instruments issued by collective investment
scheme, whose name appears on the books of the collective investment scheme issuing the said security to receive
 30  Lesson 1 • EP-SLCM

and retain any income in respect of units or other instruments issued and declared by the collective investment
scheme in respect thereof for any year, though the said security, being units or other instruments issued by collective
investment scheme, has already been transferred by him for consideration, unless the transferee who claims the
income in respect of units or other instruments issued by collective investment scheme from the transfer or has
lodged the security and all other documents relating to the transfer which may be required by the collective
investment scheme with the collective investment scheme for being registered in his name within fifteen days of the
date on which the income in respect of units or other instruments issued by the collective investments scheme
became due.
Explanation – The period specified in this section shall be extended –
(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his claim
to the income in respect of units or other instruments issued by collective investment scheme;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the
actual period taken for the replacement thereof; and
(ii) in case of delay in the lodging of any security, being units or other instruments issued by the collective
investment scheme, and other documents relating to the transfer due to causes connected with the post, by
the actual period of the delay.

This shall not affect –

(a) the right of a collective investment scheme to pay any income from units or other instruments issued by
collective investment scheme which has become due to any person whose name is for the time being
registered in the books of the collective investment scheme as the registered holder in the books of the
collective investment scheme being units or other instruments issued by collective investment scheme in
respect of which the income in respect of units or other instruments issued by Collective Investment Scheme
has become due; or
(b) the right of transferee of any security, being units or other instruments issued by collective investment
scheme, to enforce against the transferor or any other person his rights, if any, in relation to the transfer in
any case where the company has refused to register the transfer of the security being units or other
instruments issued by the collective investment scheme in the name of the transferee.

Right to receive Income from Mutual Fund

Section 27B provides that it shall be lawful for the holder of any securities, being units or other instruments issued
by any mutual fund, whose name appears on the books of the mutual fund issuing the said security to receive and
retain any income in respect of units or other instruments issued by the mutual fund declared by the mutual fund
in respect thereof for any year, notwithstanding that the said security, being units or other instruments issued by
the mutual fund, has already been transferred by him for consideration, unless the transferee who claims the income
in respect of units or other instruments issued by the mutual fund from the transferor has lodged the security and
all other documents relating to the transfer which may be required by the mutual fund with the mutual fund for
being registered in his name within fifteen days of the date on which the income in respect of units or other
instruments issued by the mutual fund became due.
The period specified in this Section may be extended –
(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his claim
to the income in respect of units or other instrument issued by the mutual fund;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of transferee, by the actual
period taken for the replacement thereof;
(iii) in case of delay in the lodging of any security, being units or other instruments issued by the mutual fund, and
other documents relating to the transfer due to cause connected with the post, by the actual period of the
delay.
This shall not affect –
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 31

(a) the right of a mutual fund to pay any income from units or other instruments issued by the mutual fund which
has become due to any person whose name is for the time being registered in the books of the mutual fund as
the holder of the security being units or other instruments issued by the mutual fund in respect of which the
income in respect of units or other instruments issued by mutual fund has become due; or
(b) the right of transferee of any security, being units or other instruments issued by the mutual fund, to enforce
against the transferor or any other person his rights, if any, in relation to the transfer in any case where the
mutual fund has refused to register the transfer of the security being units or other instruments issued by the
mutual fund in the name of the transferee.
Protection of action taken in good faith
No suit, prosecution or other legal proceeding whatsoever shall lie in any court against the governing body or any
member, office bearer or servant of any recognised stock exchange or against any person or persons appointed
under sub-section (1) of section 11 for anything which is in good faith done or intended to be done in pursuance of
this Act or of any rules or bye-laws made thereunder.
Special Provisions related to Commodity Derivatives
Section 30A deals with following special provisions relating to commodity derivatives:-
1. This Act shall not apply to non-transferable specific delivery contracts. However, no person shall organise or
assist in organising or be a member of any association in any area to which the provisions of section 13 have
been made applicable (other than a stock exchange) which provides facilities for the performance of any non-
transferable specific delivery contract by any party thereto without having to make or receive actual delivery
to or from the other party to the contract or to or from any other party named in the contract.
2. Where in respect of any area, the provisions of section 13 have been made applicable in relation to commodity
derivatives for the sale or purchase of any goods or class of goods, the Central Government may, by notification,
declare that in the said area or any part thereof as may be specified in the notification all or any of the
provisions of this Act shall not apply to transferable specific delivery contracts for the sale or purchase of the
said goods or class of goods either generally, or to any class of such contracts in particular.
3. If the Central Government is of the opinion that in the interest of the trade or in the public interest it is
expedient to regulate and control non-transferable specific delivery contracts in any area, it may, by
notification in the Official Gazette, declare that all or any of the provisions of this Act shall apply to such class
or classes of non-transferable specific delivery contracts in such area in respect of such goods or class of
goods as may be specified in the notification, and may also specify the manner in which and the extent to
which all or any of the said provisions shall so apply.

Validation of certain Acts

Section 32 provides that any act or thing done or purporting to have been done under the principal Act, in respect
of settlement of administrative and civil proceedings, shall, for all purposes, be deemed to be valid and effective as
if the amendments made to the principal Act had been in force at all material times.
II. SECURITIES CONTRACTS (REGULATION) RULES, 1957
These rules were made by the Central Government in exercise of the powers conferred by Section 30 of the Securities
Contracts (Regulation) Act, 1956 and notified on February 21, 1957. The Government promulgated the Securities
Contracts (Regulation) Rules, 1957 (‘SCRR’) for carrying into effect the objects of the Securities Contracts
(Regulation) Act. These rules provide among other things, for the-

procedure to be Submission of inquiry into the affairs requirements for

followed for periodical returns and of stock exchanges and listing of securities on
recognition of Stock annual reports by their members a recognised stock
Exchanges recognised stock exchange
exchanges
 32  Lesson 1 • EP-SLCM

The rules are statutory and they constitute a code of standardized regulations uniformly applicable to all the
recognised stock [Link] the SCRR, the Government and the Securities and Exchange Board of India (SEBI)
issue notifications, guidelines, and circulars which need to be complied with by market participants. Most of the
powers under the SCRA are exercisable by Department of Economic Affairs (DEA) while a few others by SEBI. The
powers of the DEA under the SCRA are also concurrently exercised by SEBI. The powers in respect of the contracts
for sale and purchase of securities, gold related securities, money market securities and securities derived from
these securities and carry forward contracts in debt securities are exercised concurrently by Reserve Bank of India (RBI).
REQUIREMENTS OF LISTING OF SECURITIES WITH RECOGNISED STOCK EXCHANGES

Rule 19(1)
This is one of the most important provisions of the Securities Contracts (Regulation) Rules, 1957. Rule 19 provides
for the complete procedure in this regard. A public company as defined under the Companies Act, 2013, desirous of
getting its securities listed on a recognised stock exchange, shall apply for the purpose to the stock exchange and
forward along with its application the following documents and particulars:
(a) Memorandum and articles of association and, in the case of a debenture issue, a copy of the trust deed.
(b) Copies of all prospectuses or statements in lieu of prospectuses issued by the company at any time.
(c) Copies of offers for sale and circulars or advertisements offering any securities for subscription or sale during
the last five years.
(d) Copies of balance sheets and audited accounts for the last five years, or in the case of new companies, for such
shorter period for which accounts have been made up.
(e) A statement showing –
i. dividends and cash bonuses, if any, paid during the last ten years (or such shorter period as the
company has been in existence, whether as a private or public company),
ii. dividends or interest in arrears, if any.
(f) Certified copies of agreements or other documents relating to arrangements with or between –
i. vendors and/or promoters,
ii. underwriters and sub-underwriters,
iii. brokers and sub-brokers.
(g) Certified copies of agreements with –
i. managing agents and secretaries and treasurers,
ii. selling agents,
iii. managing directors and technical directors,
iv. general manager, sales manager, managers or secretary.
(h) Certified copy of every letter, report, balance sheet, valuation contract, court order or other document, part
of which is reproduced or referred to in any prospectus, offer for sale, circular or advertisement offering
securities for subscription or sale, during the last five years.
(i) A statement containing particulars of the dates of, and parties to all material contracts, agreements (including
agreements for technical advice and collaboration), concessions and similar other documents (except those
entered into in the ordinary course of business carried on or intended to be carried on by the company)
together with a brief description of the terms, subject-matter and general nature of the documents.
(j) A brief history of the company since its incorporation giving details of its activities including any reorganization,
reconstruction or amalgamation, changes in its capital structure (authorised, issued and subscribed) and
debenture borrowings, if any.
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 33

(k) Particulars of shares and debentures issued (i) for consideration other than cash, whether in whole or part,
(ii) at a premium or discount, or (iii) in pursuance of an option.
(l) A statement containing particulars of any commission, brokerage, discount or other special terms including
an option for the issue of any kind of the securities granted to any person.
(m) Certified copies of –
i. acknowledgment card or the receipt of filing offer document with the SEBI;
ii. agreements, if any, with the Industrial Finance Corporation, Industrial Credit and Investment
Corporation and similar bodies.
(n) Particulars of shares forfeited.
(o) A list of highest ten holders of each class or kind of securities of the company as on the date of application
along with particulars as to the number of shares or debentures held by and the address of each such holder.
(p) Particulars of shares or debentures for which permission to deal is applied for;

However, a recognised stock exchange may either generally by its bye-laws or in any particular case call for such
further particulars or documents as it deems proper.
Rule 19(2)
Sub-rule 2 of Rule 19 provides that apart from complying with such other terms and conditions as may be laid down
by a recognised stock exchange, an applicant company shall satisfy the stock exchange that;
(a) Its articles of association provide for the following among others –
(i) that the company shall use a common form of transfer;
(ii) that the fully paid shares will be free from all lien, while in the case of partly laid shares, the company’s
lien, if any, will be restricted to moneys called or payable at a fixed time in respect of such shares;
(iii) that any amount paid-up in advance of calls on any share may carry interest but shall not entitle the
holder of the share to participate in respect thereof, in a dividend subsequently declared;
(iv) there will be no forfeiture of unclaimed dividends before the claim becomes barred by law;
(v) that option or right to call of shares shall not be given to any person except with the sanction of the
company in general meeting;
However, a recognised stock exchange may provisionally admit to dealings the securities of a company which
undertakes to amend its articles of association at its next general meeting so as to fulfill the foregoing
requirements and agrees to act in the meantime strictly in accordance with the provisions of this clause.

Rule 19(2)(b)
The minimum offer and allotment to public in terms of an offer document shall be-
(i) at least twenty five per cent of each class or kind of equity shares or debenture convertible into equity shares
issued by the company, if the post issue capital of the company calculated at offer price is less than or equal
to one thousand six hundred crore rupees;
(ii) at least such percentage of each class or kind of equity shares or debentures convertible into equity shares
issued by the company equivalent to the value of four hundred crore rupees, if the post issue capital of the
company calculated at offer price is more than one thousand six hundred crore rupees but less than or equal
to four thousand crore rupees;
(iii) at least ten percent of each class or kind of equity shares or debentures convertible into equity shares issued
by the company, if the post issue capital of the company calculated at offer price is above four thousand crore
rupees but less than or equal to one lakh crore rupees;
(iv) at least such percentage of each class or kind of equity shares or debentures convertible into equity shares
issued by the company equivalent to the value of five thousand crore rupees and at least five per cent of each
 34  Lesson 1 • EP-SLCM

such class or kind of equity shares or debenture convertible into equity shares issued by the company, if the
post issue capital of the company calculated at offer price is above one lakh crore rupees.
However, the company referred to in sub-clause (ii) or sub-clause (iii), shall increase its public shareholding
to at least twenty five per cent within a period of three years from the date of listing of the securities.
The company referred to in this sub-clause (iv) shall increase its public shareholding to at least ten per cent
within a period of two years and at least twenty-five per cent. within a period of five years, from the date of
listing of the securities.

The applicant company, who has issued equity shares having superior voting rights to its promoters or
founders and is seeking listing of its ordinary shares for offering to the public under this rule and the regulations
made by the SEBI in this regard, shall mandatorily list its equity shares having superior voting rights at the same
recognized stock exchange along with the ordinary shares being offered to the public.

Conditions precedent to submission of application for listing by Stock Exchange

Sub-rule (3) of Rule 19 provides that company while applying for listing shall, as conditions precedent, undertake
inter alia –
(a) (i) that letters of allotment will be issued simultaneously and that, in the event of its being impossible to
issue letters of regret at the same time, a notice to that effect will be inserted in the press so that it will
appear on the morning after the letters of allotment have been posted.
(ii) that letters of right will be issued simultaneously,
(iii) that letters of allotment, acceptance or rights will be serially numbered, printed on good quality paper
and, examined and signed by a responsible officer of the company and that whenever possible, they
will contain the distinctive numbers of the securities to which they relate.
(iv) that letters of allotment and renounceable letters of right will contain a proviso for splitting and that,
when so required by the exchange, the form of renunciation will be printed on the back of or attached
to the letters of allotment and letters of right;
(v) that letters of allotment and letters of right will state how the next payment of interest or dividend on
the securities will be calculated;
(b) to issue, when so required, receipts for all securities deposited with it whether for registration, subdivision,
exchange or for other purposes; and not to charge any fees for registration of transfers, for sub-division and
consolidation of certificate and for sub-division of letters of allotment, renounceable letters of right, and
split consolidation, renewal and transfer receipts into denominations of the market unit of trading;
(bb) to issue, when so required, consolidation and renewal certificates in denominations of the market unit of
trading, to split certificates, letters of allotment, letters of right, and transfer, renewal, consolidation and split
receipts into smaller units, to split call notices, issue duplicates thereof and not require any discharge on call
receipts and to accept the discharge of members of stock exchange on split, consolidation and renewal
receipts as good and sufficient without insisting on the discharge of the registered holders;
(c) when documents are lodged for sub-division or consolidation (or renewal) through the clearing house of the
exchange;
(i) to accept the discharge of an official of the stock exchange clearing house on the company’s split
receipts and (consolidation receipts and renewal receipts) as good and sufficient discharge without
insisting on the discharge of the registered holders; and
(ii) to verify when the company is unable to issue certificates or split receipt or (consolidation receipts or
renewal receipts) immediately on lodgement whether the discharge of the registered holders, on the
documents lodged for sub-division or consolidation (or renewal) and their signatures on the relative
transfers are in order;
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 35

(d) on production of the necessary documents by shareholders or by members of the exchange, to make on
transfers an endorsement to the effect that the power of attorney or probate or letters of administration or
death certificate or certificate of the Controller of Estate Duty or similar other document has been duly
exhibited to and registered by the company;
(e) to issue certificates in respect of shares or debentures lodged for transfer within a period of one month of the
date of lodgement of transfer and to issue balance certificates within the same period where the transfer is
accompanied by a larger certificate;
(f) to advise the stock exchange of the date of the board meeting at which the declaration or recommendation of
a dividend (or the issue or right or bonus share) will be considered;
(g) to recommend or declare all dividends and/or cash bonuses at least five days before the commencement of
the closure of its transfer books or the record date fixed for the purpose and so advise the stock exchange in
writing of all dividends and/or cash bonuses recommended or declared immediately after a meeting of the
board of the company has been held to finalise the same;
(h) to notify the stock exchange of any material change in the general character or nature of the company’s
business;
(i) to notify the stock exchange of any change –
(i) in the company’s directorate by death, resignation, removal or otherwise,
(ii) of managing director, managing agent or secretaries and treasurers,
(iii) of auditors appointed to audit the books and accounts of the company;
(j) to forward to the stock exchange copies of statutory and annual reports and audited accounts as soon as
issued, including directors’ reports;
(k) to forward to the stock exchange as soon as they are issued, copies of all other notices and circulars sent to
the shareholders including proceedings of ordinary and extraordinary general meetings of the company and
to file with the stock exchange certified copies of resolutions of the company as soon as such resolutions
become effective;
(l) to notify the stock exchange prior to intimating the shareholders, of any new issue of securities whether by
way of right, privilege, bonus or otherwise and the manner in which it is proposed to offer or allot the same;
(m) to notify the stock exchange in the event of re-issue of any forfeited securities or the issue of securities held
in reserve for future issue;
(n) to notify the stock exchange of any other alteration of capital including calls;
(o) to close the transfer books only for the purpose of declaration of dividend or issue of right or bonus shares or
for such other purposes as the stock exchange may agree and to give notice to the stock exchange as many
days in advance as the exchange may from time to time reasonably prescribe, stating the dates of closure of
its transfer books (or, when the transfer books are not to be closed, the date fixed for taking a record of its
shareholders or debenture holders) and specifying the purpose or purposes for which the transfer books are
to be closed (or the record is to be taken) and in the case of a right or bonus issue to so close the transfer
books or fix a record date only after the sanctions of the competent authority subject to which the issue is
proposed to be made have been duly obtained, unless the exchange agrees otherwise;
(p) to forward to the stock exchange an annual return immediately after each annual general meeting of at least
ten principal holders of each class of security of the company along with particulars as to the number of
shares or debentures held by, and address of, each such holder;
(q) to grant to shareholders the right of renunciation in all cases of issue of rights, privileges and benefits and to
allow them reasonable time not being less than four weeks within which to record, exercise, or renounce such
rights, privileges and benefits, and to issue, where necessary, coupons or fractional certificates or provide for
the payment of the equivalent of the value of the fractional right in cash unless the company in general
meeting or the stock exchange agrees otherwise;
(r) to promptly notify the stock exchange–
 36  Lesson 1 • EP-SLCM

(i) of any action which will result in the redemption, cancellation or retirement in whole or in part of any
securities listed on the exchange,
(ii) of the intention to make a drawing of such securities, intimating at the same time the date of the
drawing and the period of the closing of the transfer books (or the date of the striking of the balance)
for the drawing,
(iii) of the amount of securities outstanding after any drawing has been made;
(s) to intimate the stock exchange any other information necessary to enable the shareholders to appraise the
position of the company and to avoid the establishment of a false market in the shares of the company;
(t) that in the event of the application for listing being granted, such listing shall be subject to the rules and bye-
laws of the exchange in force from time to time and that the company will comply within a reasonable time,
with such further listing requirements as may be promulgated by the exchange as a general condition for new
listings.

Application for listing of new securities

Rule 19(4) stipulates that an application for listing shall be necessary in respect of the following:
(a) all new issues of any class or kind of securities of a company to be offered to the public;
(b) all further issues of any class or kind of securities of a company if such class or kind of securities of the
company are already listed on a recognised stock exchange.

Suspension or withdrawal of admission to dealings in securities on stock exchange

Rule 19(5) stipulates that a recognised stock exchange may suspend or withdraw admission to dealings in the
securities of a company or body corporate either for a breach of or non-compliance with, any of the conditions of
admission to dealings or for any other reason, to be recorded in writing, which in the opinion of the stock exchange
justifies such action;
However, no such action shall be taken by a stock exchange without affording to the company or body corporate
concerned a reasonable opportunity by a notice in writing, stating the reasons, to show cause against the proposed
action.
Further, where a recognised stock exchange has withdrawn admission to dealings in any security, or where
suspension of admission to dealings has continued for a period exceeding three months, the company or body
corporate concerned may prefer an appeal to the Securities Appellate Tribunal constituted under section 15K of the
SEBI Act, 1992 and the procedure laid down under the Securities Contracts (Regulation) (Appeal to Securities
Appellate Tribunal) Rules, 2000 shall apply to such appeal. The Securities Appellate Tribunal may, after giving the
stock exchange an opportunity of being heard, vary or set aside the decision of the stock exchange and its orders
shall be carried out by the stock exchange. [Rule 19(5)]
A recognised stock exchange may, either at its own discretion or shall in accordance with the orders of the Securities
Appellate Tribunal restore or re-admit to dealings any securities suspended or withdrawn from the list. [Rule 19(6)]
All requirements with respect to listing prescribed by these rules shall, so far as they may be, also apply to a public
sector company. [Rule 19(6A)]
The SEBI may, at its own discretion or on the recommendation of a recognised stock exchange, waive or relax the
strict enforcement of any or all of the requirements with respect to listing prescribed by these rules. [Rule 19(7)]
The minimum offer and allotment requirements as prescribed under clause (b) of sub-rule (2) shall not be applicable
to the listing of such equity shares having superior voting rights issued to the promoters or founders as the case
may be, in cases where the applicant company is seeking listing of its ordinary shares for offering to the public in
accordance with the provisions of this rule and the regulations made by the Securities and Exchange Board of India
in this regard. [Rule 19(8)]
 Lesson 1 • Securities Contracts (Regulation) Act, 1956 37

Minimum Shareholding
Rule 19A (1) stipulates that every listed public sector company other than public sector company shall maintain
public shareholding of at least 25%. However, any listed company which has public shareholding below 25% on the
commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, shall increase its public
shareholding to at least 25% , within a period of three years from the date of such commencement, in the manner
specified by the SEBI.
Explanation : For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and
allotment made to public in terms of clause (b) of sub-rule (2) of rule 19, shall maintain minimum 25% public
shareholding from the date on which the public shareholding in the company reaches the level of 25% in terms of
said sub-clause.
Sub-rule (2) provides that where the public shareholding in a listed company falls below 25 % at any time, such
company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of
such fall in the manner specified by the SEBI.
However every listed public sector company whose public shareholding falls below twenty five per-cent. at any
time after the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, shall
increase its public shareholding to at least twenty five per-cent, within a period of two years from such fall, in the
manner specified by the SEBI.
Where the public shareholding in a listed company falls below 25% in consequence to SCRR (Amendment) Rules,
2015, such company shall increase its shareholding to atleast 25%, in the manner specified by the SEBI within a
period of three years, as the case may be, from the date of notification of:
(a) the Depository Receipts Scheme, 2014, in cases where the public shareholding falls below 25% as a result of
such scheme;
(b) the SEBI (Share Based Employee Benefits) Regulations, 2014, in cases where the public shareholding falls
below 25%, as a result of such regulations.

Sub rule (5) provides that where the public shareholding in a listed company falls below twenty-five per cent, as a
result of implementation of the resolution plan approved under section 31 of the Insolvency and Bankruptcy Code,
2016, such company shall bring the public shareholding to twenty-five per cent within a maximum period of three
years from the date of such fall, in the manner specified by the Securities and Exchange Board of India.
However, if the public shareholding falls below ten per cent, the same shall be increased to at least ten per cent,
within a maximum period of 12 months from the date of such fall, in the manner specified by the Securities and
Exchange Board of India. It is further provided that every listed company shall maintain public shareholding of at
least five per cent as a result of implementation of the resolution plan approved under section 31 of the Insolvency
and Bankruptcy Code, 2016.
The Central Government may, in the public interest, exempt any listed public sector company from any or all of
the provisions of minimum shareholding.

DELISTING OF SECURITIES

1. Rule 21 deals with delisting of securities. A recognized stock exchange may, without prejudice to any other
action that may be taken under the Act or under any other law for the time being in force, delist any securities
listed thereon on any of the following grounds in accordance with the regulations made by the SEBI, namely:–
(a) the company has incurred losses during the preceding three consecutive years and it has negative
networth;
(b) trading in the securities of the company has remained suspended for a period of more than six months;
(c) the securities of the company have remained infrequently traded during the preceding three years;
 38  Lesson 1 • EP-SLCM

(d) the company or any of its promoters or any of its director has been convicted for failure to comply with
any of the provisions of the Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations,
agreements made thereunder, as the case may be and awarded a penalty of not less than rupees one
crore or imprisonment of not less than three years;
(e) the addresses of the company or any of its promoter or any of its directors, are not known or false
addresses have been furnished or the company has changed its registered office in contravention of the
provisions of the Companies Act, 2013; or
(f) shareholding of the company held by the public has come below the minimum level applicable to the
company as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the
company has failed to raise public holding to the required level within the time specified by the
recognized stock exchange.
However, no securities shall be delisted unless the company concerned has been given a reasonable
opportunity of being heard.
2. If the securities is delisted under clause (1),
(a) the company, promoter and director of the company shall be jointly and severally liable to purchase
the outstanding securities from those holders who wish to sell them at a fair price determined in
accordance with regulations made by the SEBI, under the Act; and
(b) the said securities shall be delisted from all recognized stock exchanges.
3. A recognized stock exchange may, on the request of the company, delist any securities listed thereon in
accordance with the regulations made under the Act by the SEBI, subject to the following conditions, namely:
(a) the securities of the company have been listed for a minimum period of three years on the recognized
stock exchange;
(b) the delisting of such securities has been approved by the two-third of public shareholders; and
(c) the company, promoter and/or the director of the company purchase the outstanding securities from
those holders who wish to sell them at a price determined in accordance with regulations made by
SEBI under the Act.
However, the condition at (c) may be dispensed with by Securities and Exchange Board of India if the
securities remain listed at least on the National Stock Exchange of India Limited or the Bombay Stock
Exchange Limited.

Question: Whether a stock exchange on its own can delist any security thereon?
Answer: Rule 21 of the Securities Contracts (Regulations) Rules, 1957 deals with the delisting of securities. A
recognized stock exchange may, without prejudice to any other action that may be taken under the Act or under
any other law for the time being in force, delist any securities listed thereon on the grounds in accordance with
the regulations made by the Securities and Exchange Board of India.

ROLE OF COMPANY SECRETARY

Company Secretary has the Right to Legal Representation before Securities Appellate Tribunal (SAT). The appellant
may either appear before SAT in person or authorise one or more chartered accountants or company secretaries
or cost accountants or legal practitioners or any of its officers to present his or its case.
Lesson 1 • Securities Contracts (Regulation) Act, 1956 39

LESSON ROUND-UP

• The Securities Contracts (Regulation) Act, 1956 (‘SCRA‘) was enacted by Parliament to prevent undesirable
transactions in securities by regulating the business of dealing therein, and by providing for certain other
matters connected therewith.
• Section 2 of this Act contains definitions of various terms used in the Act.
• Section 3 lays down that any stock exchange, desirous of being recognized for the purposes of this Act
may make an application in the prescribed manner to the Central Government.
• Powers of the Central Government as covered under Section 6, 8, 11, 12, 16, 23-O, 29A.
• Powers of Recognised Stock Exchange as covered under Section 7A and 9.
• Powers of the SEBI as covered under section 10, 12A, 23-I and 31.
• The Act prescribes various penalties against persons who might be found guilty of offences under the Act.
• Section 21 of the Act provides that where securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the SEBI (LODR), Regulations,
2015.
• Section 31 provides that, SEBI may, by notification in the Official Gazette, make regulations consistent
with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.
• The Government promulgated the Securities Contracts (Regulation) Rules, 1957 for carrying into effect
the object of the Securities Contracts (Regulation) Rules, 1956.
• Rule 19 dealt with the requirement with respect to the listing of securities on a recognised stock exchange.
• Rule 21 dealt with the Delisting of securities.

GLOSSARY

Stock Exchange Anybody of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating controlling the business of buying, selling or dealing in securities.
Admission to Dealing The process of granting permission to the securities of a company to be listed on a
Stock Exchange and to provide trading facilities for the securities in the market.
Listed Company A company which has any of its securities offered through an offer document listed on
a recognised stock exchange and also includes Public Sector Undertakings whose
securities are listed on a recognised stock exchange.
Appointed date It means the date which the SEBI may, by notification in the Official Gazette, appoint
and different appointed dates may be appointed for different recognized stock
exchanges.
Commodity Derivative It means a contract - (i) for the delivery of such goods, as may be notified by the
Central Government in the Official Gazette, and which is not a ready delivery contract;
or (ii) for differences, which derives its value from prices or indices of prices of such
underlying goods or activities, services, rights, interests and events,
asmaybenotifiedbythe Central Government, inconsultationwiththe SEBI, butdoes not
include securities as referred to in sub-clauses (A) and (B) of clause (ac) of Section 2
under Securities Contracts (Regulation) Act, 1956.
Clearing Clearing Settlement or clearance of accounts, for a fixed period in a Stock Exchange
40  Lesson 1 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Briefly discuss the powers of stock exchange under the Securities Contracts (Regulation) Act, 1956.
2. The Central Government has directed a recognised stock exchange to suspend its business in the interest
of the trade or public? Describe the powers of Central Government in accordance with SEBI (Securities
Contracts (Regulation) Act, 1956
3. ABC Ltd. is listed on National Stock Exchange of India Limited (NSE) and further planning to list its shares
on BSE under Direct Listing. Can company list its shares on both stock exchanges? If yes, what are the
requirements to be made for such listing on BSE in accordance with the SEBI (Securities Contracts
(Regulation) Act, 1956) and rules made thereunder?
4. XYZ Ltd. has filed listing application to stock exchange. Stock exchange rejected the listing application on
the ground that the listing norms had not been complied with. You as a Company Secretary prepare a note
to your Managing Director in the light of rights available with the company.
5. ABC Ltd. applied for listing of instruments in a recognized stock exchange. However, permission was
refused by the stock exchange. Can the company appeal to SAT against such refusal? Explain.
6. 'A stock exchange on its own can delist any security thereon'. Explain how Recognized Stock Exchange
delists any securities listed thereon under Securities Contracts (Regulations) Rules, 1957.
7. What are the provisions for continuous listing requirement under Securities Contracts (Regulation)
Rules, 1957? List any six methods for achieving minimum public shareholding by a listed company

LIST OF FURTHER READINGS

• SEBI Notifications
• SEBI Circulars
• SAT Orders

OTHER REFERENCES (Including Websites/Video Links)

• [Link]
• [Link]
• [Link]
• [Link]
 Securities and Exchange Board
Lesson 2 of India Act, 1992
Key Concepts One Learning Objectives
Should Know
To understand the
• Securities and
• Objectives of establishment of SEBI
Exchange Board
of India • Regulatory prescriptions on establishment and incorporation of SEBI
• Securities • Functions and powers of SEBI
Appellate • Regulatory prescriptions on Registration of Intermediaries
Tribunal (SAT) • Penalties and its adjudications
• Adjudications • Regulatory prescriptions on establishment and appeal to Securities
• Settlement Appellate Tribunal (SAT)
• Recovery • Powers of the Central Government
• Offences
The Company Secretary is recognised to appear as legal representative before
• Penalty SAT under the SEBI Act, 1992, therefore a student who is pursuing CS course
• Securities needs to update himself with the various provisions and compliances of the
• Investigations SEBI Act 1992.

Lesson Outline
• Introduction • Appeal to Supreme Court
• Objective of SEBI • Powers of Central Government
• Regulatory Framework of SEBI • Returns and Reports
Act, 1992
• Delegation of Powers
• Establishment of the SEBI
• Appeal to the Central Government
• Management of SEBI
• Bar of Jurisdiction
• Functions and Powers of the SEBI
• Public Servants
• Registration of Intermediaries
• Offences & Punishments
• Prohibition of Manipulative and
deceptive devices, insider trading • Cognizance of Offences by Courts
etc. • Recovery of Amounts
• Penalties for failure • Central Government power to
• Adjudications make Rules SEBI power to
make Regulations
• Settlement of Administrative and • Role of Company Secretary
Civil Proceedings
• Establishment of Securities • LESSON ROUND-UP
Appellate Tribunal • GLOSSARY
• Appeal to Securities Appellate • TEST YOURSELF
Tribunal and its procedure
• LIST OF FURTHER READINGS
• Powers of Securities Appellate
Tribunal • OTHER REFERENCES
 42  Lesson 2 • EP-SLCM

Regulatory Framework
• Securities and Exchange Board of India Act, 1992

INTRODUCTION
The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of
the Securities and Exchange Board of India Act, 1992. The first statutory regulatory body that the Government of
India set up post the reforms of 1991 was the Securities and Exchange Board of India (SEBI).
The SEBI –
• can specify the matters to be disclosed and the standards of disclosure required for the protection of investors
in respect of issues;
• can issue directions to all intermediaries and other persons associated with the securities market in the
interest of investors or of orderly development for securities market; and
• can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act.
Since its establishment in 1992, a lot of initiatives have been taken to protect the interests of the investors. SEBI
under the SEBI Act, 1992 has been empowered to frame subordinate legislation and to investigate wrong doing,
impose relevant penalties and to conduct search and seizure operations.
In short, it has been given necessary autonomy and authority to regulate and develop an orderly securities market.
As per Section 1 of the Act, this Act may be called the Securities and Exchange Board of India Act, 1992. It extends
to the whole of India. It shall be deemed to have come into force on the 30th day of January, 1992.

OBJECTIVES OF SEBI

S
OBJECTIVES OF SEBI

To protect the interests of To regulate the securities market

To promote the development of and for matters connected
investors in securities
therewith or incidental thereto

SEBI ACT, 1992

Regulatory Framework
The SEBI Act, 1992 is divided into ten chapters which are discussed below:

SEBI Act, Chapter I Definitions of various terms

1992 Chapter II Establishment of SEBI
Chapter III Transfer of assets, liabilities, etc., of the existing SEBI
Chapter IV Powers and Functions of SEBI
Chapter V Registration Certificate
Chapter VA Prohibition of Manipulative and Deceptive Devices, Insider Trading and Substantial
Acquisition of Securities or Control
Chapter VI Finance, Accounts and Audit
Chapter VIA Penalties and Adjudication
Chapter VI B Establishment, Jurisdiction, Authority and Procedure of Securities Appellate Tribunal
Chapter VII Miscellaneous
 Lesson 2 • Securities and Exchange Board of India Act, 1992 43

ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Establishment and Incorporation of Board
Section 3 of the SEBI Act provides that there shall be a Board by the name of the Securities and Exchange Board of
India (SEBI) established as -
• a body corporate;
• having perpetual succession and a common seal;
• with power to acquire, hold and dispose of property, both movable and immovable; and
• to contract, and shall, by the said name, sue or be sued;
• the head office of the Board shall be at Mumbai.
Further, the Board may establish offices at other places in India.

MANAGEMENT OF THE SEBI

Section 4(1) of the SEBI Act provides that the SEBI shall consist of the following members (appointed by the Central
Government), namely:

Chairman

• The general superintendence, direction and management of the affairs of the Board shall vest in a Board of
members, which may exercise all powers and do all acts and things which may be exercised or done by the Board.
• The Chairman shall also have powers of general superintendence and direction of the affairs of the Board and
may also exercise all powers and do all acts and things which may be exercised or done by that Board.
• The Chairman and the other members shall be persons of ability, integrity and standing who have shown
capacity in dealing with problems relating to securities market or have special knowledge or experience of
law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the
Central Government, shall be useful to the Board.

FUNCTIONS AND POWERS OF THE SEBI

Chapter IV of the SEBI Act, 1992 deals with the powers and functions of SEBI.

Section 11 Functions of the SEBI

Section 11A To Regulate or Prohibit Issue of Prospectus, Offer

Document or AdvertisementSoliciting Money for Issue of Securities
 44  Lesson 2 • EP-SLCM

Section 11AA To Regulate Collective Investment Schemes

Section 11B Power to Issue Directions and Levy Penalty

Section 11C Investigation

Section 11D Cease and Desist Proceedings

Functions of the SEBI

regulate the
securities markets

protect the interests of promote the development

Duty of SEBI
the investors in securities of securities markets

Section 11 of the Act lays down that it shall be the duty of SEBI to protect the interests of the investors in securities
and to promote the development of, and to regulate the securities markets by such measures as it thinks fit.
Section 11(2) provides that the measures may provide for –

Measures
• Regulating the business in stock exchanges and any other securities markets;
• Registering and regulating the working of stock brokers, sub-broker, share transfer agents, bankers to an
issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities markets in any
manner;
• Registering and regulating the working of the depositories, participants, custodians of securities, foreign
institutional investors, credit rating agencies and such other intermediaries as the SEBI, may by notification
specify in this behalf;
• Registering and regulating the working of venture capital funds and collective investment schemes,
including mutual funds;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 45

• Promoting and regulating self-regulatory organisations;

• Prohibiting fraudulent and unfair trade practices relating to securities markets;
• Promoting investors’ education and training of intermediaries of securities markets;
• Prohibiting insider trading in securities;
• Regulating substantial acquisition of shares and takeover of companies;
• Calling for information, undertaking inspection, conducting inquiries and audits of the stock exchanges,
mutual funds, other persons associated with the securities markets, intermediaries and self regulatory
organisations in the securities market;
• Calling for information and records:
» from any person including any bank or any authority or board or corporation established or constituted
by or under any central or state Act, which in the opinion of the SEBI, shall be relevant to any investigation
or inquiry by the SEBI in respect of any transaction in securities;
» from any such agencies, as may be specified by the SEBI, such information as may be considered
necessary by it for the efficient discharge of its functions;
» from other authorities, whether in India, or outside India having functions similar to those of the
SEBI, in the matters relating to the prevention or detection of violation in respect of securities laws,
subject to the provisions of other laws for the time being in force in this regard.
• Performing such functions and exercising such powers under the provisions of the Securities Contracts
(Regulation) Act, 1956, as may be delegated to it by the Central Government;
• Levying fees or other charges for carrying out the purposes of this section;
• Conducting research for the above purposes;
• Calling from or furnishing to any such agencies, as may be specified by the SEBI such information as may
be considered necessary by if for the efficient discharge of its functions;
• Performing such other functions as may be prescribed.

Powers with respect to inspection of Books and Documents

Section 11(2A) prescribes that SEBI may take measures to undertake inspection of any book, or register, or other
document or record of any listed public company or a public company which intends to get its securities listed on
any recognised stock exchange where SEBI has reasonable grounds to believe that such company has been indulging
in insider trading or fraudulent and unfair trade practices relating to securities market.

Board is vested with the same power as that of Civil Court

Section 11(3) of the SEBI Act provides that the SEBI has been vested with the same powers as are available to a
Civil Court under the Code of Civil Procedure, 1908 for trying a suit in respect of the following matters:
(i) the discovery and production of books of account and other documents at such place and such time
indicated by SEBI.
(ii) summoning and enforcing the attendance of persons and examining them on oath.
(iii) inspection of any books, registers and other documents of any person listed referred in section 12 of the
Act at any place.
(iv) inspection of any book or register or other document or record of any listed company or a public company
which intends to get its securities listed on any recognized stock exchange.
(v) issuing commissions for the examination of witnesses or documents.

Passing of an order by an Board

As per Section 11(4), the SEBI, may, by an order or for reasons to be recorded in writing, in the interest of investors
or securities market take any of the following measures either pending investigation or inquiry or on completion of
such investigation or enquiry namely:
 46  Lesson 2 • EP-SLCM

(a) suspend the trading of any security in a recognised stock exchange.

(b) restrain persons from accessing the securities market and prohibit any person associated with securities
market to buy, sell or deal in securities.
(c) suspend any office-bearer of any stock exchange or self regulatory organisation from holding such position.
(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation.
(e) attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or any
person associated with the securities market in any manner involved in violation of any of the provisions of
this Act, or the rules or the regulations made thereunder.
However, the SEBI shall, within ninety days of the said attachment, obtain confirmation of the said attachment
from the Special Court, established under section 26A, having jurisdiction and on such confirmation, such
attachment shall continue during the pendency of the aforesaid proceedings and on conclusion of the said
proceedings, the provisions of section 28A shall apply.
Further, only property, bank account or accounts or any transaction entered therein, so far as it relates to the
proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations
made thereunder shall be allowed to be attached.
(f) direct any intermediary or any person associated with the securities market in any manner not to dispose of
or alienate an asset forming part of any transaction which is under investigation.

The SEBI shall give an opportunity of hearing to such intermediaries or persons concerned either before or
after passing such orders.

Levy of Penalty
The SEBI may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D,
15E, 15EA, 15EB, 15F, 15G, 15H, 15HA, 15HAA and 15HB after holding an inquiry in the prescribed manner.
The amount disgorged, pursuant to direction issued under section 11B or section 12A of the Securities Contracts
(Regulation) Act, 1956 or section 19 of the Depositories Act, 1996, or under a settlement made under section 15JB
or section 23JA of the Securities Contracts (Regulation) Act, 1956 or section 19-IA of the Depositories Act, 1996, as
the case may be –
• shall be credited to the Investor Protection and Education Fund established by the SEBI
• such amount shall be utilized by the SEBI in accordance with the regulations made under this Act.

Power of the sebi to regulate or prohibit issue of prospectus, offer document or advertisement
soliciting money for issue of securities
(1) As per the section 11A, the SEBI may, for the protection of investors, –

specify, by regulations – by general or special orders

the matters relating to issue of capital, prohibit any company from issuing
transfer of securities and other matters prospectus, any offer document, or
incidental thereto advertisement soliciting money from the
public for the issue of securities
the manner in which such matters shall be
disclosed by the companies specify the conditions subject to which the
prospectus, such offer document or
advertisement, if not prohibited, may be
issued
 Lesson 2 • Securities and Exchange Board of India Act, 1992 47

Power to Regulate Collective Investment Schemes

Section 11AA (1) of the SEBI Act, provides that any scheme or arrangement which satisfies the conditions referred
to in sub-section (2) or sub-section (2A) shall be a collective investment scheme.
However, any pooling of funds under any scheme or arrangement, which is not registered with the SEBI or is not
covered under sub-section (3), involving a corpus amount of Rs. 100 crore or more shall be deemed to be a collective
investment scheme.

[This section has been discussed in Lesson No. 13]

Power to issue directions and levy penalty

Issue of Directions
Section 11B of the Act provides that if the SEBI is satisfied, after making or causing to be made an enquiry that it is
necessary:

SEBI may issue such

directions

to any person or class of persons referred to any company in respect of matters relating
to in section 12, or associated with the to issue of capital, transfer of securities and
securities market; or other matter incidental thereto, as may be
appropriate in the interests of investors in
securities and the securities market.

in the interest of investors, or orderly development of securities market; or

to prevent the affairs of any intermediary or other persons referred to in

section 12 being conducted in a manner detrimental to the interests of
investors or securities market; or

to secure the proper management of any such intermediary or person

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 regulations made thereunder, to disgorge an amount equivalent to the
wrongful gain made or loss averted by such contravention.

Levy of Penalty
The SEBI may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D,
15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner.

Investigations
(1) Grounds for Investigation
Section 11C of the Act provides that where the SEBI has reasonable ground to believe that:

• the transactions in securities are being dealt within a manner detrimental to the investors or the securities
market; or
• any intermediary or any person associated with the securities market has violated any of the provisions of
this Act or the rules or the regulations made or directions issued by SEBI thereunder;
 48  Lesson 2 • EP-SLCM

it may, at any time by order in writing, direct any person specified in the order to investigate the affairs of such
intermediary or persons associated with the securities market and to report thereon to the SEBI.
(2) Duty of officers to produce Accounts and Records
It is the duty of -
• every manager, managing director, officer and other employee of the company;
• every intermediary; or
• every person associated with the securities market;
to preserve and to produce to the Investigating Authority or any person authorised by it in this behalf, all the books,
registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the
intermediary or such person, which are in their custody or power.

(3) Powers of Investigating Authority

The Investigating Authority may require any intermediary or any person associated with securities market in any
manner to furnish such information to, or produce such books, or registers, or other documents, or record before
him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information
or the production of such books, or registers, or other documents, or record is relevant or necessary for the purposes
of its investigation.

(4) Period of Custody

The Investigating Authority may keep in its custody any books, registers, other documents and record produced for
six months and thereafter shall return the same to any intermediary or any person associated with securities market by
whom or on whose behalf the books, registers, other documents and record are produced.
However, the investigating officer may call for any book,, register, other document and record if they are needed
again. Further, if the person on whose behalf the books, registers, other documents and record are produced
requires certified copies of the books, registers, other documents and record produced before the Investigating
Authority, it shall give certified copies of such books, registers, other documents and record to such person or on
whose behalf the books, registers, other documents and record were produced.

(5) Examination on oath

Any person, directed to make an investigation may, examine on oath, any manager, managing director, officer and
other employee of any intermediary or any person associated with securities market in any manner, in relation to
the affairs of his business and may administer an oath accordingly and for that purpose may require any of those
persons to appear before it personally.

(6) Failure in compliance

If any person fails without reasonable cause or Person shall be punishable with
refuses

• to produce to the Investigating Authority or any • imprisonment for a term which may extend to 1
person authorised by it in this behalf any book, year, or
register, other document and record which is his • with fine, which may extend to 1 crore rupees, or
duty to produce; or • with both, and
• to furnish any information which it is his duty to • also with a further fine which may extend to five
furnish; or lakh rupees for every day after the first during
• to appear before the Investigating Authority which the failure or refusal continues.
personally when required to do so or to answer any
question which is put to him by the Investigating
Authority; or
• to sign the notes of any examination.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 49

(7) Notes of examination

Notes of any examination shall be taken down in writing and shall be read over to, or by, and signed by,
the person examined, and may thereafter be used in evidence against him.

(8) Seizure of Records

Application to the Magistrate or Judge of such designated Court for an order for the Seizure of records
Where in the course of an investigation, the Investigating Authority has reasonable ground to believe that the books,
registers, other documents and record of, or relating to any, any intermediary or any person associated with
securities market in any manner may be destroyed, mutilated, altered, falsified or secreted, the Investigating
Authority may make an application to the Magistrate or Judge of such designated Court in Mumbai, as may be
notified by the Central Government for an order for the seizure of such books, registers, other documents and records.
The authorised officer may requisition the services of any police officer or any office of the Central Government, or
of both, to assist him for all or any of the purposes specified above and it shall be the duty of every such officer to
comply with such requisition.
(9) Order of the Magistrate or Judge of such designated Court authorising the Investigating Authority
After considering the application and hearing the Investigating Authority, if necessary, the Magistrate or Judge of the
Designed Court may, by order, authorize the investigating authority –
(a) to enter, with such assistance, as may be required, the place or places where such books, registers, other
documents and records are kept,
(b) to search that place or those places in the manner specified in the order and,
(c) to seize books, registers and other documents and records, it consider necessary for the purpose of the
investigation.
Exemptions
However, the Magistrate or Judge of the Designated Court shall not authorize seizure of books, registers, other
documents and record of any listed public company or a public company (not being the intermediary specified
under section 12) which intends to get its securities listed on any recognized stock exchange unless such company
indulges in insider trading or market manipulation.

(10) Returning of records

The Investigating Authority shall keep in its custody the books, registers, other documents and record seized under
this section for such period not later than the conclusion of the investigation as it considers necessary and thereafter
shall return the same to the company or the other body corporate, or, as the case may be, to the managing director
or the manager or any other person, from whose custody or power they were seized and inform the Magistrate or
Judge of the Designated Court of such return.
The Investigating Authority may, before returning such books, registers, other documents and record as afores aid,
place identification marks on them or any part thereof.
(11) Every search or seizure made under this section shall be carried out in accordance with the provisions of the
Code of Criminal Procedure, 1973 relating to searches or seizures made under that Code.
 50  Lesson 2 • EP-SLCM

CASE LAWS

18.03.2021 Mr. Neeleshkumar Radheshyam Lahoti Adjudicating Officer, SEBI

(Noticee) (In the matter of Supreme Tex
Mart Limited) vs. Securities and Exchange
Board of India (SEBI)

Every person from whom information is sought should fully co-operate with the investigating officer
and promptly produce all documents, records, information as may be necessary for the investigations.
Facts of the Case:
SEBI conducted an investigation into the affairs of Supreme Tex Mart Limited (STML/ Company) for the period
June 01, 2016 to October 31, 2016. During the course of investigation, the Investigating Authority (IA) of SEBI
issued summons under Section 11C(2) read with Section 11C(3) of the SEBI Act, 1992 to Mr. Neeleshkumar
Radheshyam Lahoti (Noticee) seeking certain documents/ information. The Noticee replied to the summons
and submitted certain information. However, it was alleged that the Noticee submitted incorrect information. In
view of the same, SEBI initiated adjudication proceedings under Section 15HB of the SEBI Act against the Noticee.
SEBI Order:
SEBI imposed a penalty of 8 lakh on the Noticee under the provisions of Section 15HB of the SEBI Act. It was
established that the Noticee provided incorrect information to the Investigating Authority (IA) of SEBI and
hampered the process of investigation thus violating the provisions of Section 11C(2) read with Section 11C(3)
of the SEBI Act, 1992. It was a deliberate attempt of Noticee to misguide investigation. Section 11C(3) of the SEBI
Act empowers the IA to obtain records, documents, information etc., as considered relevant or necessary for the
purpose of investigation. Section 11C(2) of SEBI Act casts an obligation on every person associated with the
securities market to preserve and to produce to the Investigating Authority or any person authorised by it in this
behalf, such records, documents, information which are in their custody or power.

Cease and Desist Proceedings

Section 11D deals with the cease and desist powers of the SEBI. If the SEBI finds, after causing an inquiry to be
made, that any person has violated, or is likely to violate any provisions of this Act, or any rules or regulations made
thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation.
However, the SEBI shall not pass such order in respect of any listed public company or a public company which
intends to get its securities listed on any recognized stock exchange unless SEBI has reasonable grounds to believe
that such company has indulged in insider trading or market manipulation.

Power to Make Regulations

As per Section 30 of SEBI Act, 1992, the SEBI may, by notification, make regulations consistent with this Act and the
rules made thereunder to carry out the purposes of this Act. In particular, and without prejudice to the generality of
the foregoing power, such regulations may provide for all or any of the following matters, namely :–
• the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-
section (1) of section 7 including quorum necessary for the transaction of business;
• the terms and other conditions of service of officers and employees of the SEBI under sub-section (2) of
section 9;
• the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the
manner in which such matters shall be disclosed by the companies under section 11A;
• the utilisation of the amount credited under sub-section (5) of section 11;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 51

• the fulfilment of other conditions relating to collective investment scheme under subsection (2A) of section
11AA;
• the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for
certificate of registration and the manner of suspension or cancellation of certificate of registration under
section 12;
• the terms determined by the SEBI for settlement of proceedings under sub-section (2) and the procedure for
conducting of settlement proceedings under sub-section (3) of section 15JB;
• any other matter which is required to be, or may be, specified by regulations or in respect of which provision
is to be made by regulations.

POWERS OF SEBI NOT TO APPLY TO INTERNATIONAL FINANCIAL SERVICES CENTRE

Section 28C provides that the powers exercisable by the SEBI under this Act,—
(a) shall not extend to an International Financial Services Centre set up under sub-section (1) of section 18 of
the Special Economic Zones Act, 2005;
(b) shall be exercisable by the International Financial Services Centres Authority established under sub-
section (1) of section 4 of the International Financial Services Centres Authority Act, 2019,
in so far as regulation of financial products, financial services and financial institutions that are permitted
in the International Financial Services Centres are concerned.

REGISTRATION OF INTERMEDIARIES
Chapter V of the Act provides for registration of various intermediaries such as stock broker, sub-broker, share
transfer agents etc.
Section 12(1) of the Act provides that the following intermediaries are required to obtain a registration certificate
from the SEBI to buy, sell or deal in securities :
• Stock-Broker
• Sub-Broker
• Share Transfer Agent
• Banker to an issue
• Trustee of Trust Deed
• Registrar to an Issue
• Merchant Banker
• Underwriter
• Portfolio Manager
• Investment Adviser
• Depository
• Depository Participant
• Custodian of Securities
• Foreign Institutional Investor
• Credit Rating Agency
• Such other intermediary
(Above intermediaries are discussed in Chapter 16 of the study)
 52  Lesson 2 • EP-SLCM

A person shall not sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds
or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the
SEBI in accordance with the regulations.
It is clarified by the SEBI that a collective investment scheme or mutual fund shall not be include any unit linked
insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of
investment besides the component of insurance issued by an insurer.
A person shall not sponsor or cause to be sponsored or carry on or cause to be carried on the activity of an alternative
investment fund or a business trust as defined in clause (13A) of section 2 of the Income-tax Act, 1961, unless a
certificate of registration is granted by the SEBI in accordance with the regulations made under this Act.

Manner of application for registration

Every application for registration would in such manner and on payment of such fees as may be determined by the
SEBI Regulations.

Suspension/cancellation of a certificate of registration

The SEBI may, by order, suspend or cancel a certificate of registration in such manner as may be determined by the
SEBI Regulations. However, no such order shall be made unless the person concerned has been given a reasonable
opportunity of being heard.
PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES, INSIDER TRADING ETC.
Chapter VA of the Act deals with prohibition of manipulative and deceptive devices, insider trading and substantial
acquisition of securities or control.
Section 12A of the Act provides that a person shall not directly or indirectly:
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed
on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are
listed or proposed to be listed on a recognized stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a
recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made
thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or communicate such material or
non-public information to any other person, in a manner which is in contravention of the provisions of this
Act or the rules or the regulations made thereunder;
(f) acquire control of any company or securities more than the percentage of equity share capital of a company
whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the
regulations made under this Act.
PENALTIES AND ADJUDICATION
Chapter VIA of the SEBI Act deals with penalties which can be imposed under the Act for various failures, defaults,
non-disclosure and other offences.
It may be recalled that Section 11(2)(i) empowers SEBI to call for information and conduct enquiries and audits of
the stock exchanges, mutual funds, other persons associated with securities markets, intermediaries and self-
regulatory organisations in the security market.
Also Section 11(2)(ia) of the Act requires calling for information and record from any bank or any other authority
or SEBI or corporation established or constituted by or under any central, state or provincial Act in respect of any
transaction in securities which is under investigation or inquiry by the SEBI.
Lesson 2 • Securities and Exchange Board of India Act, 1992 53

Sl. No. Section Particulars

1. Section 15A Failure to furnish information, return, etc.

2. Section 15B Failure by any person to enter into agreement with clients.

3. Section 15C Failure to redress investors’ grievances.

4. Section 15D Certain Default in case of Mutual Funds.

5. Section 15E Failure to observe rules and regulations by an asset management company.

6. Section 15EA Default in case of alternative investment funds, infrastructure investment trusts
and real estate investment trusts.

7. Section 15EB Default in case of investment adviser and research analyst.

8. Section 15F Default in case of stock brokers.

9. Section 15G Insider Trading.

10. Section 15H Non-Disclosure of Acquisition of Shares and Takeovers.

11. Section 15HA Fraudulent and unfair trade practices.

12. Section 15HAA Penalty for alteration, destruction, etc., of records and failure to protect the
electronic database of SEBI.

13. Section 15HB Contravention where no separate penalty has been provided.

14. Section 15I Adjudications.

15. Section 15J Factors to be taken into account by the adjudicating officer.

16. Section 15JA Crediting sums realised by way of penalties to Consolidated Fund of India

17. Section 15JB Settlement of administrative and civil proceedings.

Penalties for Failures

Section Contravention Penalty

15A Failure to furnish information, return, etc. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15B Failure by any person to enter into agreement Penalty of at least 1 lakh rupees but may extend to 1
with clients. lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15C Failure to redress investors’ grievances. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
15D Certain defaults in case of mutual funds. Penalty of at least 1 lakh rupees but may extend to 1
lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees
15E Failure to observe rules and regulations by an Penalty of at least 1 lakh rupees but may extend to 1
asset management company. lakh rupees per day during which such failure
continues, subject to a maximum of 1 crore rupees.
54  Lesson 2 • EP-SLCM

15EA In case of alternative investment funds, Penalty of at least 1 lakh rupees but may extend to 1
infrastructure investment trusts and real lakh rupees per day during which such failure
estate investment trusts fails to comply with continues, subject to a maximum of 1 crore rupees
the regulations made by the SEBI or directions or 3 times the amount of gains made out of such
issued by the SEBI. failure, whichever is higher.

15EB In case investment adviser and research analyst Penalty of at least 1 lakh rupees but may extend to 1
fails to comply with the regulations made by the lakh rupees per day during which such failure
SEBI or directions issued by the SEBI. continues, subject to a maximum of 1 crore rupees.
15F Default in case of stock [Link] any stock • Penalty of at least 1 lakh rupees but which may
broker- extend to 1 crore rupees for which the contract
• fails to issue contract notes in the form note was required to be issued by that broker.
and manner specified by the stock • Penalty of at least 1 lakh rupees but may extend
to 1 lakh rupees per day during which such
exchange of which such broker is a
failure continues, subject to a maximum of 1
member
crore rupees.
• fails to deliver any security or fails to • penalty of at least 1 lakh rupees but which may
make payment of the amount due to the extend to five times the amount of brokerage
investor in the manner within the charged in excess of the specified brokerage,
period specified in the regulations whichever is higher.
• charges an amount of brokerage which
is in excess of the brokerage specified in
the regulations
15G Insider Trading. Penalty of at least 10 lakh rupees but which may extend
If any insider who,— to 25 crore rupees or 3 times the amount of profits
made out of insider trading, whichever is higher.
• either on his own behalf or on behalf of any other
person, deals in securities of a body corporate
listed on any stockexchange on the basis of any
unpublished price-sensitive information; or
• communicates any unpublished price-sensitive
information to any person, with or without his
request for such information except as required
in the ordinary course of business or under any
law; or
• counsels, or procures for any other person to deal
in any securities of any body corporate on the
basis of unpublished price-sensitive information.
15H Non-disclosure of acquisition of shares and Penalty of at least 10 lakh rupees but which may
takeovers. extend to 25 crore rupees or 3 times the amount of
profits made out of such failure, whichever is higher.
15HA Fraudulent and unfair trade practices Penalty of at least 5 lakh rupees but which may
extend to 25 crore rupees or 3 times the amount of
profits made out of such failure, whichever is higher
15HAA Alteration, destruction, etc., of records and Penalty of at least 1 lakh rupees but which may
failure to protect the electronic database of extend to 10 crore rupees or 3 times the amount of
Board. Profits made out of such act, whichever is higher
15HB Contravention where no separate penalty has Penalty of at least 1 lakh rupees but which may
been provided. extend to 1 crore rupees
 Lesson 2 • Securities and Exchange Board of India Act, 1992 55

ADJUDICATIONS
Section 15-I deal with the SEBI’s power to adjudicate.
The SEBI may appoint any of its officers not below the rank of Division Chief to be
an adjudicating officer for holding an inquiry in the prescribed manner after giving
any person concerned a reasonable opportunity of being heard for the purpose of
imposing any penalty.

The adjudicating officer has powers to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case to give evidence or to
produce any document which in the opinion of the adjudicating officer, may be
useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is
satisfied that the person has failed to comply with the provisions, he may impose
such penalty as he thinks fit in accordance with the provisions of any of those sections.

The SEBI may call for and examine the record of any proceedings under this section and
if it considers that the order passed by the adjudicating officer is erroneous to the
extent it is not in the interests of the securities market, it may, after making or causing
to be made such inquiry as it deems necessary, pass an order enhancing the quantum
of penalty, if the circumstances of the case so justify.

However, no such order shall be passed unless the person concerned has been given an
opportunity of being heard in the matter. Further, nothing contained in this section
shall be applicable after an expiry of a period of three months from the date of the
order passed by the adjudicating officer or disposal of the appeal under section 15-T,
whichever is earlier.

Factors to be Taken into Account while Adjudging quantum of penalty

Section 15J lays down that while adjudging the quantum of penalty, the SEBI or the adjudicating officer shall have
due regard to the following factors, viz. –

The amount of loss caused to

an investor or group of
investors as a result of the
default
e d ade ere or
efa as ver

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su ab ag e f
re ntifi ant onat t o

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ul a
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a dv ti un

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atu
th

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Section 15JA provides that all sums realised by way of penalties

under this Act shall be credited to the Consolidated Fund of India.
56  Lesson 2 • EP-SLCM

CASE LAWS

1. 28.02.2019 Adjudicating Officer, SEBI (Appellant) vs. Bhavesh Supreme Court of India
Pabari (Respondent)
The Supreme Court of India ruled in Adjudicating Officer, SEBI v. Bhavesh Pabari granting back the
discretionary power to Adjudicating Officer (AO) under supervision and scrutiny of the court.
Facts of the Case
The SEBI Act, as the object of its enactment would indicate, was enacted “to provide for the establishment of
SEBI to protect the interests of investors in securities and to promote the development of, and to regulate, the
securities market and for matters connected therewith or incidental thereto.”
Sections 15 A to 15 HA of the SEBI Act, 1992 are the penalty provisions whereas Section 15 I deals with the
power of adjudication and Section 15 J enumerates the “factors to be taken into account by the Adjudicating
Officer” while adjudging the quantum of penalty.
Section 15J has been a part of SEBI since 1992. Section 15J lays down that while adjudging the amount of penalty,
the adjudicating officer shall have due regard to the factors which are as follows:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the
default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
Explanation- For the removal of doubts, it is clarified that the power to adjudge the quantum of penalty under
sections 15A to 15E, clauses (b) and (c) of section 15-F, 15G, 15H and 15HA shall be and shall always be deemed
to have been exercised under the provisions of this section.”

The questions referred in the given case can be enumerated and summarized as follows:
(i) Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15J of the Securities and Exchange
Board of India Act, 1992 are exhaustive to govern the discretion in the Adjudicating Officer to decide on
the quantum of penalty or the said conditions are merely illustrative?
(ii) Whether the power and discretion vested by Section 15J of the SEBI Act to decide on the quantum of
penalty, regardless of the manner in which the first question is answered, stands eclipsed by the penalty
provisions contained in Section 15A to Section 15HA of the SEBI Act?
The Court held and in the view that-
• The provisions of clauses (a), (b) and (c) of Section 15J are illustrative in nature and have to be taken into
account whenever such circumstances exist. But this is not to say that there can be no other circumstance(s)
beyond those enumerated in clauses (a), (b) and (c) of Section 15J that the Adjudicating Officer is
precluded in law from considering while deciding on the quantum of penalty to be imposed.
Conditions stipulated in clauses (a), (b) and (c) of Section 15J are not exhaustive and in the given facts of
a case, there can be circumstances beyond those enumerated by clauses (a), (b) and (c) of Section 15J
which can be taken note of by the Adjudicating Officer while determining the quantum of penalty.
• Insofar as the second question is concerned, if the penalty provisions are to be understood as not admitting
of any exception or discretion and the penalty as prescribed in Section 15 A to Section 15-HA of the SEBI
Act is to be mandatorily imposed in case of default/failure, Section 15J of the SEBI Act would stand
obliterated and eclipsed. Hence, the question referred. Sections 15-A (a) to 15 HA have to be read along
with Section 15J in a manner to avoid any inconsistency or repugnancy.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 57

2. 01.07.2020 India Ratings and Research Private Ltd. (Appellant) vs. SEBI Securities Appellate
(Respondent) Tribunal
SEBI can call for and examine records of any proceedings if it considers the orders passed by the
adjudicating officer erroneous and not in the interests of securities markets. After making inquiry, SEBI
may enhance the quantum of penalty imposed, if the circumstances of the case so justify.

Facts of the case:

The Adjudicating Officer by the impugned order dated 26th December, 2019 had imposed a penalty of Rs.25
lakhs upon the Appellant for violating the Code of Conduct to the Securities and Exchange Board of India (Credit
Rating Agencies) Regulations, 1999 while granting credit rating to IL&FS for the financial year 2018-19.
SEBI issued a second show cause notice dated 28th January, 2020 by exercising powers under Section 15I(3) of
the SEBI Act directing the Appellant to show cause as to why penalty should not be enhanced as in their opinion
the order of the Adjudicating Officer was not in the interest of the securities market.
“Under Section 15I(3), the SEBI can call for and examine records of proceedings if it considers the orders passed
by the adjudicating officer erroneous and not in the interests of securities markets. After examining the matter,
the SEBI can enhance the quantum of penalty imposed.”
Misc. Application no.159 of 2020 has been filed in Appeal no.103 of 2020 praying that proceedings initiated by
SEBI pursuant to the second show cause notice dated 28th January, 2020 issued under Section 15I(3) of the
SEBI Act, should be stayed.
Order:
SEBI has the power to initiate proceedings under Section 15I(3) of the SEBI Act. SAT directed the Appellant to
deposit a sum of Rs.25 lakhs pursuant to the impugned order dated 26th December, 2019 before the Respondent
within four weeks which would be subject to the result of the appeal. SAT further directed that the proceedings in
pursuance to the second show cause notice dated 28th January, 2020 will continue and the Respondent will pass
appropriate orders after giving an opportunity of hearing to the Appellant either through physical hearing or
through video conferencing but any order that is passed by the Respondent shall not be given effect to during
the pendency of this appeal. Misc. Application is accordingly disposed of.

Settlement of Administrative and Civil Proceedings

Section 15JB deals with settlement of administrative and civil proceeding by SEBI.

Filing of an application

Any person against where any proceedings have been initiated or may be initiated under section 11, Section 11B,
section 11D, section 12(3) or section 15I, may file an application in writing to the SEBI proposing for settlement of
proceeding initiated or to be initiated for the alleged defaults.

SEBI may consider for settlements of defaults.

The SEBI, may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for
settlement, on payment of such by the defaulter or on such other terms as may be determined by the SEBI in
accordance with the regulations made under this Act.
 58  Lesson 2 • EP-SLCM

Procedure of settlement proceedings

The settlement proceedings shall be conducted in accordance with the procedure specified in the regulations made
under this Act.

No appeal shall be made

No appeal shall lie under section 15T against any order passed by the SEBI or adjudicating officer as the case may be.

Settlement amounts shall be credited to the Consolidated Fund of India.

All the settlement amounts excluding the disgorgement amount and legal costs, realised under this Act shall be
credited to the Consolidated Fund of India.

Case Snippets
1. JM Financial Ltd’s (JMFL) former vice president on July 16, 2020 had settled an alleged insider trading case
with SEBI by paying an amount of Rs 15 lakh towards settlement charges. During the span of investigation,
SEBI observed that he had entered into two off-market trades in shares of JMFL and had not obtained pre-
clearance from JMFL for the two off-market trades. Besides, he had entered the off-market transaction when
the trading window was closed.
2. Shareholders of the Kapashi Commercials Ltd. on 10th July, 2020, a BSE Listed company, have settled with
SEBI a case of alleged violation of takeover norms by paying over Rs 34 lakh amount towards settlement
terms. They had filed an application with the SEBI proposing to settle the case for alleged violation of SAST
(Substantial Acquisition of Shares and Takeovers) Regulations in respect of change in their shareholding in
Kapashi Commercials. It was alleged that the four individuals made delayed disclosures to the company and
BSE, about the change in their shareholding in Kapashi Commercials.
3. Northward Financial Planners (NFP) and its partners on July, 09, 2020 have settled with SEBI a case related
to alleged violation of Investment Advisers regulations upon payment of Rs. 21.67 lakh towards settlement
charge. NFP and partners were carrying on investment advisory activities since F.Y. 2013-14 and filed
application for SEBI registration after a delay of over 4 years and continued to carry on investment advisory
activity without seeking registration.

SECURITIES APPELLATE TRIBUNAL (SAT)

In order to afford proper appellate remedies, Chapter VIB of the SEBI Act provides for the establishment of the
Securities Appellate Tribunals (SAT) to consider appeals against the SEBI’s orders, or penalties.

Sl. No. Section Particulars

1. Section 15K Establishment of Securities Appellate Tribunals

2. Section 15L Composition of Securities Appellate Tribunal

3. Section 15M Qualification for appointment as Presiding Officer or Member of Securities

Appellate Tribunal
4. Section 15MA, 15MB Appointment of Presiding Officer or Member of Securities Appellate Tribunal
 Lesson 2 • Securities and Exchange Board of India Act, 1992 59

5. Section 15MC Validity of Appointment

6. Section 15N Tenure of office of Presiding Officer and other Members of Securities Appel-
late Tribunal
7. Section 15O Salary and allowances and other terms and conditions of service of
Presiding Officers
8. Section 15P, 15 PA Filling up of vacancies

9. Section 15Q Resignation and removal

10. Section 15R Orders constituting Appellate Tribunal to be final and not to invalidate its
proceedings
11. Section 15S Staff of the Securities Appellate Tribunal

12. Section 15T Appeal to the Securities Appellate Tribunal

13. Section 15U Procedure and powers of the Securities Appellate Tribunal

14. Section 15V Right to legal representation

15. Section 15W Limitation

16. Section 15X Presiding Officer, Members and staff of Securities Appellate Tribunals to be
public servants
17. Section 15Y Civil Court not to have jurisdiction

18. Section 15Z Appeal to Supreme Court

Establishment of Securities Appellate Tribunals.

• As per Section 15K, the Central Government is empowered to establish a Tribunal by notification, to be known
as the Securities Appellate Tribunal to exercise the jurisdiction, power and authorities conferred on it or
under the Act or any other law for the time being in force.
• The Central Government shall also specify in the notification the matters and places in relation to which the
Securities Appellate Tribunal may exercise jurisdiction.

Composition of Securities Appellate Tribunal

According to Section 15 L, the Securities Appellate Tribunal shall consist of a Presiding Officer and such number of
Judicial Members and Technical Members as the Central Government may determine, by notification, to exercise the
powers and discharge the functions conferred on the Securities Appellate Tribunal under this Act or any other law
for the time being in force.
Subject to the provisions of this Act,—
(a) the jurisdiction of the Securities Appellate Tribunal may be exercised by Benches thereof;
(b) a Bench may be constituted by the Presiding Officer of the Securities Appellate Tribunal with two or more
Judicial or Technical Members as he may deem fit;
However, every Bench constituted shall include at least one Judicial Member and one Technical Member;
(c) the Benches of the Securities Appellate Tribunal shall ordinarily sit at Mumbai and may also sit at such other
places as the Central Government may, in consultation with the Presiding Officer, notify.
The Presiding Officer may transfer a Judicial Member or a Technical Member of the Securities Appellate Tribunal
from one Bench to another Bench.
 60  Lesson 2 • EP-SLCM

Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal

(Section 15M)

Qualification

Presiding Judicial Technical

officer member member

is, or has been, a Judge of the Supreme Court

or a Chief Justice of a High Court or a Judge of High
Court for at least seven years, in the case of the
Presiding Officer; and

is, or has been, a Judge of High Court for at least five

years, in the case of a Judicial Member; or

The Presiding Officer and Judicial Members of the (i) is, or has been, a Secretary or an Additional Secretary in the
Securities Appellate Tribunal shall be appointed by the Ministry or Department of the Central Government or any
Central Government in consultation with the Chief equivalent post in the Central Government or a State
Justice of India or his nominee. Government; or
(ii) is a person of proven ability, integrity and standing having
special knowledge and professional experience, of not less than
fifteen years, in financial sector including securities market or
pension funds or commodity derivatives or insurance.

Appointment of Technical Member

The Technical Members of the Securities Appellate Tribunal shall be appointed by the Central Government on the
recommendation of a Search-cum-Selection Committee consisting of the following, namely:
(a) Presiding Officer, Securities Appellate Tribunal – Chairperson;
(b) Secretary, Department of Economic Affairs – Member;
(c) Secretary, Department of Financial Services – Member; and
(d) Secretary, Legislative Department or Secretary, Department of Legal Affairs – Member.
The Secretary, Department of Economic Affairs shall be the Convener of the Search-cum-Selection Committee. The
Search-cum-Selection Committee shall determine its procedure for recommending the names of persons to be
appointed.

Validity of appointment
As per Section 15MC, no appointment of the Presiding Officer, a Judicial Member or a Technical Member of the
Securities Appellate Tribunal shall be invalid merely by reason of any vacancy or any defect in the constitution of
the Search cum- Selection Committee.
A member or part time member of the SEBI or the Insurance Regulatory and Development Authority or the Pension
Fund Regulatory and Development Authority, or any person at senior management level equivalent to the Executive
Director in the SEBI or in such Authorities, shall not be appointed as Presiding Officer or Member of the Securities
Appellate Tribunal, during his service or tenure as such with the SEBI or with such Authorities, as the case may be,
or within two years from the date on which he ceases to hold office as such in the SEBI or in such Authorities.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 61

The Presiding Officer or such other member of the Securities Appellate Tribunal, holding office on the date of
commencement of Part VIII of Chapter VI of the Finance Act, 2017 shall continue to hold office for such term as he
was appointed and the other provisions of this Act shall apply to such Presiding Officer or such other member, as if
Part VIII of Chapter VI of the Finance Act, 2017 had not been enacted.
Tenure of office of Presiding Officer and other Members of Securities Appellate Tribunal
Section 15N lays down that the Presiding Officer or every Judicial or Technical Member of the Securities Appellate
Tribunal shall hold office for a term of five years from the date on which he enters upon his office, and shall be
eligible for reappointment for another term of maximum five years.
However, no Presiding Officer or the Judicial or Technical Member shall hold office after he has attained the age of
70 years.

Salary and allowances and other terms and conditions of service of Presiding Officers
Section 15O lays down that the salary and allowances payable to and the other terms and conditions of service
including pension, gratuity and other retirement benefits of the Presiding Officer and other Members of a Securities
Appellate Tribunal shall be such as may be prescribed.
However neither the salary and allowances nor the other terms and conditions of service of the Presiding Officer
and other Members of a Securities Appellate Tribunal shall be varied to their disadvantage after appointment.

Filling up of vacancies
As per Section 15P, if for reason other than temporary absence, any vacancy occurs in the office of the Presiding
Officer or any other Member of a Securities Appellate Tribunal -
• then the Central Government shall appoint another person in accordance with the provisions of this Act to fill
the vacancy and
• the proceedings may be continued before the Securities Appellate Tribunal from the stage at which the
vacancy is filled.
In the event of occurrence of any vacancy in the office of the Presiding Officer of the Securities Appellate Tribunal
by reason of his death, resignation or otherwise, the senior-most Judicial Member of the Securities Appellate
Tribunal shall act as the Presiding Officer until the date on which a new Presiding Officer is appointed in accordance
with the provisions of this Act.

Resignation and removal

Resignation by notice in writing
15Q lays down that the Presiding Officer or any other Member of a Securities Appellate Tribunal may, by notice in
writing under his hand addressed to the Central Government, resign his office.
However the Presiding Officer or any other Member shall, unless he is permitted by the Central Government to
relinquish his office sooner, continue to hold office -
• until the expiry of three months from the date of receipt of such notice, or
Whichever is the
• until a person duly appointed as his successor enters upon his office, or
earliest
• until the expiry of his term of office.

Removal of Presiding Officer or Judicial Member or Technical Member

The Central Government may, after an inquiry made by the Judge of the Supreme Court, remove the Presiding Officer or
Judicial Member or Technical Member of the Securities Appellate Tribunal, on such conditions as may be specified.
Provided that he shall not be removed from office unless he has been given a reasonable opportunity of being heard
in the matter. The Central Government may, by rules, regulate the procedure for the investigation of misbehavior or
incapacity of the Presiding Officer or any other Member.
 62  Lesson 2 • EP-SLCM

Orders Constituting Appellate Tribunal to be Final and not to invalidate its Proceedings
Section 15R makes it clear that no order of the Central Government appointing any person as the Presiding Officer
or a member of a Securities Appellate Tribunal shall be called in question in any manner, and no Act or proceeding
before a Securities Appellate Tribunals shall be called in question in any manner on the ground merely of any defect
in the constitution of a Securities Appellate Tribunal.

Appeal to the Securities Appellate Tribunal

Section 15T and 15U deal with the appeal procedure and powers of Securities Appellate Tribunal.

Any person aggrieved by an order of the

SEBI made or by an order made by an
adjudicating officer under this Act or by
an order of the IRDA1 or the PFRDA2 may
prefer an appeal to a SAT having
jurisdiction in the matter.
appeal within 6 months
SAT shall dispose of the

Within a period of forty-five days from the date

on which a copy of the order made by the SEBI
or the Adjudicating Officer or the IRDA or the
PFRDA as the case may be, is received by him
and it shall be in such form and be accompanied
by such fee as prescribed.

On receipt of appeal and after giving the parties

to opportunity of being heard SAT, pass order as
thinks fit, confirming, modifying or setting aside
the order appealed against.

The Securities Appellate Tribunal may entertain an

appeal after the expiry of the said period of
forty-five days if it is satisfied that there was
sufficient cause for not filing it within that period.

1. IRDA- Insurance Regulatory and Development Authority

2. PFRDA- Pension Fund Regulatory and Development Authority
The Securities Appellate Tribunal shall send a copy of every order made by it to the SEBI or the Insurance Regulatory
and Development Authority (IRDA) or the Pension Fund Regulatory and Development Authority (PFRDA), as the
case may be, the parties to the appeal and to the concerned Adjudicating Officer.

Procedure of SAT
Section 15U lays down that the Securities Appellate Tribunal 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 and subject to the other
provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own
procedure including the places at which they shall have their sittings.

Powers of SAT
The Securities Appellate Tribunals shall have, for the purposes of discharging their functions under this Act, the
same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, while trying a suit, in respect of
the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
 Lesson 2 • Securities and Exchange Board of India Act, 1992 63

(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.
Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the
meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code and the Securities
Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the
Code of Criminal Procedure, 1973.
Where benches are constituted, the Presiding Officer of the Securities Appellate Tribunal may, form time to time
make provisions as to the distribution of the business of the Securities Appellate Tribunal amongst the benches and
also provide for the matters which may be dealt with, by each bench.
On the application of any of the parties and after notice to the parties, and after hearing such of them as he may
desire to be heard, or on his own motion without such notice, the Presiding Officer of the Securities Appellate
Tribunal may transfer any case pending before one Bench, for disposal, to any other Bench.
If a Bench of the Securities Appellate Tribunal consisting of two members differ in opinion on any point, they shall
state the point or points on which they differ, and make a reference to the Presiding Officer of the Securities Appellate
Tribunal who shall either hear the point or points himself or refer the case for hearing only on such point or points
by one or more of the other members of the Securities Appellate Tribunal and such point or points shall be decided
according to the opinion of the majority of the members of the Securities Appellate Tribunal who have heard the
case, including those who first heard it.

Right to Legal Representation

As per Section 15V, the appellant may either appear in person or authorise one or more chartered accountants or
company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before
the Securities Appellate Tribunal.

Limitation
As per the Section 15W, the provisions of the Limitations Act, 1963 shall apply to an appeal made to Securities
Appellate Tribunal.

Public Servants
As per section 15X, the Presiding Officer and other officers and employees of Securities Appellate Tribunal shall be
deemed to be public servants within the meaning of Section 21 of the Indian Penal Code.

Jurisdiction of Civil Court

Section 15Y lays down that no civil court has jurisdiction to entertain any suit or proceeding in respect of any matter
which an Adjudicating Officer appointed under this Act or a Securities Appellate Tribunal under this Act is
empowered by or under this Act to determine and no injunction shall be granted by any Court or other authority in
respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

Appeal to Supreme Court

Section 15Z lays down that 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 decision or order of the
Securities Appellate Tribunal to him on any question of law arising out of such order.
It has been provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient
cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.
 64  Lesson 2 • EP-SLCM

Question: What is the time period for filling an appeal with SAT and Supreme Court?
Answer:
• In case of filing appeal with SAT: Within 45 days from the date of order of the copy made by the SEBI or
the adjudicating officer or the IRDA or the PFRDA, as the case may be.
• In case of filing appeal with Supreme Court: Within 60 days from the date of communication of the
decision or order of SAT.

POWERS OF CENTRAL GOVERNMENT

To issue directions
Section 16 empowers Central Government to issue directions in writing to the SEBI on questions of policy as it may
deem fit from time to time. However, the Central Government shall as far as practicable, give an opportunity to the
SEBI to express its views before any such directions is given by the Central Government. The decision of the Central
Government whether a question is one of policy or not shall be final.

To Supersede the SEBI

Section 17 lays down that if at any time the Central Government is of opinion that the SEBI is unable to discharge its
functions it may, by notification, supersede the SEBI for such period, not exceeding six months, as may be specified
in the notification.

circumstances exist which

render it necessary in the
public interest so to do,
the SEBI has persistently made
default in complying with any direction
issued by the Central Government
under this Act or in the discharge of the
Central Government functions and duties imposed on it by
on account of grave emergency, the or under the provisions of this Act and
SEBI is unable to discharge the may supersede the SEBI
as a result of such default the financial
functions and duties imposed on it by if position of the SEBI or the
or under the provisions of this Act administration of the SEBI has
deteriorated

Effect of publication of notification of superseding the SEBI

Upon the publication of the notification, it will have the following effects:
(a) all the members shall, as from the date of supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act, be exercised or
discharged by or on behalf of the SEBI, shall until the SEBI is reconstituted, be exercised and discharged by
such person or persons as the Central Government may direct; and
(c) all property owned or controlled by the SEBI shall, until the SEBI is reconstituted, vest in the Central
Government.
Reconstitution of Board on the expiration of the period of supersession
On the expiration of the period of supersession specified in the notification, the Central Government may reconstitute
the SEBI by a fresh appointment and in such case any person or persons who vacated their offices because of
supersession shall not be deemed disqualified for appointment.
However, the Central Government may, at any time, before the expiration of the period of supersession, take action.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 65

Action taken to be laid before each House of Parliament

The Central Government shall cause a notification issued and a full report of any action taken under this section and
the circumstances to such action to be laid before each House of Parliament at the earliest.

Power to grant Immunity

As per Section 24B of the Act, the Central Government may on the recommendations by the SEBI, if satisfied that
any person who is alleged to have violated any of the provisions of this Act or the rules or regulations made
thereunder has made a full and true disclosures in respect of alleged violations, grant to such persons, subject to
conditions as it may think fit to impose, immunity from prosecution for any offences under this Act or the rules or
the regulations made thereunder or also from the imposition of any penalty under this Act with respect to the
alleged violation.

Exemption
However, no such immunity shall be granted by the Central Government in cases where the proceedings for the
prosecution for any such offence have been instituted before the date of receipt of application for grant of such
immunity. It has also been provided that recommendations of the SEBI shall not be binding upon the Central
Government.

Withdrawal of granted immunity by the Central Government

An immunity granted to a person can be withdrawn by the Central Government, if it is satisfied such person had, in
the course of the proceedings not complied with the condition on which the immunity was granted or had given
false evidence and thereupon such person may be tried for the offence with respect to which the immunity was
granted or for any other offence of which he appears to have been guilty in connection with the contravention. He
shall also become liable to the imposition of any penalty under this Act to which such person would have been liable
had not such immunity been granted.

Power to make Rules

As per Section 29 of SEBI Act, 1992, the Central Government may, by notification, make rules for carrying out the
purposes of this Act. In particular, and without prejudice to the generality of the foregoing power, such rules may
provide for all or any of the following matters, namely :–
• the term of office and other conditions of service of the Chairman and the members under sub-section (1)of
section 5;
• the additional functions that may be performed by the Board under section 11;
• the manner in which the accounts of the Board shall be maintained under section 15;
• the manner of inquiry under sub-section (1) of section 15-I;
• the salaries and allowances and other terms and conditions of service of the 178[Presiding Officers, Members]
and other officers and employees of the Securities Appellate Tribunal under section 15-O and sub-section (3)
of section 15S;
• the procedure for the investigation of misbehaviour or incapacity of the 179[Presiding Officers, or other
Members] of the Securities Appellate Tribunal under sub-section (3) of section 15Q;
• the form in which an appeal may be filed before the Securities Appellate Tribunal under section 15T and the
fees payable in respect of such appeal;
• the form and the manner in which returns and report to be made to the Central Government under section 18;
• any other matter which is to be, or may be, prescribed, or in respect of which provision is to be, or may be,
made by rules.
 66  Lesson 2 • EP-SLCM

RETURNS AND REPORTS

Furnishing of returns and reports by the SEBI to the Central Government
In accordance with section 18 of the SEBI Act, the SEBI shall furnish to the Central Government at such time and in
such form and manner as may be prescribed or as the Central Government may direct, such returns and statements
and such particulars in regard to any proposed or existing programme for the promotion and development of the
securities market, as the Central Government may, from time to time, require.
Report of previous financial year by SEBI
SEBI shall, within ninety days after the end of each financial year, submit to the Central Government a report in such
form, as may be prescribed, giving a true and full account of its activities, policy and programmes during the previous
financial year.
Report to be presented before Parliament.
A copy of the report be laid, as soon as may be after it is received, before each House of Parliament.
DELEGATION OF POWERS
In accordance with Section 19 of the SEBI Act, the SEBI may, by general or special order in writing delegate to any
member, officer of the SEBI or any other person subject to such conditions, if any as may be specified in the order,
such of its powers and functions under the Act as it may deem necessary.

APPEAL TO THE CENTRAL GOVERNMENT

Appeal to Central Government
Section 20 of the Act provides that any person aggrieved by an order of the SEBI made, before the commencement of the
Securities Laws (Second Amendment) Act, 1999, under this Act or the rules or regulations made thereunder, may prefer
an appeal to the Central Government within such time as may be prescribed.
No appeal after expiry of limitation
The appeal shall not be admitted if it is preferred after the expiry of the period prescribed therefore.
However, an appeal may be admitted after the expiry of the period prescribed therefore if the appellant satisfies the
Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.
Appeal shall be made in prescribed form with a copy of an order
Every appeal made under this section shall be made in prescribed form and shall be accompanied by a copy of the
order appealed against by such fees as may be prescribed.
The procedure for disposing of an appeal shall be such as may be prescribed and the appellant shall be given a
reasonable opportunity of being heard.
BAR OF JURISDICTION
Section 20A lays down that -

no order passed by the SEBI or the no civil court shall have jurisdiction in no injunction shall be granted by any
Adjudicating Officer under this Act respect of any matter which the SEBI court or other authority in respect of
shall be appealable except as provided (or the adjudicating officer) is any action taken or to be taken in
in section 15T or section 20 and empowered by, or under, this Act to pursuance of any order passed by the
pass any order and SEBI or the adjudicating officer by, or
under, the SEBI Act

PUBLIC SERVANTS
Section 22 of the Act provides that all members, officers and other employees of the SEBI while acting or purporting
to act in pursuance of any of the provisions of the Act shall be deemed to be public servants within the meaning of
Section 21 of the Indian Penal Code.
Lesson 2 • Securities and Exchange Board of India Act, 1992 67

OFFENCES (SECTION 24)

Without prejudice to any award of penalty by the Adjudicating Officer or the SEBI under the
SEBI Act, if any person contravenes or attempts to contravene or abets the contravention of
the provisions of this Act or of any rules or regulations made thereunder, he shall be
punishable with imprisonment for a term which may extend to ten years or with fine which
may extend to twenty five crore rupees or with both.

If any person fails to pay the penalty imposed by the Adjudicating Officer or the SEBI or
fails to comply with directions or orders, he shall be punishable with imprisonment, for
a term which shall not be less than one month but which may extend to ten years or
with fine which may extend to twenty - five crore rupees or with both.

Section 24A provides that any offence punishable under this Act, not being an offence
punishable with imprisonment only or with imprisonment and also with fine, may before or
after the institutions of any proceeding, be compounded by a Securities Appellate Tribunal
or a Court before which such proceedings are pending.

COGNIZANCE OF OFFENCES BY COURTS

Sl No. Section Particulars

1. Section 26 Cognizance of Offences by Courts
2. Section 26A Establishment of Special Courts
3. Section 26B Offences triable by Special Courts
4. Section 26C Appeal and revision
5. Section 26D Application of Code to proceedings before Special Court

Section 26(1) lays down that no court shall take cognizance of any offence punishable under
this Act or any rules or regulations made thereunder, save on a complaint made by SEBI.

Section 26A(1) empowered the Central Government for providing speedy trial of offences under
this Act, by notification, establish or designate as many Special Courts as may be necessary.

Section 26A(2) provides that Special Court shall consist of a single judge who shall be
appointed by the Central Government with the concurrence of the Chief Justice of the High
Court within whose jurisdiction the Judge to be appointed is working.

Sub-section (3) of Section 26A stipulates that a person shall not be qualified for appointment
as a Judge of a Special Court unless he is, immediately before such appointment, holding the
office of a Sessions Judge or an Additional Sessions Judge, as the case may be.
 68  Lesson 2 • EP-SLCM

Offences triable by Special Courts

• Section 26B stipulates that notwithstanding anything contained in the Code of Criminal Procedure, 1973,
all offences under this Act, shall be taken cognizance of and tried by the Special Court established for the
area in which the offence is committed or where there are more Special Courts than one for such area, by
such one of them as may be specified in this behalf by the High Court concerned.

Appeal and revision

• Section 26 C provides for appeal and revision. The High Court may exercise, so far as may be applicable, all
the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court,
as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session
trying cases within the local limits of the jurisdiction of the High Court.

Application of Code to proceedings before Special Court

• Section 26D (1) provides that the provisions of the Code of Criminal Procedure, 1973 shall apply to the
proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be
deemed to be a Court of Session and the person conducting prosecution before a Special Court shall be
deemed to be a Public Prosecutor within the meaning of clause (u) of section 2 of the Code of Criminal
Procedure, 1973.
The person conducting prosecution referred to in Section 26D(1) should have been in practice as an
advocate for not less than seven years or should have held a post, for a period of not less than seven years,
under the Union or a state, requiring special knowledge of law.

Transitional provisions

• Section 26E provides that any offence committed under this Act, which is triable by a Special Court shall,
until a Special Court is established, be taken cognizance of and tried by a Court of Session exercising
jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973.
• However, this section shall not affect the powers of the High Court, under section 407 of the Code of
Criminal Procedure, 1973 to transfer any case or class of cases taken cognizance by a Court of Session
under this section.

CONTRAVENTION BY COMPANIES
Section 27 lays down that:
(1) Where a contravention of any of the provisions of this Act or any rule, regulation, direction or order made
thereunder has been committed by a company, every person who at the time the contravention was committed
was in charge of, and was responsible to, the company for the conduct of the business of the company, as well
as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against
and punished accordingly.
Exemption:
However, this provision shall not render any such person liable to any punishment provided in this Act, if he
proves that the contravention was committed without his knowledge or that he had exercised all due diligence
to prevent the commission of such contravention.
 Lesson 2 • Securities and Exchange Board of India Act, 1992 69

(2) Where a contravention under this Act has been committed by a company and it is proved that the contravention
has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any
director, manager, secretary or other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished
accordingly.
RECOVERY OF AMOUNTS

Section 28A(1) provides that if a person

Fails to pay the Fails to comply with Fails to comply with a Fails to pay any fees
penalty imposed any direction of the direction of due to the SEBI
under this Act SEBI for refund of disgorgement order
monies or issued under section
11B or

The Recovery Officer may draw up under his signature a statement in the specified form specifying the
amount due from the person (such statement being hereafter in this Chapter referred to as certificate).

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

“Recovery Officer” means any officer of the SEBI who may be authorized, by general or special order in writing, to
exercise the powers of a Recovery Officer.
Sub-section (2) empowered the Recovery Officer to seek the assistance of the local district administration while
exercising the powers.
The recovery of amounts by a Recovery Officer, pursuant to non-compliance with any direction issued by the SEBI
under section 11B, shall have precedence over any other claim against such person.

Explanation 1 - For the purpose of this sub-section, the person’s movable or immovable property or monies
held in bank accounts shall include any property or monies held in bank accounts which has been transferred
directly or indirectly on or after the date when the amount specified in certificate had become due, by the person
to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and
which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable
property or monies held in bank accounts so transferred to his minor child or his son’s minor child is concerned,
it shall, even after the date of attainment of majority by such minor child or son’s minor child, as the case may
be, continue to be included in the person’s movable or immovable property or monies held in bank accounts for
recovering any amount due from the person.
 70  Lesson 2 • EP-SLCM

Explanation 2 - Any reference under the provisions of the Second and Third Schedules to the Income-tax Act,
1961 and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a reference
to the person specified in the certificate.
Explanation 3 - Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act, 1961,
shall be construed as a reference to appeal before the Securities Appellate Tribunal under Section 15T of this Act.
Explanation 4 - The interest referred to in Section 220 of the Income-tax Act, 1961 shall commence from the
date the amount became payable by the person.

Continuance of proceedings
Section 28B (1) lays down that where a person dies, his legal representative shall be liable to pay any sum which the
deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased.
However, in case of any penalty payable under this Act, a legal representative shall be liable only in case the penalty
has been imposed before the death of the deceased person.
For the purposes of sub-section (1), –
(a) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, initiated against the deceased before his death, shall be deemed to
have been initiated against the legal representative, and may be continued against the legal representative
from the stage at which it stood on the date of the death of the deceased and all the provisions of this Act shall
apply accordingly;
(b) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act,
except a proceeding for levy of penalty, which could have been initiated against the deceased if he had
survived, may be initiated against the legal representative and all the provisions of this Act shall apply
accordingly.
Every legal representative shall be personally liable for any sum payable by him in his capacity as legal representative
if, while his liability for such sum remains undischarged, he creates a charge on or disposes of or parts with any
assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited
to the value of the asset so charged, disposed of or parted with.
The liability of a legal representative under this section shall be limited to the extent to which the estate of the
deceased is capable of meeting the liability.
Explanation.– For the purposes of this section “legal representative” means a person who in law represents the
estate of a deceased person, and includes any person who inter-meddles with the estate of the deceased and where
a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the
party so suing or sued.

ROLE OF COMPANY SECRETARY

Right to Legal Representation (Section 15V of the SEBI Act)
Any person aggrieved (the appellant) may either appear in person or authorise one or more chartered accountants
or company secretaries (PCS) or cost accountants or legal practitioners or any of its officers to present his or its case
before the Securities Appellate Tribunal (SAT).
Lesson 2 • Securities and Exchange Board of India Act, 1992 71

LESSON ROUND-UP

• The SEBI Act, 1992, was notified to protect the interests of the investors and to promote the
development of, and to regulate the securities markets by such measures as it thinks fit.
• The SEBI regulates the securities market and the SAT acts as a watchdog to ensure justice.
• The SEBI Act, 1992 empowers an aggrieved person for remedies against the SEBI’s order or penalties by
establishing Securities Appellate Tribunal.
• Any person aggrieved by any decision or order of the SAT can file an appeal to the Supreme Court.
• Section 15 Y of the SEBI Act provides that no civil court shall have jurisdiction to entertain a suit or
proceeding in respect of any matter in which an Adjudicating Officer (AO’) is appointed under the Act or
SAT is empowered by or under the Act to determine and no injunction shall be granted by any Court or
other authority in respect of any action taken or to be taken in pursuance of any power conferred by or
under the Act.
• The SEBI is empowered to issue directions under section 11B of the Act.
• The SEBI is further empowered to conduct inspections of registered intermediaries.
• Besides inspection, the SEBI is empowered to conduct investigations in case of breach of any regulation
or in case of action determental to the interest of investors.
• The SEBI is empowered to make rules and regulations.

GLOSSARY

Injunction A court order by which an individual is required to perform, or is restrained from

performing, a particular Act.

Ordinance An ordinance is an executive order issued by the President of India that holds the
same force and effect on an Act passed by the Parliament.

Securities Appellate Government by notification to exercise the jurisdiction, powers and authority
Tribunal (SAT) conferred on such Tribunal by or under the SEBI Act or any other law for the time
being in force.

Tribunal Article 227 of the Constitution of India defines ‘tribunal’ as a person or a body
other than a Court set up by the State for deciding rights of contending parties in
accordance with rules framed for regulation having force of law.
72  Lesson 2 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Discuss the various functions and powers of the SEBI.
2. Explain the role of the SEBI in strengthening regulatory framework and fostering investor confidence.
3. Enumerate the various penalties which can be imposed under the SEBI Act, 1992 for various failures,
defaults, non-disclosure and other offences.
4. Explain the procedure for Appeal to the Securities Appellate Tribunal.
5. Discuss the various powers of the Central Government under the SEBI Act, 1992.
6. Explain the factors to be considered by SEBI to arrive at the settlement terms.
7. ABC Ltd. is a registered stock broker of the Bombay Stock Exchange. SEBI levied a penalty of 2 crore on
the company for violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to the Securities Market) Regulations, 2003. ABC Ltd. is contemplating to challenge the SEBI’s
order before the Securities Appellate Tribunal (SAT) in an appeal. Explain the procedure for making an
appeal before the SAT.

LIST OF FURTHER READINGS

• SEBI Notifications
• SEBI Circulars
• SEBI Orders
• SAT Orders

OTHER REFERENCES (Including Websites/Video Links)

• [Link]
• [Link]
Lesson 3 Depositories Act, 1996
Key Concepts One Learning Objectives
Should Know
To understand:
• Depository
• Basic concept of depository and how it works
• Depository • Depository participants, its functions, rights and obligations of
Participant (DP) depositories, benefits of depositories, dematerialisation process,
and the regulatory framework for depository in India.
• Issuer
• Rights and Obligations of Depositories, Participants, Issuers and
• Beneficial Owner Beneficial Owners
(BO)
• Powers of SEBI, Depositories and Central Government
• Registered Further, a Company Secretary in Practice is authorised by SEBI to
Owner conduct internal/ concurrent audit of depositories participants and
• Security also to conduct the reconciliation of share capital.

Lesson Outline
• Introduction • Membership Rights in respect
of securities held by a
• Depository System – An
Depository
Overview
• Power of Central Government
• Depository Functions
to Make Rules
• Benefits of Depository System
• Power of Depositories to Make
• Models of Depository Bye-Laws
• Legal Linkage • SEBI (Depositories and
Participants)
• Depository Participant
• Regulations, 2018
• Issuer
• Reconciliation & Audit under
• Dematerialisation
SEBI (Depositories and
• Rematerialisation Participants) Regulations,
2018
• Electronic Credit in New Issues
• Internal Audit of operations of
• Trading System
Depository Participants
• Corporate Actions
• Concurrent Audit
• Legal Framework
• Role of Company Secretary
• Depositories Act,1996
• LESSON ROUND-UP
• Power of SEBI
• GLOSSARY
• Penalties and Adjudication
• TEST YOURSELF
• Offences and Cognizance
• LIST OF FURTHER READINGS
• OTHER REFERENCES
 74  Lesson 3 • EP-SLCM

Regulatory Framework
• The Depositories Act, 1996
• The SEBI (Depositories and Participants) Regulations, 2018
• Bye-laws of Depository
• Business Rules of Depository.
• The Companies Act, 2013
• The Indian Stamp Act, 1899
• Securities and Exchange Board of India Act, 1992
• Securities Contracts (Regulation) Act, 1956
• Benami Transaction (Prohibition) Act, 1988
• Income Tax Act, 1961
• Bankers’ Books Evidence Act, 1891
• Prevention of Money Laundering Act (PMLA), 2002

INTRODUCTION
Depositories are institutions that hold securities of investors in dematerialized / electronic form and provide demat
services to the investors through their Depository Participants (DP). There are two depositories in our country
namely, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Under each Depository, there are registered Depository Participants (DPs), which provide various services to the
investors like opening and maintaining of a Demat account, dematerialization of shares, etc.

The inception of depository system in the Indian Capital market has been started during the 90’s. Theft, forgery,
mutilation of certificates and other irregularities provided the issuer right to refuse the transfer of a security.
Added costs and delays in settlement, restricted liquidity and made investor grievance redressal time
consuming. To obviate these problems, the Depositories Act, 1996 was passed and subsequently the regulations
were notified.
LEGAL FRAMEWORK
The legal framework for a depository system has been laid down by the Depositories Act, 1996 and is regulated by
SEBI. The depository business in India is regulated by –
• The Depositories Act, 1996
• The SEBI (Depositories and Participants) Regulations, 2018
 Lesson 3 • Depositories Act, 1996 75

• Bye-laws of Depository
• Business Rules of Depository.
Apart from the above, Depositories are also governed by certain provisions of:
• The Companies Act, 2013
• The Indian Stamp Act, 1899
• Securities and Exchange Board of India Act, 1992
• Securities Contracts (Regulation) Act, 1956
• Benami Transaction (Prohibition) Act, 1988
• Income Tax Act, 1961
• Bankers’ Books Evidence Act, 1891

The legal framework for depository system in the Depositories Act, 1996 provides for the establishment of multiple
depositories. Anybody to be eligible for providing depository services must be formed and registered as a company
under the Companies Act, 2013 and seek registration with SEBI and obtain a Certificate of Commencement of
Business from the SEBI on fulfillment of the prescribed conditions.
The investors opting to join depository mode are required to enter into an agreement with depository through a
participant who acts as an agent of the depository. The agencies such as custodians, banks, financial institutions,
large corporate brokerage firms, non-banking financial companies etc. act as participants of depositories. The
companies issuing securities are also required to enter into an agreement with the Depository.

DEPOSITORY SYSTEM – AN OVERVIEW

• A depository is an organization which holds securities
(like shares, debentures, bonds, government According to Section 2(e) of the Depositories
securities, mutual fund units etc.) of investors in Act, 1996, Depository means a company formed
electronic form at the request of the investors through and registered under the Companies Act, 2013
a registered depository participant. It also provides and which has been granted a certificate of
services related to transactions in securities. registration under Section 12(1A) of the SEBI
• A Depository is an organization like a Central Bank Act, 1992.
where the securities of a shareholder are held in the
electronic form at the request of the shareholder through the medium of a Depository Participant. To utilize
the services offered by a Depository, the investor has to open an account with the Depository through a
Depository Participant.
• In the depository system, share certificates belonging to the investors are to be dematerialized and their
names are required to be entered in the records of depository as beneficial owners. Consequent to these
changes, the investors’ names in the companies’ register are replaced by the name of depository as the
registered owner of the securities.
• The depository, however, does not have any voting rights or other economic rights in respect of the shares as
a registered owner. The beneficial owner continues to enjoy all the rights and benefits and is subject to all the
liabilities in respect of the securities held by a depository.
• In the Depository mode, corporate actions such as IPOs, rights, conversions, bonus, mergers/amalgamations,
subdivisions & consolidations are carried out without the movement of paper, saving both cost & time.
Information of beneficiary owners is readily available. The issuer gets information on changes in shareholding
pattern on a regular basis, which enables the issuer to efficiently monitor the changes in shareholdings.
• The Depository system links the issuing corporates, Depository Participants (DPs), the Depositories and
clearing corporations of stock exchanges. This network facilitates holding of securities in the soft form and
effects transfers by means of account transfers.
 76  Lesson 3 • EP-SLCM

• Under the provisions of the Depositories Act, these Depositories provide various services to investors and
other Participants in the capital market, such as, clearing members, stock exchanges, investment institutions,
banks and issuing corporates. These include basic facilities like account opening, dematerialization,
settlement of trades and advanced facilities like pledging, distribution of non-cash corporate actions,
distribution of securities to allottees in case of public issues, etc.
• A depository cannot act as a depository unless it obtains a certificate of commencement of business from the SEBI.
• To utilize the services of a depository, the investor has to open an account with the depository through a
participant, similar to the opening of an account with any of the bank branches to utilize services of that bank.
Registration of the depository is required under the SEBI (Depositories and Participants) Regulations, 2018
and is a pre-condition to the functioning of the depository. Depository and depository participant both are
regulated by the SEBI.

BANK–DEPOSITORY - AN ANALOGY

BANK DEPOSITORY
Holds funds in an account Holds securities in an account
Transfers funds between accounts on the instruction of Transfers securities between accounts on the
the account holder instruction of the Beneficial owner account holder
Facilitates transfer of ownership without having to
Facilitates transfer without having to handle money
handle securities
Accountable for the safe keeping of funds Accountable for the safe keeping of securities

DEPOSITORY FUNCTIONS
• Account opening
• Dematerialisation
• Rematerialisation
• Settlement
• Initial Public Offers (IPO’s), corporate benefits
• Creation of encumbrance

Difference between Depository and Custodian

Both depository and custodian services are responsible for safe keeping of securities but they are different in the
sense that the Depository can legally transfer beneficial ownership, while a custodian cannot. The main objective of
a Depository is to minimize the paper work involved with the ownership, trading and transfer of securities.

BENEFITS OF DEPOSITORY SYSTEM

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.
At the outset, this system rids the capital market of the dangers related to handling of paper. The system provides
numerous direct and indirect benefits, like:
• Elimination of bad deliveries - In the depository environment, once the holdings of an investor are
dematerialised, the question of bad delivery does not arise i.e. they cannot be held “under objection”. In the
physical environment, buyer of shares was required to take the risk of transfer and face uncertainty of the
quality of assets purchased, while in a depository environment good money certainly begets good quality of
assets.
• Elimination of all risks associated with physical certificates - Dealing in physical securities have associated
security risks of theft, mutilation of certificates, loss of certificates during movements through and from the
registrars, thus exposing the investors to the cost of obtaining duplicate certificates, loss of certficates and
advertisements, etc. This problem does not arise in the depository environment.
 Lesson 3 • Depositories Act, 1996 77

• Immediate transfer and registration of securities - In the depository environment, once the securities are
credited to the investor’s account on pay out, he becomes the legal owner of the securities. There is no further
need to send it to the company’s registrar for registration. If securities are purchased in the physical environment,
the investor has to send it to the company’s Share Transfer Agent so that the change of ownership can be
registered. This process usually takes around three to four months and is rarely completed within the statutory
framework of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss
in transit. To overcome this, the normally accepted practice is to hold the securities in street names i.e. not to
register the change of ownership. However, if the investors miss a book closure the securities are not good for
delivery and the investor would also stand to loose their corporate entitlements.
• Faster disbursement of non-cash corporate benefits like rights, bonus, etc. – Depository system provides
for direct credit of non-cash corporate entitlements to an investors account, thereby ensuring faster
disbursement and avoiding risk of loss of certificates in transit.
• Reduction in brokerage by many brokers for trading in dematerialized securities – Brokers provide this
benefit to investors as dealing in dematerialized securities reduces their back office cost of handling paper and
also eliminates the risk of being the introducing broker.
• Reduction in handling of huge volumes of paper and periodic status reports to investors on their holdings and
transactions, leading to better controls.
• Elimination of problems related to change of address of investor, transmission, etc. – In case of change of
address or transmission of demat shares, investors are saved from undergoing the entire change procedure
with each company or registrar. Investors have to only inform their DP with all relevant documents and the
required changes are effected in the database of all the companies, where the investor is a registered holder of
securities.
• Elimination of problems related to selling securities on behalf of a minor – A natural guardian is not
required to take court approval for selling demat securities on behalf of a minor.
MODELS OF DEPOSITORY
Immobilisation – Where physical share certificate are kept in vaults with the depository for safe custody and all
subsequent transactions in these securities take place in book entry form. The actual owner has the right to
withdraw his physical securities as and when desired. The immobilization of fresh issue may be achieved by issuing
a jumbo certificate representing the entire issue in the name of depository, as nominee of the beneficial owners.
Dematerialisation – No Physical scrip in existence, only electronic records maintained by depository. This type of
system is cost effective and simple and has been adopted in India.

LEGAL LINKAGE
 78  Lesson 3 • EP-SLCM

DEPOSITORY PARTICIPANT (DP)

Just as a brokers act an agent of the investor at the Stock Exchange, a Depository Participant (DP) is the representative
(agent) of the investor in the depository system providing the link between the Company and investor through the
Depository. The Depository Participant maintains securities’ account balances and intimates the status of holding
to the account holder from time to time.

• Transmission requests/nomination
• Acts as an Agent of Depository
• Customer interface of Depository
• Functions like Securities Bank
• Characteristics of a DP

Characteristics • Account opening

of a DP • Facilitates dematerialisation/rematerialisation
• Instant transfer on pay-out
• Enables off market transfers
• Settles trades in electronic segment
• Pledge/enforcement of pledge etc.

A DP is one with whom an investor needs to open an account to deal in shares in electronic form. While the
Depository can be compared to a Bank, DP is like a branch of that bank with which an account can be opened.

Question: Who can be a DP?

Answer: Public financial institutions, scheduled commercial banks, foreign banks operating in India with the
approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing
corporations / clearing houses, NBFCs and registrar to an issue or share transfer agent complying with the
requirements prescribed by SEBI can be registered as DP.

ISSUER
“Issuer” means person making an issue of securities. Any entity such as a corporate / state or central government
organizations issuing securities which can be held by depository in electronic form.

Functions of Issuer Dematerialisation

Confirmation of Beneficiary Holdings
Corporate Actions – Rights, Bonus, etc.
Reconciliation of Depository Holdings
Rematerialisation

DEMATERIALISATION
Dematerialization is a process by which the physical share certificates of an investor are taken back by the Company
and an equivalent number of securities are credited his account in electronic form at the request of the investor. An
investor will have to first open an account with a Depository Participant and then request for the dematerialization
of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into
that account. This is very similar to opening a Bank Account.
Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has
to demat the shares if he/she wishes to sell the same through the Stock Exchanges, as physical shares are to be sold
through a separate session and are sold at a big discount to the market prices. Similarly, if an investor purchases
 Lesson 3 • Depositories Act, 1996 79

shares from the Stock Exchange, he/she will get delivery of the shares in demat form. Odd lot share certificates can
also be dematerialized. Similarly, in Public Issues/Right Issues, shares are issued only in demat form.
REMA PROCEDURE FOR DEMATERIALISATION TE

Question: Can an investor, already having a demat account; open another account with any other Depository
Participant (DP)?
Answer: Yes, the investor has a choice to open another demat account with any DP.

REMATERIALISATION
Rematerialisation is the process of converting securities held in electronic form in a demat account back in physical
certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the
DP with whom he has an account. A client can rematerialise his dematerialised holdings at any point of time. The
securities sent for rematerialisation cannot be traded.
 80  Lesson 3 • EP-SLCM

ELECTRONIC CREDIT IN NEW ISSUES

• Investor opens account with DP
• Submits application with option to hold securities in depository giving DP-Id and Client-Id
• Registrar uploads list of allottees to Depository
• Depository credits allottee’s account with DP
• Refunds sent by Registrar as usual.

TRADING SYSTEM
• Separate quotes in Book Entry
• Trading Member to have Clearing Account with DP
• Settlement as per Settlement Calendar of Stock Exchange
• Trading can be introduced in any Stock exchange if settlement is guaranteed.

CORPORATE ACTIONS
• Dividends/cash benefits, these benefits are directly forwarded to the investors by the company or its registrar
and transfer agent.
• Non-cash benefits, viz. Bonus, Rights Issue, etc. these benefits are electronically credited to the beneficial
owner’s account through Depository.

Question: How would Mr. X get Bonus Shares if he holds shares in Demat Form?
Answer: The concerned company obtains the details of beneficiary holders and their holdings from Depository
(NSDL or CDSL) as on the record date. The number of shares he is entitled for, are credited to his demat account
by the company / its RTA.

DEPOSITORIES ACT, 1996

Regulatory Framework
The Depositories Act, 1996 is divided into five chapters which are discussed below as under:

Depositories Act, 1996 Chapter I Definitions of various terms

Chapter II Certificate of Commencement of Business
Chapter III Rights and Obligations of Depositories, Participants, Issuers
and Beneficial Owners
Chapter IV Enquiry and Inspection
Chapter V Miscellaneous

Objectives
The depositories’ legislation as per the Statement of Objects and Reasons appended to the Depositories Act, 1996
aims at providing :
• A legal basis for establishment of depositories to conduct the task of maintenance of ownership records and
effecting changes in ownership records through book entry;
• Dematerilisation of securities in the depositories mode as well as giving option to an investor to choose between
holding securities in physical mode and holding securities in a dematerialized form in a depository;
 Lesson 3 • Depositories Act, 1996 81

• Making the securities fungible;

• Making the shares, debentures and any interest thereon of a public limited company freely transferable; and
• Exempting all transfers of shares within a depository from stamp duty.

Certificate of Commencement of Business by Depositories

Section 3 of the Depository Act, stipulates that no depository shall act as a depository unless it obtains a certificate
of commencement of business from the SEBI in such form as may be specified by the SEBI (Depositories and
Participants) Regulations, 2018.
The SEBI shall not grant a certificate unless it is satisfied that the depository has adequate systems and safeguards
to prevent manipulation of records and transactions.
However no certificate shall be refused unless the depository concerned has been given a reasonable opportunity
of being heard.
Eligibility Condition for Depository Services
Any company or other institution to be eligible to provide depository services must:
• has a net worth of not less than rupees one hundred crores.
• be formed and registered as a company under the Companies Act, 2013.
• be registered with SEBI as a depository under SEBI Act, 1992.
• has framed bye-laws with the previous approval of SEBI.
• has one or more participants to render depository services on its behalf.
• has adequate systems and safeguards to prevent manipulation of records and transactions to the satisfaction
of SEBI.
• complies with Depositories Act, 1996 and SEBI (Depositories and Participants) Regulations, 2018.
• meets eligibility criteria in terms of constitution, network, etc.

Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws,
with any depository for availing its services.

Rights and Obligations of Depositories, Participants, Issuers and Beneficial Owners

Agreement between depository and participant

A depository shall enter into an agreement with one or more participants as its agent in such form as may be
specified by the bye-laws.
Services of depository
Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws,
with any depository for availing its services.
Surrender of certificate of security
Any person who has entered into an agreement through a participant shall surrender the certificate of security, for which
he seeks to avail the services of a depository, to the issuer in such manner as may be specified by the regulations.
The issuer, on receipt of certificate of security, shall cancel the certificate of security and substitute in its records
the name of the depository as a registered owner in respect of that security and inform the depository
accordingly.
A depository shall, on receipt of the information from issuer, enter the name of the person in its records, as the
beneficial owner.3
 82  Lesson 3 • EP-SLCM

Registration of transfer of securities with depository

Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of
the transferee. If a beneficial owner or a transferee of any security seeks to have custody of such security the
depository shall inform the issuer accordingly.

Options to receive security certificate or hold securities with depository

Section 8 states that –
(1) Every person subscribing to securities offered by an issuer shall have the option either to receive the security
certificates or hold securities with a depository.
(2) Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details
of allotment of the security, and on receipt of such information the depository shall enter in its records the
name of the allottee as the beneficial owner of that security.
However, Section 29 of the Companies Act, 2013 read with the Companies (Prospectus and
Allotment of Securities) Rules, 2014, provides that –
• every company making public offer and such other class or classes of companies as may be prescribed, shall
issue the securities only in dematerialised form by complying with the provisions of the Depositories Act,
1996 and the regulations made thereunder.
• Further, in case of such class or classes of unlisted companies as may be prescribed, the securities shall be
held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and
the regulations made thereunder.
• Any company, other than a company mentioned above, may convert its securities into dematerialised form or
issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in
accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

It is not necessary that all eligible securities must be in the depository mode. In the scheme of the Depositories
legislation, the investor has been given supremacy. The investor has the choice of holding physical securities or opts
for a depository based ownership record.
However, in case of fresh issue of securities all securities issued have to be in dematerialized form. However, after
that investor will also have the freedom to switch from depository mode to physical mode and vice versa. The
decision as to whether or not to hold securities within the depository mode and if in depository mode, which
depository or participant, would be entirely with the investor.

Question: What type of instruments are available for demat at Depository?

Answer: All types of equity/ debt instruments viz. equity shares, preference Shares, partly paid shares, bonds,
debentures, commercial papers, certificates of deposit, government securities (G-SEC) etc. irrespective of
whether these instruments are listed / unlisted / privately placed can be dematerialized with depository, if they
have been admitted with the depository.

Restriction on Transfer of Securities

SEBI has amended relevant provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 to disallow listed companies from accepting request for transfer of securities which are held in physical form.
The shareholders who continue to hold shares and other types of securities of listed companies in physical form
even after this date, will not be able to lodge the shares with company / its RTA for further transfer. They will need
to convert them to demat form compulsorily if they wish to effect any transfer. Only the requests for transmission
and transposition of securities in physical form, will be accepted by the listed companies / their RTAs.
This amendment will help in curbing fraud and manipulation risk in physical transfer of securities by unscrupulous
persons. Further, with shares held in demat form will improve ease, convenience and safety of transactions for investors.
 Lesson 3 • Depositories Act, 1996 83

Requirements with the promoters and promoter group shareholding

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall ensure that
hundred percent of shareholding of promoter and promoter group is in dematerialized form and the same is
maintained on a continuous basis in the manner as specified by the SEBI.

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

Rights of Depositories and Beneficial Owner

Section 10 lays down that a depository should be deemed to be the registered owner for the purposes of effecting
transfer of ownership of security on behalf of a beneficial owner. The depository as a registered owner should not
have any voting rights or any other rights in respect of securities held by it. The beneficial owner is entitled to all
the rights and benefits and is subject to all the liabilities in respect of his securities held by a depository.

Register of Beneficial Owner

Section 11 provides that every depository is required to maintain a register and an index of beneficial owners in the
manner provided in the Companies Act, 2013.
Pledge or Hypothecation of Securities held in a Depository
Section 12 lays down that a beneficial owner may with the previous approval of the depository create a pledge or
hypothecation in respect of a security owned by him through a depository. Every beneficial owner should give
intimation of such pledge or hypothecation to the depository and such depository is required to make entries in its
records accordingly. Any entry in the records of a depository should be evidence of a pledge or hypothecation.
Furnishing of Information and Records by Depository and Issuer
Section 13 stipulates that depository shall furnish to the issuer information about the transfer of securities in the
name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws. Every issuer
shall make available to the depository copies of the relevant records in respect of securities held by such depository.

Option to opt out in respect of any Security

Section 14 of the Act provides that if a beneficial owner seeks to opt out of a depository in respect of any
security he shall inform the depository accordingly. After the receipt of intimation the depository should make
appropriate entries in its records and also inform the issuer. Every issuer shall, within thirty days of the receipt
of intimation from the depository and on fulfillment of such conditions and on payment of such fees as may be
specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the
case may be.

Act 18 of 1891 to apply to depositories

Section 15 lays down that the Bankers’ Books Evidence Act, 1891 shall apply in relation to a depository as if it were
a bank as defined in section 2 of that Act.

Depositories to Indemnify Loss in certain cases

As per section 16, any loss caused to the beneficial owner due to the negligence of the depository or the
participant, would be indemnified by the depository to such beneficial owner. Where the loss due to the
negligence of the participant is indemnified by the depository, the depository has the right to recover the same
from such participant.
 84  Lesson 3 • EP-SLCM

POWERS OF THE SEBI

1. To Call for Information and Enquiry

Section 18 of the Act provides that the SEBI in the public interest or in the interest of investors may by order in
writing,-
• call upon any issuer, depository, participant or beneficial owner to furnish in writing such information
relating to the securities held in a depository as it may require; or
• authorise any person to make an enquiry or inspection in relation to the affairs of the issuer, beneficial
owner, depository or participant, who shall submit a report of such enquiry or inspection to it within
such period as may be specified in the order.
Sub-section (2) to Section 18 provides that every director, manager, partner, secretary, officer or employee of
the depository or issuer or the participant or beneficial owner shall on demand produce before the person
making the enquiry or inspection all information or such records and other documents in his custody having
a bearing on the subject matter of such enquiry or inspection.
2. To Give Directions
Section 19 provides that the SEBI, if after making or causing to be made an enquiry or inspection, the SEBI is
satisfied that it is necessary in the interest of investors or the securities market or to prevent the affairs of any
depository or participant being conducted in the manner detrimental to the interests of investors or the
securities market, it may issue such directions, –
(a) to any depository or participant or any person associated with the securities market; or
(b) to any issuer,
as may be appropriate in the interest of investors or the securities market.
The Board may, by order, for reasons to be recorded in writing, levy penalty under sections 19A, 19B, 19C, 19D,
19E, 19F, 19FA and 19G after holding an inquiry in the prescribed manner.

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 regulations made thereunder, to disgorge an amount equivalent to
the wrongful gain made or loss averted by such contravention.

3. To Make Regulations
Section 25 of the Act provides that the SEBI may, by notification in the Official Gazette, make regulations
consistent with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.
In particular, and without prejudice to the generality of the foregoing power, such regulations may provide
for—
• the form in which record is to be maintained;
• the form in which the certificate of commencement of business shall be issued;
 Lesson 3 • Depositories Act, 1996 85

• the manner in which the certificate of security shall be surrendered ;

• the manner of creating a pledge or hypothecation in respect of security owned by a beneficial owner;
• the conditions and the fees payable with respect to the issue of certificate of securities ;
• the rights and obligations of the depositories, participants and the issuers ;
• the eligibility criteria for admission of securities into the depository .
• the terms determined by the Board for settlement of proceedings ;
• any other matter which is required to be, or may be, specified by regulations or in respect of which
provision to be made by regulations.

PENALTIES AND ADJUDICATION

The SEBI may, by order, for reasons to be recorded in writing, levy, penalty after holding an inquiry in the prescribed
manner.

Sl No. Section Particulars

1. Section 19A Penalty for failure to furnish information, return, etc.

2. Section 19B Penalty for failure to enter into an agreement.

3. Section 19C Penalty for failure to redress investors’ grievances.

4. Section 19D Penalty for delay in dematerialisation or issue of certificate of securities.

5. Section 19E Penalty for failure to reconcile records.

6. Section 19F Penalty for failure to comply with directions issued by the SEBI under section 19 of the Act.

7. Section 19FA Penalty for failure to conduct business in a fair manner.

8. Section 19G Penalty for contravention where no separate penalty has been provided.

9. Section 19H Penalty for power to adjudicate.

10. Section 19I Factors to be taken into account by adjudicating officer while adjudging quantum of penalty.

11. Section 19-IA Settlement of Administrative Civil Proceedings.

12. Section 19-IB Recovery of amounts.

13. Section 19-IC Continuance of proceedings

14. Section 19J Crediting sums realised by way of penalties to Consolidated Fund of India.
 86  Lesson 3 • EP-SLCM

Penalties

Shall be liable to a penalty

which shall not be less PENALTY
than one lakh rupees but
which may extend to one
crore rupees.

shall be liable to a penalty which shall not be less than one lakh rupees
but which may extend to one lakh rupees for each day during which such
failure continues subject to a maximum of one crore rupees.

It shall be liable to penalty which shall not be

less than five crore rupees but which may extend
Penalty for failure to conduct to twenty-five crore rupees or three times the
business in a fair manner. amount of gains made out of such failure,
whichever is higher.

Adjudication
The adjudication procedure, Settlement of Administrative Civil Proceedings, Recovery of amounts, Continuance of
Proceedings, Crediting sums by way of Penalities to Consolidated fund of India, as mentioned under Section 19H to 19J of
the Depositories Act, 1996 are same as the adjudication procedure prescribed under the SEBI Act, 1992. (Lesson-2)

OFFENCES AND COGNIZANCE

Sl No. Section Particulars

1. Section 20 Offences

2. Section 21 Contravention by Companies

Lesson 3 • Depositories Act, 1996 87

3. Section 22 Cognizance of Offences by Courts

4. Section 22A Composition of certain Offences

5. Section 22B Power to grant immunity

6. Section 22C Establishment of Special Courts

7. Section 22D Offences triable by Special Courts

8. Section 22E Appeal and revision

9. Section 22F Application of Code to proceedings before Special Court

10. Section 22G Transitional Provisions

11. Section 23 Appeals

12. Section 23A Appeal to SAT

13. Section 23B Procedure and powers of Securities Appellate Tribunal

14. Section 23C Right to legal representation

15. Section 23 D Limitation

16. Section 23E Civil court not to have jurisdiction

17. Section 23F Appeal to Supreme Court

18. Section 23G Powers of Board not to apply to International Financial Services Centre

Offences
 88  Lesson 3 • EP-SLCM

Contravention by companies
Where a contravention of any of the Provided that nothing contained in Where a contravention of any of
provisions of this Act or any rule, this sub-section shall render any the provisions of this Act or any
regulation, direction or order made such person liable to any rule, regulation, direction or order
thereunder has been committed by punishment provided in this Act, if made thereunder has been
a company, every person who at the he proves that the contravention committed by a company and it is
was committed without his proved that the contravention has
time the contravention was
knowledge or that he had exercised been committed with the consent or
committed was in charge of, and was all due diligence to prevent the connivance of, or is attributable to
responsible to, the company for the commission of such contravention. any neglect on the part of, any
conduct of the business of the director, manager, secretary or
company, as well as the company, other officer of the company, such
shall be deemed to be guilty of the director, manager, secretary or
contravention and shall be liable to other officer shall also be deemed
be proceeded against and punished to be guilty of the contravention and
accordingly. shall be liable to be proceeded
against and punished accordingly.

Cognizance of offences by courts

Section 22 provides that no court shall take cognizance of any offence punishable under this Act or any rules
or regulations or bye-laws made there under, save on a complaint made by the Central Government or State
Government or the SEBI or by any person.

Composition of certain offences

Section 22A provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, any
offence punishable under this Act, not being an offence punishable with imprisonment only, or with
imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded
by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Miscellaneous provisions
The miscellaneous provisions from Section 22B to 23G as mentioned above in the table are same as the
provisions as prescribed under the SEBI Act, 1992.

POWER OF CENTRAL GOVERNMENT TO MAKE RULES

Section 24 of the Act provides that the Central Government may, by notification in the Official Gazette, make rules
for carrying out the provisions of this Act. In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters, namely :—
• the manner of inquiry under sub-section (1) of section 19H;
• the time within which an appeal may be preferred under sub-section (1) of section 23;
• the form in which an appeal may be preferred under sub-section (3) of section 23 and the fees payable in
respect of such appeal;
• the procedure for disposing of an appeal under sub-section (4) of section 23;
• the form in which an appeal may be filed before the Securities Appellate Tribunal under section 23A and the
fees payable in respect of such appeal.

In exercise of the powers conferred, the Central Government makes the Depositories (Procedure for Holding
enquiry and imposing penalties by adjudicating officer) Rules, 2005 for holding inquiry for the purpose of
imposing penalty under sections 19A to 19G of the Depositories Act.
 Lesson 3 • Depositories Act, 1996 89

POWER OF DEPOSITORIES TO MAKE BYE-LAWS

A depository shall, with the previous approval of the Board, make bye-laws consistent with the provisions of this
Act and the regulations. In particular, and without prejudice to the generality of the foregoing power, such bye-laws
shall provide for -
• the eligibility criteria for admission and removal of securities in the depository;
• the conditions subject to which the securities shall be dealt with;
• the eligibility criteria for admission of any person as a participant;
• the manner and procedure for dematerialisation of securities;
• the procedure for transactions within the depository;
• the manner in which securities shall be dealt with or withdrawn from a depository;
• the procedure for ensuring safeguards to protect the interests of participants and beneficial owners;
• the conditions of admission into and withdrawal from a participant by a beneficial owner;
• the procedure for conveying information to the participants and beneficial owners on dividend
declaration, shareholder meetings and other matters of interest to the beneficial owners;
• the manner of distribution of dividends, interest and monetary benefits received from the company among
beneficial owners;
• the manner of creating pledge or hypothecation in respect of securities held with a depository;
• inter se rights and obligations among the depository, issuer, participants, and beneficial owners;
• the manner and the periodicity of furnishing information to the Board, issuer and other persons;
• the procedure for resolving disputes involving depository, issuer, company or a beneficial owner;
• the procedure for proceeding against the participant committing breach of the regulations and provisions for
suspension and expulsion of participants from the depository and cancellation of agreements entered with
the depository;
• the internal control standards including procedure for auditing, reviewing and monitoring.

Where the SEBI considers it expedient so to do, it may, by order in writing, direct a depository to make any bye-laws
or to amend or revoke any bye-laws already made within such period as it may specify in this behalf.
If the depository fails or neglects to comply with such order within the specified period, the SEBI may make the bye-
laws or amend or revoke the bye-laws made either in the form specified in the order or with such modifications
thereof as the SEBI thinks fit.

SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 2018

The Depositories Act, 1996 requires that the registration of the depository, depository participant and the
custodian, is mandatory with the SEBI. These market intermediaries can function or commence business only
after registration from SEBI has been obtained and requisite fee paid to SEBI. The requirement of registration
is a continuing one and the moment the registration is cancelled or revoked or surrendered, the person shall
cease to act as such.
The SEBI, on October 3, 2018, notified the SEBI (Depositories and Participants) Regulations, 2018 (‘New DP
Regulations’), repealing the SEBI (Depositories and Participants) Regulations, 1996 (‘Old DP Regulations’)
introducing amendments largely related to structuring, shareholding and governance of depositories.
These regulations also contain provisions for operations and functioning of depositories, form for application and
certificates used and schedule of fees for participants, etc. It also contains provisions for registration of depository
and depository participants, rights and obligations of various users and constituents, inspection and procedure for
action in case of default.
 90  Lesson 3 • EP-SLCM

RECONCILIATION
Regulation 75 of SEBI (Depositories and Participants)Regulations, 2018 provides that the issuer or its agent shall
reconcile the records of dematerialised securities with all the securities issued by the issuer, on a daily basis, where
the State or the Central Government is the issuer of Government securities, the depository shall, on a daily basis,
reconcile the records of the dematerialised securities.

AUDIT UNDER SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 2018

Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018 provides that every issuer shall submit
audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company Secretary or a
qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital, listed capital and
capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and
the in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such
further issued capital.
The audit report is required to give the updated status of the register of members of the issuer and confirm that
securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer
and where the dematerialization has not been effected within the said stipulated period, the report would disclose
the reasons for such delay.
The issuer is under an obligation to immediately bring to the notice of the depositories and the stock exchanges, any
difference observed in its issued, listed, and the capital held by depositories in dematerialized form.

INTERNAL AUDIT OF OPERATIONS OF DEPOSITORY PARTICIPANTS

The two Depository service providers in India, viz., National Securities Depository Ltd. (NSDL) and Central
Depository Services (India) Limited (CDSL) have allowed Company Secretaries in whole-time practice to undertake
internal audit of the operations of Depository Participants (DPs).
NSDL amended its Bye Law 10.3.1 of Chapter 10 w.e.f. March 16, 2009 which reads as follow:
10.3.1 “Every Participant shall ensure that an internal audit in respect of its depository operations is conducted
at intervals of not more than six months by a qualified Chartered Accountant or a Company Secretary or a
Cost and Management Accountant, holding a Certificate of Practice and a copy of the internal audit report shall
be furnished to the Depository.”
CDSL has vide its letter dated September 28, 1999 notified amendment of its Bye Laws 16.3.1 as follows:
16.3.1 Every participant shall ensure that an internal audit shall be conducted in respect of the participant’s
operations relating to CDSL by a qualified Chartered Accountant in accordance with the provisions of the
Chartered Accountants Act, 1949, or by a Company Secretary in accordance with the provisions of the
Company Secretaries Act, 1980 or by a Cost Accountant in accordance with the provisions of the Cost and
Works Accountants Act, 1959; in practice, at such intervals as may be specified by CDSL from time to time. A
copy of Internal Audit report shall be furnished to CDSL.
Checklist of Internal Audit of Operations of Depository Participants
• Account opening
• Reporting to BOs
• Dematerialisation of Securities
• Rematerialisation of Securities
• Market Trades
• Off Market Trades
• Transmission
• Returns to Depository
• Grievance Redressal Mechanism
 Lesson 3 • Depositories Act, 1996 91

• Collateral Security
• Assignment of Business
• Freezing of Account
• Closure of Account
• Pledge and Hypothecation
• Invocation of Pledge/Hypothecation by Pledgee
• Lending and Borrowing of Securities
• Records to be Maintained by DPs
• Disclosure and Publication of Information
• Supervision by DP
• Code of Ethics for DPs
• Branch of Depository Participants

CONCURRENT AUDIT
National Securities Depository Limited vide its Circular No. NSDL/POLICY/ 2006/0021 dated June 24, 2006
provides for concurrent audit of the Depository Participants. The Circular provides that w.e.f. August 1, 2006, the process
of demat account opening, control and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
Depository Participants have been advised to appoint a firm of qualified Chartered Accountant(s) or Company
Secretary(ies) holding a certificate of practice for conducting the concurrent audit. However, the participants in
case they so desire, may entrust the concurrent audit to their Internal Auditors. In respect of account opening, the
auditor should verify all the documents including KYC documents furnished by the Clients and verified by the
officials of the Participants. The scope of concurrent audit with respect to control and verification of DIS cover the
areas given below:
(I) Issuance of DIS
The procedure followed by the participants with respect to:
(a) Issuance of DIS booklets including loose slips.
(b) Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique pre- printed
serial numbers.
(c) Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

(II) Verification of DIS

The procedure followed by the Participants with respect to:
(a) Date and time stamping (including late stamping) on instruction slips.
(b) Blocking of used/reported lost/stolen instruction slips in back office system/ manual record.
(c) Blocking of slips in the back office system/manual record which are executed in DPM directly.
(d) Two step verification for a transaction for more than Rs. 5 lakh, especially in case of off transactions.
(e) Instructions received from dormant accounts.
The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued and controls on DIS
as mentioned above, during the day, by the next working day. In case the audit could not be completed within the
next working day due to large volume, the auditor should ensure that the audit is completed within a week’s time.
Any deviation and/or non-compliance observed in the aforesaid areas should be mentioned in the audit report of
the Concurrent Auditor. The Management of the Participant should comment on the observations made by the
Concurrent Auditor. The Concurrent Audit Report should be submitted to NSDL, on a quarterly basis, in a hard copy
form. If the Auditor for Internal and Concurrent Audit is the same, consolidated report may be submitted.
 92  Lesson 3 • EP-SLCM

ROLE OF COMPANY SECRETARY

• Right to Legal Representation (Section 23C): In case of any decision of the SEBI, the aggrieved entity/
company (the appellant) may either appear in person or authorise one or more chartered accountants or
company secretaries (PCS) or cost accountants or legal practitioners or any of its officers to present his or its
case before the Securities Appellate Tribunal (SAT).
• Internal Audit of Depository Participants: The 2 (two) Depository services providers in India, viz., National
Securities Depository Ltd. (NSDL) and Central Depository Services (India) Limited (CDSL) have allowed
Company Secretaries in whole-time practice to undertake internal audit of the operations of Depository
Participants (DPs).
• Reconciliation of Share Capital Audit: Company Secretary is authorised to issue quarterly certificate with
regard to reconciliation of the total issued capital, listed capital and capital held by depositories in
dematerialized form, details of changes in share capital during the quarter, and in-principle approval obtained
by the issuer from all the stock exchanges where it is listed in respect of such further issued capital under
SEBI (Depositories and Participants) Regulations, 2018. [Regulation 76 of SEBI (Depositories and Participants)
Regulations, 2018]
• Concurrent Audit of Depository Participants: Practising Company Secretary is authorized to carry out
concurrent audit of Depository Participants which covers audit of the process of demit account opening,
control and verification of Delivery Instruction Slips (DIS).

CASE LAW
31.03.2020 Jaypee Capital Services Ltd (Noticee) vs. SEBI Whole Time Member, Securities and
Exchange Board of India
Facts of the Case
Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate of Registration as
a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee) in accordance with provisions of
SEBI (Depositories and Participants) Regulations, 1996 (DP Regulations) initially for a period of five years which
was valid from August 11, 2006 to August 10, 2011. The certificate of registration was, thereafter, renewed in
2011 for a further period of five years and the renewed certificate was valid till August 10, 2016.
SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited (hereinafter
referred to as ‘CDSL’) informing that it has terminated the agreement with the Noticee w.e.f April 04, 2016
due to non- compliance on the part of JCSL with the bye-laws of CDSL. CDSL vide the said letter also
requested SEBI to cancel the certificate of registration granted to the Noticee at act as a Depository
Participant with immediate effect. Thereafter, National Securities Depositories Limited (hereinafter
referred to as “NSDL”) vide its letter dated April 22, 2016 informed SEBI that it has also terminated the
agreement with JCSL w.e.f May 23, 2016 due to the non-compliance on part of JCSL with the various bye-
laws of NSDL.
Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was alleged that the
Noticee was no longer eligible to be admitted as a participant of depository and had failed to inform SEBI about
the termination of its agreements with CDSL and NSDL.
Order
The failure on the part of the Noticee to inform SEBI of the termination of the agreement by the depositories
would have to be considered as a violation of Clause 14 of the Code of Conduct for the DPs.
SEBI, in exercise of powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992
read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, cancelled the certificate of
registration granted to the Noticee / Jaypee Capital Services Limited (SEBI Registration No. IN-DP-
NSDL-291-2008/IN-DP- CDSL-368- 2006) with immediate effect.
Lesson 3 • Depositories Act, 1996 93

LESSON ROUND-UP

• The legal framework for depository system in the Depositories Act, 1996 provides for the establishment
of single or multiple depositories.
• There are two Depositories functioning in India, namely the National Securities Depository Limited
(NSDL) and the Central Depository Services (India) Limited (CDSL).
• All the securities held by a depository are dematerialized and are in a fungible form.
• In the depository system, the ownership and transfer of securities takes place by means of electronic book
entries.
• A Depository Participant (DP) is the representative (agent) of the investor in the depository system
providing the link between the Company and investor through the Depository.
• The Depository Act, 1996 and SEBI (Depositories and Participants) Regulations, 2018 regulates the
function of Depositories and participants.
• Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018 provides that every issuer shall
submit audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company
Secretary or a qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital,
listed capital and capital held by depositories in dematerialized form, the details of changes in share
capital during the quarter and the in-principle approval obtained by the issuer from all the stock exchanges
where it is listed in respect of such further issued capital.
• Both the Depositories in India have allowed Practising Company Secretaries to undertake internal audit
of the operations of Depository Participants (DPs).
• Depository Participants are subject to concurrent audit by a Practising Company Secretary or qualified
Chartered Accountant. Concurrent Audit includes audit of process of demat account opening, control and
verification of delivery instruction slips.

GLOSSARY

Beneficial The true owner of a security or property, which may be registered in another
owner (BO) name means a person whose name appears as such on the records of the depository.
ISIN International Securities Identification Number (ISIN) is a code that uniquely identifies a
specific security, which is allocated at the time of admitting the same in the depository system.
Joint Account It means a bank or a demat account in the names of more than one person (maximum three
in case of a demat account). All the account holders must give their signature to operate a
demat account held jointly.
Pledge Any person having a demat account can pledge securities against loan / credit facilities
extended by a pledgee, who too has a demat account with a DP.
RRN A system generated unique number when a remat request is set up.
Transmission Transmission of securities denotes a process by which ownership of securities is transferred to
a legal heir or to some other person by operation of law. In case of transmission transfer deed
and stamp duty are not required.
94  Lesson 3 • EP-SLCM

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Briefly outline the concept of Depository system in India.
2. “The holding of securities in dematerialise form is not mandatory”. Explain the relevant provisions with
reference to the Depositories Act.
3. Enumerate the enquiry, inspection and penalties under the Depositories Act, 1996.
4. Elucidate the procedure for dematerialisation of shares.
5. ‘‘Depository is to indemnify loss caused to the beneficial owner due to the negligence of the depository or
the depository participant’’. Examine
6. Depository participant provides link between the company and investors. Comment
7. Briefly explain the role of a Practising Company Secretary in concurrent audit of depository participants.
8. Write short note on:
(a) Fungibility
(b) Models of Depository
(c) Internal Audit of Depository Participants
(d) Concurrent Audit
(e) Rematerialisation
(f) Reconciliation of share capital under Regulation 75 of the SEBI (Depositories and Participants)
Regulations, 2018.

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI FAQs
• Depositories Bye-Laws
• SEBI Annual Reports
• SEBI Monthly Bulletin

OTHER REFERENCES (Including Websites/Video Links)

• [Link]
• [Link]
• [Link]
 An Overview of SEBI (Issue
of Capital and Disclosure
Lesson 4 Requirements) Regulations, 2018

Key Concepts One Learning Objectives

Should Know
To understand:
• Primary & • Evolution of SEBI (Issue of Capital and Disclosure Requirements)
Secondary Markets Regulations, 2015
• Initial Public Offer • Conceptual understanding of important terminologies
• Further Public • Various types of issues in capital market
Offer
• Modes of raising funds and compliance requirements
• Private Placement
• Key Provisions like Draft offer letter, prospectus etc.
• Preferential • Eligibility requirements for issuing various instruments
Allotment
• Lock-in-period and its requirements
• Warrants
• Fast-track issue
• Intermediaries
• Regulatory requirements for IPO of Indian Depository Receipts
• Lead Manager
• Regulatory framework for IPO by Small and Medium Enterprises
• Underwriting • Provisions for listing on Innovators Growth Platform
• Offer Document
• Qualified
Institutional Buyer Lesson Outline
• Retail Individual • Introduction • Rights Issue
Investor • Genesis • Preferential Issue
• Application • Types of Issues • Qualified Institutions Placement
Supported by • Applicability of the SEBI (Issue • Initial Public Offer of Indian
Blocked Amount of Capital and Disclosure Depository Receipts
(ASBA) Requirements) Regulations, 2018 • Rights Issue of Indian
• Book Building • Meaning of Draft Offer Depository Receipts
Document, Letter Of Offer and • Initial Public Offer by Small and
• Innovators Growth Red Herring Prospectus Medium Enterprises
Platform • Initial Public Offer/Further • Innovators Growth Platform
• Selling Public Offering
• Bonus Issue
shareholders • Eligibility requirements to be
• Power to Relax Strict
complied with for IPO
Enforcement of the Regulations
• Eligibility criteria for Further
• Procedure for issue of securities
Public Offer (FPO)
• Role of Company Secretary
• Promoters’ Contribution
• LESSON ROUND-UP
• Lock-in Requirements
• GLOSSARY
• Other requirements for IPO &
FPO • TEST YOURSELF
• Fast Track FPO • LIST OF FURTHER READINGS
• Exit Opportunity to Dissenting • OTHER REFERENCES
Shareholders
 96  Lesson 4 • EP-SLCM

Regulatory Framework
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• Securities Contracts (Regulation) Rules, 1957

INTRODUCTION
Management of a public issue involves co-ordination of activities and co-operation of a number of agencies such
as managers to the issue, underwriters, brokers, registrar to the issue, solicitors/legal advisors, printers, publicity
and advertising agents, financial institutions, auditors and other Government/Statutory agencies such as Registrar
of Companies, Reserve Bank of India, SEBI etc. The whole process of issue of shares can be divided into two parts
(i) pre-issue activities and (ii) post issue activities. All activities beginning with the planning of capital issue till
the opening of the subscription list are pre-issue activities while, all activities subsequent to the opening of the
subscription list may be called post issue activities. As the demat shares are being admitted for dealings on the
stock exchanges, the securities can be issued only with the purpose of allotting the shares in Dematerialised form.
GENESIS
India ushered from a merit based regime (Controller of Capital Act) to disclosure based regime under SEBI. Under
Controller of Capital Issues (CCI) issue size and price were approved by CCI after examining the various parameters/
ratios. With the repeal of Capital Issues (Control) Act, 1947 all the guidelines, notifications, circulars etc. issued by
the office of the Controller of Capital Issues became defunct. The SEBI was given the mandate to regulate issuance of
securities, namely the guidelines for Disclosure and Investor Protection, 1992. Later, the SEBI issued a compendium
containing consolidated Guidelines, circulars, instructions relating to issue of capital effective from January 27,
2000. The compendium titled the SEBI (Disclosure and Investor Protection) Guidelines, 2000 replaced the original
Guidelines issued in June 1992 and clarifications thereof. On August 26, 2009 the SEBI rescinded the SEBI (DIP)
Guidelines, 2000 and notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
To align the provisions under ICDR Regulations with Companies Act, 2013 and allied regulations, SEBI issued a
consultation paper detailing the suggestive changes under various fund-raising options by listed issuers. Between
2009-till date, numerous amendments have been made to the ICDR Regulations. Different types of offerings to
raise funds in the primary market have been introduced. Further, there have been changes in market practices and
regulatory environment over a period of time. A need was thus felt to review and realign the ICDR Regulations
with these developments and to ensure that they reflect the best practices adopted globally. In view of the same,
the SEBI constituted the Issue of Capital & Disclosure Requirements Committee (“ICDR Committee”) under the
Chairmanship of Shri Prithvi Haldea in June, 2017, to review the ICDR Regulations with the following objectives:
a) To simplify the language and complexities in the regulations;
b) To incorporate changes/new requirements which have occurred due to change in market practices and
regulatory environment; and
c) To make the regulations more readable and easier to understand.

ICDR Committee Suggestions

The ICDR Committee suggested certain policy changes. These suggestions were also taken to the Primary Market
Advisory Committee (PMAC) of the SEBI which comprises of eminent representatives from the Ministry of Finance,
Industry, Market Participants, academicians, the Institute of Chartered Accountants of India and the Institute of
Company Secretaries of India. The recommendations of the PMAC were incorporated in the draft of the proposed
ICDR Regulations. In addition to the public consultation, the draft regulations along with the key policy changes
were also forwarded to the Ministry of Finance (MoF), Ministry of Corporate Affairs (MCA) and the Reserve Bank
of India (RBI) for their comments. The provisions of Companies Act, 1956 (wherever applicable), Companies Act,
2013, the SEBI (Substantial Acquisition & Substantial Takeover) Regulations, 2011, the SEBI (Share Based Employee
Benefits) Regulations, 2014 have been suitably incorporated.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 97

SEBI vide its notification dated 11th September, 2018 issued the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018 (‘ICDR Regulations, 2018’) which was effective from 60th day of its
publication in Official Gazette.

Chapter as per ICDR Regulations, 2018 Particulars

I. Preliminary
II. Initial Public Offer (IPO) on Main Board
III. Right Issue
IV. Further Public Offer
V. Preferential Issue
VI. Qualified Institutions Placement
VII. IPO of Indian Depositary Receipts (IDR)
VIII. Rights Issue of IDR
IX. IPO by Small and Medium Enterprises (SME)
X. Innovators Growth Platform (IGP)
XI. Bonus Issue
XI-A. Power to Relax Strict Enforcement of the Regulations
XII. Miscellaneous

TYPES OF ISSUES

Initial Further
Public Offer Public Offer

Qualified
Institutional
Placement
Types of Bonus
Issues Issue

Preferential
Issue
Rights Issue
of Securities
Private
Placement

Primary Market deals with those securities which are issued to the public for the first time. Primary Market provides
an opportunity to issuers of securities, Government as well as corporates, to raise financial resources to meet their
requirements of investment and/or discharge their obligations.
The following are the various types of issues in the capital market -
• Initial Public Offer: It means an offer of specified securities by an unlisted issuer to the public for subscription
and includes an offer for sale of specified securities to the public by any existing holder of such securities in
an unlisted issuer. In order to qualify as an Initial public offer, the offer of securities must be by an unlisted
issuer company and such an issue shall be made to the public and not to the existing shareholders of the
unlisted issuer company.
 98  Lesson 4 • EP-SLCM

• Further Public Offer (FPO): It is an offer of specified securities by a listed issuer company to the public for
subscription. In other words, another issue to the public other than its existing shareholders or to a select
group of persons by the listed persons is referred to as a Further Public offer.
• Rights Issue: Rights issue of securities is an issue of specified securities by a company to its existing
shareholders as on a record date in a predetermined ratio.
• Preferential Allotment: It refers to an issue, where a listed issuer issues shares or convertible securities,
to a select group of persons on a private placement basis it is called a preferential allotment. The issuer is
required to comply with various provisions which inter alia include pricing, disclosures in the notice, lock in
etc., in addition to the requirements specified in the Companies Act, 2013.
• Qualified Institutional Placement (QIP): It refers to an issue by a listed entity to only qualified institutional
buyers in accordance of Chapter VI of the SEBI (ICDR) Regulations, 2018.
• Bonus Issue: Bonus issue of shares means additional shares issued by the Company to its existing shareholders
to reward for their royalty and is an opportunity to enhance the shareholders wealth. The bonus shares are
issued without any cost to the Company by capitalizing the available reserves.

APPLICABILITY OF THE SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS)

REGULATIONS, 2018 [REGULATION 3]

RS. 50 crore or more

MEANING OF DRAFT OFFER DOCUMENT, LETTER OF OFFER AND RED HERRING PROSPECTUS
Draft Offer Documents

“Draft Offer document” means the offer document in draft stage. The draft offer documents are filed with the SEBI,
at least 30 days prior to the filing of the Offer Document with ROC/Stock Exchanges. The SEBI may specify changes,
if any, in the Draft Offer Document and the Issuer or the Lead Merchant banker shall carry out such changes in the
draft off document before filing the Offer document with ROC/SEs. The Draft Offer document is available on the
SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with the SEBI.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 99

Offer Document
“Offer document” means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a right
issue, which is filed with Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the
relevant information to help an investor to make his/ her investment decision.
Red Herring Prospectus (RHP)
“Red Herring Prospectus” is a prospectus, which does not have details of either price or number of shares being
offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper
and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares
are determined later. An RHP for an FPO can be filed with the ROC without the price band and the issuer, in such a
case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue.
In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding
process is completed. Hence, such details are not shown in the RHP filed with ROC as per the Companies Act, 2013.
Only on completion of the bidding process, the details of the final price are included in the offer document. The offer
document filed thereafter with ROC is called a prospectus.

INITIAL PUBLIC OFFER / FURTHER PUBLIC OFFER

A public issue of specified securities by an issuer can be either an Initial Public Offer (IPO) or a Further Public Offer
(FPO). An IPO is done by an unlisted issuer while a FPO is done by a listed issuer. As per the ICDR Regulations, the
issuer shall comply with the following conditions before making an IPO of specified securities. The conditions need
to be satisfied both at the time of filing the draft offer document (commonly referred to as the Draft Red Herring
Prospectus) and the time of registering or filing the final offer document (commonly referred to as the Prospectus)
with the Registrar of Companies.

ELIGIBILITY REQUIREMENTS TO BE COMPLIED WITH FOR IPO

Entities not eligible to make an initial public offer [Regulation 5(1) & (2)]

a) If the issuer, any of its promoters, promoter

group, selling shareholders* are debarred from
ENTITIES NOT ELIGIBLE TO MAKE AN IPO

accessing the capital market by the SEBI.

b) If any of the promoters or directors of the

issuer is a promoter or a director of any other
company

c) If the issuer or any of its promoters or directors

is a willful defaulter.

d) If any of the promoters or directors of the

issuer is a fugitive offender.

e) If there are any outstanding convertible securities or any

other right which would entitled any person with any
option to receive equity shares of the issuer.

Note: The restrictions under (a) and (b) above shall not apply to the persons or entities mentioned therein, who were
debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the draft offer
document with the SEBI.

* “selling shareholder(s)” means any shareholder of the issuer who is offering for sale the specified securities in
a public issue in accordance with these Regulations.
 100  Lesson 4 • EP-SLCM

Non applicability of Regulation 5(1) & (2)

Eligibility requirements for an initial public offer [Regulation 6(1) & 6(2)]
An issuer shall be eligible to make an IPO only if:
a. the issuer has net tangible assets of atleast Rs. 3 crores, calculated on a restated and consolidated basis, in
each of the preceding three full years of (12 months each) of which not more than 50% is held in monetary
assets.
However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or
made firm commitments to utilize such excess monetary assets in its business or project. This limit of 50%
shall not apply in case of IPO is made entirely through an offer for sale.
b. the issuer has an average operating profit of at least Rs.15 crores, calculated on a restated and consolidated
basis, during the three preceding 3 years, with operating profit in each of the three preceding years;
c. the issuer has a networth of atleast Rs.1 crore in each of the preceding three full years, calculated on a restated
and consolidated basis.
In case the issuer has changed its name within the last one year, atleast 50% of the revenue calculated on
a restated and consolidated basis, for the preceding one full year has been earned by it from the activity
indicated by the new name.
In case the Eligibility conditions are not met-
An issuer not satisfying the above-mentioned conditions shall be eligible to make an initial public offer only if the
issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to
qualified institutional buyers (QIBs) and to refund the full subscription money if it fails to do so.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 101

Eligibility Criteria for Main Board Listing as per SEBI (ICDR), 2018

Option I Net Tangible Assets of at Average operating Net worth of at least Rs.
least Rs. 3 crores (for past profit of Rs. 15 crores in 1 crore in each of the
Net tangib assets,
3 years) Not more than preceding three years (of preceding 3 full years
profitability and net worth = + twelve months each), with +
50% in monetary assets
track record
operating profit in each of
these preceding three years

Option II Issue through book If QIB part is not

building route with at subscribed, the issue
No net tangible assets, least 75% allotted to will fail even if it is
profitability and net = QIBs + oversubscribed on
worth track record overall basis

The above eligibility conditions are explained by the following Example:

Eligibility Condition No: 1
In case the issuer is proposing to file its draft offer document with the SEBI in August 2018, then the net tangible
assets for the last 3 full years of 12 months each shall be atleast Rs.3 crores and not more than 50% of the same
shall be held in monetary assets. In the following table, it is seen that the net tangible assets is more than Rs.
3 crores in the year ended March 31, 2014, March 31, 2015 and March 31, 2016. Further monetary assets
constitute less than 50% of the net tangible assets in each of the three previous financial years:
(Rs. in lacs)

Year Ended March 31 2014 2015 2016 2017 2018

Net Tangible Assets 1448.56 2275.53 2532.60 3510.33 4657.50
Monetary Assets 292.76 61.97 108.25 302.33 288.17
Monetary Assets as a percentage 20.21 2.72 4.27 8.61 6.19
of Net Tangible Assets
“Net Tangible Assets” mean the sum of all net assets of the issuer, excluding intangible assets as defined in
Accounting Standard 26 (AS 26) or Indian Accounting Standard (Ind AS) 38, as applicable, issued by the Institute
of Chartered Accountants of India.
Eligibility Condition No: 2
In case the issuer proposes to file its draft offer document with the SEBI in August 2018, then the average
operating profit for three preceding years shall be atleast Rs 15 crores. Further, the company shall have
operating profit in each of the three years. The average of the profits for the 3 preceding years is Rs.15.75 crores
which is more than the prescribed average of Rs.15 crores.
(Rs. in lacs)

Year Ended March 31 2016 2017 2018

Operating Profit 1630.31 1232.65 1864.63
 102  Lesson 4 • EP-SLCM

Eligibility Condition No: 3

In case the issuer proposes to file its draft offer document with the SEBI in August 2018 then the networth shall
be atleast Rs. 1 crore in each of the last 3 financial years. In the following table, it is seen that the company has
a networth of Rs. 1 crore in each of the last three financial years prior to the date of the filing of the draft offer
document with the SEBI.
(Rs. in lacs)

Year Ending March 31 2014 2015 2016 2017 2018

Equity Share Capital 1448.56 2000.00 2000.00 2000.00 2022.00
Share Application Money 0.00 0.00 0.00 0.00 165.00
Reserves & Surplus 0.00 304.52 590.02 1430.47 2742.71
Total 1448.56 2304.52 2590.02 3595.47 4764.71
Less : Misc. Expenses not
0.00 0.00 0.00 0.00 0.00
written off
Less: Deferred Tax Assets 0.00 0.00 13.45 0.00 61.08
Net worth 1448.56 2304.52 2576.57 3595.47 4703.63

Since the all the above eligibility conditions are satisfied in the example and there is no change in the name of
the company, this company is eligible to make an Initial Public Offering.
However, in case an issuer does not satisfy the eligibility conditions stipulated above, it may make an Initial
Public Offer through the book building process and further undertake to allot atleast 75% of the net offer to
the public to qualified institutional buyers and to refund full subscription money if it fails to do so. [Regulation
6(2)]

General Conditions [Regulation 7]

• An issuer making an initial public offer shall ensure that:
a) it has made an application to one or more stock exchanges to seek an in-principle approval for listing
of its specified securities on such stock exchanges and has chosen one of them as the designated stock
exchange;
b) it has entered into an agreement with a depository for dematerialisation of the specified securities
already issued and proposed to be issued;
c) all its specified securities held by the promoters are in dematerialised form prior to filing of the offer
document;
d) all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited;
e) it has made firm arrangements of finance through verifiable means towards 75% of the stated means
of finance for a specific project proposed to be funded from the issue proceeds, excluding the amount
to be raised through the proposed public issue or through existing identifiable internal accruals.
• The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document
and the offer document shall not exceed 25% of the amount being raised by the issuer.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 103

Explanation:
(i) “Project” means the object for which monies are proposed to be raised to cover the objects of the issue.
(ii) Partnership Firms
In case of an issuer which had been a partnership firm or a limited liability partnership, the track record of
distributable profit of the partnership firm or the LLP shall be considered only if the financial statements of the
partnership business for the period during which the issuer was a partnership firm conform to and are revised in
the format prescribed for companies under the Companies Act, 2013 and also comply with the following:
(a) adequate disclosures are made in the financial statements as required to be made in the format prescribed
under the Companies Act, 2013;
(b) the financial statements are duly certified by a Chartered Accountant stating that:
(i) the accounts and the disclosures made are in accordance with the provisions of Schedule III of the
Companies Act, 2013
(ii) the accounting standards of the Institute of Chartered Accountants of India have been followed;
(iii) the financial statements present a true and fair view of the firm’s accounts.

(iii) Spinning off of a division

In case of an issuer formed out of a division of an existing company, the track record of distributable profits of
the division spun-off shall be considered only if the requirements regarding financial statements as provided for
partnership firms and LLPs are complied with.

Additional conditions for an offer for sale [Regulation 8]

Shares must be fully paid-up.

Shall be held by the sellers for a period of at least one year

prior to the filing of the draft offer document.

The holding period of such convertible securities, including depository

receipts, as well as that of resultant equity shares together shall be
considered for the purpose of calculation of one year period.

In case the equity shares received Further, such holding period of one year shall be required
on conversion or exchange of fully to be complied with at the time of filing of the draft offer
paid-up compulsorily convertible document.
securities including depository
receipts are being offered for sale

If the equity shares arising out of the conversion or exchange of the fully paid-up
compulsorily convertible securities are being offered for sale, the conversion or exchange
should be completed prior to filing of the offer document (i.e. red herring prospectus in the
case of a book built issue and prospectus in the case of a fixed price issue), provided full
disclosures of the terms of conversion or exchange are made in the draft offer document.
 104  Lesson 4 • EP-SLCM

The requirement of holding equity shares for a period of one year shall not apply:

Non-Applicability

The offer for sale of a government company or statutory authority or corporation

or any special purpose vehicle set up and controlled by any one or more of them,
which is engaged in the infrastructure sector;

Equity shares offered for sale were acquired pursuant to any scheme approved by a High Court
under the sections 391 to 394 of Companies Act, 1956, or approved by a tribunal or the Central
Government under the sections 230 to 234 of Companies Act, 2013, as applicable, in lieu of
business and invested capital which had been in existence for a period of more than one year
prior to approval of such scheme;

If the equity shares offered for sale were issued under a bonus issue on securities held for a
period of at least one year prior to the filing of the draft offer document with the SEBI and
further subject to the following:

Such specified securities being issued out of

free reserves and share premium existing in the Such equity shares not being issued by utilisation
books of account as at the end of the financial of revaluation reserves or unrealized profits of the
year preceding the financial year in which the AND issuer.
draft offer document is filed with SEBI;

Issue of Warrants [Regulation 13]

An issuer shall be eligible to issue warrants in an initial public offer subject to the following:

Tenure of such warrants shall not exceed eighteen In case the warrant holder does not exercise the
months from the date of their allotment in the option to take equity shares against any of the
initial public offer warrants held by the warrant holder, within three
months from the date of payment of consideration,
such consideration made in respect of such
warrants shall be forfeited by the issuer

Eligibility

Price or formula for determination of exercise A specified security may have one or more
price of the warrants shall be determined upfront warrants attached to it
and disclosed in the offer document and atleast
25 % of the consideration amount based on the
exercise price shall also be received upfront
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 105

In case the exercise price of warrants is based on a formula, 25 % consideration amount based on the cap price of
the price band determined for the linked equity shares or convertible securities shall be received upfront.

ELIGIBILITY CRITERIA FOR FURTHER PUBLIC OFFER (FPO)

Entities not eligible to make a FPO [Regulation 102]
An issuer shall not be eligible to make a FPO of specified securities:

(a) If the issuer, any (b) If any of the (C) If the issuer or (d) If any of the
of its promoters, promoters or any of its promoters promoters or
promoter group or directors of the or directors is a directors of the
directors, selling issuer is a promoter willful defaulter issuer is a fugitive
shareholders are or a director of any offender
debarred from other company
accessing the capital which is debarred
market from accessing
capital market by the
SEBI

Note : The restrictions under (a) and (b) above shall not apply to the persons or entities mentioned therein, who
were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the
draft offer document with the SEBI.
Eligibility requirements for FPO [Regulation 103]
• An issuer may make a FPO if it has changed its name within the last one year and atleast 50% of the revenue
in the preceding one full year has been earned from the activity suggested by the new name.
• If an issuer does not satisfy the above-mentioned condition, it may make a FPO only, if, the issue is made
through the book-building process and the issuer undertakes to allot at least 75% of the net offer, to qualified
institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to
qualified institutional buyers.
General Conditions for FPO [Regulation 104]
An issuer making an FPO shall ensure that:

An application is made for listing of the specified securities to one or more of the recognized
stock exchanges and choose one of the exchanges as the designated stock exchange.

An agreement is entered into with a depository for dematerialization of specified

securities already issued and proposed to be issued.

All its existing partly paid up equity shares have either been fully paid up or have been
forfeited. In other words, if a company has partly paid up equity shares, they shall not be
permitted to make a public issue

The issuer should make firm arrangements of finance through verifiable means towards
75% of the stated means of finance for the specific project proposed to be funded from
the issue proceeds, excluding the amount to be raised through the proposed public issue
or through existing identifiable internal accruals.

Amount for General Corporate Purposes as mentioned in objects of the issue in the draft
offer document and the offer document shall not exceed 25% of the amount being raised
by the issuer.
 106  Lesson 4 • EP-SLCM

Issue of Warrants [Regulation 111]

An issuer shall be eligible to issue warrants in a further public offer subject to the following conditions:
• the tenure of such warrants shall not exceed eighteen months from the date of their allotment in the public
issue;
• a specified security may have one or more warrants attached to it;
• the price or formula for determination of exercise price of the warrants shall be determined upfront and at
least 25% of the consideration amount based on the exercise price shall also be received upfront. However, in
case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price
of the price band determined for the linked equity shares or convertible securities shall be received upfront.
• in case the warrant holder does not exercise the option to take equity shares against any of the warrants held
by the warrant holder, within three months from the date of payment of consideration, such consideration
made in respect of such warrants shall be forfeited by the issuer.

PROMOTERS’ CONTRIBUTION
In Case of IPO [Regulation 14]

The promoters of the issuer shall hold at least 20% of the post-issue capital.
However, in case the post-issue shareholding of the promoters is less than 20%., alternative investment funds
or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance
companies registered with IRDA may contribute to meet the shortfall in minimum contribution as specified for the
promoters, subject to a maximum of ten percent of the post-issue capital without being identified as promoter(s).
Non applicability
The requirement of minimum promoters’ contribution shall not apply in case an issuer does not have any identifiable
promoter.

Minimum Promoters’ Contribution

The minimum promoters’ contribution shall be as follows:

Promoters shall contribute 20%., as the case may be, either by way of equity shares including SR equity
shares held, if any, or by way of subscription to convertible securities.
If the price of the equity shares allotted pursuant to conversion is not pre-determined and not disclosed in
the offer document, the promoters shall contribute only by way of subscription to the convertible securities
being issued in the public issue and shall undertake in writing to subscribe to the equity shares pursuant to
conversion of such securities.

For issue of convertible securities which are For initial public offer of convertible debt
convertible or exchangeable on different dates and instruments without a prior public issue of
if the promoters’ contribution is by way of equity equity shares
shares (conversion price being pre-determined)
the promoters shall bring in a contribution of at least
such contribution shall not be at a price lower than 20% of the project cost in the form of equity shares,
the weighted average price of the equity share capital subject to contributing at least 20% of the issue size
arising out of conversion of such securities. from their own funds in the form of equity shares
However, if the project is to be implemented in stages, the promoters’ contribution shall be with respect to total
equity participation till the respective stage vis-à-vis the debt raised or proposed to be raised through the public
issue.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 107

Promoters’ Contribution to be brought in before Public Issue Opens [Regulation 14(4)]

• Timing: The promoters shall bring full amount of the promoters’ contribution including premium at least
one day prior to the date of opening of the issue. In case the promoters have to subscribe to equity shares or
convertible securities towards minimum promoters’ contribution, the amount of promoters’ shall be kept in
an escrow account with a scheduled commercial bank, which shall be released to the issuer along with the
release of the issue proceeds. However, where the promoters’ contribution has already been brought in and
utilised, the issuer shall give the Cash flow statement disclosing the use of such funds in the offer document.
• Pro-rata basis: Where the minimum promoters’ contribution is more than Rs.100 crore and the initial public
offer is for partly paid shares, the promoters shall bring in at least Rs.100 crore before the date of opening
of the issue and the remaining amount may be brought on a pro-rata basis before the calls are made to the
public.
Promoters’ contribution shall be computed on the basis of the post-issue expanded capital:
(a) assuming full proposed conversion of convertible securities into equity shares;
(b) assuming exercise of all vested options, where any employee stock options are outstanding at the time
of initial public offer.

Securities Ineligible for Minimum Promoters’ Contribution [Regulation 15]

For the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:

(a) Specified securities acquired during the preceding three years, if (b) specified securities acquired by
these are:- promoters and AIFs/ FVCIs / scheduled
• acquired for consideration other than cash and revaluation of commercial banks/ PFIs/ insurance
assets or capitalisation of intangible assets is involved in such companies during the preceding one
transaction; or year at a price lower than the price
• resulting from a bonus issue by utilisation of revaluation reserves at which specified securities are being
/unrealised profits of the issuer/from bonus issue against equity
offered to public in the initial public offer.
shares which are ineligible for minimum promoters’ contribution.

(c) promoters and AIFs during the preceding one year at a price less
than the issue price, against funds brought in by them during that period,
in case of an issuer formed by conversion of one or more partnership (d) specified securities pledged with any
firms/LLPs, where the partners of the erstwhile partnership firms/ creditor.
LLPs are the promoters of the issuer and there is no change in the
management. *

* In clause (c), specified securities, alloted to promoters against capital existing in such firms for a periodof
more than one year on a continuous basis, shall be eligible.
However, Clause (b) shall not apply:
• if the promoters and AIFs, as applicable pay to the issuer, the difference between the price at which specified
securities are offered in the initial public offer and the price at which the specified securities had been
acquired;
• if such specified securities are acquired in terms of the scheme under section 391 to 394 of the Companies
Act, 1956 or sections 230-240 of the Companies Act, 2013, as approved by a High Court or a tribunal or the
Central Government, as applicable, by promoters in lieu of business and invested capital that had been in
existence for a period of more than one year prior to such approval;
 108  Lesson 4 • EP-SLCM

• to an initial public offer by a government company, statutory authority or corporation or any special purpose
vehicle set up by any of them, which is engaged in infrastructure sector;
Specified securities referred above shall be eligible for the computation of promoters’ contribution, if such
securities are acquired pursuant to a scheme which has been approved by a High Court under sections 391- 394
of the Companies Act, 1956 or approved by Tribunal or the Central Government under sections 230-240 of the
Companies Act, 2013.

In Case of FPO

Exemption from Requirement of Promoters’ Contribution [Regulation 112]

The requirements of minimum promoters’ contribution shall not apply in case of:

(a) An issuer which does not have any identifiable promoter;

(b) where the equity shares of the issuer are frequently traded on a stock
exchange for a period of at least three years immediately preceding
the reference date, and:
• the issuer has redressed at least ninety five per cent of the
complaints received from the investors till the end of the quarter
immediately preceding the month of the reference date, and;
• the issuer has been in compliance with the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 for a minimum
period of three years immediately preceding the reference date

Minimum Promoters’ Contribution [Regulation 113]

• The promoters shall contribute in the public issue as follows:
a) either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital;
b) in case of a composite issue (i.e., further public offer cum rights issue), either to the extent of 20%
of the proposed issue size or to the extent of 20% of the post-issue capital excluding the rights issue
component.
• In case of a public issue or composite issue of convertible securities, the minimum promoters’ contribution
shall be as follows:
a) the promoters shall contribute 20%, as the case may be, either by way of equity shares or by way of
subscription to the convertible securities. However, if the price of the equity shares allotted pursuant
to conversion is not pre-determined and not disclosed in the offer document, the promoters shall
contribute only by way of subscription to the convertible securities being issued in the public issue and
shall undertake in writing to subscribe to the equity shares pursuant to conversion of such securities.
b) in case of any issue of convertible securities which are convertible or exchangeable on different dates
and if the promoters’ contribution is by way of equity shares (conversion price being pre- determined),
such contribution shall not be at a price lower than the weighted average price of the equity share
capital arising out of conversion of such securities.
• In case of a further public offer or composite issue where the promoters contribute more than the stipulated
minimum promoters’ contribution, the allotment with respect to excess contribution shall be made at a price
determined in terms of the provisions relating to pricing of frequently trading shares or the issue price,
whichever is higher.
• In case the promoters have to subscribe to equity shares or convertible securities towards promoters’
contribution, the promoters shall satisfy the requirements of at least one day prior to the date of opening
of the issue and the amount of promoters’ contribution shall be kept in an escrow account with a scheduled
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 109

commercial bank and shall be released to the issuer along with the release of the issue proceeds.
Further, where the minimum promoters’ contribution is more than one hundred crore rupees and the further
public offer is for partly paid shares, the promoters shall bring in at least one hundred crore rupees before the
date of opening of the issue and the remaining amount may be brought on a pro-rata basis before the calls are
made to the public.
• The SR equity shares of promoters, if any, shall be eligible towards computation of minimum promoters’
contribution.

“Weighted average price”:

(a) “weight” means the number of equity shares arising out of conversion of such specified securities into
equity shares at various stages;

(b) “price” means the price of equity shares on conversion arrived at after taking into account predetermined
conversion price at various stages.

Securities ineligible for minimum promoters’ contribution [Regulation 114]

For the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:
(a) specified securities acquired during the preceding three years, if these are:
i) acquired for consideration other than cash and revaluation of assets or capitalisation of intangible
assets is involved in such transaction; or
ii) resulting from a bonus issue by utilisation of revaluation reserves or unrealised profits of the issuer or
from bonus issue against equity shares which are ineligible for minimum promoters’ contribution;
(b) specified securities pledged with any creditor other than those for borrowings by the issuer or its subsidiaries.
Specified securities referred shall be eligible for the computation of promoters’ contribution, if such securities
are acquired pursuant to a scheme which has been approved by the High Court under section 391 to 394 of
the Companies Act, 1956 or approved by a tribunal or the Central Government under section 230 to 234 of the
Companies Act, 2013.
LOCK-IN REQUIREMENTS

For Securities Held by Promoters [Regulations 16 & 115]

In a public issue, the specified securities held by promoters shall be locked-in for the period stipulated hereunder:

The promoters contribution including contribution made by AIFs or FVCIs or scheduled

Promoters commercial banks or PFIs or insurance companies registered with IRDA, shall be locked-
Contribution in for a period of 3 years from the date of commencement of commercial production or
from the date of allotment in the IPO/FPO, whichever is later

Promoters’ holding
in excess of Promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for
minimum promoters’ a period of 1 year from the date of allotment in the initial public offer.
contribution

SR equity shares shall be under lock-in until conversion into equity shares having voting
In case of SR Equity rights same as that of ordinary shares or shall be locked-in for a period specified above,
whichever is later. In case of FPO, the SR equity shares shall be under lock-in until their
Shares conversion to equity shares having voting rights same as that of ordinary shares, provided
they are in compliance with the other provisions of these regulations.
 110  Lesson 4 • EP-SLCM

“Date of commencement of commercial production” means the last date of the month in which commercial
production of the project in respect of which the funds raised are proposed to be utilized as stated in the
offer document, is expected to commence.

Securities held by persons other than Promoters [Regulation 17]

The entire pre-issue share capital, held by persons other than the promoters, shall be locked-in for a period of one
year from the date of allotment in the initial public offer.
The provisions of this regulation shall not apply, in case of:
(i) Equity shares allotted to employees under employee stock option or employee stock purchase scheme prior
to initial public offer, if the issuer has made full disclosures with respect to such option; and
(ii) Equity shares held by an employee stock option trust or transferred to the employees by an employee stock
option trust pursuant to exercise of options by the employees, in accordance with the employee stock option
plan or employee stock purchase scheme;
(iii) Equity shares held by a venture capital fund or AIF of category I & II or a FVCI and such equity shares shall be
locked-in for a period of at least one-year from the date of purchase by the venture capital or AIF or FVCI.

For Point No. (iii), in case such equity shares have resulted pursuant to conversion of fully paid- up compulsorily
convertible securities, the holding period of such convertible securities as well as that of resultant equity
shares together shall be considered for the purpose of calculation of one year period and convertible securities
shall be deemed to be fully paid- up, if the entire consideration payable thereon has been paid and no further
consideration is payable at the time of their conversion.

Lock-in of party-paid securities [Regulations 19 & 117]

If the specified securities which are subject to lock-in are partly paid-up and the amount called-up on such specified
securities is less than the amount called-up on the specified securities issued to the public, the lock- in shall end
only on the expiry of three years after such specified securities have become pari passu with the specified securities
issued to the public.
Inscription or recording of non-transferability [Regulations 20 & 118]
The certificates of specified securities which are subject to lock-in shall contain the inscription “non-transferable”
and specify the lock-in period and in case such specified securities are dematerialised, the issuer shall ensure that
the lock-in is recorded by the depository.
Pledge of Locked In Shares [Regulations 21 & 119]
Specified securities, except SR equity shares, held by the promoters and locked in may be pledged as collateral
security for a loan granted by a scheduled commercial bank or a public financial institution or a systemically
important non-banking finance company or a housing finance company, subject to the following:
a) if the specified securities are locked-in as per Regulation 16 (a)- Lock-in of specified securities held
by the promoters, the loan has been granted to the issuer company or its subsidiary/subsidiaries
for the purpose of financing one or more of the objects of the issue and pledge of specified securities
is one of the terms of sanction of the loan.
b) if the specified securities are locked-in as per Regulation 16 (b)- Lock-in of specified securities
held by the promoters and the pledge of specified securities is one of the terms of sanction of the
loan.
However, such lock-in shall continue pursuant to the invocation of the pledge and such transferee shall not be
eligible to transfer the specified securities till the lock-in period stipulated in these regulations, has expired.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 111

Transferability of locked-in specified securities [Regulations 22 & 120]

Subject to the provisions of the SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011, the
specified securities except SR equity shares held by the promoters and locked-in as per regulation 115 may be
transferred to another promoter or any person of the promoter group or a new promoter or a person in control of
the issuer.
However, lock-in on such specified securities shall continue for the remaining period with the transferee and such
transferee shall not be eligible to transfer them till the lock-in period stipulated in these regulations has expired.
OTHER REQUIREMENTS FOR IPO & FPO
Appointment of Lead Managers, Other Intermediaries and Compliance Officer [Regulation 23 & 121]
• The issuer shall appoint one or more merchant bankers, which are registered with the SEBI, as lead manager(s)
to the issue.
• Where the issue is managed by more than one lead manager, the rights, obligations and responsibilities,
relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each lead manager
shall be predetermined and be disclosed in the draft offer document and the offer document.
• At least one lead manager to the issue shall not be an associate, as defined under the SEBI (Merchant Bankers)
Regulations, 1992 of the issuer.
• If any of the lead manager is an associate of the issuer, it shall disclose itself as an associate of the issuer and
its role shall be limited to marketing of the issue.
• The issuer shall, in consultation with the lead manager(s), appoint other intermediaries which are registered
with the SEBI after the lead manager(s) have independently assessed the capability of other intermediaries
to carry out their obligations.
• The issuer shall enter into an agreement with the lead manager(s) and enter into agreements with other
intermediaries as required under the respective regulations applicable to the intermediary concerned.
• Such agreements may include such other clauses as the issuer and the intermediaries may deem fit without
diminishing or limiting in any way the liabilities and obligations of the lead manager(s), other intermediaries
and the issuer under the Act, the Companies Act, 2013 or the Companies Act, 1956 (to the extent applicable),
the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and the rules and regulations
made thereunder or any statutory modification or statutory enactment thereof.
• In case of ASBA process, the issuer shall take cognizance of the deemed agreement of the issuer with the self-
certified syndicate banks.
• The issuer shall, in case of an issue made through the book building process, appoint syndicate member(s)
and in the case of any other issue, appoint bankers to issue, at centres.
• The issuer shall appoint a registrar to the issue, registered with the SEBI which has connectivity with all the
depositories.
• If the issuer itself is a registrar, it shall not appoint itself as registrar to the issue.
• The lead manager shall not act as a registrar to the issue in which it is also handling the post-issue
responsibilities.
• The issuer shall appoint a compliance officer who shall be responsible for monitoring the compliance of the
securities laws and for redressal of investors’ grievances.
Disclosures in draft offer document and offer document [Regulation 24 & 122]
• The draft offer document and the offer document shall contain all material disclosures which are true and
adequate to enable the applicants to take an informed investment decision.
 112  Lesson 4 • EP-SLCM

• The red-herring prospectus, shelf prospectus and prospectus shall contain:

(i) disclosures specified in the Companies Act, 2013; and
(i) disclosures specified in Part A of Schedule VI of ICDR Regulations 2018. In case of FPO the disclosures
are subject to the provisions of Parts C and D thereof.
• The lead manager(s) shall exercise due diligence and satisfy themselves about all aspects of the issue
including the veracity and adequacy of disclosures made in the draft offer document and the offer document.
• The lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale,
the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the
offer document and as required in terms of the ICDR Regulations 2018.
• The lead manager(s) shall ensure that the information contained in the offer document and the particulars
as per audited financial statements in the offer document are not more than six months old from the issue
opening date.

Filing of offer Document [Regulations 25 & 123]

• Prior to making an IPO/FPO, the issuer shall file three copies of the draft offer document with the concerned
regional office of the SEBI under the jurisdiction of which the registered office of the issuer company is
located, along with fees as specified, through the lead manager(s).
• The lead manager(s) shall submit the following to the SEBI along with the draft offer document:
» a certificate, confirming that an agreement has been entered into between the issuer and the lead
manager(s);
» a due diligence certificate;
» in case of an issue of convertible debt instruments, a due diligence certificate from the debenture
trustee.
• The issuer shall also file the draft offer document with the stock exchange(s) where the specified securities
are proposed to be listed, and submit to the stock exchange(s), the Permanent Account Number, bank account
number and passport number of its promoters where they are individuals, and Permanent Account Number,
bank account number, company registration number or equivalent and the address of the Registrar of
Companies (ROC) with which the promoter is registered, where the ROC promoter is a body corporate.
• The SEBI may specify changes or issue observations, on the draft offer document filed with it within a period
of 30 days from the later of the following dates:
a) the date of receipt of the draft offer document filed with the SEBI; or
b) the date of receipt of satisfactory reply from the lead managers, where the SEBI has sought any
clarification or additional information from them; or
c) the date of receipt of clarification or information from any regulator or agency, where the SEBI has
sought any clarification or information from such regulator or agency; or
d) the date of receipt of a copy of in-principle approval letter issued by the recognised stock exchanges.
• If the SEBI specifies any changes or issues observations on the draft offer document, the issuer and lead
manager(s) shall carry out such changes in the draft offer document and shall submit to the Board an updated
draft offer document complying with the observations issued by the Board and highlighting all changes made
in the draft offer document and before filing the offer documents with the Registrar of Companies or an
appropriate authority, as applicable.
• If there are any changes in the draft offer document in relation to the matters specified in these regulations,
an updated offer document or a fresh draft offer document, as the case may be, shall be filed with the SEBI.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 113

• Copy of the offer documents shall also be filed with the SEBI and the stock exchanges through the lead
manager(s) promptly after filing the offer document with the Registrar of Companies.
• The draft offer document and the offer document shall also be furnish to the SEBI in a soft copy.

Draft offer document and offer document to be available to the public [Regulations 26 & 124]
• The draft offer document filed with the SEBI shall be made public for comments, if any, for a period of at least
21 days from the date of filing, by hosting it on the websites of the SEBI, stock exchanges where specified
securities are proposed to be listed and lead manager(s) associated with the issue.
• Issuer: The issuer shall, within two days of filing the draft offer document with the SEBI, make a public
announcement in one English national daily newspaper with wide circulation, one Hindi national daily
newspaper with wide circulation and one regional language newspaper with wide circulation at the place
where the registered office of the issuer is situated, disclosing the fact of filing of the draft offer document
with the SEBI and inviting the public to provide their comments to the SEBI, the issuer or the lead manager(s)
in respect of the disclosures made in the draft offer document.
• Lead Manager: The lead manager(s) shall, after expiry of the period stipulated above, file with the SEBI,
details of the comments received by them or the issuer from the public, on the draft offer document, during
that period and the consequential changes, if any, that are required to be made in the draft offer document.
• Issuer and Lead Manager: The issuer and the lead manager(s) shall ensure that the offer documents are
hosted on the websites as required under these regulations and its contents are the same as the versions as
filed with the Registrar of Companies, the SEBI and the stock exchanges, as applicable.
• Lead manager(s) and the stock exchanges: The lead manager(s) and the stock exchanges shall provide
copies of the offer document to the public as and when requested and may charge a reasonable sum for
providing a copy of the same.
Face Value of Equity Shares [Regulations 27 & 125]
The disclosure about the face value of equity shares shall be made in the draft offer document, offer document, offer
document, advertisements and application forms, along with price band or the issue price in identical font size.
Pricing [Regulations 28 & 126]
An issuer in an IPO and FPO may determine the price of specified securities in consultation with the lead manager
or through the book building process.

Price and Price Band [Regulations 29 & 127]

• The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor
price or price band in the red herring prospectus (in case of a book built issue) and determine the price at a
later date before filing the prospectus with the Registrar of Companies.
• However, the prospectus filing with the RoC shall contain only one price or the coupon rate, as the case may be.
• The cap on the price band, and the coupon rate in case of convertible debt instruments, shall be less than or
equal to one hundred and 20% of the floor price.
• The floor price or the final price shall not be less than the face value of the specified securities.
• Where the issuer opt not to make disclosure of the floor price or price band in the red herring prospectus,
the issuer shall be announce the floor price or price band at least two working days before the opening of the
bid (in case of an initial public offer) and at least one working day before the opening of the bid (in case of
a further public offer), in all the newspapers in which the pre issue advertisement was released or together
with the pre-issue advertisement.
• The announcement referred above shall also contain all the relevant financial ratios computed for both the
upper and lower end of the price band and also a statement drawing attention of the investors to the section
titled “basis of issue price” of the offer document.
 114  Lesson 4 • EP-SLCM

• The announcement and the relevant financial ratios shall be disclosed on the websites of those stock
exchanges where the securities are proposed to be listed and shall also be pre-filled in the application forms
available on the websites of the stock exchanges.
Differential Pricing [Regulations 30 & 128]
An issuer may offer specified securities at different prices, subject to the following:

Retail individual investors or retail individual shareholders or In other words, if the issue
employees entitled for reservation made under regulation 33 & price to the other categories of
130 of the ICDR Regulations, may be offered specified securities at applicants is Rs.100 the price
= at which the securities can be
a price not lower than by more than 10% of the price at which net
offer is made to other categories of applicants, other than anchor offered to the reserved categories
investors; shall not be less than Rs.90.

in case of a book built issue, the price of the In case the issuer opts for the alternate method
specified securities offered to an anchor investor of book building as specified under the ICDR
shall not be lower than the price offered to other Regulations, 2018, the issuer may offer specified
applicants securities to its employees at a price not lower by
more than 10% of the floor price

In case of FPO, an additional condition is that in case of a composite issue, the price of the specified securities offered
in the public issue may be different from the price offered in rights issue and justification for such price difference
shall be given in the offer document; and discount, if any shall be expressed in rupee terms in the offer document.

Minimum Offer to Public [Regulation 31]

The minimum net offer to the public shall be subject to the provision of clause (b) of sub-rule (2) of rule 19 of
Securities Contracts (Regulations) Rules, 1957.

Reservation on Competitive Basis [Regulations 33 & 130]

Reservation on competitive basis means reservation wherein specified securities are allotted in portion of the
number of specified securities applied for in respect of a particular reserved category to the number of specified
securities reserved for that category.
According to the SEBI (ICDR) Regulations, 2018, there are certain persons eligible for reservation on competitive
basis.
(1) The issuer may make reservation on a competitive basis out of the issue size excluding promoters’ contribution
in favour of the following categories of persons:
• Employees;
• shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter
companies.
However, the issuer shall not make any reservation for the lead manager(s), registrar, syndicate
member(s), their promoters, directors and employees and for the group or associate companies (as
defined under the Companies Act, 2013) of the lead manager(s), registrar and syndicate member(s)
and their promoters, directors and employees.
(2) In case of an FPO, other than in a composite issue, the issuer may make a reservation on a competitive basis
out of the issue size excluding promoters’ contribution for the existing retail individual shareholders of the
issuer.
(3) The reservation on competitive basis shall be subject to following conditions:
• the aggregate of reservations for employees shall not exceed 5% of the post issue capital of the issuer
and the value of allotment to any employee shall not exceed Rs. 2 Lakh. However, in the event of
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 115

under-subscription in the employee reservation portion, the unsubscribed portion may be alloted on
a proportionate basis, for a value in excess of Rs. 2 Lakh, subject to the total allotment to an employee
not exceeding Rs. 5 Lakh.
• reservation for shareholders shall not exceed ten per cent of the issue size;
• no further application for subscription in the net offer can be made by persons (except an employee
and retail individual shareholder of the listed issuer and retail individual shareholders of listed
subsidiaries of listed promoter companies) in favour of whom reservation on a competitive basis is
made;
• any unsubscribed portion in any reserved category may be added to any other reserved category and
the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall
be added to the net offer category;
• in case of under-subscription in the net offer category, spill-over to the extent of under-subscription
shall be permitted from the reserved category to the net public offer category.
(4) An applicant in any reserved category may make an application for any member of specified securities, but
not exceeding the reserved portion for that category.

ASBA [Regulations 35 & 132]

The issuer shall accept bids using only the ASBA facility in the manner specified by SEBI.

Availability of issue material [Regulations 36 &133]

The lead manager(s) shall ensure availability of the offer document and other issue material including application
forms to stock exchanges, syndicate members, registrar to issue, registrar and share transfer agents, depository
participants, stock brokers, underwriters, bankers to the issue, and self-certified syndicate banks before the
opening of the issue.

Prohibition on payment of incentives [Regulations 37 & 134]

Any person connected with the issue shall not offer any incentive, whether direct or indirect, in any manner, whether
in cash or kind or services or otherwise to any person for making an application in the initial public offer, except for
fees or commission for services rendered in relation to the issue.

Security Deposit [Regulations 38 & 135]

The issuer shall, before the opening of the subscription list, deposit with the stock exchange or stock exchanges
an amount calculated at the rate of 1% of the amount of the issue size available for subscription to the public in
the manner as may be specified by the SEBI and the amount so deposited shall be refundable or forfeitable in the
manner specified by the SEBI.
IPO Grading – Applicable to IPO only [Regulation 39]
The issuer may obtain grading for its initial public offer from one or more credit rating agencies registered with the
SEBI.

Underwriting [Regulations 40 & 136]

• If an issuer makes a IPO/FPO other than through the book building process, desires to have the issue
underwritten, it shall appoint the underwriters in accordance with the SEBI (Underwriters) Regulations,
1993.
• If the issuer makes a public issue through a book building process,
a) the issue shall be underwritten by lead managers and syndicate members. However, at least 75% of
the net offer to the public is proposed to be compulsorily allotted to the QIBs, and such portion cannot
be underwritten;
 116  Lesson 4 • EP-SLCM

b) the issuer shall, prior to filing the prospectus, enter into an underwriting agreement with the lead
manager(s) and syndicate member(s) which shall indicate the number of specified securities which
they shall subscribe to at the predetermined price in the event of under-subscription in the issue;
c) if the syndicate member(s) fail to fulfill their underwriting obligations, the lead manager(s) shall fulfill
the underwriting obligations;
d) the lead manager(s) and syndicate member(s) shall not subscribe to the issue in any manner except
for fulfilling their underwriting obligations;
e) in case of every underwriting issue, the lead manager(s) shall undertake minimum underwriting
obligation as specified in the SEBI (Merchant Bankers) Regulations, 1992;
f) where the issue is required to be underwritten, the underwriting obligations should at least to the
extent if minimum subscription.
Monitoring Agency [Regulations 41 & 137]

If the issue size excluding the size of offer for • The monitoring agency shall submit its report
sale by selling shareholders, exceeds Rs.100 to the issuer in the format specified in the ICDR
crores, the issuer shall ensure that the use Regulations, 2018 on a quarterly basis, till at least
of the proceeds of the issue is monitored by 95% of the proceeds of the issue excluding the
a public financial institution or by one of the proceeds raised for general corporate purposes,
scheduled commercial banks named in the have been utilized.
offer document as a banker to the issuer
• The Board of Directors and the management of
the issuer shall provide their comments on the
findings of the monitoring agency.

• The issuer shall, within forty-five days from the

end of each quarter, publicly disseminate the
In case the issuer is a bank or a public report of the monitoring agency by uploading
financial institution or an insurance company, the same on its website as well as submitting the
this provision is not applicable. same to the stock exchange(s) on which its equity
shares are listed.

Public Communications, Publicity Materials, Advertisements and Research Reports

[Regulations 42 & 138]
All public communication, publicity materials, advertisements and research reports shall comply with the provisions
of Schedule IX of the SEBI ICDR Regulations, 2018.

Issue-related Advertisements [Regulations 43 & 139]

• Subject to the provisions of the Companies Act, 2013, the issuer shall, after filing the red herring prospectus
(in case of a book built issue) or prospectus (in case of fixed price issue) with the Registrar of Companies,
make a pre-issue advertisement in one English national daily newspaper with wide circulation, Hindi national
daily newspaper with wide circulation and one regional language newspaper with wide circulation at the
place where the registered office of the issuer is situated.
• The pre-issue advertisement shall contain the disclosures specified in Part A of Schedule X of the SEBI ICDR
Regulations, 2018. However, the disclosures in relation to price band or floor price and financial ratios
contained therein shall only be applicable where the issuer opts to announce the price band or floor price
along with the pre-issue advertisement.
• The issuer may release advertisements for issue opening and issue closing, which shall be in the formats
specified in Parts B and C of Schedule X of the SEBI ICDR Regulations, 2018.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 117

• During the period the issue is open for subscription, no advertisement shall be released giving an impression
that the issue has been fully subscribed or oversubscribed or indicating investors’ response to the issue.
Opening of the Issue [Regulations 44 & 140]
A public issue (both IPO and FPO), subject to compliance with the provisions of the Companies Act, 2013, may be
opened within 12 months from the date of issuance of the observations by the SEBI.
In case of a fast-track issue, the issue shall open within the period specifically stipulated under the Companies Act,
2013. In case the issuer has filed a shelf prospectus, the first issue may be opened within 3 months of the issuance
of observations by the SEBI.
An IPO and an FPO shall be opened after at least 3 working days from the date of filing the red herring prospectus in
case of a book built issue or the prospectus in case of a fixed price issue with the Registrar of Companies.

Minimum Subscription [Regulations 45 & 141]

The minimum subscription to be received in an issue shall be not less than 90% of the offer through offer document
except in case of an offer for sale of specified securities. In case of an IPO, the minimum subscription to be received
shall be subject to allotment of minimum number of specified securities, as prescribed under the Securities
Contracts (Regulation) Rules, 1957.
In the event of non-receipt of minimum subscription, all application monies received shall be refunded to the
applicants forthwith, but not later than fifteen days from the closure of the issue

Period of Subscription [Regulations 46 & 142]

• An IPO/FPO shall be kept open for at least 3 working days and not more than 10 working days.
• In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red
herring prospectus, for a minimum period of 3 working days.
• In case of force majeure, banking strike or similar circumstances, the issuer may, for reasons to be recorded
in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built
issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of
3 working days.

Application and Minimum Application Value [Regulations 47 & 143]

• A person shall not make an application in the net offer category for a number of specified securities that
exceeds the total number of specified securities offered to the public. However, the maximum application by
non-institutional investors shall not exceed total number of specified securities offed in the issue less total
number of specified securities offered in the issue to QIBs.
• The issuer shall stipulate in the offer document the minimum application size in terms of number of specified
securities which shall fall within the range of minimum application value of Rs.10,000 to Rs.15,000.
• The issuer shall invite applications in multiples of the minimum application value, as per Part B of Schedule
XIV of the SEBI ICDR Regulation 2018.
• The minimum sum payable on application per specified security shall be at least 25% of the issue price:

“Minimum application value” shall be with reference to the issue price of the specified securities and not with
reference to the amount payable on application.

• However, in case of an offer for sale, the full issue price for each specified security shall be payable at the time
of application.
 118  Lesson 4 • EP-SLCM

Manner of Calls [Regulations 48 & 144]

If the issuer proposes to receive subscription monies in calls, it shall ensure that the outstanding subscription money
is called within twelve months from the date of allotment in the issue and if any applicant fails to pay the call money
within the said twelve months, the equity shares on which there are calls in arrear along with the subscription
money already paid on such shares shall be forfeited. In case the issuer has appointed a monitoring agency, the
issuer shall not be required to call the outstanding subscription money within twelve months.

Allotment Procedure and Basis of Allotment [Regulations 49 & 145]

• The issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less
than 1000.
• The issuer shall not make any allotment in excess of the specified securities offered through the offer document
except in case of oversubscription for the purpose of rounding off to make allotment, in consultation with the
designated stock exchange.
• The allotment of specified securities to applicants other than to the retail individual investors and anchor
investors shall be on a proportionate basis within the respective investor categories and the number of
securities allotted shall be rounded off to the nearest integer, subject to minimum allotment being equal to the
minimum application size as determined and disclosed in the offer document. However, the value of specified
securities allotted to any person, except in case of employees, in pursuance of reservation made under these
regulations, shall not exceed Rs.2 Lakh for retail investors or up to Rs.5 Lakh for eligible employees.
• The allotment of specified securities to each retail individual investor shall not be less than the minimum
bid lot, subject to the availability of shares in retail individual investor category, and the remaining available
shares, if any, shall be allotted on a proportionate basis.
• The authorised employees of the designated stock exchange, along with the lead manager(s) and registrars to
the issue, shall ensure that the basis of allotment is finalised in a fair and proper manner in accordance with
the procedure as specified in Part A of Schedule XIV.
Oversubscription [Proviso to Regulations 49(2) & 145(2)]
However, in case of oversubscription, an allotment of not more than one percent of the net offer to the public for the
purpose of making allotment in minimum lots.

Illustration explaining the procedure of allotment

Example A
(1) Total number of specified securities on offer@ Rs. 600 per share: 1 crore specified securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified securities.
(3) The issue is over-all subscribed by 2.5 times, whereas the retail individual investors’ category is
oversubscribed 4 times.
(4) The issuer has fixed the minimum application/bid size as 20 specified securities (falling within the range
of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of one lakh retail individual investors have applied in the issue, in varying number of bid lots i.e.
between 1 – 16 bid lots, based on the maximum application size of up to two lakh rupees.
(6) Out of the one lakh investors, there are five retail individual investors A, B, C, D and E who have applied
as follows: A has applied for 320 specified securities. B has applied for 220 specified securities. C has
applied for 120 specified securities. D has applied for 60 specified securities and E has applied for 20
specified securities.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 119

(7) As the allotment to a retail individual investor cannot be less than the minimum bid lot, subject to
availability of shares, the remaining available shares, if any, shall be allotted on a proportionate basis.
The actual entitlement shall be as follows:

Sl. No. Name of Total Number Total number of specified securities eligible to be allotted
Investor of specified
securities
applied for
1. A 320 20 specified securities (i.e. the minimum bid lot) + 38 specified
securities [{35,00,000 - (1,00,000 * 20)} / {140,00,000 -
(1,00,000 * 20)}] * 300 (i.e.320-20)
2. B 220 20 specified securities (i.e. the minimum bid lot) + 25 specified
securities [{35,00,000 - (1,00,000 * 20) / {140,00,000 - (1,00,000 *
20)}] * 200 (i.e. 220-20)
3. C 120 20 specified securities (i.e. the minimum bid lot) + 13 specified
securities [{35,00,000 - (1,00,000 * 20)} / {(140,00,000 - (1,00,000
* 20)}] * 100 (i.e. 120-20)
4. D 60 20 specified securities (i.e. the minimum bid lot) + 5 specified
securities [{(35,00,000 - 1,00,000 * 20)} / {(140,00,000 - (1,00,000
* 20)}] * 40 (i.e. 60-20)
5. E 20 20 specified securities (i.e. the minimum bid lot)
Example B
(1) Total number of specified securities on offer @ Rs. 600 per share: 1 crore specified securities.
(2) Specified securities on offer for retail individual investors’ category: 35 lakh specified securities.
(3) The issue is overall subscribed by 7 times, whereas the retail individual investors’ category is over-
subscribed 9.37 times.
(4) The issuer has decided the minimum application/bid size as 20 specified securities (falling within the
range of ten thousand to fifteen thousand rupees) and in multiples thereof.
(5) A total of two lakh retail individual investors have applied in the issue, in varying number of bid lots i.e.
between 1-16 bid lots, based on the maximum application size of up to two lakh rupees.
(6) As per the allotment procedure, the allotment to retail individual investors shall not be less than the
minimum bid lot, subject to availability of shares.
(7) Since the total number of shares on offer to the retail individual investors is 35,00,000 and the minimum
bid lot is 20 shares, the maximum number of investors who can be allotted this minimum bid lot should
be 1,75,000. In other words, 1,75,000 retail applicants shall get the minimum bid lot and the remaining
25,000 retail applicants will not get any allotment.
The details of the allotment shall be as follows:
No. No. of No. of retail Total no. of No. of investors who shall receive
shares at investors shares applied minimum bid-lot (to be selected by a
of lots
each lot applying at each for at each lot lottery)
lot
A B C D= (B*C) E
1. 20 10,000 2,00,000 8,750=(1,75,000/2,00,000)*10,000
 120  Lesson 4 • EP-SLCM

2. 40 10,000 4,00,000 8,750

3. 60 10,000 6,00,000 8,750
4. 80 10,000 8,00,000 8,750
5. 100 20,000 20,00,000 17,500
6. 120 20,000 24,00,000 17,500
7. 140 15,000 21,00,000 13,125
8. 160 20,000 32,00,000 17,500
9. 180 10,000 18,00,000 8,750
10. 200 15,000 30,00,000 13,125
11. 220 10,000 22,00,000 8,750
12. 240 10,000 24,00,000 8,750
13. 260 10,000 26,00,000 8,750
14. 280 5,000 14,00,000 4,375
15. 300 15,000 45,00,000 13,125
16. 320 10,000 32,00,000 8,750
Total 2,00,000 328,00,000 1,75,000

Allotment, Refund and Payment of Interest [Regulations 50 & 146]

• The issuer and lead manager(s) shall ensure that specified securities are allotted and/or application monies
are refunded or unblocked within such period as may be specified by the SEBI.
• The lead manager(s) shall ensure that the allotment, credit of dematerialised securities, refunding or
unblocking of application monies, as may be applicable, are done electronically.
• Where specified securities are not allotted and/or application monies are not refunded or unblocked within
the period stipulated above, the issuer shall undertake to pay interest at the rate of 15% per annum to the
investors and within such time as disclosed in the offer document and the lead manager(s) shall ensure the
same.
Post-issue Advertisements [Regulations 51 & 147]
• The lead manager(s) shall ensure that an advertisement giving details relating to:
• subscription,
• basis of allotment,
• number, value and percentage of successful allottees for all applications including ASBA,
• date of completion of despatch of refund orders, as applicable, or
• instructions to self-certified syndicate banks by the registrar,
• date of credit of specified securities and date of filing of listing application, etc.
is released within ten days from the date of completion of the various activities in at least one English national
daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation and one
regional language daily newspaper with wide circulation at the place where registered office of the issuer is
situated.
• The above-mentioned details shall also be placed on the websites of the stock exchange(s).
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 121

Post-issue responsibilities of the lead manager(s) [Regulations 52 & 148]

• The responsibility of the lead manager(s) shall continue until completion of the issue process and for any
issue related matter thereafter.
• The lead manager(s) shall:
• regularly monitor redressal of investor grievances arising from any issue related activities.
• be responsible for post-issue activities till the applicants have received the securities certificates,
credit to their demat account or refund of application monies and the listing agreement is entered
into by the issuer with the stock exchange and listing or trading permission is obtained.
• co-ordinate with the registrars to the issue and with various intermediaries at regular intervals after
the closure of the issue to monitor the flow of applications from syndicate member(s) or collecting
bank branches and/ or self-certified syndicate banks, processing of the applications including
application form for ASBA and other matters till the basis of allotment is finalised, credit of the
specified securities to the demat accounts of the allottees and unblocking of ASBA accounts/ dispatch
of refund orders are completed and securities are listed, as applicable.
• Any act of omission or commission on the part of any of the intermediaries noticed by the lead manager(s)
shall be duly reported by them to SEBI.
• In case there is a devolvement on the underwriters, the lead manager(s) shall ensure that the notice for
devolvement containing the obligation of the underwriters is issued within ten days from the date of closure
of the issue.
• In the case of undersubscribed issues that are underwritten, the lead manager(s) shall furnish information in
respect of underwriters who have failed to meet their underwriting devolvement to SEBI.
Release of subscription money [Regulations 53 & 149]
• The lead manager(s) shall confirm to the bankers to the issue by way of copies of listing and trading approvals
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.
• In case the issuer fails to obtain listing or trading permission from the stock exchanges where the specified
securities were to be listed, it shall refund through verifiable means the entire monies received within seven
days of receipt of intimation from stock exchanges rejecting the application for listing of specified securities,
and if any such money is not repaid within eight days after the issuer becomes liable to repay it, the issuer
and every director of the company who is an officer in default shall, on and from the expiry of the eighth day,
be jointly and severally liable to repay that money with interest at the rate of fifteen percent per annum.
• The lead manager(s) shall ensure that the monies received in respect of the issue are released to the issuer in
compliance with the provisions of Section 40 (3) of the Companies Act, 2013, as applicable.

Reporting of transactions of the promoters and promoter group [Regulations 54 & 150]
The issuer shall ensure that all transactions in securities by the promoter and promoter group between the date of
filing of the draft offer document or offer document, as the case may be, and the date of closure of the issue shall be
reported to the stock exchange(s), within twenty-four hours of such transactions.

Post-issue reports [Regulations 55 & 151]

The lead manager(s) shall submit a final post-issue report, along with a due diligence certificate as, within seven
days of the date of finalization of basis of allotment or within seven days of refund of money in case of failure of
issue.
 122  Lesson 4 • EP-SLCM

Restriction on Further Capital Issues [Regulation 152]

The issuer shall not make any further issue of specified securities in any manner whether by way of a public issue,
rights issue, bonus issue, preferential issue, qualified institutions placement or otherwise except pursuant to an
employee stock option scheme:
• In case of a fast track issue, during the period between the date of filing the offer document (in case of a book
built issue) or prospectus (in case of a fixed price issue) with the Registrar of Companies and the listing of the
specified securities offered through the offer document or refund of application monies; or
• in case of other issues, during the period between the date of filing the draft offer document and the listing of
the specified securities offered through the offer document or refund of application monies;
unless full disclosures regarding the total number of specified securities or amount proposed to be raised from such
further issue are made in such draft offer document or offer document, as the case may be.
FAST TRACK FPO [Regulation 155]
Eligibility

An Issuer Company need not file the draft offer document with SEBI and obtain observations from SEBI, if it satisfies
the following conditions for making a further public offer through fast track route:

(a) Listing Equity shares of the issuer have been listed on any stock exchange for a period of at least
three years immediately preceding the reference date
(b) Demat form Entire shareholding of the promoter group of the issuer is held in dematerialised form on
the reference date
(C) Market Average market capitalisation of public shareholding of the issuer is at least Rs.1000
Capitalisation crores in case of public
(d) Trading Annualised trading turnover of the equity shares of the issuer during six calendar months
Turnover immediately preceding the month of the reference date has been at least 2% of the
weighted average number of equity shares listed during such six months’ period.
However, if the public shareholding is less than fifteen per cent of its issued equity capital,
the annualised trading turnover of its equity shares has been at least 2% of the weighted
average number of equity shares available as free float during such six months’ period
(e) Delivery based Annualized delivery-based trading turnover of the equity shares during six calendar
trading months immediately preceding the month of the reference date has been at least 10% of
the annualised trading turnover of the equity shares during such six months period
(f) Compliance The issuer has been in compliance with the equity listing agreement or Securities and
with SEBI Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,
(LODR) 2015, as applicable, for a period of at least three years immediately preceding the
Regulations, reference date.
2015
However, if the issuer has not complied with the provisions of the listing agreement or SEBI
(LODR) Regulations, 2015, as applicable, relating to composition of board of directors,
for any quarter during the last three years immediately preceding the reference date,
but is compliant with such provisions at the time of filing of letter of offer, and adequate
disclosures are made in the letter of offer about such non-compliances during the three
years immediately preceding the reference date, it shall be deemed as compliance with
the condition.
Further, imposition of monetary fines by stock exchange on the issuer shall not be a
ground for ineligibility for undertaking issuances under these regulations
(g) Investor Issuer has redressed at least 95% of the complaints received from the investors till the
Complaints end of the quarter immediately preceding the month of the reference date
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 123

(h) No Show-cause No show-cause notices have been issued or prosecution proceedings have been initiated
notices by the SEBI and pending against the issuer or its promoters or whole-time directors as on
the reference date;
(i) No alleged Issuer or promoter or promoter group or director of the issuer has not settled any alleged
violations violation of securities laws through the consent or settlement mechanism with the SEBI
during three years immediately preceding the reference date
(j) Disciplinary Equity shares of the issuer have not been suspended from trading as a disciplinary measure
measures during last three years immediately preceding the reference date
(k) Conflict of There shall be no conflict of interest between the lead merchant banker(s) and the issuer
interest or its group or associate company in accordance with applicable regulations.
(l) Audit Impact of audit qualifications, if any and where quantifiable, on the audited accounts of
Qualification the issuer in respect of those financial years for which such accounts are disclosed in the
letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the
respective years.
“Average Market Capitalisation of Public Shareholding” means the sum of daily market capitalisation of public
shareholding for a period of one year up to the end of the quarter preceding the month in which the proposed issue
was approved by the shareholders or the board of the issuer, as the case may be, divided by the number of trading
days.

Post-listing exit opportunity for dissenting shareholders [Regulation 59 & 157 ]

• In case of further public offers, including under the fast track route, the promoters or shareholders in control
of an issuer shall provide an exit offer to dissenting shareholders as provided for in the Companies Act, 2013,
in case of change in objects or variation in the terms of contract related to objects referred to in the offer
document as per conditions and manner is provided in Schedule XX of SEBI ICDR Regulations, 2018;
• The exit offer shall not apply where there are neither identifiable promoters nor shareholders in control of
the listed issuer.
EXIT OPPORTUNITY TO DISSENTING SHAREHOLDERS [SCHEDULE XX]
The provisions of this Chapter shall apply to an exit offer made by the promoters or shareholders in control of an
issuer to the dissenting shareholders in terms of section 13(8) and section 27(2) of the Companies Act, 2013, in
case of change in objects or variation in the terms of contract referred to in the offer document.
However, the provisions of this Chapter shall not apply where there are neither identifiable promoters nor
shareholders in control of the listed issuer.

"Dissenting Shareholders" mean those shareholders who have voted against the
resolution for change in Objects or variation in terms of a contract, referred to in the offer
document of the issuer.

Conditions for Exit Offer

The promoters or shareholders in control shall make the exit offer in accordance with the provisions of this Chapter,
to the dissenting shareholders, in cases only if a public issue has opened after April 1, 2014; if :
• the proposal for change in objects or variation in terms of a contract, referred to in the offer document is
dissented by at least 10 % of the shareholders who voted in the general meeting; and
• the amount to be utilized for the objects for which the offer document was issued is less than 75 % of the
amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer
document).
 124  Lesson 4 • EP-SLCM

Eligibility of shareholders for availing the exit offer

Only those dissenting shareholders of the issuer who are holding shares as on the relevant date shall be eligible to
avail the exit offer.
Exit offer price
The ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:
• the volume-weighted average price paid or payable for acquisitions, whether by the promoters or shareholders
having control or by any person acting in concert with them, during the fifty-two weeks immediately preceding
the relevant date;
• the highest price paid or payable for any acquisition, whether by the promoters or shareholders having
control or by any person acting in concert with them, during the twenty-six weeks immediately preceding
the relevant date;
• the volume-weighted average market price of such shares for a period of sixty trading days immediately
preceding the relevant date as traded on the recognised stock exchange where the maximum volume of
trading in the shares of the issuer are recorded during such period, provided such shares are frequently
traded;
• where the shares are not frequently traded, the price determined by the promoters or shareholders having
control and the merchant banker taking into account valuation parameters including book value, comparable
trading multiples, and such other parameters as are customary for valuation of shares of such issuers.

Manner of providing exit to dissenting shareholders

• The notice proposing the passing of special resolution for changing the objects of the issue and varying the
terms of contract, referred to in the prospectus shall also contain information about the exit offer to the
dissenting shareholders.
• In addition to the disclosures required under the provisions of section 102 of the Companies Act, 2013 read
with rule 32 of the Companies (Incorporation) Rules, 2014 and rule 7 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and any other applicable law, a statement to the effect that the promoters
or the shareholders having control shall provide an exit opportunity to the dissenting shareholders shall also
be included in the explanatory statement to the notice for passing special resolution.
• After passing of the special resolution, the issuer shall submit the voting results to the recognised stock
exchange(s), in terms of the provisions of the SEBI (LODR) Regulations, 2015.
• The issuer shall also submit the list of dissenting shareholders, as certified by its compliance officer, to the
recognised stock exchange(s).
• The promoters or shareholders in control, shall appoint a merchant banker registered with SEBI and finalize
the exit offer price in accordance with these regulations.
• The issuer shall intimate the recognised stock exchange(s) about the exit offer to dissenting shareholders and
the price at which such offer is being given.
• The stock exchange(s) shall immediately on receipt of such intimation disseminate the same to public within
one working day.
• To ensure security for performance of their obligations, the promoters or shareholders having control,
as applicable, shall create an escrow account which may be interest bearing and deposit the aggregate
consideration in the account at least two working days prior to opening of the tendering period.
• The tendering period shall start not later than seven working days from the passing of the special resolution
and shall remain open for ten working days.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 125

• The dissenting shareholders who have tendered their shares in acceptance of the exit offer shall have the
option to withdraw such acceptance till the date of closure of the tendering period.
• The promoters or shareholders having control shall facilitate tendering of shares by the shareholders and
settlement of the same through the recognised stock exchange mechanism as specified by SEBI for the
purpose of takeover, buy-back and delisting.
• The promoters or shareholders having control shall, within a period of ten working days from the last date
of the tendering period, make payment of consideration to the dissenting shareholders who have accepted
the exit offer.
• Within a period of two working days from the payment of consideration, the issuer shall furnish to the
recognised stock exchange(s), disclosures giving details of aggregate number of shares tendered, accepted,
payment of consideration and the post-offer shareholding pattern of the issuer and a report by the merchant
banker that the payment has been duly made to all the dissenting shareholders whose shares have been
accepted in the exit offer.

Maximum permissible non-public shareholding

In the event, the shares accepted in the exit offer were such that the shareholding of the promoters or shareholders
in control, taken together with persons acting in concert with them pursuant to completion of the exit offer results
in their shareholding exceeding the maximum permissible non-public shareholding, the promoters or shareholders
in control, as applicable, shall be required to bring down the non-public shareholding to the level specified and
within the time permitted under Securities Contract (Regulation) Rules, 1957.
RIGHTS ISSUE
Definition of Right Issue

“Rights issue” means an offer of specified securities by a listed issuer to the shareholders of the
issuer as on the record date fixed for the said purpose.

In general, fresh shares offered to existing shareholders in proportion to their existing holding in the share capital
of the company are termed as “Rights shares” popularly known as rights issue. In the rights issue the shareholders
have a right to participate in the issue. It is pre-emptive rights given by the status to existing shareholders. In this
rights issue, the offer is required to be made to the existing shareholders on pro-rata to their existing holdings. The
shareholders who are offered may or may not subscribe to the same. They may subscribe partly or fully the offer.
They have a power to renounce the shares offered to any other person who need not be an existing shareholder of
the company.
An issuer offering specified securities of aggregate value of ten crore rupees or more, through a rights issue shall
satisfy the conditions of Chapter III of SEBI (ICDR) Regulations, 2018 at the time of filing the draft letter of offer with
the SEBI and also at the time of filing the final letter of offer with the stock exchanges, as the case may be.
Entities not eligible to make a rights issue [Regulation 61]
An issuer shall not be eligible to make a rights issue of specified securities:

(a) if the issuer, any of its promoters, promoter group or directors of the issuer are
debarred from accessing the capital market by the SEBI

(b) if any of the promoters or directors of the issuer is a promoter or director of

any other company which is debarred from accessing the capital market by the SEBI

(c) if any of its promoters or directors is a fugitive economic offender

 126  Lesson 4 • EP-SLCM

Explanation: The restrictions under (a) and (b) above will not apply to the promoters or directors of the issuer who
were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the draft
letter of offer with the SEBI.
General conditions [Regulation 62]
(1) The issuer making a rights issue of specified securities shall ensure that:
• it has made an application to one or more stock exchanges to seek an in-principle approval for
listing of its specified securities on such stock exchanges and has chosen one of them as the
designated stock exchange.
• all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited;
• it has made firm arrangements of finance through verifiable means towards 75% of the stated
means of finance for the specific project proposed to be funded from issue proceeds, excluding the
amount to be raised through the proposed rights issue or through existing identifiable internal
accruals.
(2) The amount for general corporate purposes, as mentioned in objects of the issue in the draft letter of offer
and the letter of offer, shall not exceed 25% of the amount raised by the issuer.
(3) Where the issuer or any of its promoters or directors is a willful defaulter, the promoters or promoter group
of the issuer shall not renounce their rights except to the extent of renunciation within the promoter group.
(4) Where the issuer has issued SR equity shares to its promoters or founders, then such a SR shareholder
shall not renounce their rights and the SR shares received in a rights issue shall remain under lock-in until
conversion into equity shares having voting rights same as that of ordinary equity shares along with existing
SR equity shares.
PREFERENTIAL ISSUE
Definition of Preferential Issue

“Preferential issue” means an issue of specified securities by a listed issuer to any select person or group of
persons on a private placement basis in accordance with Chapter V of these regulations and does not include
an offer of specified securities made through employee stock option scheme, employee stock purchase scheme
or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

An issuer offering specified securities through preferential issue shall satisfy the conditions of Chapter V of SEBI
(ICDR) Regulations, 2018.

Issuers ineligible to Make a Preferential Issue [Regulation 159]

Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity
shares of the issuer during the six months preceding the relevant date. However, in respect of the preferential issue of
equity shares and compulsorily convertible debt instruments, whether fully or partly, the SEBI may grant relaxation
from the requirements of this sub-regulation, if the SEBI has granted relaxation in terms of regulation 11(2) of the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 to such a preferential allotment.
Explanation: Where any person belonging to promoter(s) or the promoter group has sold/ transferred their equity
shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall
be ineligible for allotment of specified securities on preferential basis.
However the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s)
of the promoter group which qualifies for inter-se transfer amongst qualifying persons under regulation 10(1)
(a) of the SEBI (Substantial Acquisition of Shares and Takeover Regulations), 2011 or in case of transfer of shares
held by the promoters or promoter group on account of invocation of pledge by a scheduled commercial bank or
public financial institution or a systemically important non-banking finance company or mutual fund or insurance
company registered with the Insurance Regulatory and Development Authority.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 127

However, where any person belonging to promoter(s) or the promoter group has previously subscribed to warrants
of an issuer but has failed to exercise the warrants, the promoter(s) and promoter group shall be ineligible for issue
of specified securities of such issuer on preferential basis for a period of one year from:
• the date of expiry of the tenure of the warrants due to non-exercise of the option to convert; or
• the date of cancellation of the warrants, as the case may be.
• An issuer shall not be eligible to make a preferential issue if any of its promoters or directors is a fugitive
economic offender.
Conditions for preferential issue [Regulation 160]
A listed issuer making a preferential issue of specified securities shall ensure that:
• Fully Paid-up: All equity shares allotted by way of preferential issue shall be made fully paid up at the time
of the allotment.
• Special Resolution: A special resolution has been passed by its shareholders.
• Demat form: All equity shares held by the proposed allottees in the issuer are in dematerialised form.
• Compliance: The issuer is in compliance with the conditions for continuous listing of equity shares as
specified in the listing agreement with the stock exchange where the equity shares of the issuer are listed and
SEBI (LODR) Regulations, 2015 as amended, and any circular or notification issued by the SEBI thereunder.
• PAN: The issuer has obtained the Permanent Account Numbers (PAN) of the proposed allottees, except those
allottees which may be exempt from specifying their PAN for transacting in the securities market by the SEBI.

QUALIFIED INSTITUTIONS PLACEMENT

Definition of Qualified Institutions Placement

“Qualified institutions placement” means issue of eligible securities by a listed issuer to qualified
institutional buyers on a private placement basis and includes an offer for sale of specified securities by
the promoters and/ or promoter group on a private placement basis, in terms of these regulations.

The provisions relating to eligibility, conditions and other provisions for Qualified Institutions Placement have been
provided in Chapter VI of SEBI(ICDR) Regulations, 2018.
Conditions for Qualified Institutions Placement [Regulation 172]
(1) A listed issuer may make a qualified institutions placement of eligible securities if it satisfies the following
conditions:
(a) Special resolution:
• a special resolution approving the qualified institutions placement has been passed by its
shareholders, and the special resolution shall, among other relevant matters, specify that the
allotment is proposed to be made through qualified institutions placement and the relevant date
referred to in regulation 171(b)(ii);
• No shareholders’ resolution will be required in case the qualified institutions placement is
through an offer for sale by promoters or promoter group for compliance with minimum public
shareholding requirements specified in the Securities Contracts (Regulation) Rules, 1957;
• The allotment pursuant to the special resolution referred to in regulation 172(a) shall be
completed within a period of 365 days from the date of passing of the resolution.
 128  Lesson 4 • EP-SLCM

(b) Proposed allotment:

• the equity shares of the same class, which are proposed to be allotted through qualified institutions
placement or pursuant to conversion or exchange of eligible securities offered through qualified
institutions placement, have been listed on a stock exchange for a period of at least one year
prior to the date of issuance of notice to its shareholders for convening the meeting to pass the
special resolution.
• Where an issuer, being a transferee company in a scheme of compromise, arrangement and
amalgamation sanctioned by a High Court under sections 391-394 of the Companies Act, 1956 or
approved by a tribunal or the Central Government under sections 230 to 234 of the Companies
Act, 2013, whichever is applicable makes qualified institutions placement, the period for which
the equity shares of the same class of the transferor company were listed on a stock exchange
having nation-wide trading terminals shall also be considered for the purpose of computation of
the period of one year.
• This clause shall not be applicable to an issuer proposing to undertake qualified institutional
placement for complying with the minimum public shareholding requirements specified in the
Securities Contracts (Regulation), Rules 1957.
Explanation: For the purpose of clause (b), “equity shares of the same class” shall mean equity shares
which rank pari-passu in relation to rights as to dividend, voting or otherwise.
(c) An issuer shall be eligible to make a qualified institutions placement if any of its promoters or directors
is not a fugitive economic offender.
(2) All eligible securities issued through a qualified institutions placement shall be listed on the recognised stock
exchange where the equity shares of the issuer are listed. Provided that the issuer shall seek approval under
rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, if applicable.
(3) The issuer shall not make any subsequent qualified institutions placement until the expiry of two weeks from
the date of the prior qualified institutions placement made pursuant to one or more special resolutions.
Conditions for offer for sale by promoters for compliance with minimum public shareholding
requirements specified in the Securities Contracts (Regulation) Rules, 1957. [Regulation 173]
• The promoters and members of the promoter group may make an offer for sale of fully paid-up equity shares,
through a qualified institutions placement, for the purpose of achieving minimum public shareholding in
terms of the Securities Contracts (Regulation) Rules, 1957.
• The promoters or members of the promoter group shall not make such offer for sale if the promoter or
member of the promoter group has purchased or sold any equity shares of the issuer during twelve weeks
period prior to the date of the opening of the issue and they shall not purchase or sell any equity shares of the
issuer during the twelve weeks period after the date of closure of the issue.
• Such promoters or members of the promoter group may, within the twelve-week periods provided above, sell
equity shares of the issuer held by them through offer for sale through stock exchange mechanism specified
by the SEBI or through an open market sale, in accordance with the conditions specified by the SEBI
from time to time, subject to the condition that there shall be a gap of minimum two weeks between the
two successive offer(s).
INITIAL PUBLIC OFFER OF INDIAN DEPOSITORY RECEIPTS
The provisions of this Chapter shall apply to an issue of Indian Depository Receipts (hereinafter referred to as
“IDR”) made in terms of the Companies Act, 2013 and Companies (Registration of Foreign Companies) Rules, 2014.
An issuer making a public issue of IDRs shall satisfy the conditions of Chapter VII of SEBI (ICDR) Regulations, 2018
as on the date of filing draft offer document with the SEBI and also as on the date of filing the offer document with
the Registrar of Companies.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 129

Eligibility conditions [Regulation 183]

• Issuing company is listed in its home country for at least three

immediately preceding years;
• Issuer is not prohibited to issue securities by any regulatory body;
Eligibility
• Issuer has a track record of compliance with the securities market
regulations in its home country;
• Any of its promoters or directors is not a fugitive economic offender.
(‘home country’ means the country where the issuer is incorporated or listed)

• issue size shall not be less than Rs.50 crore;

• at any given time, there shall be only one denomination of IDRs of the
issuer;
Conditions • issuer shall ensure that the underlying equity shares against which
IDRs are issued have been or will be listed in its home country before
listing of IDRs in stock exchange(s);
• issuer shall ensure that the underlying shares of IDRs shall rank pari
passu with the existing shares of the same class.

• it has made an application to one or more stock exchanges to seek an

in-principle approval for listing of the IDRs on such stock exchanges
and has chosen one of them as the designated stock exchange;
• it has entered into an agreement with a depository for dematerialisation
of the IDRs proposed to be issued;

Issuer shall • it has made firm arrangements of finance through verifiable means
ensure that: towards 75% of the stated means of finance for the project proposed
to be funded from issue proceeds, excluding the amount to be raised
through the proposed issue of IDRs or through existing identifiable
internal accruals, have been made;
• The amount for general corporate purposes, as mentioned in objects
of the issue in the draft offer document and the offer document shall
not exceed 25% of the amount being raised by the issuer.

RIGHTS ISSUE OF INDIAN DEPOSITORY RECEIPTS

In addition to compliance with Chapter VII Initial Public Offer of Indian Depository Receipts, wherever applicable, a
listed issuer offering IDRs through a rights issue shall satisfy the conditions specified in Chapter VIII of SEBI (ICDR)
Regulations, 2018 at the time of filing the offer document.
The issuer shall ensure that it has made an application to all the stock exchanges in India, where its IDRs are already
listed, for listing of the IDRs to be issued by way of rights and has chosen one of them as the designated stock
exchange.
 130  Lesson 4 • EP-SLCM

Entities not eligible to make a rights issue [Regulation 213]

An issuer shall not be eligible to make a rights issue of IDRs if –

At the time of undertaking the rights issue,

the issuer is in breach of ongoing material
obligations under the listing agreement
and the SEBI LODR as may be applicable
to such issuer or material obligations
under the deposit agreement entered into
between the domestic depository and the Any of its promoters or directors is a
issuer at the time of initial offering of IDRs fugitive economic offender

INITIAL PUBLIC OFFER BY SMALL AND MEDIUM ENTERPRISES

An issuer making an initial public offer of specified securities shall satisfy the conditions of Chapter IX of SEBI
(ICDR) Regulations, 2018 as on the date of filing of the draft offer document with the SME exchange and also as on
the date of filing the offer document with the Registrar of Companies.

Entities not eligible to make an initial public offer [Regulation 228]

An issuer shall not be eligible to make an initial public offer:

(a) if the issuer, any of its promoters, promoter group or directors or selling shareholders are debarred from
accessing the capital market by the SEBI

(b) if any of the promoters or (c) if the issuer or any of its promoters (d) if any of its promoters or directors
directors of the issuer is a promoter or directors is a willful defaulter is a fugitive economic offender
or director of any other company
which is debarred from accessing
the capital market by the SEBI

Explanation: The restrictions under clauses (a) and (b) shall not apply to the persons or entities mentioned therein,
who were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the
draft offer document with the SME Exchange.
Eligibility requirements for an initial public offer [Regulation 229]

If post issue paid-up capital is <= Rs.10 Crores - list only on SME Board

If post issue paid-up capital is > Rs 10 crores but up to Rs.25 crores – Option to list either on SME
Board or on Main Board

SEBI does not issue any observation on the offer document

The lead manager(s) shall submit a due-diligence certificate to SEBI

IPO shall be 100% underwritten. The lead manager(s) shall underwrite at least 15%
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 131

Compulsory market making for a minimum period of 3 years from the date of listing

Minimum application size in IPO & Trading lot shall be one lakh rupees

May migrate to Main Board if SR is passed through postal ballot with majority of minority

In case of an issuer formed out of merger or a division of an existing company, the track record of the resulting issuer
shall be considered only if the requirements regarding financial statements as specified above are complied with.
General conditions [Regulation 230]
(1) An issuer making an initial public offer shall ensure that:
• it has made an application to one or more SME exchanges for listing of its specified securities on such
SME exchange(s) and has chosen one of them as the designated stock exchange
• it has entered into an agreement with a depository for dematerialisation of its specified securities
already issued and proposed to be issued;
• all its existing partly paid-up equity shares have either been fully paid-up or forfeited;
• all specified securities held by the promoters are in the dematerialised form;
• it has made firm arrangements of finance through verifiable means towards 75% of the stated means
of finance for the project proposed to be funded from the issue proceeds, excluding the amount to be
raised through the proposed public offer or through existing identifiable internal accruals.
(2) The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document
and the offer document shall not exceed 25% of the amount being raised by the issuer.

INNOVATORS GROWTH PLATFORM

Definition of Innovators growth platform

“Innovators growth platform” means the trading platform for listing and trading of specified
securities of issuers that comply with the eligibility criteria specified in regulation 283 of
SEBI (ICDR), 2018

Listing on Innovators Growth Platform (IGP)

Aimed to list start ups which are intensive in the use of technology, information technology, intellectual
property, data analytics, bio-technology or nano-technology to provide products, services or business
platform

At least 25% of pre-issue capital is held by QIBs, Innovators Growth Platform Investors, any other class
of investors as specified by SEBI for atleast a 1 year

Listing is allowed with or without IPO. SEBI will issue its observations in both the cases

The minimum offer size shall be ten crore rupees in case of IPO

Minimum application size shall be two lakh rupees and in multiples thereof

Number of allottees in the initial public offer shall at least be fifty

Minimum trading lot shall be two lakh rupees and in multiples thereof
 132  Lesson 4 • EP-SLCM

BONUS ISSUE

Bonus issue of shares means additional shares issued by the company to its
existing shareholders to reward for their royalty and is an opportunity to
enhance the shareholders wealth. The bonus shares are issued without any cost
to the Company by capitalizing the available reserves.

A listed company issuing bonus shares shall comply with the requirements of Companies Act, 2013 and also Chapter
XI of SEBI (ICDR) Regulations, 2018.

Conditions for a bonus issue [Regulation 293]

Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to
issue bonus shares to its members if:

it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc

If there is no such provision in the articles of association, the issuer shall pass a resolution at
its general body meeting making provisions in the articles of associations for capitalisation
of reserve

it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it

it has not defaulted in respect of the payment of statutory dues of the employees such as
contribution to provident fund, gratuity and bonus

any outstanding partly paid shares on the date of the allotment of the bonus shares, are
made fully paid-up

any of its promoters or directors is not a fugitive economic offender

Restrictions on a bonus issue [Regulation 294]

• An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same
class in favour of the holders of outstanding compulsorily convertible debt instruments if any, in proportion
to the convertible part thereof.
• The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments,
shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of
such convertible debt instruments, optionally convertible instruments, warrants, as the case may be, on the
same terms or same proportion at which the bonus shares were issued.
• A bonus issue shall be made only out of free reserves, securities premium account or capital redemption
reserve account and built out of the genuine profits or securities premium collected in cash and reserves
created by revaluation of fixed assets shall not be capitalised for this purpose.
• Bonus shares shall not be issued in lieu of dividends.
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 133

• If an issuer has issued SR equity shares to its promoters or founders, any bonus issue on the SR equity shares
shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in
a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity
shares along with existing SR equity shares.

Completion of a bonus issue [Regulation 295]

• An issuer, announcing a bonus issue after approval by its board of directors and not requiring shareholders’
approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue
within fifteen days from the date of approval of the issue by its board of directors:
• Where the issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making
the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of
its board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’
approval.
Explanation: For the purpose of a bonus issue to be considered as ‘implemented’ the date of commencement
of trading shall be considered.
• A bonus issue, once announced, shall not be withdrawn.

POWER TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases [Regulation 295A]
• SEBI may exempt any person or class of persons from the operation of all or any of the provisions of these
regulations for a period as may be specified but not exceeding twelve months, for furthering innovation
relating to testing new products, processes, services, business models, etc. in live environment of regulatory
sandbox in the securities markets.
• Any exemption granted by the SEBI shall be subject to the applicant satisfying such conditions as may be
specified by the Board including conditions to be complied with on a continuous basis.
Explanation — For the purposes of these regulations, “regulatory sandbox” means a live testing environment where
new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the SEBI.
PROCEDURE FOR ISSUE OF SECURITIES
In the light of the provisions of the Companies Act and the guidelines issued by Government/SEBI under the
Securities Contracts (Regulation) Rules, 1957 and the SEBI Act, 1992, the procedure for issue of securities to be
followed by companies is given below. This procedure should be read along with the relevant SEBI regulations and
provisions of the other Acts.
Issue of Shares to the Public
A company proposing to raise resources by a public issue should first select the type of securities i.e., shares and/
or debentures to be issued by it. In case the company has applied for financial assistance to any of the financial/
investment institutions, the requirement of the funds to be raised from the public is to be decided in consultation
with the said institution while appraising the project of the company. The decision regarding the issue of shares to
be made at par or premium should be taken. The various steps involved in public issue of shares are enumerated
below:
(1) Compliance with the SEBI Regulations: Before making any issue of capital, it is to be ensured that the
proposed issue complies with the eligibility norms and other provisions of SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009.
 134  Lesson 4 • EP-SLCM

(2) Holding of general meeting: A general meeting of the shareholders (annual or extraordinary) is to be
convened for obtaining their consent to the proposed issue of shares if the articles so require. In case the
proposed issue requires any increase in authorised share capital (Section 61, 62, 64), alteration in capital
clause of the Memorandum of Association (Section 13), alteration of the Articles of Association (Section 14)
etc. the approvals for the same should also be obtained at the General Meeting.
(3) Appointment of managers to the issue: The Company issuing shares is to appoint one or more Merchant
Bankers to act as managers to the public issue.
(4) Appointment of various other agencies: The company should in consultation with the Managers to the
issue, decide upon the appointment of the following other agencies:
(a) Registrars to the Issue;
(b) Collecting bankers to the Issue;
(c) Advisors to the Issue;
(d) Underwriters to the Issue;
(e) Brokers to the Issue;
(f) Printers;
(g) Advertising Agents,
(h) Self Certified Syndicate Banks, etc.
(5) Drafting of prospectus: Next step is to draft a prospectus in accordance with Section 26 of the Companies
Act, 2013 and an abridged prospectus as required under Section 33(1) of the Companies Act, 2013. The
prospectus should contain the disclosures as required by the SEBI Regulations under Schedule VIII.
(6) Intimation to Stock Exchange: A copy of the Memorandum and Articles of Association of the company is to
be sent to the Stock Exchanges where the shares are to be enlisted, for approval.
(7) Approval of prospectus: The draft offer document along with the application form for issue of shares should
be got approved by the solicitors/legal advisors of the company to ensure that it contains all disclosures
and information as required by various statutes, rules, regulations, notifications, etc. The managers to the
issue should also verify and approve the draft prospectus. The financial institutions providing loan facilities
generally stipulate that the prospectus should be got approved by them. The company should in such a case,
forward a copy of the draft prospectus for their verification and approval as well. The approval of underwriters
should also be taken if they so require.
A copy of the draft offer document is also to be filed with the SEBI for scrutiny. Merchant Bankers, acting
as the Lead Manager to ensure that an offer document contain the disclosure requirements as specified by
the SEBI from time to time for the issue of securities. Also, to ensure that an offer document provides a true,
correct and fair view of the state of affairs of the company which are adequate for the investors to arrive at
a well-informed investment decision. The Merchant Bankers are required to submit the draft of the offer
document along with Due Diligence Certified to the SEBI in the form specified within six weeks before the
issue is scheduled to open for subscription. Further, they are held responsible for ensuring the compliance
with the SEBI Rules, Regulations, Guidelines and requirements for other laws, for the time being in force.
(8) Approval of board of directors to prospectus and other documents: After getting observations of the
SEBI in the draft prospectus and the application form, the board of directors of the company should approve
the final draft before filing with the Registrar of Companies. The company should, therefore, hold the meeting
of the board of directors to transact the following business:
• to approve and accept consent letters received from various parties agencies to act in their respective
capacities;
• to approve and accept appointment of underwriters, brokers, bankers to the issue registrar to the
issue, solicitors and advocates to the issue, etc;
 Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 135

• to accept the Auditors’ Report for inclusion in the prospectus;

• to approve the date of opening of subscription list as also earliest and latest dates for closing of
subscription list with the authority in favour of any director for earlier closing if necessary;
• to approve draft prospectus/draft abridged prospectus and the draft share application form;
• to authorise filing of the prospectus signed by all the directors or their constituted attorneys with the
Registrar of Companies;
• to authorise any officer of the company to deliver the prospectus for registration with the Registrar of
Companies and to carry out the corrections, if any, at the office of the Registrar of Companies;
• to approve the format of the statutory announcement;
(9) Making application to Stock Exchange(s) for permission to listing: Before filing prospectus with the
Registrar of Companies the company should submit an application(s) to the Stock Exchange(s) for enlistment
of securities offered to the public by the said issue [Section 40(1) of the Companies Act, 2013]. The fact that
an application(s) has/have been made to the Stock Exchange(s) must be stated in the prospectus.
(10) Printing and distribution of prospectus and application forms: After receipt of the intimation from
Registrar of Companies regarding registration of prospectus, the company should take steps to issue the
prospectus within 90 days of its registration with ROC. For the purpose, the first step is to get adequate
number of prospectuses and application forms printed. The provisions of Section 33 of the Companies Act,
2013 should be kept in view in this regard which provide that no one shall issue any form of application for
shares in or debenture of a company unless the form is accompanied by a memorandum containing such
salient features of a prospectus as may be prescribed.
At least 2 weeks before the announcement is made in any newspaper, journal etc. requisite number of copies
of the prospectus and application forms accompanied by the abridged prospectus should be distributed to
the brokers, underwriters, merchant bankers, lead managers, bankers etc. to the issue.
(11) Pricing
(12) Promoters contribution and lock-in-period
(13) Underwriting
(14) Mandatory Collection Centres
(15) Certificate relating to promoters’ contribution: The SEBI Regulations require that atleast one day prior to
the date of opening of the issue, a certificate from the Chartered Accountant to the effect that the promoters’
contribution in its entirety has been brought in advance before the public issue opens should be forwarded to
it. The certificate should be accompanied by a list of names and addresses of friends, relatives and associates
who have contributed to the promoters’ quota, along with the amount of subscription made by each of them.
The same shall be applicable if the promoter do not hold shares equivalent to minimum 20% of Post issue
paid up capital.
(16) Coordination with the bankers to the issue: The date of opening and closing of the subscription list should
be intimated to all the collecting and controlling branches of the bank with whom the company has entered
into an agreement for the collection of application forms. Further, the company should ensure that a separate
bank account is opened for the purpose of collecting the proceeds of the issues as required by Section 40(3)
of the Companies Act, 2013 and furnish to the controlling branches the resolution passed by the Board of
directors for opening bank account.
(17) Minimum subscription
(18) Allotment of shares: A return of allotment in Form PAS-3 of the Companies (Prospectus and Allotment of
Securities) should be filed with the Registrar of Companies within 30 days of the date of allotment along with
the fees as rules, 2014 specified in the Companies (Registration Offices and Fees) Rules, 2014.
 136  Lesson 4 • EP-SLCM

(19) Refund orders: The company shall disclose the mode in which it shall made refunds to applicants in the
prospectus and abridged prospectus.
ROLE OF COMPANY SECRETARY

SEBI Circular
Certification by Practising Company Secretary in case of offer/allotment of securities by companies to more than
49 and up to 200 investors. To issue a certificate regarding issuance of securities to more than 49 and up to 200
investors that the refund procedure as prescribed by the SEBI has been duly complied with [SEBI Circular No.
Eligibility
CFD/DIL3/CIR/P/2016/53 dated May 03, 2016]
In addition to the above, the Company Secretaries also have a major role to play in ensuring compliance with SEBI
(ICDR) Regulations, 2018 and other Capital market regulations including:
• The Company Secretaries have to guide the management in various regulatory and compliance activities in
public issue and listing
• The Company Secretary also has a key role to play in drafting of prospectus, securities documents and
approval listing or delisting of the securities.
• Co-coordinating and working closely with the Bankers, Registrars, Underwriters and relevant intermediaries.
• Operating as required under various laws including Companies Act, Regulations and Guidelines issued by
SEBI and Stock Exchange needs.
• Ensuring compliance with the regulations relating to Issue of Capital and Disclosure Requirements.
• The Company Secretary shall also ensure compliance with the rules and provisions related to the internal
audit, certifications and other applicable rules.

LESSON ROUND-UP

• Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of
prospectus.

• All listed companies whose equity shares are listed on a stock exchange and unlisted companies eligible to
make a public issue and desirous of getting its securities listed on a recognised stock exchange pursuant
to a public issue, may freely price its equity shares or any securities convertible at a later date into equity
shares.

• Issue of Securities are regulated by the SEBI (ICDR) Regulations, 2018.

• The SEBI (ICDR) Regulations, 2018 lays down the provisions and procedure for various types of issue,
including public and rights issue.

• In case of an IPO, the promoters of the issue shall hold at least 20% of the post issue capital.

• The SR shares shall be issued only to the promoters/ founders who hold an executive position in the
issuer company;

• The promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of
one year from the date of allotment in the IPO.
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 137

• A merchant banker holding a valid certificate of registration is required to be appointed to manage the
issue.

• Every company making a public issue is required to appoint a compliance officer and intimate the name
of the compliance officer to SEBI.

• Public issue must be kept open for atleast 3 working days but not more than 10 working days including
the days for which the issue is kept open in case of revision in price band.

• Rights issue means an offer of specified securities by a listed issuer to the shareholders of the issuer as
on the record date fixed for the said purpose.

• Qualified institutions placement means issue of eligible securities by a listed issuer to qualified
institutional buyers on a private placement basis and includes an offer for sale of specified securities by
the promoters and/or promoter group on a private placement basis, in terms of these regulations.

• Innovators growth platform means the trading platform for listing and trading of specified securities of
issuers that comply with the eligibility criteria specified in regulation 283 of SEBI (ICDR), 2018.

• Bonus issue of shares means additional shares issued by the Company to its existing shareholders to
reward for their royalty and is an opportunity to enhance the shareholders wealth. The bonus shares are
issued without any cost to the Company by capitalizing the available reserves.

GLOSSARY

Average market
It means the sum of daily market capitalization of “public shareholding” for a period of capitalisation of one year
up to the end of the quarter preceding the month in which the proposed public shareholding issue was approved
by the Board of Directors/ shareholders, as the case may be, divided by the number of trading days.
Basis of allotment
An allotment pattern of an issue among different categories of applicant.
General Corporate Purpose
It includes such identified purposes for which no specific amount is allocated or any amount so specified towards
General Corporate Purpose or any such purpose by whatever name called, in the draft offer document filed with SEBI.
Offer for sale
An offer of securities by existing shareholder(s) of a company to the public of subscription through an offer document.
Price Band
The range within which the price of a security or the index of a currency is permitted to move within a given period.
138  Lesson 4 • EP-SLCM

TEST YOURSELF

1. Discuss briefly provisions relating to reservation on competitive basis under the SEBI (ICDR) Regulations, 2018.
2. What is the eligibility requirement for making an initial public offer by an issuer?
3. A company cannot offer its shares at different sets of people in a particular public issue. Comment
4. Briefly enumerate the various conditions required to be fulfilled by an issuer to issuer warrant in an initial
public offer.
5. What do you mean by SR equity shares?
6. P Ltd. is planning to issue an IPO in 2019 for which a draft offer document is proposed to be filed in
September, 2019. The following data is available regarding the company :
(`in crore)

2015-16 2016-17 2017-18

Net Tangible Assets 5.00 8.00 7.00
Monetary Assets 1.00 3.00 3.00
Net Worth 3.00 4.00 5.00

(i) Advice the company whether they can proceed with the IPO.
(ii) Will your answer be different if value of monetary assets is Rs. 4 crore in 2016-17 ?
(iii) How will you deal with the situation, if company has monetary assets of Rs. 5 crore in the year 2017-18
?
7. Write short notes on –
(a) Minimum subscription
(b) Minimum promoters’ contribution and lock-in-period
(c) Offer Document
(d) Red-herring Prospectus
(e) Regulatory sandbox

LIST OF FURTHER READINGS

• SEBI Manual
• Premier on Companies Act, 2013
• Regulations/Rules/Guidelines/Circulars issued by SEBI, RBI, MCA etc. from time to time
• SEBI Annual Reports
• SEBI Monthly Bulletin
Lesson 4 • An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 139

OTHER REFERENCES (Including Websites/Video Links)

[Link]
[Link]
[Link]
[Link]
[Link]
www. [Link]
[Link]
140  Lesson 4 • EP-SLCM
 An Overview of SEBI (Listing
Obligations and Disclosure
Lesson 5 Requirements) Regulations, 2015

Key Concepts One Learning Objectives Regulatory Framework

Should Know
To understand: • SEBI (Listing Obligations
• Disclosures and Disclosure
• Key provisions of the SEBI
Requirements) Regulations,
• Designated (LODR) Regulations, 2015
2015
securities • Various time and event
• Specified securities based compliances
• Various disclosure
• Listing agreement requirements prescribed
• Key Managerial therein
Personnel • Regulatory prescriptions on
Corporate Governance
• Listed Entity provisions
• Net Worth • Conceptual Understanding
on various committees of
• Related Party
the Board
• Small and Medium • Conceptual Understanding
Enterprises on various policies of a listed
• Subsidiary Company company

Lesson Outline
• Introduction • Compliances under SEBI
• Regulatory Framework of (LODR) Regulations, 2015
SEBI (Listing Obligations and for the Listed Entity which
Disclosure Requirements) has listed its Non-
Regulations, 2015 Convertible Debt Securities
or Non-Convertible
• Key Definitions
Redeemable Preference
• Applicability Shares or Both
• Obligations of Listed Entities • Policies covered under SEBI
• Compliances under SEBI (LODR) Regulations, 2015
(LODR) Regulations, 2015 • Liability of a Listed Entity
• Corporate Governance under for Contravention
SEBI (LODR) Regulations, • Role of Company Secretary
2015
• LESSON ROUND-UP
• Prior Intimations
• GLOSSARY
• Disclosure of Events or
• TEST YOURSELF
Information
• LIST OF FURTHER READINGS
• Meeting of shareholders and
voting • OTHER REFERENCES
 142  Lesson 5 • EP-SLCM

INTRODUCTION
Section 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) provides that where the securities are listed
on the application of any person in any recognised stock exchange, such person shall comply with the conditions of
the listing agreement with that stock exchange. Pursuant to insertion of these provisions in the SCRA in 1956, the
Listing Agreement, although a contract, was made a statutory requirement, thereby making it mandatory for every
listed entity in India to comply with the Listing Agreement.
In India, the Securities and Exchange Board of India (SEBI) regulats listed companies through the medium of listing
agreement entered into between each listed company with the concerned stock exchange. Compliance with the
listing conditions is mandatory by virtue of the governing law. SEBI has modified the provisions relating to Listing
Agreement that the companies need to enter into with the stock exchanges while listing securities and replaced the
Listing agreement with the new the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(‘Listing Regulations’).
Listing of securities with stock exchange is a matter of great importance for companies and investors, because this
provides the liquidity to the securities in the market. Any company intending to offer its shares to the public for
subscription is required to be listed on the stock exchange and has to comply with SEBI (Listing Obligation and
Disclosure Requirements) Regulations, 2015 (SEBI (LODR) Regulations). A company seeking listing of securities on
the Stock Exchange is required to enter into a formal listing agreement with the Stock Exchange.
Accordingly, the listed entity, before issuing securities, shall obtain an ‘in-principle’ approval from recognised stock
exchange(s) in the following manner:
(a) where the securities are listed only on recognised stock exchange(s) having nationwide trading terminals,
from all such stock exchange(s);
(b) where the securities are not listed on any recognised stock exchange having nationwide trading terminals,
from all the stock exchange(s) in which the securities of the issuer are proposed to be listed;
(c) where the securities are listed on recognised stock exchange(s) having nationwide trading terminals as well
as on the recognised stock exchange(s) not having nationwide trading terminals, from all recognised stock
exchange(s) having nationwide trading terminals.
The requirement of obtaining in-principle approval from recognised stock exchange(s), shall not be applicable for
securities issued pursuant to the scheme of arrangement for which the listed entity has already obtained
No-Objection Letter from recognised stock exchange(s) in accordance with regulation 37 of these SEBI (LODR)
Regulations.
SEBI has prescribed and also specified all the quantitative and qualitative requirements to be continuously complied
with by the issuer for continued listing. The Stock Exchanges monitor the compliances by listed companies and can
order suspension of the trading of such company’s shares in case of any non-compliance.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

SEBI notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’/
SEBI (LODR)’’) on September 2, 2015, which were effective from December 1, 2015 with two objectives, firstly, to
align clauses of the listing agreement with Companies Act, 2013 and secondly, to consolidate the conditions under
different securities listing agreements in one single regulation.

REGULATORY FRAMEWORK

S. Chapter and
Schedule No.
No.
under LODR Particulars
Regulations,
2015
1. Chapter I Preliminary (Definitions)
2. Chapter II Principles Governing Disclosures and Obligations of Listed Entity
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 143

3. Chapter III Common Obligations of Listed Entities

4. Chapter IV Obligations of Listed Entity which has Listed its Specified Securities
Obligations of Listed Entity which has Listed its Non-Convertible Debt Securities or
5. Chapter V
Non-Convertible Redeemable Preference Shares or Both
Obligations of Listed Entity which has Listed Its Specified Securities and either Non-
6. Chapter VI
Convertible Debt Securities or Non-Convertible Redeemable Preference Shares or Both

7. Chapter VII Obligations of Listed Entity which has Listed its Indian Depository Receipts

8. Chapter VIII Obligations of Listed Entity which has Listed its Securitised Debt Instruments
9. Chapter VIII A Obligations of Listed Entity which has Listed its Security Receipts
10. Chapter IX Obligations of Listed Entity which has Listed its Mutual Fund Units
11. Chapter X Duties and Obligations of the Recognised Stock Exchange(s)
12. Chapter XI Procedure for Action in Case of Default
13. Chapter XIA Power to relax strict enforcement of the regulations
14. Chapter XII Miscellaneous
15. Schedule I Terms of Securities
16. Schedule II Corporate Governance
Part A - Minimum Information to be Placed Before Board of Directors
Part B – Compliance Certificate
Part C - Role of the Audit Committee and Review of Information by Audit Committee
Part D - Role of Committees (other than Audit Committee)
Part E – Discretionary Requirements
17. Schedule III Part A - Disclosures of Events or Information: Specified Securities
Part B - Disclosure of Information having Bearing on Performance/Operation of Listed
Entity and/or Price Sensitive Information: Non-Convertible Debt Securities &
Non-Convertible Redeemable Preference Shares
Part C - Disclosures of Material Events or Information: Indian Depository Receipts
Part D - Disclosure of Information having Bearing on Performance/ Operation of Listed
Entity and/or Price Sensitive Information: Securitised Debt Instrument
Part E - Disclosure of Events or Information to Stock Exchanges: Security Receipts
18. Schedule IV Part A: Disclosures in Financial Results
Part B: Preparation and Disclosures in Financial Results of Listed Entity which has
Listed its Indian Depository Receipts
19. Schedule V Annual Report
20. Schedule VI Manner of Dealing With Unclaimed Shares
21. Schedule VII Transfer of Securities
22. Schedule IX Amendments to other Regulations
23. Schedule X List of SEBI Circulars which stand Rescinded
24. Schedule XI Fee in respect of draft Scheme of Arrangement
 144  Lesson 5 • EP-SLCM

KEY DEFINITIONS
• “Listed entity” means an entity which has listed, on a recognised stock exchange(s), the designated securities
issued by it or designated securities issued under schemes managed by it, in accordance with the listing
agreement entered into between the entity and the recognised stock exchange(s).
• “Designated securities” means specified securities, non-convertible debt securities, non-convertible
redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares,
Indian depository receipts, securitised debt instruments, security receipts, units issued by mutual funds and
any other securities as may be specified by the SEBI.
• “Specified securities” means ‘equity shares’ and ‘convertible securities’ as defined under clause (eee) of
sub- regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018.
• “Listing agreement” means an agreement that is entered into between a recognised stock exchange and an
entity, on the application of that entity to the recognised stock exchange, undertaking to comply with
conditions for listing of designated securities.
• “Independent Director” means a non-executive director, other than a nominee director of the listed entity:
(i) who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise
and experience;
(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or
member of the promoter group of the listed entity;
(iii) who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate
company;
(iv) who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with
the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during
the two immediately preceding financial years or during the current financial year;
(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent.
or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be
prescribed from time to time, whichever is lower, during the two immediately preceding financial
years or during the current financial year;
(vi) who, neither himself, nor whose relative(s) —
(A) holds or has held the position of a key managerial personnel or is or has been an employee of
the listed entity or its holding, subsidiary or associate company in any of the three financial
years immediately preceding the financial year in which he is proposed to be appointed;
(B) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of —
1. a firm of auditors or company secretaries in practice or cost auditors of the listed entity
or its holding, subsidiary or associate company; or
2. any legal or a consulting firm that has or had any transaction with the listed entity, its
holding, subsidiary or associate company amounting to ten per cent or more of the gross
turnover of such firm;

(C) holds together with his relatives two per cent or more of the total voting power of the listed
entity; or
(D) is a chief executive or director, by whatever name called, of any non-profit organisation that
receives twenty-five per cent or more of its receipts or corpus from the listed entity, any of its
promoters, directors or its holding, subsidiary or associate company or that holds two per cent
or more of the total voting power of the listed entity;
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 145

(E) is a material supplier, service provider or customer or a lessor or lessee of the listed entity;
(vii) who is not less than 21 years of age
(viii) who is not a non-independent director of another company on the board of which any non- independent
director of the listed entity is an independent director

APPLICABILITY
These regulations shall apply to a listed entity which has listed any of the following designated securities on
recognised stock exchange(s):

Securitised debt
instruments
Indian depository Security
receipts receipts

NCDs, NCRPs, Units issued by

Perpetual Debt mutual funds
Instrument

Specified securities
listed on main Any other
board or SME
Exchange or
Applicability securities as may
be specified by
Innovators Growth SEBI
Platform .

The provisions of these regulations which become applicable to listed entities on the basis of
market capitalisation criteria shall continue to apply to such entities even if they fall below
such thresholds.

OBLIGATIONS OF LISTED ENTITIES

The obligations of listed entities have been classified under following categories -

Common obligations (Applicable for all listed entities)

Obligations of Listed entity which has listed its Specified Securities

Obligations of Listed entity which has listed its Non- Convertible Debt Securities or Non-
Convertible Redeemable Preference Shares or both
 146  Lesson 5 • EP-SLCM

Obligations of Listed entity which has listed its Specified Securities and either
Non-Convertible Debt Securities or Non-Convertible Redeemable Preference
Shares or both

Obligations of Listed entity which has listed its Indian depository receipts.

Obligations of Listed entity which has listed its securitised debt instruments,

Obligations of Listed entity which has listed its Security Receipts.

Obligations of Listed entity which has listed its units issued by mutual funds.

COMMON OBLIGATIONS OF LISTED ENTITIES

The listed entity shall ensure that key managerial personnel, directors, promoters or any other person dealing with
the listed entity, complies with responsibilities or obligations, if any, assigned to them under these regulations.

General obligations applicable to all listed companies

Following are the key obligations applicable to all listed companies:
• Compliance officer and his/her obligations: A listed company shall appoint a qualified Company Secretary
as the Compliance officer who shall be responsible for:
» ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit
» Co-ordination and reporting to Board, recognised stock exchange(s) and depositories
» Ensuring correct procedures are followed and reports are filed
» Monitoring email address of grievance redressal division
• Share-transfer agent: The listed entity shall appoint a share transfer agent or mange the share transfer
facility in house
• Co-operation with intermediaries registered with the SEBI: Wherever applicable the listed entity
shall co-operate with and submit correct and adequate information to the intermediaries registered with the
SEBI such as credit rating agencies, registrar to an issue and share transfer agent etc.
• Preservation of documents: The listed entity shall have a policy for preservation of documents, approved
by its board of directors, classifying them in at least two categories as follows-
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 147

» documents whose preservation shall be permanent in nature

» documents with preservation period of not less than eight years after completion of the relevant
transactions
However, the listed entity may keep documents in electronic mode.
• Filing of information: The listed entity shall file the reports, statements, documents, filings and any other
information with the recognised stock exchange(s) on the electronic platform as specified by the SEBI or the
recognised stock exchange(s).
• Scheme of Arrangement: The listed entity shall ensure that any scheme of arrangement /amalgamation/
merger /reconstruction /reduction of capital etc. to be presented to any Court or Tribunal does not in any
way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s).
• Payment of dividend or interest or redemption or repayment: The listed entity shall use any of the
electronic mode of payment facility approved by the Reserve Bank of India, in the manner specified in
Schedule I, for the payment of dividends, interest, redemption or repayment amounts.
• Grievance Redressal Mechanism: The listed entity shall ensure that adequate steps are taken for expeditious
redressal of investor complaints. The listed entity shall ensure that it is registered on the SCORES platform or
such other electronic platform or system of the SEBI as shall be mandated from time to time.
• Fees and other charges to be paid to the recognized stock exchange(s): The listed entity shall pay all
such fees or charges, as applicable, to the recognised stock exchange(s), in the manner specified by the SEBI
or the recognised stock exchange(s).

COMPLIANCES UNDER SEBI (LODR) REGULATIONS

The Listed entity shall comply with the following compliances under the SEBI (LODR) Regulations:-
• One Time Compliances
• Quarterly Compliances
• Half yearly Compliances
• Yearly Compliances
• Event based Compliances

One-time Compliances
The following are the one time compliances:-

Regulation Particulars

6(1) A listed entity shall appoint a Company Secretary as the Compliance Officer

7(1) The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.
However, in the case of in-house share transfer facility, as and when the total number of holders of
securities of the listed entity exceeds one lakh, the listed entity shall either register with the SEBI
as a Category II share transfer agent or appoint Registrar to an issue and share transfer agent
registered with the SEBI
9 The listed entity shall have a policy for preservation of documents, approved by its Board of
Directors
 148  Lesson 5 • EP-SLCM

Quarterly Compliances

Regulation Title Particulars Time Limit

13(3) Investor complaints The listed entity shall file with the recognised within 21 days from end of
Statement stock exchange, a statement giving the quarter
number of investor complaints pending at
the beginning of the quarter, those received
during the quarter, disposed of during the
quarter and those remaining unresolved at
the end of the quarter

27(2) Quarterly The listed entity shall submit a quarterly within 21 days from the
Compliance report compliance report on corporate governance end of each quarter
in the format as specified by SEBI from time
to time to the recognized stock exchange(s)

31(1)(b) Shareholding The listed entity shall submit to the stock within 21 days from the
pattern exchange(s) a statement showing holding of end of each quarter
securities and shareholding pattern
separately for each class of securities, in the
format specified by SEBI from time to time
32(1) Statement of The listed entity shall submit to the stock Quarterly Basis till such
deviation(s) or exchange a statement of deviation or variation time the issue proceeds
Variation(s) (for public issue, rights issue, preferential have been fully utilized or
issue etc.) the purpose for which
these proceeds were
raised has been achieved.
32(6) Monitoring Agency Where the listed entity has appointed a within 45 days from the
Report monitoring agency to monitor utilisation of end of each quarter
proceeds of a public or rights issue, the listed
entity shall submit to the stock exchange(s)
any comments or report received from the
monitoring agency
33(3) Financial results The listed entity shall submit quarterly and within 45 days of end of
year-to-date standalone financial results to each quarter, other than
the stock exchange. the last quarter
In case the listed entity has subsidiaries, the
listed entity shall also submit quarterly/
year- to date consolidated financial results
47 Advertisements in Financial results, along-with the modified Within 48 hours of
Newspapers opinion(s) or reservation(s), if any, expressed conclusion of the meeting
by the auditor of board of directors at
which the financial results
were approved
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 149

Half Yearly Compliances

Regula-
Title Particular Time Limit
tion
23(9) Related Party The listed entity shall submit to the stock within 30 days from
disclosures exchange, disclosures of related party on the date of publication
consolidated basis of its standalone and
consolidated financial
results for the half year
33(3) Statement of The listed entity shall also submit as part half-yearly basis
Assets and of its standalone or consolidated financial
Liabilities/ results for the half year a statement of
Cashflow assets and liabilities and a statement of
cash flows by way of a note

Yearly Compliances

Regulation Title Particulars Time Limit

7(3) Compliance The listed entity shall submit a compliance Within 30 from the end of the
Certificate certificate to the exchange, duly signed by financial year
both the compliance officer of the listed
entity and the authorised representative of
the share transfer agent certifying that all
activities in relation to share transfer facility
of the listed entity are maintained either in
house or by Registrar to an issue and share
transfer agent registered with the SEBI
14 Annual Listing The listed entity shall pay all such fees or within 30 days of the end of
Fees charges, as applicable, to the recognised financial year
stock exchange(s), in the manner specified
by SEBI or the recognised Stock Exchange (s)

33(3) Annual Financial The listed entity shall submit annual audited within 60 days from the end of
results standalone financial results with audit the financial year
report and Statement on Impact of Audit
Qualifications applicable only for audit
report with modified opinion, to the stock
exchange
34 Annual Report The listed entity shall submit the annual Not later than the day of
report along with the Notice of the Annual commencement of dispatch to
General Meeting to the stock exchange. its shareholders.
34(1)(b) Changes to annual In case any changes to the annual report, within 48 hours after the
report the revised copy along with the details of annual general meeting
and explanation for the changes shall be sent
36 Annual reports to The listed entity shall send annual report to Not less than 21 days before
securities holders the holders of securities the annual general meeting.
(in soft or hard copy)
150  Lesson 5 • EP-SLCM

40(9) Certificate The listed entity shall ensure that the share within 30 days from the end of
transfer agent and/or the in-house share the financial year
transfer facility, as the case may be, produces
a certificate from a practising company
secretary certifying that all certificates
have been issued within thirty days of the
date of lodgment for transfer, subdivision,
consolidation, renewal, exchange or
endorsement of calls/ allotment monies

Event Based Compliances

Regulation Title Particulars Time Limit

7(5) Share-transfer The listed entity shall intimate the ap- Within 7 days of Agreement
agent pointment of Share Transfer Agent, to the with RTA
stock exchange(s)
28(1) In-principle The listed entity shall obtain In-principle Prior to issuance of Security
approval approval from recognised stock exchange

29(1)(a) read Intimations The listed entity shall give prior intimations At least 5 days in advance
along with of Board Meeting for fi- nancial result viz. (excluding the date of the
proviso to 29 quarterly, half yearly or annual, to the stock intimation and the date of
(2) exchange(s) the meeting)
29(1) (b), (c), Intimations The listed entity shall give prior intimations At least 2 working days in
(d), (e) & (f) of Board Meeting for Buyback, Voluntary advance (excluding the date
read along delisting, Fund raising by way of FPO, Rights of the intimation and date
with 29 (2) Issue, ADR, GDR, QIP, FCCB, Preferential of the meeting)
issue, debt issue or any other method,
declaration/ recommendation of dividend,
issue of convertible securities including
convertible debentures or of debentures
carrying a right to subscribe to equity shares
or the passing over of dividend, proposal for
declaration of Bonus securities etc., to the
stock exchange(s)
29(3) Intimations The listed entity shall give prior intimations At least 11 working days in
of Board Meeting for alteration in nature of Advance
Securities, alteration in the date on which
interest on debentures/ bonds/redemption
amount, etc. shall be payable to the stock
exchange(s)
30(6) Disclosure of events The listed entity shall disclose all events, as Not later than 24 hours
specified in Part A of Schedule III of SEBI from the occurrence of the
(LODR) Regulations, to the stock exchange(s) event or information

31(1)(a) Holding of Specified The listed entity shall submit to the stock One day prior to listing of
securities exchange(s) a statement showing hold- ing Securities
of securities and shareholding pattern
separately for each class of securities prior to
listing of securities
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 151

31(1)(c) Shareholding The listed entity shall submit to the stock Within 10 days of any
pattern exchange(s) a statement showing hold- ing capital restructuring
of securities and shareholding pattern exceeding 2% of the total
separately for each class of securities in case paid-up share capital
of Capital Restructuring
31A (8) Disclosure of The listed entity shall disclose to the stock within 24 hours from
material events in exchange the deemed material events i.e., the occurrence of the event
case for receipt of request for re-classification by
reclassification of the listed entity from the promoter(s)
any person as seeking re-classification, Minutes of the
promoter/public board meeting considering such request
which would include the views of the board
on the request, etc
37(1) Scheme of The listed entity shall file draft Scheme of Prior approval before filing
arrangement Arrangement to the stock exchange(s) with Court or Tribunal
39(2) Issue of Certificate The listed entity shall issue certificates or within 30 days from the
receipts or advices, as applicable, of date of such lodgment
subdivision, split, consolidation, renewal,
exchanges, endorsements, issuance of
duplicates thereof or issuance of new
certificates or receipts or advices, as
applicable, in cases of loss or old decrepit or
worn out certificates or receipts or advices,
as applicable
39(3) Information relating The listed entity shall submit information Within 2 days of getting in-
loss of securities with respect to loss of share certificates formation
and issue of the duplicate certificates to the
stock exchange
40(3) Registering the The listed entity shall register transfers of its within 15 days from the
transfer of securities in the name of the transferee(s) and date of such receipt of
securities issue certificates or receipts or advices, as request for transfer.
applicable, of transfers; or issue any valid
objection or intimation to the transferee or
transferor, as the case may be,
Transmission The listed entity shall proceed the In case securities held in
request transmission request for securities held in Dematerialised Mode,
dematerialization mode and physical mode within 7 days after receipt
of the documents
In case of Physical Mode,
within 21 days after receipt
of the documents
 152  Lesson 5 • EP-SLCM

42(2) Record Date / Book The listed entity shall intimate the record In case of Right Issue, at
Closure date or date of closure of transfer books to all least 3 working days in
the stock exchange(s) specifying the purpose advance (excluding the date
of the record date where it is listed or where of intimation and record date)
stock derivatives are available on the stock
of the listed entity or where listed entity’s
stock form part of an index on which Other than Right Issue, at
derivatives are available. The listed entity least 7 working days in
shall intimate the following events: advance (excluding the
(a)declaration of dividend date of intimation and
record date)
(b)issue of right or bonus shares
(c)issue of shares for conversion of
debentures or any other convertible security
(d)shares arising out of rights attached to
debentures or any other convertible security
(e)corporate actions like mergers, de-
mergers, splits, etc
(f) such other purposes as may be specified
by the stock exchange(s)
* For securities held in physical form the
listed entity may announce transfer book
closure
43A Dividend Dividend Distribution Policy by the top To formulate a dividend
distribution 1000 listed entities based on market distribution policy which
policy capitalization (calculated as on March 31 shall be disclosed on
of every financial year) the website of the listed
entity and a web-link shall
also be provided in their
annual reports.
44(3) Voting results The listed entity shall submit to the stock Within 2 working days
exchange details regarding voting results of conclusion of its
in the format specified by SEBI General Meeting
46 Maintenance of The listed entity shall maintain a functional within 2 working days
website website containing the basic information from the date of change in
about the listed entity and update any content
change in the content of its website.

Note: as per Regulation 36(4), the information and documents made by the listed entity-
(a) to the stock exchanges shall be in XBRL; and
(b) to the stock exchanges and on its website, shall be in a format that allows users to find relevant information
easily through a searching tool.

CORPORATE GOVERNANCE UNDER SEBI (LODR) REGULATIONS, 2015

The listed entities which has listed its specified securities on any recognised stock exchange(s) either on the main
board or on SME Exchange or on Innovators Growth Platform has to comply with certain corporate governance
provisions which are specified in Regulations 17 to 27 and clause (b) to (i) and t of regulation 46(2) and para C, D
and E of Schedule V of the SEBI (LODR) Regulations.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 153

Sl. Listing
Particulars
No. Regulation
1. Definitions 16
2. Board Composition 17(1)
3. Size of the Board 17(1)(a)
4. Appointment of Woman Director 17(1)(a)
5. Minimum number of directors requirement for top 1000 and top 2000 listed entities. 17(1)(c)
6. Where the listed company has outstanding SR equity shares. 17(1)(d)
7. Maximum age of non-executive directors 17 (1A)
8. Number of meetings of the board of directors. 17(2)
9. Quorum for meeting of the board of directors of top 1000 and top 2000 listed entities. 17(2A)
10. Maximum number of directorships 17A
11. Succession planning 17(4)
12. Code of Conduct of Board of Directors & Senior Management 17(5)
13. Prohibited Stock options for Independent Directors (IDs) 17(6)(d)
14. Performance evaluation of IDs 17 (10)
15. Maximum number of directorships 17A
16. Constitution of Audit Committee 18
17. Constitution of Nomination & Remuneration Committee 19
18. Constitution of Stakeholders Relationship Committee 20
19. Constitution of Risk management Committee 21
20. Formulation of Vigil mechanism 22
21. Related party transactions 23
22. Corporate governance requirements with respect to subsidiary of listed entity. 24
23. Secretarial Audit and Secretarial Compliance Report 24A
24. Obligations with respect to Independent Directors 25
25. Obligations with respect to employees including senior management, key managerial 26
persons, directors and promoters.
26. Other Corporate Governance Requirements 27
27. Submission of Corporate Governance Report to Stock Exchange 27(2) (a)
28. Dissemination under a separate section on the website of the company 46(2)
29. Corporate Governance Report to be part of the Annual Report Para C of
Schedule V
30. Declaration signed by the chief executive officer stating that the members of board of Para D of
directors and senior management personnel have affirmed compliance with the code of Schedule V
conduct of board of directors and senior management.
31. Compliance certificate from either the auditors or practicing company secretaries Para E of
regarding compliance of conditions of corporate governance shall be annexed with Schedule V
the directors’ report.
 154  Lesson 5 • EP-SLCM

Exceptions for Listed Entity which has listed its Specified Securities

As per Regulation 15(2) of the SEBI (LODR) Regulations, 2015 the compliance with the corporate governance
provisions as specified in Regulations 17 to 27 and clauses (b) to (i) and t of Regulation 46(2) and para C, D and E
of Schedule V shall not apply, in respect of following -
1. A listed entity having:-
• paid up equity share capital not exceeding rupees 10 crore and
• net worth not exceeding rupees 25 crore, as on the last day of the previous financial year.
Provided that-
Where the provisions of regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and
para C, D and E of Schedule V become applicable to a listed entity at a later date, it shall ensure compliance with the
same within six months from such date.
Further, once the above regulations become applicable to a listed entity, they shall continue to remain applicable till
such time the equity share capital or the networth of such entity reduces and remains below the specified threshold
for a period of three consecutive financial years.

Question: A Company ABC Limited, which has its Equity Shares listed on stock exchanges, has a paid up capital
of Rs. 9 Crore and net worth of Rs. 26 Crore.
Answer: In such a case, the exemption will not be available to ABC Limited as it is required to comply with both
conditions as stated in para 1 above.

2. A listed entity which has listed its specified securities on the SME Exchange.

3. The provisions as specified in regulation 17 shall not be applicable during the insolvency resolution process
period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency
Code: However, the role and responsibilities of the board of directors as specified under regulation 17 shall be
fulfilled by the interim resolution professional or resolution professional in accordance with sections 17 and 23 of
the Insolvency Code.
4. Regulations 18, 19, 20 and 21 shall not be applicable during the insolvency resolution process period in respect
of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code.
However, the roles and responsibilities of the committees specified in the respective regulations shall be fulfilled by
the interim resolution professional or resolution professional.
5. Notwithstanding any provisions under Regulation 15(2) stated above, the provisions of Companies Act, 2013
shall continue to apply, wherever applicable.

KEY PROVISIONS PERTAINING TO CORPORATE GOVERNANCE

Composition of Board of Directors

Board of Directors shall have optimum combination of executive and non-executive directors with at least one-
woman director and not less than fifty per cent. of the board of directors shall comprise of non-executive directors.

However, the Board of directors of the top 500 listed entities shall have at least one independent woman director by
April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman
director by April 1, 2020.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 155

Question:
ABC Limited is a listed entity and having on Board one-woman Director as Executive Director. The Company is
within the top 1000 listed entities. Whether the Company still requires to appoint another woman Director?
Answer:
In the given case, the Company will be required to appoint one Independent woman Director as the Company is
having Executive woman Director and not independent.

The Composition of board of directors of the listed entity shall be as follows:

Chairman Composition
• In case chairperson is a non-executive • at least one-third of the board of directors
director shall comprise of independent directors
Further in case-
• non-executive chairperson is a promoter of the • at least half of the board of directors shall be
listed entity or independent directors
• is related to any promoter or person occupying
management positions at the level of board of
director or at one level below the board of
directors
In case listed entity does not have a regular non- at least half of the board of directors shall comprise of
executive chairperson independent directors

Where the listed company has outstanding SR equity shares, atleast half of the board of directors shall comprise of
independent directors.

Question:
Mr. A is non-executive director of ABC Limited. X, Y and Z are promoters of ABC Limited. Mr. A is a chairperson
of the Company and he is also related to X. Suggest the requirement of Independent directors for ABC Limited.
Answer:
In the given case, since Mr. A is non-executive chairperson and is related to promoter, then ABC Limited will be
required to appoint atleast half of the directors as independent director.

With effect from April 1, 2022, the top 500 listed entities shall ensure that the Chairperson of the board of such
listed entity shall –
• be a non-executive director;
• not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative”
defined under the Companies Act, 2013.
However, the above shall not be applicable to the listed entities which do not have any identifiable promoters as per
the shareholding pattern filed with stock exchanges.

Maximum age of non-executive directors

No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who
has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory
statement annexed to the notice for such motion shall indicate the justification for appointing such a person.
 156  Lesson 5 • EP-SLCM

Explanation: The top 1000 and 2000 entities shall be determined on the basis of market capitalisation as at the end
of the immediate previous financial year.
Minimum Directors Requirement
The board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities
(with effect from April 1, 2020) shall comprise of not less than six directors.
Meetings of Board
Board shall meet at least four times a year, with a maximum time gap of one hundred and twenty days between any
two meetings.
Quorum of board meeting
The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019
and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three
directors, whichever is higher, including at least one independent director.
In case of listed entity, one independent director should be present at the Meeting to form a quorum.

Key Compliance Requirements for Board

• Periodically review compliance reports pertaining to all laws applicable to the listed entity, as well as steps
taken by the listed entity to rectify instances of non-compliances.
• Satisfy itself that plans are in place for orderly succession for appointment to the board of directors and
senior management.
• Lay down a code of conduct for all members of board of directors and senior management and incorporate
duties of independent directors.
• Recommend all fees or compensation, if any, paid to non-executive directors, including independent directors
and shall require approval of shareholders in general meeting.
• Lay down procedures to inform members of board of directors about risk assessment and minimization
procedures
• Responsible for framing, implementing and monitoring the risk management plan for the listed entity.
• Performance evaluation of independent directors
• The minimum information to be placed before the board of directors is specific in Part A of Schedule II.
• The chief executive officer and the chief financial officer shall provide the compliance certificate to the board
of directors as specified in Part B of Schedule II.

Maximum Number of Directorships / Committee Membership & Chairpersonship

• A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not
more than seven listed entities with effect from April 1, 2020. However a person shall not serve as an
independent director in more than seven listed entities.
• Any person who is serving as a whole time director / managing director in any listed entity shall serve as an
independent director in not more than three listed entities.
[Explanation - For the purpose of this regulation, the count for the number of listed entities on which a person
is a director / independent director shall be only those whose equity shares are listed on a stock exchange.]
• A director shall not be a member in more than ten committees or act as chairperson of more than five
committees across all listed entities in which he / she is a director which shall be determined as follows:
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 157

(a) the limit of the committees on which a director may serve in all public limited companies, whether
listed or not, shall be included and all other companies including private limited companies, foreign
companies and companies under Section 8 of the Companies Act, 2013 shall be excluded;
(b) for the purpose of determination of limit, chairpersonship and membership of the audit committee
and the Stakeholders’ Relationship Committee alone shall be considered.

Question:
Mr. A is a Director of ABC Listed company. He holds following membership / chairmanship in following companies –
1. Chairman of Audit Committee of ABC Listed company
2. Chairman of Nomination & Remuneration Committee of ABC Listed company
3. Chairman of Stakeholders’ Relationship Committee of ABC Listed company
4. Chairman of Audit Committee of XYZ Limited company
5. Chairman of Nomination & Remuneration Committee of XYZ Limited company
6. Chairman of Stakeholders’ Relationship Committee of XYZ Limited company
Please advise the limit of membership / chairpersonship.
Answer:
Mr. A, in the given case, is chairman of above mentioned committees. Only Audit Committee and Stakeholders
Relationship Committee will be counted for the purpose and both ABC Listed company and XYZ Limited, being
public limited company will be considered.
In view of the above, his total chairperson is 4 which is within the limit of 5 committee chairpersonship as
permitted.

It is to be noted that chairpersonship is counted in the overall limit of membership as well.

Board Committees

Audit Committee
(Regulation 18)

Nomination and
Risk Management Remuneration
Committee Committees
Committee
(Regulation 21) (Regulation 19)

Stakeholders Relationship
Committee (Regulation
20)
158  Lesson 5 • EP-SLCM

Nomination & Stakeholders

Audit Committee Remuneration Relationship Risk Management
Committee Committee
Committee
Composition • The committee • The committee shall • The committee shall • The Risk
shall comprise comprise of at least comprise of atleast Management
of at least three three directors. three directors. Committee shall
directors.
• All directors of the • The committee shall have minimum
• Two-thirds of the
members of audit committee shall be have at least one three members
committee shall non- executive independent with majority of
be independent directors. director. them being
directors. • At least fifty percent • In case of a listed members of the
• In case of a listed of the directors entity having board of
entity having directors,
shall be outstanding SR
outstanding SR including at
equity shares, the independent equity shares, at
audit committee directors. least two thirds of least one
shall only • In case of a listed the Stakeholders independent
comprise of entity having Relationship C o m director.
independent outstanding SR m i t t e e shall • In case of a
directors. comprise of listed entity
equity shares, two
• All members of having
thirds of the independent
audit committee
shall be nomination and directors. outstanding SR
financially remuneration equity shares, at
literate and at committee shall least two thirds
least one comprise of of the Risk
member shall independent Management
have accounting Committee shall
or related directors.
financial comprise
management independent
expertise directors.
Chairperson • The chairperson • The Chairperson • The chairperson of • The
shall be an shall be an this committee shall Chairperson of
independent independent be a non-executive the Risk
director. director . Provided director. management
• The Chairperson that the chairperson • The Chairperson of committee shall
shall be present of the listed entity, the be a member of
at Annual general whether executive • Stakeholders the board of
meeting to or non- executive, Relationship directors and
answer may be appointed Committee shall be senior
shareholder as a member of the present at the executives of the
queries. Committee and annual general listed entity
shall not chair such meetings to answer may be
Committee. queries of the members of the
• The Chairperson of security holders. committee.
may be present at
the annual general
meeting, to answer
the shareholders’ q
u e r i e s ; however,
it shall be up to the
chairperson to
decide who shall
answer the queries.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 159

Secretarial Standard 2 prescribes that the Chairman of the Audit Committee, Nomination and
Remuneration Committee and the Stakeholders Relationship Committee, or any other Member
of any such Committee authorised by the Chairman of the respective Committee to attend on
his behalf, shall attend the General Meeting.
Meetings • The committee • The committee shall • The committee shall • The committee
shall meet at meet at least once meet at least once in shall meet at
least four times in a year. a year. least twice in a
in a year and year.
not more than
one hundred and
twenty days shall
elapse between
two meetings.
Quorum • The quorum for • The quorum for a • The quorum for
audit committee meeting of the a meeting of the
meeting shall nomination and Risk
either be two remuneration Management
members or one committee shall be Committee shall
third of the either two members be either two
members of the or one third of the members or one
audit committee, members of the third of the
whichever is committee, members of the
greater, with at whichever is committee,
least two greater, including at whichever is
independent least one higher, including
directors. independent at least one
director in member of the
attendance board of
directors in
attendance.
• The meetings of
the risk
management
committee shall
be conducted in
such a manner
that on a
continuous
basis not more
than one
hundred and
eighty days shall
elapse between
any two
consecutive
meetings.
Secretarial Standard 1 prescribes that unless otherwise stipulated in the Act or the Articles or
under any other law, the Quorum for Meetings of any Committee constituted by the Board shall
be as specified by the Board.
If no such Quorum is specified as stated above, the presence of all the members of any such
Committee is necessary to form the Quorum.
 160  Lesson 5 • EP-SLCM

Role of • The role of the • The role of the • The role of the • The board of
Committee audit committee nomination and Stakeholders directors shall
and the remuneration Relationship define the role
information to be committee shall be Committee shall be and
reviewed by the as specified as in as specified as in responsibility of
audit committee Part D of the Part D of the the Risk
shall be as Schedule II. Schedule II. Management
specified in Part Committee and
C of Schedule II. may delegate
monitoring and
reviewing of the
risk
management
plan to the
committee and
such other
functions as it
may deem fit
(such function
shall specifically
cover cyber
security).
• The role and
responsibilities
of the Risk
Management
Committee shall
mandatorily
include the
performance of
functions
specified in Part
D of Schedule II.

Question:
ABC Limited is a listed company having all committees constituted in compliance with listing regulations. Its
Audit committee having 5 directors, out of which 4 directors are independent. At a meeting of the Audit
Committee, 2 directors were present (one non-executive and one independent). Is the meeting valid?
Answer:
In terms of the listing regulations, two independent directors should be present at the meeting of the Audit
Committee to constitute a valid quorum. Therefore, the aforesaid Meeting is invalid as only one Independent
Director was present.

Note:
• The Company Secretary shall act as the secretary to the audit committee.
• The provisions of Risk Management Committee shall be applicable to top 1000 listed entities, determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.
• The Risk Management Committee shall have powers to seek information from any employee, obtain outside
legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers
necessary.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 161

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

Related Party Transactions

Under Listing Regulations, 2015
As per Regulation 2(1) (zb) “related party” means a related party as defined under sub-section (76) of section 2 of
the Companies Act, 2013 or under the applicable accounting standards.
Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding
20% or more of shareholding in the listed entity shall be deemed to be a related party.
Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on
a recognised stock exchange(s).
As per Regulation 2(1)(zc) “related party transaction” means a transfer of resources, services or obligations between
a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party
shall be construed to include a single transaction or a group of transactions in a contract:
Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a
recognised stock exchange(s).
Under Companies Act, 2013
According to section 2 (76) “related party”, with reference to a company, means –
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds or holds along with his relatives,
more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act;
However, nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a
professional capacity;
(viii) Any body corporate which is –
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;
Explanation. – For the purpose of this clause, “the investing company or the venturer of a company” means a
body corporate whose investment in the company would result in the company becoming an associate
company of the body corporate.
 162  Lesson 5 • EP-SLCM

(ix) a director other than an independent director or key managerial personnel of the holding company or his
relative with reference to a company, shall be deemed to be a related party.

When will a transaction with a related party be material?

The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related
party transactions 108[including clear threshold limits duly approved by the board of directors and such policy
shall be reviewed by the board of directors at least once every three years and updated accordingly

A transaction with a related party shall With effect from July 01, 2019 a transaction
be considered material if the involving payments made to a related party
transaction(s) to be entered into with respect to brand usage or royalty shall
be considered material if the transaction(s) to
individually or taken together with
be entered into individually or taken together
previous transactions during a financial with previous transactions during a financial
year, exceeds 10% of the annual year, exceed five percent of the annual
consolidated turnover of the listed consolidated turnover of the listed entity as
per the last audited financial statements of
entity as per the last audited financial
the listed entity.
statements of the listed entity

Question:
A company ABC Limited, listed entity, entered into a transaction with related party namely XYZ Limited for an
amount of Rs. 26 Crore. The turnover of ABC Limited is Rs. 240 Cr on standalone basis and after considering
consolidation of subsidiaries & associates is Rs. 290 Cr. Please advise whether the transaction is related party
transaction or not.
Answer:
A material related party transaction is transaction which either individually or taken together with previous
transactions during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity as per the
last audited financial statements of the listed entity.
In the above case, ABC Limited has a consolidated turnover of Rs. 290 Cr and therefore, threshold for materiality
would be Rs. 29 Cr for a transaction with related party.
In case ABC Limited has not entered into any transaction during the financial year 2019-20, which crosses the
overall limit of Rs. 29 Cr including the existing Rs. 26 Cr transaction then it is not material related party transaction.

Approval of Audit Committee

All related party transactions shall require prior approval of the audit committee.

This approval is required irrespective of transaction is material or not.

Omnibus Approval: Audit committee may grant omnibus approval for related party transactions proposed to be
entered into by the listed entity subject to the following conditions-
(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on
related party transactions of the listed entity and such approval shall be applicable in respect of transactions
which are repetitive in nature;
(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval
is in the interest of the listed entity;
(c) the omnibus approval shall specify:
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 163

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of
transactions that shall be entered into,
(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and
(iii) such other conditions as the audit committee may deem fit.
However, where the need for related party transaction cannot be foreseen and aforesaid details are not
available, audit committee may grant omnibus approval for such transactions subject to their value not
exceeding rupees one crore per transaction.
(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered
into by the listed entity pursuant to each of the omnibus approvals given.
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals
after the expiry of one year.

Approval of the shareholders

All material related party transactions shall require approval of the shareholders through resolution and no related
party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.
However, the requirements specified above shall not apply in respect of a resolution plan approved under section
31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of
the resolution plan being approved.

Exceptions
The approval of Audit committee and shareholders shall not be required in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the shareholders at the general meeting for approval.
Government Company(ies) means Government Company as defined in sub-section (45) of section 2 of the Companies
Act, 2013.

Other provisions
• The provisions of this regulation shall be applicable to all prospective transactions.
• For the purpose of this regulation, all entities falling under the definition of related parties shall not vote to
approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.
• All existing material related party contracts or arrangements entered into prior to the date of notification of
these regulations and which may continue beyond such date shall be placed for approval of the shareholders
in the first General Meeting subsequent to notification of these regulations.
• The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated
financial results for the half year, disclosures of related party transactions on a consolidated basis, in the
format specified in the relevant accounting standards for annual results to the stock exchanges and publish
the same on its website.

Corporate Governance requirements related to Subsidiary

• “Material Subsidiary” shall mean a subsidiary, whose income or net worth exceeds ten percent of the
consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year.
Explanation.- The listed entity shall formulate a policy for determining ‘material’ subsidiary.
 164  Lesson 5 • EP-SLCM

• At least one independent director on the board of directors of the listed entity shall be a director on the board
of directors of an unlisted material subsidiary, whether incorporated in India or not.
• The audit committee of the listed entity shall review the financial statements, in particular, the investments
made by the unlisted subsidiary.
• The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting
of the board of directors of the listed entity.
• The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of
the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted
subsidiary.
Explanation.- For the purpose of this regulation, the term “significant transaction or arrangement” shall mean any
individual transaction or arrangement that exceeds or is likely to exceed ten percent of the total revenues or total
expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately
preceding accounting year

Question:
ABC Limited is having three subsidiaries A Ltd, B Ltd and C Ltd. The consolidated income of ABC Limited is Rs.
300 Cr and networth is Rs. 600 Cr.
The income and networth of A Ltd, B Ltd and C Ltd. are as follows –

Income Networth
A Ltd 10 Cr 65 Cr
B Ltd 45 Cr 14 Cr
C Ltd 10 Cr 18 Cr
Please examine if there is any material subsidiary of ABC Limited.
Answer:
In the given case,
10 % of consolidated income and networth of ABC Limited would be 30 Cr and 60 Cr respectively.
Hence, A Ltd since crossed threshold in terms of Networth, would be a material subsidiary.
B Ltd since crossed threshold in terms of income, would be a material subsidiary.
C Ltd since does not cross either of the threshold, would not be a material subsidiary.

Secretarial Audit and Secretarial Compliance Report

• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial
audit and shall annex a secretarial audit report given by a company secretary in practice, in such form as
specified, with the annual report of the listed entity.
• Every listed entity shall submit a secretarial compliance report in such form as specified, to stock exchanges,
within sixty days from end of each financial year.

Obligations in Respect of Independent Directors

• No person shall be appointed or continue as an alternate director for an independent director of a listed
entity with effect from October 1, 2018.
• The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and
rules made thereunder.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 165

• The independent directors of the listed entity shall hold at least one meeting in a financial year, without the
presence of non-independent directors and members of the management and all the independent directors
shall strive to be present at such meeting.
• An independent director who resigns or is removed from the board of directors of the listed entity shall be
replaced by a new independent director by listed entity at the earliest but not later than the immediate next
meeting of the board of directors or three months from the date of such vacancy, whichever is later.

Where the listed entity fulfils the requirement of independent directors in its board of directors without filling
the vacancy created by such resignation or removal, the requirement of replacement by a new independent
director shall not apply.

• The listed entity shall familiarise the independent directors through various programmes about the listed
entity, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
(c) roles, rights, responsibilities of independent directors; and
(d) any other relevant information.
• Every independent director shall, at the first meeting of the board in which he participates as a director and
thereafter at the first meeting of the board in every financial year or whenever there is any change in the
circumstances which may affect his status as an independent director, submit a declaration that he meets the
criteria of independence.
• With effect from October 1, 2018, the top 500 listed entities by market capitalization calculated as on March
31 of the preceding financial year, shall undertake Directors and Officers insurance (‘D and O insurance’) for
all their independent directors of such quantum and for such risks as may be determined by its board of
directors.

Obligation in Respect of Employees including senior Management, key Managerial persons, Directors and
Promoters

• Every director shall inform the listed entity about the committee positions he or she occupies in other listed
entities and notify changes as and when they take place.
• All members of the board of directors and senior management personnel shall affirm compliance with the
code of conduct of board of directors and senior management on an annual basis.
• Senior management shall make disclosures to the board of directors relating to all material, financial and
commercial transactions, where they have personal interest that may have a potential conflict with the
interest of the listed entity at large.
Explanation.- For the purpose of this sub-regulation, conflict of interest relates to dealing in the shares of
listed entity, commercial dealings with bodies, which have shareholding of management and their relatives etc.

PRIOR INTIMATIONS [REGULATION 29]

The listed entity is required to give prior intimation to stock exchange about the meeting of the board of directors
in which any of the following proposals is due to be considered. This is to ensure a complete transparency and to
maintain the volatility of the market price of the shares of the Company.
 166  Lesson 5 • EP-SLCM

At least 5 Clear Days in At least 2 Working Days in advance At least 11 Working Days in
advance advance
• financial results viz. • proposal for buyback of securities; • any alteration in the form or
quarterly, half yearly, • proposal for voluntary delisting nature of any of its listed
or annual, as the case • fund raising by way of FPO, rights issue, securities or in the rights or
may be; ADR/GDR/FCB, QIP, debt issue, privileges of the holders
preferential issue or any other method thereof.
and for determination of issue price: • any alteration in the date on
• declaration/ recommendation of dividend, which, the interest on
issue of convertible securities including debentures or bonds, or the
convertible debentures redemption amount of
• declaration of bonus securities redeemable shares or of
debentures or bonds, shall be
payable.

DISCLOSURE OF EVENTS OR INFORMATION [REGULATION 30]

• The listed entity shall frame a policy for determination of materiality, based on criteria specified in this sub-
regulation, duly approved by its board of directors, which shall be disclosed on its website.

• The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose
of determining materiality of an event or information and for the purpose of making disclosures to stock
exchange and the contact details of such personnel shall be also disclosed to the stock exchange and as well as
on the listed entity's website.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 167

• The listed entity shall first disclose to stock exchange of all events or information as soon as reasonably possible
and not later than 24 hours from the occurrence of event or information.

Outcome of Meetings of the board of directors

(to be disclosed to the Exchange within 30 minutes of the closure of the meeting)
a) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend and the date
on which dividend shall be paid/dispatched;
b) any cancellation of dividend with reasons thereof;
c) the decision on buyback of securities;
d) the decision with respect to fund raising proposed to be undertaken
e) increase in capital by issue of bonus shares through capitalization including the date on which such bonus
shares shall be credited/dispatched;
f) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for future issue or
the creation in any form or manner of new shares or securities or any other rights, privileges or benefits to
subscribe to;
g) short particulars of any other alterations of capital, including calls;
h) financial results;
i) decision on voluntary delisting by the listed entity from stock exchange(s).
In case of board meetings being held for more than one day, the financial results shall be disclosed within thirty
minutes of end of the meeting for the day on which it has been considered

MEETINGS OF SHAREHOLDERS AND VOTING [REGULATION 44]

• The top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall
hold their annual general meetings within a period of five months from the date of closing of the financial year.
• The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general
meetings.
• The listed entity shall provide the facility of remote e-voting to its shareholders and submit to the stock
exchange, within 2 working days of conclusion of its General Meeting, details regarding the voting results in
the format specified by the Board.

REGULATIONS APPLICABLE ON TOP 500, TOP 1000 AND TOP 2000 LISTED ENTITIES

TOP 500 LISTED ENTITIES TOP 1000 LISTED ENTITIES TOP 2000 LISTED ENTITIES
Board of directors shall have at least Board of directors shall have at least -
one independent woman director by one independent woman director by
April 1, 2019 April 1, 2020
With effect from April 1, 2022, the The board of directors (with effect The board of directors (with effect
Chairperson of the board of such from April 1, 2019) shall comprise from April 1, 2020) shall comprise
listed entity shall – of not less than six directors. of not less than six directors.
(a) be a non-executive director;
(b) not be related to the Managing
Director or the Chief Executive
Officer as per the definition of
the term “relative” defined
under the Companies Act,
2013.
 168  Lesson 5 • EP-SLCM

With effect from October 1, 2018, The quorum for every meeting of The quorum for every meeting of
entities shall undertake Directors the board of directors with effect the board of directors with effect
and Officers insurance (‘D and O from April 1, 2019 shall be one-third from April 1, 2020 shall be one-third
insurance’) for all their independent of its total strength or three of its total strength or three
directors of such quantum and for directors, whichever is higher, directors, whichever is higher,
such risks as may be determined by including at least one independent including at least one independent
its board of directors. director. director.
The provisions of Risk Management
Committee shall be applicable to top
1000 listed entities.
- The top 1000 listed entities shall -
formulate a dividend distribution
policy which shall be disclosed on
the website of the listed entity and a
web-link shall also be provided in
their annual reports.

• The top 500, 1000 and 2000 entities shall be determined on the basis of market capitalisation, as at the end
of the immediate previous financial year.

COMPLIANCES UNDER SEBI (LODR) REGULATIONS FOR THE LISTED ENTITY WHICH HAS LISTED
ITS NON-CONVERTIBLE DEBT SECURITIES OR NON- CONVERTIBLE REDEEMABLE PREFERENCE
SHARES OR BOTH

Regulation Title Intimation to Stock Exchanges Time Limit

50(1) Intimation to Stock Prior intimation to the stock exchange(s) before the Atleast 11 working days
exchanges due date for which the interest on debentures and
bonds, and redemption amount of redeemable
shares or of debentures and bonds shall be
payable.
50(3) Intimation of Board Intimation regarding the meeting of its board of Atleast 2 working days
meetings directors, at which the recommendation or in advance
declaration of issue of non- convertible debt
securities or any other matter affecting the
rights or interests of holders of non- convertible
debt securities or non-convertible redeemable
preference shares is proposed to be considered.
52(1) Half Yearly Financial The listed entity shall prepare and submit Within 45 days from the
results unaudited or audited financial results on a half end of each of the half
yearly basis in the format as specified by the year
Board to the recognized stock exchange
accompanied by the Limited Review Report
Proviso to Copy of financial The listed entities which have listed their equity On the same day on
52(1) results to Debenture shares and debt securities, a copy of the financial which the information
Trustee results submitted to stock exchanges shall be is submitted to the
provided to Debenture Trustees stock exchange
52(2) Annual Financial The listed entity shall prepare and submit Within 60 days from the
Results audited financial results end of the financial year

52(5) Submission of The listed entities shall submit a certificate Within 7 working days
certificate signed by signed by debenture trustee that is has taken from the date of
Debenture Trustee note of the contents of half yearly/annual submission of the
financial results submitted to Stock Exchange information
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 169

54(2) Disclosure of Asset The listed entity shall disclose to the stock Quarterly, half-yearly,
Cover exchange the extent and nature of security year-to-date and annual
created and maintained with respect to its financial statements as
secured listed non-convertible debt securities. applicable
55 Credit Ratings Each rating obtained by the listed entity with Atleast once a year
respect to non-convertible debt securities shall
be reviewed by a credit rating agency registered
by the SEBI.
57(1) Certificate The listed entity shall submit a certificate to the within one working day
stock exchange regarding status of payment in of the interest or
case of non-convertible securities. dividend or principal
becoming due

POLICIES COVERED UNDER SEBI (LODR) REGULATIONS

Regulation Title of Policy Requirements
9 Preservation of To be classified into two categories:-
documents Policy 1. documents whose preservation shall be permanent in nature
2. documents with preservation period of not less than eight
years after completion of the relevant transactions
16(1)(c ) Policy on determining The listed entity shall formulate a policy for determining ‘material’
"material subsidiary" subsidiary.
17(5) Code of Conduct The board of directors shall lay down a code of conduct for all
members of board of directors and senior management of the
listed entity. The code of conduct shall suitably incorporate the
duties of independent directors as laid down in the Companies Act,
2013
17(9)(b) Risk Management Policy The board of directors shall be responsible for framing, implementing
and monitoring the risk management plan for the listed entity
22 Vigil Mechanism The listed entity shall formulate a vigil mechanism/whistle
blower policy for directors and employees to report genuine
concerns
23(1) Materiality of related The listed entity shall formulate a policy on materiality of related
party transactions and party transactions and on dealing with related party transactions,
on dealing with related including clear threshold limits duly approved by the board of
party transactions directors and such policy shall be reviewed by the board of
directors at least once every three years and updated accordingly
30 Policy on determination The listed entity shall frame a policy for determination of
of materiality of events/ materiality, based on criteria specified in this sub-regulation, duly
information approved by its board of directors, which shall be disclosed on its
website.
43A Dividend The top 1000 listed entities based on market capitalization shall
Distribution Policy formulate a dividend distribution policy which shall be disclosed
on the website of the listed entity and a web-link shall also be
provided in their annual reports
Part D of Schedule II Board Diversity Policy The Nomination and Remuneration Committe shall devise a
policy on diversity of board of directors
 170  Lesson 5 • EP-SLCM

LIABILITY OF A LISTED ENTITY FOR CONTRAVENTION

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

ROLE OF COMPANY SECRETARY

For Company Secretary in Employment

 A listed entity shall appoint a Qualified Company Secretary as the Compliance Officer. The compliance officer
of the listed entity shall be responsible for –
• ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
• co-ordination with and reporting to SEBI, recognised stock exchange(s) and depositories with respect
to compliance with rules, regulations and other directives of these authorities in manner as specified
from time to time.
• ensuring that the correct procedures have been followed that would result in the correctness,
authenticity and comprehensiveness of the information, statements and reports filed by the listed
entity under these regulations.
• monitoring email address of grievance redressal division as designated by the listed entity for the
purpose of registering complaints by investors.
 The listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance
officer of the listed entity and the authorised representative of the share transfer agent, wherever applicable,
within one month of end of each half of the financial year, certifying that all activities in relation to both physical
and electronic share transfer facility are maintained either in house or by Registrar to an issue and share transfer
agent registered with SEBI.
 “Senior Management” shall mean Officers/Personnel of the listed entity who are members of its core
management team excluding Board of directors and normally this shall comprise all members of management
one level below Chief Executive Officer/ Managing Director/ Whole Time Director/
Manager (including Chief Executive Officer/Manager, in case they are not part of the board) and shall specifically
include Company Secretary and Chief Financial Officer.

For Company Secretary in Practice

In addition to the above responsibilities, the following are the recognition to Company Secretary under the SEBI
Listing Regulations, 2015 :
• Certificate regarding Transfer of Securities: Certification to the effect that all transfers have been completed
within the stipulated time. [Regulation 40(9)]
• Certificate Regarding Compliance of Conditions of Corporate Governance under SEBI Listing
Regulations: SEBI listing regulations authorizes Company Secretary in Practice to issue certificate regarding
compliance of conditions of Corporate Governance. [Schedule V, clause E]

• Secretarial Audit and Secretarial Compliance Report: Every listed entity and its material unlisted
subsidiaries incorporated in India shall undertake secretarial audit and shall annex a secretarial audit report
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 171

given by a company secretary in practice, in such form as specified, with the annual report of the listed entity
[Regulation 24A].

• Certification regarding Director’s Disqualification: A certificate from a Company Secretary in Practice that
none of the directors on the board of the company have been debarred or disqualified from being appointed
or continuing as Directors of Companies by the Board/ Ministry of Corporate Affairs or any such Statutory
Authority. [Schedule V, Part C, Clause 10 (i)]

CASE LAWS

1. 04.03.2020 Picturehouse Media Ltd. vs. Bombay Securities Appellate Tribunal

Stock Exchange Ltd.
Penalty imposed for non compliance of SEBI LODR Regulations on delay appointment of women
director

The provisions of the LODR regulations require that every listed company should have a women director. The
appellant hereby is a public listed company and one women director resigned and consequently the post
became vacant which was require to be filled up by another woman under the LODR Regulations. Since there
was a delay in appointing a woman director of the company, the penalty was imposed by BSE under LODR
Regulations. The appellant has filed the appeal against the order passed by BSE imposing a penalty of
Rs.7,59,920/- for violation of Regulations 17(1) and 19(1) and 19(2) of SEBI LODR Regulations, 2015. In the
light of default committed by the appellant SAT did not find any error in the impugned order and dismissed the
appeal.

CASE STUDIES
1. Ms. Maya is the promoter director of Mayamruga Limited, who founded the Company along with her late father
many decades ago. Ms. Maya still owns 24% of the share capital and is a major shareholder. Due to personal issues
she resigned from the Board and had appointed professional directors as part of succession planning for the
Company.
Although she is no longer a director, [Link] continues to show considerable interest in the business affairs of the
company. Recently she has been indicating that the board should consult her on issues of business strategy and
dividend policy. She has her own opinion about executive directors and wants the Board to remove two executive
directors as she believes that they contribute nothing of value to the board. Two other members of the board agree,
and argue that Ms. Maya should be consulted regularly on important issues, given her success in leading the
company in the past. However, the majority of the board members are hostile and resent Ms. Maya’s continual
interference.
After a recent showdown with the chairman, Ms. Maya has threatened to sue members of the board for gross
dereliction of their duties as directors. She believed that one director has deceived the Company by selling his own
property to the Company at an excessive price. The chairman was unaware of this transaction.
Required
As company secretary, prepare a report advising the chairman-
(a) the powers of the board under the Companies Act,2013
(b) the appropriate measures for dealing with Ms. Maya and responsibility of the board towards her.
(c) Whether the purchase of property by the company from one of its director was compliant with the provisions
of SEBI(LODR)
 172  Lesson 5 • EP-SLCM

Suggested Solution -

(a) Powers of the Board: As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its
Powers) Rules, 2014, the Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:–
• to make calls on shareholders in respect of money unpaid on their shares;
• to authorise buy-back of securities under section 68;
• to issue securities, including debenture, whether in or outside India;
• to borrow monies;
• to invest the funds of the company;
• to grant loans or give guarantee or provide security in respect of loans;
• to approve financial statement and the Board’s report;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another company;
• to make political contributions;
• to appoint or remove key managerial personnel (KMP);
• to appoint internal auditors and secretarial auditor.
(b) Ms. Maya was one of the founders and promoter directors of the Company and a major shareholder of the
company holding 24% of the shares. A responsible business acts with care and loyalty towards its shareholders
and in good faith for the best interests of the corporation. Business therefore has a responsibility to:
• Apply professional and diligent management in order to secure fair, sustainable and competitive
returns on shareholder investments.
• Disclose relevant information to shareholders, subject only to legal requirements and competitive
constraints.
• Conserve, protect, and increase shareholder wealth.
• Respect shareholder views, complaints, and formal resolutions.
(c) According to Section 2(76) of Companies Act 2013, “related party”, with reference to a company, means–
(i) a director or his relative;
(ii) key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds or holds along with his
relatives, more than two per cent. (2%) of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions
given in a professional capacity;
(viii) any body corporate which is—
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 173

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;”;
Explanation. — For the purpose of this clause, “the investing company or the venturer of a company” means
a body corporate whose investment in the company would result in the company becoming an associate
company of the body corporate.
(ix) a director other than an independent director or key managerial personnel of the holding company or his
relative with reference to a company, shall be deemed to be a related party.
Section 188 (1) of the Companies Act 2013 deals with the related party transactions with respect to:
• Sale, purchase or supply of any goods or materials
• Selling or otherwise disposing of, or buying, property of any kind
• Leasing of property of any kind
• Availing or rendering of any services
• Appointment of any agent for purchase or sale of goods,materials, services or property
• Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate
company,and
• Underwriting the subscription of any securities or derivatives thereof, of the company.
Also, Section 188(1) of the Companies Act 2013 provides that a company shall enter into any contract or arrangement
with a related party with respect to Related party transactions only with the consent of the Board of Directors given
by a resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule15 of the
Companies(Meetings of Board and its Powers)Rules,2014.
One of the board members had sold his property to Mayamrug Ltd. at a price which [Link] considers excessive.
The board member is related party as per Section2(76) of Companies Act 2013 and selling property of any kind is
a related party transaction as per Section188(1) of the Companies Act 2013.
The law in India does not prohibit RPTs. Instead, the law puts into place a system of checks and balances, such as
requirements for approval from the board of directors/shareholders, timely disclosures and prior statutory
approvals, to ensure that the transactions are conducted within appropriate boundaries. RPTs are required to be
managed transparently, so as not to impose a heavy burden on a company’s resources,affect the optimum allocation
of resources, distort competition or siphon off public resources.
Therefore, if the related party transaction has taken place with the consent of the Board of Directors given by a
resolution at a meeting of the Board and subject to certain conditions as prescribed under Rule 15 of the
Companies(Meetings of board and its Powers) Rules, 2014,then it is allowed as per the laws and regulations and the
allegations will not hold much significance.
__________________________________________________________________________________________________________________________________
2. Dr. Mahopatra, is a pathologist with more than 20 years of experience and has recently been appointed to the post
of Chairman of Testocare Ltd., a listed company. He has previously been employed in the company as Research
Director. [Link] had always been heading technical matters and management was a new avenue for him. He
is trying to spearhead the management of such a vast listed company and uphold the principles of corporate
governance. The Board is also evaluating to appoint another CEO.
Presently, the board of directors comprise of total ten directors (including one women director), six non-executive
directors and five were independent. The board is responsible for overseeing strategy, approving major corporate
initiatives and reviewing performance. There are three board committees - the Audit Committee, Remuneration
Committee and Stakeholders Relationship Committees. However, there is no Nomination Committee.
As the Company Secretary and Compliance Officer of Testocare Ltd, he is seeking your assistance to clarify some
issues of concern.
 174  Lesson 5 • EP-SLCM

You have been asked to prepare a brief report to:

(a) Provide Dr. Mahopatra with a robust definition of corporate governance and a brief explanation of what you
understand corporate governance to be.
(b) Comment on the board composition of Testocare Ltd. with respect to the Companies Act, 2013 and SEBI
LODR Regulations, 2015.
(c) Also comment whether the Board should appoint a CEO when Dr. Mahopatra is already the Chairman of the
Company.
Suggested Solution
(a) Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of
corporate governance is transparency, disclosure, accountability and integrity. It is to be borne in mind that
mere legislation does not ensure good governance. Good governance flows from ethical business practices
even when there is no legislation.
Good corporate governance promotes investor confidence, which is crucial to the ability of entities listed to
compete for capital. Good corporate governance is essential to develop added value to the stakeholders as it
ensures transparency which ensures strong and balanced economic development. This also ensures that the
interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes their rights.
The Institute of Company Secretaries of India defines - “Corporate Governance is concerned with the way
corporate entities are governed,as distinct from the way business within those companies are managed.
Corporate governance addresses the issues facing Board of Directors, such as the interaction with top
management and relationships with the owners and others interested in the affairs of the company”.
(b) Board Composition: Section 149(1) of the Companies Act 2013 provides that every company shall have a
Board of Directors consisting of individuals as Directors and shall have—
• A minimum number of three directors in the case of a public company,
• Atleast two directors in the case of a private Company, and
• Atleast one director in the case of a One Person Company, and
• A maximum of fifteen directors provided that a company may appoint more than fifteen directors after
passing a special resolution.
Section 149(4) provides that every public listed company shall have at- least one third of total number of
directors as independent directors.
Regulation 17(1)(a) of SEBI LODR Regulations, 2015 provides that Board of directors shall have an optimum
combination of executive and non-executive directors with at least one woman director and not less than fifty
per cent of the board of directors shall comprise of non-executive directors.
The board of Testocare Ltd. comprises of total ten directors, six non-executive directors and five were
considered independent. The total number of directors is more than the minimum required directors and at-
least one third of total number of directors are independent directors.
Also, as per SEBI Regulations, more than fifty per cent of the board of directors comprises of non- executive
directors and one women director. Therefore, the board composition of Company. is optimum as per the laws
and regulations.
The Company may also consider enhancing the scope of Remuneration Committee and make it Nomination &
Remuneration Committee.
(C) Separation of Chairman and CEO: First proviso to Section 203(1) of the Companies Act, 2013 provides for
the separation of role of Chairman and Chief Executive Officer subject to conditions thereunder.
 Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 175

It specifies that an individual shall not be appointed or reappointed as the chairperson of the company, in
pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the
company at the same time after the date of commencement of this Act unless, –
(a) the articles of such a company provide otherwise;
(b) the company does not carry multiple businesses:
Regulation 17(1B) of SEBI (LODR) Regulations, 2015 provides that effect from April 1, 2022, the top 500
listed entities shall ensure that the Chairperson of the board of such listed entity shall -
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term
“relative” defined under the Companies Act,2013:
Also, it is perceived that separating the roles of chairman and chief executive officer (CEO) increases the
effectiveness of a company’s board. It is the board’s and chairman’s job to monitor and evaluate a company’s
performance. A CEO, on the other hand, represents the management team. If the two roles are performed by
the same person, then there is less accountability. A clear demarcation of the roles and responsibilities of the
Chairman of the Board and that of the Managing Director/CEO promotes balance of power.
The benefits of separation of roles of Chairman and CEO can be:
Director Communication: A separate chairman provides a more effective channel for the board to express
its views on management
Guidance: A separate chairman can provide the CEO with guidance and feedback on his/her performance
Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO manages the
company
Governance: A separate chairman allows the board to more effectively fulfill its regulatory requirements
Long-Term Outlook: Separating the position allows the chairman to focus on the long-term strategy while the
CEO focuses on short-term profitability
Succession Planning: A separate chairman can more effectively concentrate on corporate succession plans.
Therefore, on the basis of abovementioned laws and regulations and the potential benefits of separating
Chairman and CEO, the Company may appoint a CEO for the Company.
176  Lesson 5 • EP-SLCM

LESSON ROUND UP

• SEBI has notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 on
September 2, 2015 after the consultation process. The LODR Regulations came into force w.e.f. December
1, 2015.
• A listed entity shall appoint a Qualified Company Secretary as a Compliance Officer.
• The Listed entity shall comply with the following compliances under Listing Regulations:
• One Time Compliances
• Quarterly Compliances
• Half yearly Compliances
• Yearly Compliances
• Event based Compliances

• The listed entities which has listed its specified securities on any recognised stock exchange(s) either on
the main board or on SME Exchange or on institutional trading platform has to comply with certain
corporate governance provisions which are specified in Regulations 17 to 27 of the SEBI (LODR)
Regulations.

• The Board of directors shall have an optimum combination of executive and non-executive directors with
at least one-woman independent director and at least 50% of the board of directors shall comprise of non-
executive directors.
• The Board Committees are required to be constituted under SEBI (LODR) Regulations:
» Audit Committee
» Nomination and Remuneration committee
» Stakeholders Relationship Committee
» Risk Management Committee
• The listed entity shall formulate a vigil mechanism/whistle blower policy for directors and employees to
report genuine concerns.
• The listed entity shall formulate a policy on materiality of related party transactions and on dealing with
related party transactions including clear threshold limits duly approved by the board of directors and
such policy shall be reviewed by the board of directors at least once every three years and updated
accordingly.
• All material related party transactions shall require approval of the shareholders through resolution and
no related party shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not.
• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and shall annex a secretarial audit report given by a company secretary in
practice with the annual report of the listed entity.
Lesson 5 • View of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 177

GLOSSARY

Financial year It means the period of twelve months commencing on the first day of April every year.
However, a company may at its option have a financial year commencing on a date other
than the first day of April.
Interim A dividend payment made during the course of a company’s financial year. Interim
Dividend, Dividend unlike the final dividend does not have to be agreed in a general meeting.

Investing It means a body corporate whose investment in the company would result in the
Company/ company becoming an associate company of the body corporate.
Venture of
a Company
Record Date A date on which the records of a company are closed for the purpose of determining the
stock-holders to whom dividends, proxies rights etc., are to be sent.
Committee Committee” shall mean committee of board of directors or any other committee so
constituted;

Half Year Half year” means the period of six months commencing on the first day of April or
October of a financial year;

Net Worth “Net worth” means net worth as defined in sub-section (57) of section 2 of the Companies
Act, 2013;
Schedule "Schedule" means a schedule annexed to these regulations;

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation)
1. Briefly explain the applicability of the SEBI LODR Regulations, 2015.
2. Elucidate the obligations of Listed Entities under the SEBI LODR Regulations, 2015.

3. State the conditions for which Omnibus approval of Audit Committee is required under the SEBI LODR
Regulations, 2015.
4. What are the requirement of Secretarial Audit under the SEBI LODR Regulations, 2015?
5. Explain the Event based compliances under the SEBI LODR Regulations, 2015.
6. Discuss about the various committees which are required to be mandatorily constituted under the SEBI
LODR Regulations, 2015.
7. Explain the obligations of Independent Directors w.r.t Directorship / membership of the Committees
under the SEBI LODR Regulations.
6. List out Various Policies which are to be maintained by the listed companies under SEBI LODR Regulations.
178  Lesson 5 • EP-SLCM

LIST OF FURTHER READINGS

• SEBI Circulars
• SEBI Notifications
• SEBI Annual Reports
• SEBI Monthly Bulletin
• SS - 1 Secretarial Standard on Meetings of the Board of Directors
• FAQs
• SEBI orders

OTHER REFERENCES (Including Websites/Video Links)

• [Link]
• [Link]
• [Link]
 An Overview of SEBI (Substantial
Acquisition of Shares and
Lesson 6 Takeovers) Regulations, 2011

Key Concepts One Learning Objectives

Should Know
To understand:
• Target Company • Meaning and purpose of substantial acquisition
• Acquirer • Background on evolution of the SEBI (Substantial Acquisition of
• Person acting in Shares and Takeovers) Regulations, 2011
concert • Understanding the methods including strategy for such acquisitions
• Control • Events requiring the Open offer to be made to shareholders of
• Acquisition Target Company
• Understanding the process of making open offer
• Offer period and
tendering period • Statutory Obligations of Acquirer / Directors of the Target Company
/ Manager of the Offer
• Offer size
• Disclosure requirements by promoters / certain persons
• Certain exemptions from this Regulations

Lesson Outline • Obligations on Further

Acquisition
• Introduction • Completion of Acquisition
• Genesis • Disclosures for Acquisition
• SEBI (Substantial Acquisition during Offer period
of Shares and Takeovers) • Provision of Escrow
Regulations, 2011
• Mode of Payment
• Important Definitions
• Competing Offer
• Applicability & Exception
• Withdrawal of Open Offer
• Trigger point for making an
open offer by an acquirer • Obligations of the Target
Company
• Open Offer
• Obligations of the Acquirer
• Minimum Offer Size
• Obligations of the Managers
• Conditional Offer
• Disclosures
• Public Announcement
• Exemptions
• Offer Price
• Power of SEBI to relax strict
• Filing of letter of Offer with enforcement of the
the SEBI Regulations
• Dispatch of Letter of Offer • LESSON ROUND-UP
• Opening of the Offer • GLOSSARY
• TEST YOURSELF
• Completion of Requirements
• LIST OF FURTHER READINGS
• Process at glance • OTHER REFERENCES
 180  Lesson 6 • EP-SLCM

Regulatory Framework
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
• SEBI (Delisting of Equity Shares) Regulations, 2021
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

INTRODUCTION
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [SEBI Takeover Regulations or SEBI
(SAST) Regulations] prescribes a systematic framework for acquisition of stake in listed companies. By these laws
the regulatory system ensures that the interests of the shareholders of listed companies are not compromised in
case of an acquisition or takeover by acquirer. It also protect the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle. Evidently, it is equally important to note that in this highly
competitive business world, it is critical for each of the stakeholders in a company to guard their interests in the
company from all forms of third party. So, in case third party (Acquirer) proposes any such acquisition or control
over listed companies, such Acquirer would provide exit opportunity to Shareholders of that listed company prior
to completion of such transaction.

Acquirer / Person
Acting in Concert (PAC) Listed Company

The SEBI Takeover Regulations ensures that public shareholders of a listed company are treated fairly and equitably
in relation to a substantial acquisition in, or takeover of, a listed company thereby maintaining stability in the
securities market. The objective of the takeover regulations is to ensure that the public shareholders of a company
are mandatorily offered an exit opportunity at the best possible terms in case of a substantial acquisition in, or
change in control of, a listed company.
Corporate takeovers may be classified under three broad classes:

Friendly Takeover:
This type of takeover takes place with the consent of target listed company. It be either by way of agreement
between two management or between two groups. Friendly takeover often termed as negotiated takeover.
Hostile Takeover:
This is the takeover which usually takes place when the acquirer does not offer the target listed company the
proposal. Rather the acquirer continues to acquire silently to have control over the target listed company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 181

Unlike Friendly Takeover, this type of takeover takes place without consent between the management of both
acquirer and target listed company.
Bailout Takeover:
As the name suggest, this takeover is made by a financially strong acquirer to takeover sick or financially sick
company. In this takeover, generally the acquirer has advantage of negotiating the price as all lenders / creditors /
suppliers of financially sick company would like to recover their amount.
GENESIS
The existence of an efficient and smooth-functioning market for takeovers plays an important role in the economic
development of a country. It is a widely recognized fact that one of the key elements of a robust corporate governance
regime in any country is the existence of an efficient and well-administered set of Takeover Regulations. Regulations
on takeovers seek to ensure that the takeover markets operate in a fair, equitable and transparent manner.
The evolution of SEBI Takeover Regulations can be summarised as follows:

1980s Initial threads of regulation were incorporated in the late 1980s through Listing Agreement
1992 The SEBI Act, 1992 expressly mandated SEBI to regulate substantial acquisition of shares and takeovers
by suitable measures
1994 Takeover Regulations of 1994
1995 SEBI appointed a committee to review the Takeover Regulations of 1994 under the chairmanship of
Justice P.N. Bhagwati (the Bhagwati Committee). Bhagwati Committee submitted its report in January 1997.
1997 Taking into consideration its recommendations of Bhagwati Committee, the SEBI (SAST) Regulations of
1997 were notified by SEBI on February 20, 1997, repealing the Takeover Regulations of 1994
2001 A review of the Takeover Regulations of 1997 was carried out by a reconstituted committee chaired by
Justice P.N. Bhagwati. The reconstituted Bhagwati committee submitted its report in May 2002.
SEBI(SAST) Regulation, 1997 was amended 23 times.
2009 SEBI constituted the Takeover Regulations Advisory Committee with the mandate to examine and review
the Takeover Regulations of 1997 and to suggest suitable amendments, as deemed fit. The Committee
was chaired by Mr. C. Achutan.
2011 Taking into consideration its recommendations of C. Achutan Committee, the SEBI (SAST) Regulation of
2011 were notified by SEBI on September 23, 2011, repealing the Takeover Regulations of 1997
C. Achutan Committee had provided for following objectives of the then proposed Takeover SEBI (SAST), Regulation, 2011:
a. To provide a transparent legal framework for facilitating takeover activities;
b. To protect the interests of investors in securities and the securities market, taking into account that both the
acquirer and the other shareholders or investors and need a fair, equitable and transparent framework to
protect their interests;
c. To balance the various, and at times, conflicting objectives and interests of various stakeholders in the context
of substantial acquisition of shares in, and takeovers of, listed companies.
d. To provide each shareholder an opportunity to exit his investment in the target company when a substantial
acquisition of shares in, or takeover of a target company takes place, on terms that are not inferior to the
terms on which substantial shareholders exit their investments;
e. To provide acquirers with a transparent legal framework to acquire shares in or control of the target company
and to make an open offer;
f. To ensure that the affairs of the target company are conducted in the ordinary course when a target company
is subject matter of an open offer;
g. To ensure that fair and accurate disclosure of all material information is made by persons responsible for
making them to various stakeholders to enable them to take informed decisions;
 182  Lesson 6 • EP-SLCM

h. To regulate and provide for fair and effective competition among acquirers desirous of taking over the same
target company; and
i. To ensure that only those acquirers who are capable of actually fulfilling their obligations under the Takeover
Regulations make open offers.
SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011
1. Chapter I Preliminary (Regulation 1 and 2)
2. Chapter II Substantial acquisition of Shares, Voting Rights or Control, Threshold limit for open offer,
Exemptions (Regulations 3 to 11)
3. Chapter III Open offer process (Regulations 12 to 23)
4. Chapter IV Obligations of Directors, Target Company, Acquirer, Manager (Regulations 24 to 27)
5. Chapter V Disclosures of Shareholding and Control (Regulations 28 to 31)
6. Chapter V-A Power to Relax Strict Enforcement of the Regulations (Regulation 31A)
7. Chapter VI Miscellaneous (Regulations 32 to 35)

Trigeer of
Open Offer

Process of
Disclosures Open Offer

Takeover
Regulations

Voluntary
Exemption
Offer

Competitive
Offer

IMPORTANT DEFINITIONS

Acquirer
“Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or
through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.
[Reg. 2(1)(a)]
Acquisition
“Acquisition” means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control
over, a target company. [Reg. 2(1)(b)]
Control
“Control” includes the right to appoint majority of the directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 183

their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
However, a director or officer of a target company shall not be considered to be in control over such target company,
merely by virtue of holding such position. [Reg. 2(1)(e)]
Enterprise value
Enterprise value means the value calculated as market capitalization of a company plus debt, minority interest and
preferred shares, minus total cash and cash equivalents. [Reg. 2(1)(h)]

Enterprise Value= Market capitalization+ Debt+ Minority Interest + Preferred Shares- Total Cash and Cash
Equivalents

Frequently traded shares

"Frequently traded shares" means shares of a target company, in which the traded turnover on any stock exchange
during the twelve (12) calendar months preceding the calendar month in which the public announcement is
required to be made under these regulations, is at least ten percent of the total number of shares of such class of the
target company. However, where the share capital of a particular class of shares of the target company is not identical
throughout such period, the weighted average number of total shares of such class of the target company shall
represent the total number of shares. [Reg. 2(1)(j)]
Maximum permissible non-public shareholding
“Maximum permissible non-public shareholding” means such percentage shareholding in the target company
excluding the minimum public shareholding required under the Securities Contracts (Regulation) Rules, 1957.
Fugitive Economic Offender
"Fugitive economic offender” shall mean an individual who is declared a fugitive economic offender under section
12 of the Fugitive Economic Offenders Act, 2018. [Reg. 2(1)(ja)]
Identified Date
"Identified date” means the date falling on the tenth working day prior to the commencement of the tendering
period, for the purposes of determining the shareholders to whom the letter of offer shall be sent. [Reg. 2(1)(k)]
Immediate Relative
“Immediate relative” means any spouse of a person, and includes parent, brother, sister or child of such person or
of the spouse. [Reg. 2(1)(l)]
Offer period
“Offer period” means the period between the date of entering into an agreement, formal or informal, to acquire
shares, voting rights in, or control over a target company requiring a public announcement, or the date of the
public announcement, as the case may be, and the date on which the payment of consideration to shareholders
who have accepted the open offer is made, or the date on which open offer is withdrawn, as the case may be.
[Reg. 2(1)(p)]

Tendering Period and Offer Period both are different. Offer Period is wider and includes tendering
period.

Persons Acting in Concert [Reg. 2(1)(q)]

"Person acting in concert" may be classified in two category as follows :

Depending on common objective or purpose

PAC

Deemed PAC as per sub-regulation (2)

 184  Lesson 6 • EP-SLCM

“Persons acting in concert” means, –

(1) persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising
control over a target company, pursuant to an agreement or understanding, formal or informal, directly or
indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target
company.
(2) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall
be deemed to be persons acting in concert with other persons within the same category, unless the contrary
is established, –
(i) a company, its holding company, subsidiary company and any company under the same
management or control;
(ii) a company, its directors, and any person entrusted with the management of the company;
(iii) directors of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors;
(iv) promoters and members of the promoter group;
(v) immediate relatives;
(vi) a mutual fund, its sponsor, trustees, trustee company, and asset management company;
(vii) a collective investment scheme and its collective investment management company, trustees and
trustee company;
(viii) a venture capital fund and its sponsor, trustees, trustee company and asset management company;
(ix) an alternate investment fund and its sponsor, trustees, trustee company and manager;
(x) a merchant banker and its client, who is an acquirer;
(xi) a portfolio manager and its client, who is an acquirer;
(xii) banks, financial advisors and stock brokers of the acquirer, or of any company which is a holding
company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate
relative of such individual. However, this shall not apply to a bank whose sole role is that of providing
normal commercial banking services or activities in relation to an open offer under these regulations;
(xiii) an investment company or fund and any person who has an interest in such investment company or
fund as a shareholder or unitholder having not less than 10 per cent of the paid-up capital of the
investment company or unit capital of the fund, and any other investment company or fund in which
such person or his associate holds not less than 10 per cent of the paid-up capital of that investment
company or unit capital of that fund. However, this shall not be applicable to holding of units of mutual
funds registered with the SEBI.

Judicial Pronouncement: Supreme Court in the case of M/S Daiichi Sankyo Company vs. Jayaram Chigurupati
& Ors. [2010] INSC 470 (8 July 2010) held that what does the deeming provision do? The deeming provision simply
says that in case of specified kinds of relationships, in each category, the person paired with the other would be deemed
to be acting in concert with him/it. What it means is that if one partner in the pair makes or agrees to make substantial
acquisition of shares etc. in a company it would be presumed that he/it was acting in pursuance of a common objective
or purpose shared with the other partner of the pair. For example, if a company or its holding company makes or agrees
to make a move for substantial acquisition of shares etc. of a certain target company then it would be presumed that
the move is in pursuance of a common objective and purpose jointly shared by the holding company and the subsidiary
company. But the mere fact that two companies are in the relationship of a holding company and a subsidiary company,
without anything else, is not sufficient to comprise "persons acting in concert". Something more is required to comprise
"persons acting in concert" than the mere relationship of a holding company and a subsidiary company. There may be
hundreds of instances of a company having a subsidiary company but to dub them as "persons acting in concert" would
be quite ridiculous unless another company is identified as the target company and either the holding company or the
subsidiary make some positive move or show some definite inclination for substantial acquisition of shares etc. of the
target company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 185

Target company
"Target Company" means a company and includes a body corporate or corporation established under a Central
legislation, State legislation or Provincial legislation for the time being in force, whose shares are listed on a stock
exchange. [Reg. 2(1)(z)]
Tendering period
"Tendering period" means the period within which shareholders may tender their shares in acceptance of an open
offer to acquire shares made under these regulations. [Reg. 2(1)(za)]
Volume weighted average market price
"Volume weighted average market price" means the product of the number of equity shares traded on a stock
exchange and the price of each equity share divided by the total number of equity shares traded on the stock
exchange. [Reg. 2(1)(zb)]
Number of shares traded on the Stock Exchange on a particular day: X, Market Price: Y

Volume Weighted Average Market Price =

Volume weighted average price

"Volume weighted average price" means the product of the number of equity shares bought and price of each such
equity share divided by the total number of equity shares bought. [Reg. 2(1)(zc)]
Weighted average number of total shares
"Weighted average number of total shares" means the number of shares at the beginning of a period, adjusted for
shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor. [Reg. 2(1)
(zd)]
Wilful defaullter
“wilful defaulter” means any person who is categorized as a wilful defaulter by any bank or financial institution or
consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India and
includes any person whose director, promoter or partner is categorized as such [Reg. 2(1)(ze)]

APPLICABILITY & EXCEPTION

These regulations shall apply to direct and indirect acquisition of shares or voting rights, in or control over Target
Company.

Direct Indirect
acquisition of acquisition of
shares / voting shares / voting
rights rights

Control

The Regulations therefore, gets triggered on the following event (on case basis)
• Direct acquisition of shares / voting rights
• Indirect acquisition of shares / voting rights
• Control
 186  Lesson 6 • EP-SLCM

Further it may be triggered by Acquirer alone OR along with Person acting in concert.
However, these regulations shall not apply to direct and indirect acquisition of shares or voting rights in, or control over
a company listed without making a public issue, on the Innovators Growth platform of a recognized stock exchange.
TRIGGER POINT FOR MAKING AN OPEN OFFER BY AN ACQUIRER
25% Shares or Voting Rights
An acquirer, along with Persons acting in concert (PAC), if any, who intends to acquire shares which along with his
existing shareholding would entitle him to exercise 25% or more voting rights, can acquire such additional shares
only after making a Public Announcement (PA) to acquire minimum twenty six percent shares of the Target Company
from the shareholders through an Open Offer.
For example –
Mr. A is presently holding 1% in Ram Enterprises Limited, a listed entity and he further desires to acquire the shares
as tabulated below :

Case Pre Holding Proposed Acquisition Post Holding Applicability of SEBI Takeover
Regulation, 2011
1 1% 26% 27% Open offer required
2 1% 23% 24% Open offer NOT required

Creeping Acquisition Limit

An acquirer who holds 25% or more but less than maximum permissible non-public shareholding of the Target
Company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in
any financial year ending March 31 only after making a Public Announcement to acquire minimum twenty six
percent shares of Target Company from the shareholders through an Open Offer.

Name Per Holding Creeping Acquisition Post Holding Applicability of SEBI Takeover
Regulation, 2011
A 26% 3% 29% Open offer NOT required
B 26% 6% 32% Open Offer required

From exceeding 25% to 75% Only 5%

Within 25%, no need
in a financial year can be acquired
to make open offer
without making open offer

Initial threshold of 25% 75% of listed company

of listed company

OPEN OFFER
SEBI Takeover Regulations, 2011 provides certain trigger events wherein the Acquirer is required to give Open
Offer to the shareholders of the Target Company to provide them exit opportunity. However, it also allows the
Acquirer to make voluntary offer as well.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 187

I. Mandatory Open Offer

Acquisition of Shares (Regulation 3)
SEBI Takeover Regulations, 2011 provides a threshold for mandatory Open Offer. These regulations provides that
whenever an acquirer acquires the shares in excess of the threshold as prescribed under regulation 3 ando in case
of control Regulation 4 of SEBI Takeover Regulations, 2011, the acquirer is required to make a public announcement
of offer to the shareholders of the Target Company.
Regulation 3 of the SEBI Takeover Regulations, 2011 provides the Acquirer to give an open offer to the shareholders
of Target Company on the acquisition of shares or voting rights entitling the Acquirer along with the persons acting
in concert with him to exercise 25% or more voting rights in the Target Company.
Further any Acquirer who holds shares between
ONE TIME EXEMPTION FOR CREEPING ACQUISITION -
25%-75%, together with PACs can acquire further
5% shares as creeping acquisition without giving The acquisition beyond 5% but up to 10% of the voting rights in the
target company shall be permitted for the financial year 2020-21
an Open Offer to the shareholders of the Target only in respect of acquisition by a promoter pursuant to preferential
Company upto a maximum of 75%. The quantum issue of equity shares by the target company.
of acquisition of additional voting rights shall be This exemption was only permitted through preferential issue to
calculated after considering the following: promoters and not otherwise.

(a) No Netting off allowed:

For the purpose of determining the quantum of acquisition of additional voting rights, the gross acquisitions without
considering the disposal of shares or dilution of voting rights owing to fresh issue of shares by the target company
shall be taken into account.
Case of Mr. A for FY 2020-21:

Details of Acquirer Present holding Acquisition Disposal Post Holding

A 27% 3% - 30%
A 30% 1% - 31%
A 31% - 4% 27%
A 27% 3% - 30%
The shareholding of Mr. A at the beginning of FY 2020-21 was 27% and at the closure of FY 2020-21 was 30%.
Therefore, during the year he has increased holding by (30-27=3%).
 188  Lesson 6 • EP-SLCM

However, netting is not permitted under Takeover Regulations, therefore if you add all acquisitions i.e. 3%, 1%, 3%,
it amounts to 7%. Therefore, the 4th transaction whereby Mr. A further acquires 3% would trigger the Open offer
requirements.
(b) Incremental voting rights in case of fresh issue
In the case of acquisition of shares by way of issue of new shares by the target company, the difference between the
pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional
acquisition. [Regulation 3(2)]

Question:
What is the basis of computation of the creeping acquisitions limit under Regulation 3(2) of Takeover
Regulations 2011?
Answer:
For computing acquisitions limits for creeping acquisition specified under regulation 3(2), gross acquisitions/
purchases shall be taken in to account thereby ignoring any intermittent fall in shareholding or voting rights
whether owing to disposal of shares or dilution of voting rights on account of fresh issue of shares by the target
company. SEBI in the interpretative letter dated 18th September, 2015 issued under the SEBI (Informal Guidance)
Scheme, 2003 as requested by M/s Adani Properties Private Limited has held that an exempt acquisition would not
be counted towards computing acquisitions on a gross basis.

Acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceed
the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the
target company irrespective of where there is a change in the aggregate shareholding with persons action in concert.
[Regulation 3(3)]

Example:
Mr. A is contemplating acquisition of XYZ Limited, a listed entity. He presently holds 23% and his brother, who
is having common objective holds 3%. Together their holding is 26%.
Mr. A, in view of creeping acquisition limits, desires to further acquire 3% assuming the 5% ceiling in every
financial year.
Answer:
In view of Regulation 3(3) as discussed above, though together they hold 26% and can avail 5% ceiling, but in case
Mr. A on individual basis crossing the threshold of 25% or more (since presently he holds 23% and further
contemplates to acquire 3% more), he will be required to make open offer.
However, in given case, if his brother only acquires 3% and increase their total holding to 29% then their will be
no requirement of Open Offer.

This entire Regulation shall not apply to acquisition of shares or voting rights of a company by the promoters or
shareholders in control, in terms of the provisions of Schedule XX of the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018. [Regulation 3(4)]
Further for the purpose of this regulation, any reference to “twenty-five per cent” in case of listed entity which has
listed its specified securities on Innovators Growth Platform shall be read as “forty-nine per cent”.
Acquisition of Control
Regulation 4 of the SEBI Takeover Regulations, 2011 specifies that if any acquirer acquires, directly or indirectly,
control over the Target Company irrespective of the fact whether there has been any acquisition of shares or not, then he
has to give public announcement to acquire shares from shareholders of the Target Company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 189

Indirect Acquisition of Shares or control

The concept of Indirect acquisition of shares has been recognized under Regulation 5 of the SEBI Takeover
Regulations, 2011. It explains indirect acquisition as the acquisition of shares, voting rights or control over any
other company which would enable the acquirer of shares, voting rights or control to exercise such percentage of
voting rights, which would otherwise have triggered an open offer process over which would enable the acquirer to
exercise control over a company.
Certain indirect acquisitions are regarded as ‘deemed direct acquisitions’ if such indirect acquisition satisfy the
following conditions such as:

proportionate NAV of the target proportionate sales turnover of proportionate market cap. of
company as % of the the target company as % of the the target company as % of
consolidated NAV of the entity consolidated sales turnover of the enterprise value of the
or business being acquired the entity or business being entity or business being
exceeds 80 % acquired exceeds 80 % acquired exceeds 80 %

The ‘deemed direct acquisition’ has to follow the same mandatory open offer related requirements as a direct
acquisition of shares, voting rights or control.

Delisting Offer
Acquirer may opt to delist the target listed company by declaring such intention upfront.

Declare intention at the time of • To comply with delisting regulations

detailed public statement • Under delisting offer, public

• Make public announcement within 2 working days

If offer of delisting is not successful
• To comply with Takeover Regulations

In case of delisting offer not being successful, the timelines will be revised from such Public Announcement
AND
Acquirer will be required to enhance the offer price for the difference of days between the actual date of payment
as per open offer and the revised date of payment (at the rate of 10% p.a.)

Regulation 5A deals with delisting in case of certain cases arising out of open offer which is discussed below:
In the event the acquirer makes a public announcement of an open offer for
acquiring shares of a target company in terms of regulations 3, 4 or 5, he may Intention to delist shall be disclosed
delist the company in accordance with provisions of the SEBI (Delisting of upfront i.e. shall be published in the
Equity Shares) Regulations, 2009, but the acquirer shall have declared upfront detailed public statement.
his intention to so delist at the time of making the detailed public statement Subsequent intention will not be
and a subsequent declaration of delisting for the purpose of the offer proposed accepted
to be made under sub regulation (1) of regulation 5A will not suffice.
 190  Lesson 6 • EP-SLCM

Where an offer made is not successful-

(i) On account of non–receipt of prior approval of shareholders in terms of regulation 8(1)(b) of SEBI (Delisting
of Equity Shares) Regulations, 2009; or
(ii) In terms of regulation 17of SEBI (Delisting of Equity Shares) Regulations, 2009; or
(iii) On account of the acquirer rejecting the discovered price determined by the book building process in terms
of regulation 16(1) of SEBI (Delisting of Equity Shares) Regulations, 2009,

the acquirer shall make an announcement within 2 working days in respect of such failure in all the newspapers in
which the detailed public statement was made and shall comply with all applicable provisions of these regulations.
In the event of failure of the delisting offer, the open offer obligations shall be fulfilled by the acquirer in the following
manner:
(i) the acquirer, through the manager to the open offer, shall within five working days from the date of the
announcement, file with the SEBI, a draft of the letter of offer; and
(ii) shall comply with all other applicable provisions of these regulations.

However, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten per
cent per annum for the period between the scheduled date of payment of consideration to the shareholders
and the actual date of payment of consideration to the shareholders.
Explanation: For the purpose of this sub-regulation, scheduled date shall be the date on which the payment of
consideration ought to have been made to the shareholders in terms of the timelines in these regulations.
Where a competing offer is made -
(a) the acquirer shall not be entitled to delist the company;
(b) the acquirer shall not be liable to pay interest to the shareholders on account of delay due to competing offer;
(c) the acquirer shall comply with all the applicable provisions of these regulations and make an announcement
in this regard, within two working days from the date of public announcement made, in all the newspapers in
which the detailed public statement was made.

Shareholders who have tendered shares in acceptance of the offer, shall be entitled to withdraw such shares
tendered, within 10 working days from the date of the announcement. Shareholders who have not tendered their
shares in acceptance of the offer shall be entitled to tender their shares in acceptance of the offer made under these
regulations.

II. Voluntary Offer

Voluntary Offer means the Open Offer given by the acquirer voluntarily without triggering the mandatory Open
Offer obligations as envisaged under these regulations. Voluntary Offers are an important means for substantial
shareholders to consolidate their stake and therefore recognized the need to introduce a specific framework for
such Open Offers.
Regulation 6 of the Takeover Regulations provides the threshold and conditions for making the Voluntary Open
Offer which are detailed below:
Prior holding of at least 25 % shares and shareholding of the acquirer and persons acting in concert (PAC)
post completion of Open Offer
An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company
entitling them to exercise twenty-five per cent or more but less than the maximum permissible non- public
shareholding, shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares in
accordance with these regulations, subject to their aggregate shareholding after completion of the open offer not
exceeding the maximum permissible non-public shareholding.
Therefore, under Voluntary Offer the size of the Offer would be as such that the minimum public shareholding shall
be maintained even after acquisition of shares by the Acquirer.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 191

Further for the purpose of this regulation, any reference to “twenty-five per cent” in case of listed entity which has
listed its specified securities on Innovators Growth Platform shall be read as “forty-nine per cent”.
Acquisition of shares prior to the voluntary open offer
However, where an acquirer or any person acting in concert with him has acquired shares of the target company in
the preceding fifty-two weeks without attracting the obligation to make a public announcement of an open offer, he
shall not be eligible to voluntarily make a public announcement of an open offer for acquiring shares under this
regulation.
Prohibition on the acquisition of shares during the Offer Period
SEBI Takeover Regulations, 2011 prohibits the acquirer who has made a Voluntary Open Offer from further acquiring
the shares during the Offer Period otherwise than under the Open Offer.
Restriction of the acquisition of shares after completion of open offer
An acquirer and persons acting in concert with him, who have made a public announcement under this regulation
to acquire shares of a target company shall not be entitled to acquire any shares of the target company for a period
of six months after completion of the open offer except pursuant to another voluntary open offer.
However, such restriction shall not prohibit the acquirer from making a competing offer upon any other person
making an open offer for acquiring shares of the target company. Shares acquired through bonus issue or stock
splits shall not be considered for purposes of the dis-entitlement set out in this regulation.
Wilful Defaulter
No person who is a wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter
into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring
shares under these regulations.
However, this regulation shall not prohibit the wilful defaulter from making a competing offer in accordance with
regulation 20 of these regulations upon any other person making an open offer for acquiring shares of the target company.
Therefore, for willful defaulter the only route available is making competing offer.
Fugitive Economic Offender
Notwithstanding anything contained in these regulations, no person who is a fugitive economic offender shall make
a public announcement of an open offer or make a competing offer for acquiring shares or enter into any transaction,
either directly or indirectly, for acquiring any shares or voting rights or control of a target company.

Key differences between Compulsory and Voluntary Open Offer

Particulars Compulsory Open Offer Voluntary Open Offer

Eligibility Can be triggered through both Can be triggered by acquirer
direct and indirect acquisition. holding in excess of 25% or more.
Further the acquirer or PAC should
not have acquired shares of target
Company without the obligation to
make mandatory offer during the
preceding 52 weeks
Applicability On crossing the threshold or the No such applicability is required
creeping acquisition or by way of
control
Minimum size of Open Offer Minimum size shall be 26% of the Minimum size shall be 10% of the
total shares of the target company total shares of the target company
 192  Lesson 6 • EP-SLCM

MINIMUM OFFER SIZE

The minimum offer size for an open offer is as under:

Open offer when triggered Minimum open offer size

Direct acquisition under Regulation 3 & 4 or 26% of the total shares of the Target Company as on the 10th
Indirect acquisition under Regulation 5 working day from the closure of the tendering period.
Voluntary under Regulation 6 10% of the voting rights in the Target Company of the company.
The post offer shareholding of the Acquirer and PACs in such
case shall not exceed the maximum permissible non-public
shareholding.

CONDITIONAL OFFER
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.

Minimum level of acceptance implies minimum number of shares which the acquirer desires under the said
conditional offer. If the number of shares validly tendered in the conditional offer, are less than the minimum level
of acceptance stipulated by the acquirer, then the acquirer is not bound to accept any shares under the offer. In a
conditional offer, if the minimum level of acceptance is not reached, the acquirer shall not acquire any shares in the
target company under the open offer or the Share Purchase Agreement which has triggered the open offer.

PUBLIC ANNOUNCEMENT
SEBI (SAST) Regulation, 2011 provides that whenever acquirer acquires the shares or voting rights of the Target
Company in excess of the limits prescribed under these Regulations, Acquirer is required to give a Public
Announcement of an Open Offer to the shareholder of the Target Company as stated under Regulation 13. During
the process of making the Public Announcement of an Open Offer, the Acquirer is required to give Public
Announcement and publish Detailed Public Statement. The regulations have prescribed separate timelines for
Public Announcement as well as for Detailed Public Statement.
I. Public Announcement
II. Detailed Public Statement
Timing of Pubic Announcement
The Public Announcement shall be sent to all the stock exchanges on which the shares of the target company are
listed. Further, a copy of the same shall also be sent to the SEBI and to the target company at its registered office
within one working day of the date of the public announcement. The time within which the Public Announcement
is required to be made to the Stock Exchanges under different circumstances is tabulated below:

PUBLIC ANNOUNCEMENT
Regulation Particulars of Compliances Time frame within which it shall be complied
13(1) Agreement to acquire shares or voting rights or On the same day of entering into agreement to
control over the Target Company. acquire share, voting rights or control over the
Target Company.
13(2)(a) Market Purchase of shares. Prior to the placement of purchase order with the
stock broker to acquire the shares.
13(2)(b) Acquisition pursuant to conversion of Convertible On the same day when the option to convert such
Securities without a fixed date of conversion or securities into shares of the target company is
upon conversion of depository receipts for the exercised.
underlying shares of the target company.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 193

13(2)(c) Acquiring shares or voting rights or control On the second working day preceding the
pursuant to conversion of Convertible Securities scheduled date of conversion of such securities
with a fixed date of conversion. into shares of the target company.
13(2)(d) In case of disinvestment. On the date of execution of agreement for
acquisition of shares or voting rights or control
over the target company.

13(2)(e) In case of Indirect Acquisition of shares or At any time within four working days of the
voting rights in, or control over the target following dates, whichever is earlier:
company where none of the parameters a. When the primary acquisition is contracted;
mentioned in Regulation 5(2) are met. and
b. Date on which the intention or decision to
make the primary acquisition is announced
in the public domain.
13(2)(f) In case of Indirect Acquisition of shares or On the following dates, whichever is earlier:
voting rights in, or control over the target a. When the primary acquisition is contracted;
company where any of the parameters and
mentioned in Regulation 5(2) is / are met. b. Date on which the intention or decision to
make the primary acquisition is announced
in the public domain.
13(2)(g) Acquisition of shares, voting rights or control On the date when the board of directors of the
over the Target Company pursuant to an target company authorizes such preferential
Preferential Issue. issue.
13(2)(h) An increase in voting rights consequential to a Not later than the 90th day from the date of
buy-back not qualifying for exemption under closure of the buy-back offer by the target
Regulation 10. company.
13(2)(i) Acquisition of shares, voting rights or control Not later than two working days from the date of
over the Target Company where the specific receipt of such intimation of having acquired
date on which title to such shares, voting rights such title.
or control is acquired is beyond the control of
the acquirer.
13(2A) Pursuant to regulation 3 and regulation 4 for a On the date of first such acquisition.
proposed acquisition of shares or voting rights
(Provided the acquirer discloses in the public
in or control over the target company through a
announcement the details of the proposed
combination of,–
subsequent acquisition.)
(i) an agreement and any one or more modes
of acquisition referred to in sub-regulation
(2) of regulation 13, or
(ii) any one or more modes of acquisition
referred in clause (a) to (i) of sub-
regulation (2) of regulation 13.
13(3) Voluntary Offer. On the same day when the Acquirer decides to
make Voluntary Offer.
Timing of Detailed Public Statement
In terms of Regulation 13(4) of SEBI (SAST) Regulations, 2011, a Detailed Public Statement shall be published by
the acquirer through the Manager to the Open Offer, not later than 5 working days of the Public Announcement.
However, in case of Indirect Acquisition where none of condition specified in Regulation 5(2) are satisfied, the
Detailed Public Statement shall be published not later than five working days of the completion of the primary
acquisition of shares or voting rights in or control over the company or entity holding shares or voting rights in, or
control over the target company.
 194  Lesson 6 • EP-SLCM

Publication of Public Announcement and Detailed Public Statement

Regulation 14 of SEBI (SAST) Regulation, 2011 provides the requirements relating to publication of Public
Announcement and Detailed Public Statement which are tabulated below :

Regulation Particulars of Compliances Time frame within which it shall be

complied
14(1) Public Announcement shall be sent to the Stock On the same day
Exchange, all the stock exchanges and same
information disseminate to public.
14(2) Copy of Public Announcement shall also be Within one working day of the date of the
sent to the SEBI and target company at its public announcement
Registered Office
14(3) Detailed Public Statement pursuant to the Within 5 working days from the date of Public
public announcement shall be published in Announcement
all Editions of any one of English Newspaper,
any one Hindi Newspaper and any one regional
language newspaper, where the registered
office of the target company is situated and any
one regional language newspaper at place of
stock exchange where highest volume of
trading in shares of the target company are
recorded during the sixty trading days
preceding the date of the public announcement.
14(4) Within the publication of such detailed public Immediately
statement in the newspapers, a copy of the
same shall be sent to -
a) SEBI through the manager to the
open offer ;
b) All the stock exchanges on which the
shares of the target company are listed and
the stock exchanges shall forthwith
disseminate such information to the public;
c) the target company at its registered office
and the target company shall forthwith
circulate it to the members of its board.

OFFER PRICE
Offer price is the price at which the acquirer announces to acquire shares from the public shareholders under the
open offer.
(1) The offer price shall not be less than the price as calculated under regulation 8 of the SAST Regulations, 2011
for frequently or infrequently traded shares.
(2) In the case of direct acquisition of shares or voting rights in, or control over the target company, and indirect
acquisition of shares or voting rights in, or control over the target company where the parameters referred to
in sub-regulation (2) of regulation 5 are met, the offer price shall be the highest of,—
(a) the highest negotiated price per share of the target company for any acquisition under the agreement
attracting the obligation to make a public announcement of an open offer;
(b) the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any
person acting in concert with him, during the fifty-two weeks immediately preceding the date of the
public announcement;
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 195

(c) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, during the twenty-six weeks immediately preceding the date of the public
announcement;
(d) the volume-weighted average market price of such shares for a period of sixty trading days immediately
preceding the date of the public announcement as traded on the stock exchange where the maximum
volume of trading in the shares of the target company are recorded during such period, provided such
shares are frequently traded;
(e) where the shares are not frequently traded, the price determined by the acquirer and the manager to
the open offer taking into account valuation parameters including, book value, comparable trading
multiples, and such other parameters as are customary for valuation of shares of such companies; and
(f) the per share value computed under sub-regulation (5), if applicable.

(3) In the case of an indirect acquisition of shares or voting rights in, or control over the target company, where
the parameter referred to in sub-regulation (2) of regulation 5 are not met, the offer price shall be the highest
of, –
(a) the highest negotiated price per share, if any, of the target company for any acquisition under the
agreement attracting the obligation to make a public announcement of an open offer;
(b) the volume-weighted average price paid or payable for any acquisition, whether by the acquirer or by
any person acting in concert with him, during the fifty-two weeks immediately preceding the earlier
of, the date on which the primary acquisition is contracted, and the date on which the intention or the
decision to make the primary acquisition is announced in the public domain;
(c) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, during the twenty-six weeks immediately preceding the earlier of, the date on
which the primary acquisition is contracted, and the date on which the intention or the decision to
make the primary acquisition is announced in the public domain;
(d) the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting
in concert with him, between the earlier of, the date on which the primary acquisition is contracted,
and the date on which the intention or the decision to make the primary acquisition is announced in
the public domain, and the date of the public announcement of the open offer for shares of the target
company made under these regulations;
(e) the volume-weighted average market price of the shares for a period of sixty trading days immediately
preceding the earlier of, the date on which the primary acquisition is contracted, and the date on
which the intention or the decision to make the primary acquisition is announced in the public domain,
as traded on the stock exchange where the maximum volume of trading in the shares of the target
company are recorded during such period, provided such shares are frequently traded; and
(f) the per share value computed under sub-regulation (5).

(4) In the event the offer price is incapable of being determined under any of the parameters specified in sub-
regulation (3), without prejudice to the requirements of sub-regulation (5), the offer price shall be the fair
price of shares of the target company to be determined by the acquirer and the manager to the open offer
taking into account valuation parameters including, book value, comparable trading multiples, and such
other parameters as are customary for valuation of shares of such companies.
(5) In the case of an indirect acquisition and open offers under sub-regulation (2) of regulation 5 where,–
(a) the proportionate net asset value of the target company as a percentage of the consolidated net asset
value of the entity or business being acquired;
(b) the proportionate sales turnover of the target company as a percentage of the consolidated sales
turnover of the entity or business being acquired; or
(c) the proportionate market capitalization of the target company as a percentage of the enterprise value
for the entity or business being acquired;
 196  Lesson 6 • EP-SLCM

is in excess of fifteen per cent, on the basis of the most recent audited annual fi statements, the acquirer shall,
notwithstanding anything contained in sub-regulation (2) or sub-regulation (3), be required to compute and
disclose, in the letter of off , the per share value of the target company taken into account for the acquisition,
along with a detailed description of the methodology adopted for such computation.
Explanation. – For the purposes of computing the percentages referred to in clause (c) of this sub- regulation,
the market capitalisation of the target company shall be taken into account on the basis of the volume-
weighted average market price of such shares on the stock exchange for a period of sixty trading days
preceding the earlier of, the date on which the primary acquisition is contracted, and the date on which the
intention or the decision to make the primary acquisition is announced in the public domain, as traded on the
stock exchange where the maximum volume of trading in the shares of the target company are recorded
during such period.
(6) For the purposes of sub-regulation (2) and sub-regulation (3), where the acquirer or any person acting in
concert with him has any outstanding convertible instruments convertible into shares of the target company
at a specific price, the price at which such instruments are to be converted into shares, shall also be considered
as a parameter under sub-regulation (2) and sub-regulation (3).
(7) For the purposes of sub-regulation (2) and sub-regulation (3), the price paid for shares of the target company
shall include any price paid or agreed to be paid for the shares or voting rights in, or control over the target
company, in any form whatsoever, whether stated in the agreement for acquisition of shares or in any
incidental, contemporaneous or collateral agreement, whether termed as control premium or as non-compete
fees or otherwise.
(8) Where the acquirer has acquired or agreed to acquire whether by himself or through or with persons acting
in concert with him any shares or voting rights in the target company during the offer period, whether by
subscription or purchase, at a price higher than the offer price, the offer price shall stand revised to the
highest price paid or payable for any such acquisition.
However, no such acquisition shall be made after the third working day prior to the commencement of the
tendering period and until the expiry of the tendering period.
(9) The price parameters under sub-regulation (2) and sub-regulation (3) may be adjusted by the acquirer in
consultation with the manager to the offer, for corporate actions such as issuances pursuant to rights issue,
bonus issue, stock consolidations, stock splits, payment of dividend, de-mergers and reduction of capital,
where the record date for effecting such corporate actions falls prior to three working days before the
commencement of the tendering period.
However, no adjustment shall be made for dividend declared with a record date falling during such period
except where the dividend per share is more than fi per cent higher than the average of the dividend per
share paid during the three fi years preceding the date of the public announcement.
(10) Where the acquirer or persons acting in concert with him acquires shares of the target company during the
period of twenty-six weeks after the tendering period at a price higher than the offer price under these
regulations, the acquirer and persons acting in concert shall pay the difference between the highest acquisition
price and the offer price, to all the shareholders whose shares were accepted in the open offer, within sixty
days from the date of such acquisition:
However, this provision shall not be applicable to acquisitions under another open offer under these
regulations or pursuant to the SEBI (Delisting of Equity Shares) Regulations, 2009, or open market purchases
made in the ordinary course on the stock exchanges, not being negotiated acquisition of shares of the target
company whether by way of bulk deals, block deals or in any other form.
(11) Where the open offer is subject to a minimum level of acceptances, the acquirer may, subject to the other
provisions of this regulation, indicate a lower price, which will not be less than the price determined under
this regulation, for acquiring all the acceptances despite the acceptance falling short of the indicated minimum
level of acceptance, in the event the open offer does not receive the minimum acceptance.
(12) In the case of any indirect acquisition, other than the indirect acquisition referred in sub-regulation (2) of
regulation 5, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 197

per cent per annum for the period between the earlier of the date on which the primary acquisition is
contracted or the date on which the intention or the decision to make the primary acquisition is announced
in the public domain, and the date of the detailed public statement, provided such period is more than five
working days.
(13) The offer price for partly paid up shares shall be computed as the difference between the offer price and the
amount due towards calls-in-arrears including calls remaining unpaid with interest, if any, thereon.
(14) The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and
the manager to the open offer with full disclosure of justification for the price so determined, being set out in
the detailed public statement and the letter of offer.
However, such price shall not be lower than the amount determined by applying the percentage rate of
premium, if any, that the offer price for the equity shares carrying full voting rights represents to the price
parameter computed under clause (d) of sub-regulation 2, or as the case may be, clause (e) of sub-regulation
3, to the volume-weighted average market price of the shares carrying differential voting rights for a period
of sixty trading days computed on the same terms as specified in the aforesaid provisions, subject to shares
carrying full voting rights and the shares carrying differential voting rights, both being frequently traded
shares.
(15) In the event of any of the price parameters contained in this regulation not being available or denominated in
Indian rupees, the conversion of such amount into Indian rupees shall be effected at the exchange rate as
prevailing on the date preceding the date of public announcement and the acquirer shall set out the source of such
exchange rate in the public announcement, the detailed public statement and the letter of offer.
(16) For purposes of clause (e) of sub-regulation (2) and sub-regulation (4), the SEBI may, at the expense of the
acquirer, require valuation of the shares by an independent merchant banker other than the manager to the open
offer or an independent chartered accountant in practice having a minimum experience of ten years.

FILING OF LETTER OF OFFER WITH THE SEBI

The Acquirer shall submit a draft letter of offer to the SEBI within 5 working days from the date of detailed public
statement along with a non-refundable fee as applicable. [Regulation 16(1)]
Simultaneously, a copy of the draft letter of offer shall be send to the Target Company at its registered office and to
all the Stock Exchanges where the shares of the Company are listed. [Regulation 18(1)]

Sr. No. Consideration payable under the Open Offer Fees (Rs.)
1. Up to ten crore rupees Five lakh rupees (Rs. 5,00,000)
2. More than ten crore rupees but less than or equal to 0.5 per cent of the offer size
one thousand crore rupees
3. More than one thousand crore rupees Five crore rupees (Rs. 5,00,00,000) plus 0.125
per cent of the portion of the offer size in excess
of one thousand crore rupees (1000,00,00,000)
The consideration payable under the open offer shall be calculated at the offer price, assuming full acceptance of the
open offer, and in the event the open offer is subject to differential pricing, shall be computed at the highest offer
price, irrespective of manner of payment of the consideration.
However in the event of consideration payable under the open offer being enhanced owing to a revision to the offer
price or offer size the fees payable shall stand revised accordingly, and shall be paid within five working days from
the date of such revision.
DISPATCH OF LETTER OF OFFER
The Acquirer shall ensure that the letter of offer is dispatched to the shareholders whose names appear on the
register of members of the Target Company as of the identified date, not later than 7 working days from the date of
receipt of communication of comments from the SEBI or where no comments are offered by the SEBI, within 7
working days from the expiry of 15 working days from the date of receipt of draft letter of offer by SEBI.
 198  Lesson 6 • EP-SLCM

Explanation
(i) Letter of offer may also be dispatched through electronic mode in accordance with the provisions of Companies
Act, 2013.
(ii) On receipt of a request from any shareholder to receive a copy of the letter of offer in physical format, the
same shall be provided.
(iii) The aforesaid shall be disclosed in the letter of offer.
Simultaneously with the dispatch of the letter of offer to Shareholders, the acquirer shall send the letter of offer to
the custodian of shares underlying depository receipts, if any, of the target company. [Regulation 18(3)]

The target company shall furnish to the acquirer within two working days from the identified date, a list of
shareholders as per the register of members of the target company containing names, addresses, shareholding and
folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for registration
of transfer of shares are pending with the target company.
However, the acquirer shall reimburse reasonable costs payable by the target company to external agencies in order
to furnish such information.

However, it is provided that where a shareholder holding less than 5% of the voting rights of the Target Company is
resident outside India and local laws or regulations of such jurisdiction may expose the acquirer or the target
company to material risk of civil, regulatory or criminal liabilities in the event, then the letter of offer in its final form
were to be sent without material amendments or modifications into such jurisdiction, then the acquirer may refrain
from dispatch of the letter of offer into such jurisdiction. [Regulation 18(2)]

OPENING OF THE OFFER

The tendering period shall start not later than 12 working days from date of receipt of comments from SEBI and
shall remain open for 10 working days. [Regulation 18(8)]
Shareholders who have tendered shares in acceptance of the open offer shall not be entitled to withdraw such
acceptance during the tendering period. [Regulation 18(9)]
COMPLETION OF REQUIREMENTS
Within 10 working days from the last date of the tendering period, the acquirer shall complete all requirements as
prescribed under these regulations and other applicable law relating to the Open Offer including payment of
consideration to the shareholders who have accepted the open offer. [Regulation 18(10)]

PROCESS AT GLANCE

Appointment of Merchant Banker prior to Public Announcement (PA)

Public Announcement depending on transaction

Opening of Escrow Account - 2 working days prior to the date of the detailed public statement
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 199

Detailed Public Statement – within 5 working days from the date of public announcement

Filing of Draft Letter of Offer with SEBI and send a copy to Target Company and Stock
Exchanges within 5 working days from detailed public statement

Dispatch Letter of Offer - Within 7 working days of receiving comments from SEBI or in case no
comments are received within 7 working days from expiry of 15 days from filing of the draft LoF.

Upward revision of Offer price, if any by Acquirer - prior to the commencement of the last 1
working day before the commencement of the tendering period.

Recommendation of Committee of Independent Directors to be published -at least two working

days before the commencement of the tendering period

Tendering Period : Commencement - shall start not later than 12 working days from date of
receipt of comments from the Board and to remain open for 10 working days

Tendering Period to be closed after 10 working days

Payment of consideration - within 10 working days from the last date of the tendering period

Post Offer Advertisement – within 5 working days from closure of offer period

OBLIGATIONS ON FURTHER ACQUISITION

If the acquirer or persons acting in concert (PAC) with him acquires shares of the target company during the period
of 26 weeks after the tendering period at a price higher than the offer price, then the acquirer and PAC shall pay the
difference between the highest acquisition price and the offer price, to all the shareholders whose shares were
accepted in the open offer, within 60 days from the date of such acquisition.
However, such provisions shall not be applicable if the acquisition is made through another open offer under these
regulations or pursuant to the SEBI (Delisting of Equity Shares) Regulations, 2009 or open market purchase in the
 200  Lesson 6 • EP-SLCM

ordinary course on the stock exchange not being negotiated acquisition of shares of the target company whether by
way of bulk deals, block deals or in any other form. [Regulation 8(10)]

COMPLETION OF ACQUISITION

The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company,
whether by way of subscription to shares or a purchase of shares attracting the obligation to make an open offer for
acquiring shares, until the expiry of the offer period, provided that in case of an offer made under sub-regulation (1)
of regulation 20, pursuant to a preferential allotment, the offer shall be completed within the period as provided
under sub-regulation (1) of regulation 170 of Securities and Exchange Board of India (Issue of Capital and Disclosure)
Regulations, 2018.
In case of a delisting offer made under regulation 5A, the acquirer Example-
shall complete the acquisition of shares attracting the obligation
Mr. A agreed to purchase shares of XYZ
to make an offer for acquiring shares in terms of regulations 3, 4
Limited, listed entity pursuant to Share
or 5, only after making the public announcement regarding the
Purchase Agreement (SPA) and accordingly
success of the delisting proposal made in terms of sub-regulation
made open offer. However, he cannot
(1) regulation 18 of Securities and Exchange Board of India
complete the transactions as agreed in the
(Delisting of Equity Shares) Regulations, 2009.
SPA till completion of open offer
EXCEPTION TO ABOVE:
Subject to the acquirer depositing in the escrow account, cash of an amount equal to the entire consideration
payable under the open offer assuming full acceptance of the open offer, the parties to such agreement may after the
expiry of twenty-one working days from the date of detailed public statement, act upon the agreement and the
acquirer may complete the acquisition of shares or voting rights in, or control over the target company as
contemplated.
An acquirer may acquire shares of the target company through preferential issue or through the stock exchange
settlement process subject to such shares being kept in an escrow account. The acquirer shall not exercise any voting
rights on the shares kept in the escrow account.
DISCLOSURES FOR ACQUISITION DURING OFFER PERIOD
The acquirer shall disclose during the offer period every acquisition made by the acquirer or persons acting in
concert with him of any shares of the target company in such form as may be specified, to each of the stock exchanges
on which the shares of the target company are listed and to the target company at its registered office within twenty-four
hours of such acquisition, and the stock exchanges shall forthwith disseminate such information to the public.
However the acquirer and persons acting in concert with him shall not acquire or sell any shares of the target
company during the period between three working days prior to the commencement of the tendering period and
until the expiry of the tendering period.
PAYMENT OF INTEREST IN CASE OF DELAY
In case the acquirer is unable to make payment to the shareholders who have accepted the open offer within such
period, the acquirer shall pay interest for the period of delay to all such shareholders whose shares have been
accepted in the open offer, at the rate of ten per cent per annum. However, in case the delay was not attributable to
any act of omission or commission of the acquirer, or due to the reasons or circumstances beyond the control of
acquirer, the Board may grant waiver from the payment of interest.
Provided further that the payment of interest would be without prejudice to the SEBI taking any action under
regulation 32 of these regulation or under the Act [Regulation 18(11A)].

PROVISION OF ESCROW
Not later than two working days prior to the date of the detailed public statement of the open offer for acquiring
shares, the acquirer shall create an escrow account towards security for performance of his obligations under these
regulations, and deposit in escrow account such aggregate amount as per the following scale:
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 201

On first Rs. 500 Cr • An amount equal to 25% of the consideration

On balance consideration after • An additional amount equal to ten per cent of the balance
initial Rs. 500 Cr consideration.

Requirement for Conditional Offer

However, where an open offer is made conditional upon minimum level of acceptance, hundred percent of the
consideration payable in respect of minimum level of acceptance or fifty per cent of the consideration payable
under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

100% payable under

minimum acceptance
condition
Higher shall be
deposited in case in
escrow account 50% payable under
open offer

Requirement for Indirect Acquisition

In case of indirect acquisitions where public announcement has been made in terms of clause (e) of sub-regulation
(2) of regulation 13 of these regulations i.e. indirect acquisition where none of the parameters of Regulation 5 (2)
are met, an amount equivalent to hundred per cent of the consideration payable in the open offer shall be deposited
in the escrow account.
The escrow account may be kept in following form –

Bank
Cash deposited guarantee in
in bank favour of
manager

Deposit of
tradeable
securities

Regulation 17 (3) prescribes that the escrow account may be in the form of, –

(a) cash deposited with any scheduled commercial bank;

(b) bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or
(c) deposit of frequently traded and freely transferable equity shares or other freely transferable securities with
appropriate margin.
 202  Lesson 6 • EP-SLCM

However, deposit of securities shall not be permitted in respect of indirect acquisitions where public announcement
has been made.
Explanation : The cash component of the escrow account as referred to in clause (a) above may be maintained in an
interest bearing account, subject to the merchant banker ensuring that the funds are available at the time of making
payment to the shareholders.
In the event of the escrow account being created by way of a bank guarantee or by deposit of securities, the acquirer
shall also ensure that at least one per cent of the total consideration payable is deposited in cash with a scheduled
commercial bank as a part of the escrow account.
For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the
acquirer shall while opening the account, empower the manager to the open offer to instruct the bank to issue a
banker’s cheque or demand draft or to make payment of the amounts lying to the credit of the escrow account, in
accordance with requirements under these regulations.
For such part of the escrow account as is in the form of a bank guarantee, such bank guarantee shall be in favour of
the manager to the open offer and shall be kept valid throughout the offer period and for an additional period of
thirty days after completion of payment of consideration to shareholders who have tendered their shares in
acceptance of the open offer.
For such part of the escrow account as is in the form of securities, the acquirer shall empower the manager to the
open offer to realise the value of such escrow account by sale or otherwise, and in the event there is any shortfall in
the amount required to be maintained in the escrow account, the manager to the open offer shall be liable to make
good such shortfall.
The manager to the open offer shall not release the escrow account until the expiry of thirty days from the completion
of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, save
and except for transfer of funds to the special escrow account as required under regulation 21.

Forfeiture of Escrow Account

In the event of non-fulfillment of obligations under these regulations by the acquirer the Board may direct the
manager to the open offer to forfeit the escrow account or any amounts lying in the special escrow account, either
in full or in part.
MODE OF PAYMENT

Cash

Issue, exchange or transfer of listed shares in the equity shares of

acquirer
Payment mode

Issue, exchange or transfer of listed secured debt instruments issued by acquirer

issue, exchange or transfer of convertible debt securities of acquirer

Combination of above
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 203

Certain case requires only cash mode payment

However, where any shares have been acquired or agreed to be acquired by the acquirer and persons acting in
concert with him during the fifty-two weeks immediately preceding the date of public announcement constitute
more than ten per cent of the voting rights in the target company and has been paid for in cash, the open offer shall
entail an option to the shareholders to require payment of the offer price in cash, and a shareholder who has not
exercised an option in his acceptance shall be deemed to have opted for receiving the offer price in cash.
Amount to be deposited in case of revision of offer
In case of revision in offer price the mode of payment of consideration may be altered subject to the condition that
the component of the offer price to be paid in cash prior to such revision is not reduced.
Therefore, say Mr. A as an acquirer announced earlier offer for Rs. 50 Crore with cash mode only and subsequent to
revision in offer price totaling to open offer for Rs. 70 Crore, he may alter the payment mode. However, he needs to
ensure that earlier announced cash mode of Rs. 50 Crore shall not be reduced. For Balance Rs. 20 Crore he may opt for
other mode of payment.

COMPETING OFFER
Upon a public announcement of an open offer for acquiring shares of a target company being made, any person,
other than the acquirer who has made such public announcement, shall be entitled to make a public announcement
of an open offer within fifteen working days of the date of the detailed public statement made by the acquirer who
has made the first public announcement. [Regulation 20(1)]
However, the open offer made under this regulation shall be for such number of shares which, when taken together
with shares held by such acquirer along with persons acting in concert with him, shall be at least equal to the
holding of the acquirer who has made the first public announcement, including the number of shares proposed to
be acquired by him under the offer and any underlying agreement for the sale of shares of the target company
pursuant to which the open offer is made.

Revision of original offer in case of competing offer

Upon the public announcement of a competing offer, an acquirer who had made a preceding competing offer shall
be entitled to revise the terms of his open offer provided the revised terms are more favourable to the shareholders
of the target company.
However, the acquirers making the competing offers shall be entitled to make upward revisions of the offer price at
any time up to one working day prior to the commencement of the tendering period.

Timelines in case of competing offer

The schedule of activities and the tendering period for all
competing offers shall be carried out with identical timelines The timeline i.e. starting from Public
and the last date for tendering shares in acceptance of the Announcement of Competing offer would be
every competing offer shall stand revised to the last date for revised and accordingly will be extended
tendering shares in acceptance of the competing offer last including the tendering period.
made.

WITHDRAWAL OF OPEN OFFER

An open offer for acquiring shares once made shall not be withdrawn except under any of the following
circumstances,–
(a) statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to
make an open offer under these regulations having been finally refused, subject to such requirements for
approval having been specifically disclosed in the detailed public statement and the letter of offer;
 204  Lesson 6 • EP-SLCM

(b) the acquirer, being a natural person, has died;

(c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is
not met for reasons outside the reasonable control of the acquirer, then it should be disclosed in the detailed
public statement and the letter of offer; or
However, an acquirer shall not withdraw an open offer pursuant to a public announcement made under
clause (g) of sub-regulation (2) of regulation 13 i.e. relating to preferential issue, even if the proposed
acquisition through the preferential issue is not successful.
(d) such circumstances as in the opinion of the SEBI, merit withdrawal.
SEBI shall pass a reasoned order permitting withdrawal and such order shall be listed by SEBI on its official website.
Obligations on withdrawal of offer
In the event of withdrawal of the open offer, the acquirer shall through the manager to the open offer, within two
working days, –
(a) make an announcement in the same newspapers in which the public announcement of the open offer was
published, providing the grounds and reasons for withdrawal of the open offer; and
(b) simultaneously with the announcement, inform in writing to,–
(i) SEBI;
(ii) all the stock exchanges on which the shares of the target company are listed, and the stock exchanges
shall forthwith disseminate such information to the public; and
(iii) the target company at its registered office. [Regulation 23]

OBLIGATIONS OF THE TARGET COMPANY

(1) Upon a public announcement of an open offer for acquiring shares of a target company being made, the board
of directors of such target company shall ensure that during the offer period, the business of the target
company is conducted in the ordinary course consistent with past practice.
(2) During the offer period, unless the approval of shareholders of the target company by way of a special
resolution by postal ballot is obtained, the board of directors of either the target company or any of its
subsidiaries shall not, –
(a) alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any
agreement therefore outside the ordinary course of business;
(b) effect any material borrowings outside the ordinary course of business;
(c) issue or allot any authorised but unissued securities entitling the holder to voting rights. However, the
target company or its subsidiaries may, –
(i) issue or allot shares upon conversion of convertible securities issued prior to the publi
announcement of the open off , in accordance with pre-determined terms of such conversion;
(ii) issue or allot shares pursuant to any public issue in respect of which the red herring
prospectus has been filed with the Registrar of Companies prior to the public announcement
of the open offer; or
(iii) issue or allot shares pursuant to any rights issue in respect of which the record date has
been announced prior to the public announcement of the open offer;
(d) implement any buy-back of shares or effect any other change to the capital structure of the target
company;
(e) enter into, amend or terminate any material contracts to which the target company or any of its
subsidiaries is a party, outside the ordinary course of business, whether such contract is with a
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 205

related party, within the meaning of the term under applicable accounting principles, or with any
other person; and
(f) accelerate any contingent vesting of a right of any person to whom the target company or any of its
subsidiaries may have an obligation, whether such obligation is to acquire shares of the target company
by way of employee stock options or otherwise.

(3) In any general meeting of a subsidiary of the target company in respect of the matters referred to in sub-
regulation (2), the target company and its subsidiaries, if any, shall vote in a manner consistent with the
special resolution passed by the shareholders of the target company.
(4) The target company shall be prohibited from fixing any record date for a corporate action on or after the third
working day prior to the commencement of the tendering period and until the expiry of the tendering period.
(5) The target company shall furnish to the acquirer within two working days from the identified date, a list of
shareholders as per the register of members of the target company containing names, addresses, shareholding
and folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for
registration of transfer of shares are pending with the target company.
However, the acquirer shall reimburse reasonable costs payable by the target company to external agencies
in order to furnish such information.
(6) Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a
committee of independent directors to provide reasoned recommendations on such open offer, and the target
company shall publish such recommendations.
However, such committee shall be entitled to seek external professional advice at the expense of the target
company. Provided further that while providing reasoned recommendations on the open offer proposal, the
committee shall disclose the voting pattern of the meeting in which the open offer proposal was discussed.
(7) The committee of independent directors shall provide its written reasoned recommendations on the open
offer to the shareholders of the target company and such recommendations shall be published in such form
as may be specified, at least two working days before the commencement of the tendering period, in the same
newspapers where the public announcement of the open offer was published, and simultaneously, a copy of
the same shall be sent to, –
(i) the SEBI;
(ii) all the stock exchanges; and
(iii) to the manager to the open offer, and where there are competing offers, to the manager to the open
offer for every competing offer.

(8) The board of directors of the target company shall facilitate the acquirer in verification of shares tendered in
acceptance of the open offer.
(9) The board of directors of the target company shall make available to all acquirers making competing offers,
any information and co-operation provided to any acquirer who has made a competing offer.
(10) Upon fulfilment by the acquirer, of the conditions required under these regulations, the board of directors of
the target company shall without any delay register the transfer of shares acquired by the acquirer in physical
form, whether under the agreement or from open market purchases, or pursuant to the open offer.

Clarification: In case an acquirer or any person acting in concert with the acquirer who proposes to acquire shares
under the offer is not eligible to acquire shares through stock exchange due to operation of any other law, such
offers would follow the existing ‘tender offer method. In case of competing offers under Regulation 20 of the
Takeover Regulations, in order to have a level playing field, in the event one of the acquirers is ineligible to acquire
shares through stock exchange mechanism, then all acquirers shall follow the existing ‘tender offer method.
[Circular No. CIR/CFD/POLICYCELL/1/2015 dated 13th April, 2015]
 206  Lesson 6 • EP-SLCM

OBLIGATIONS OF THE ACQUIRER

(1) Prior to making the public announcement of an open offer for acquiring shares under these regulations, the
acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations
under the open offer and that the acquirer is able to implement the open offer, subject to any statutory
approvals for the open offer that may be necessary.
(2) In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer
to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale,
lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired
control over the target company, shall be debarred from causing such alienation for a period of two years
after the offer period.
However, in the event the target company or any of its subsidiaries is required to so alienate assets despite
the intention to alienate not having been expressed by the acquirer, such alienation shall require a special
resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such
postal ballot shall inter alia contain reasons as to why such alienation is necessary.
(3) The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the
letter of off and the post-off advertisement are true, fair and adequate in all material aspects and not
misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.
(4) The acquirer and persons acting in concert with him shall not sell shares of the target company held by them,
during the offer period.
(5) The acquirer and persons acting in concert with him shall be jointly and severally responsible for fulfilment
of applicable obligations under these regulations.

OBLIGATIONS OF THE MANAGER TO THE OPEN OFFER

(1) Prior to public announcement being made, the manager to the open offer shall ensure that,—
(a) the acquirer is able to implement the open offer; and
(b) firm arrangements for funds through verifiable means have been made by the acquirer to meet the
payment obligations under the open offer.
(2) The manager to the open offer shall ensure that the contents of the public announcement, the detailed
public statement and the letter of offer and the post-offer advertisement are true, fair and adequate in
all material aspects, not misleading in any material particular, are based on reliable sources, state the
source wherever necessary, and are in compliance with the requirements under these regulations.
(3) The manager to the open offer shall furnish to the Board a due diligence certificate along with the draft
letter of offer filed under regulation 16.
(4) The manager to the open offer shall ensure that market intermediaries engaged for the purposes of the open
offer are registered with the Board.
(5) The manager to the open offer shall exercise diligence, care and professional judgment to ensure
compliance with these regulations.
(6) The manager to the open offer shall not deal on his own account in the shares of the target company during
the offer period.
(7) The manager to the open offer shall file a report with the Board within fifteen working days from the
expiry of the tendering period, in such form as may be specified, confirming status of completion of
various open offer requirements.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 207

DISCLOSURES
In the SEBI Takeover Regulations, 2011, the obligation to give the disclosures on the acquisition of certain limits, is
only on the acquirer and not on the Target Company. Further as against the Open Offer obligations where the
individual shareholding is also to be considered, the disclosure shall be of the aggregated shareholding and voting
rights of the acquirer or promoter of the target company or every person acting in concert with him.
EVENT BASED DISCLOSURES

Regulation Made by Trigger Time Period Made to

Regulation Acquirer Acquirer + persons acting in concert (PAC) Within two Every Stock
29(1) acquiring 5% or more of the shares or voting working days of Exchange
rights of the target company shall disclose to their the receipt of where the
aggregate shareholding and voting rights in such intimation of shares of the
target company. allotment of target
shares, or the company are
This disclosure is like an initial disclosure which
acquisition or the listed and the
is required to be given on acquiring 5% or more
disposal of shares target
shares or voting rights of Target Company.
or voting rights in company at its
Further in case of listed entity which has listed its the target registered
specified securities on Innovators Growth company. office.
Platform, any reference to “five per cent” shall be
read as “ten per cent”.
Regulation Acquirer Any person + persons acting in concert (PAC), holds Within two Every Stock
29(2) shares or voting rights entitling them to five per cent working days of Exchange
or more of the shares or voting rights in a target the receipt of where
company, shall disclose the number of shares or intimation of the shares
voting rights held and change in shareholding or allotment of of the target
voting rights, even if such change results in shares or the company are
shareholding falling below five percent, if there has acquisition or the listed and the
been change in such holdings from the last disclosure disposal of shares target
made under sub-regulation (1) or under this sub- or voting rights in company at its
regulation; and such change exceeds two per cent of the target registered
total shareholding or voting rights in the target company. office.
company.
Further in case of listed entity which has listed its
specified securities on Innovators Growth Platform,
any reference to “five per cent” shall be read as “ten
per cent” and any reference to “two per cent” shall
be read as “five per cent”.
Note :
• Shares taken by way of encumbrance shall be treated as an “acquisition”.
• Share given upon release of encumbrance shall be treated as a “disposal”
• The requirement as listed above shall not apply to a Scheduled Commercial bank or public financial institution
or a housing finance company or a systematically important non-banking financial company as pledgee in
connection with a pledge of shares for securing indebtness in the ordinary course of business.
 208  Lesson 6 • EP-SLCM

Example:
Disclosure
Requirement

CONTINUAL DISCLOSURES / YEARLY DISCLOSURES

Regulation Trigger Time Period Made to

Regulation Every Person + PAC holding more than Within 7 working days Every Stock Exchange
30(1) 25% shares or voting rights in a target from the financial year where the shares of the
company to disclose their aggregate ending 31st March every target company are listed
shareholding and voting rights as on 31st year. and the target company at
March. its registered office.
Regulation Promoter +PAC disclose their aggregate Within 7 working days Every stock exchange
30(2) shareholding and voting rights as of the from the financial year where the shares of the
31st March, in such target company. ending 31st March every target company are listed
This disclosure is to be made irrespective and the target company
year. at its registered office.
of the holding of Promoters + PAC.
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 209

DISCLOSURES OF ENCUMBERED SHARES

Regulation Who will Trigger Time Period Made to

make
Regulation Promoter Promoter + PAC creating Within 7 working Every Stock
31(1) encumbrance on the shares of the days from the exchange where the
target company. creation or shares
invocation or release
of encumbrance as
the case may be.
Regulation Promoter Invocation of such encumbrance or Within 7 working Every Stock
31(2) release of such encumbrances of the days from the exchange where the
shares of the target company. creation or shares
invocation or release
of encumbrance as
the case may be.
Regulation Promoter Promoter + PAC shall declare on a Within 7 working Every Stock
31(4) yearly basis that he, along with days from the exchange where the
persons acting in concert, has not financial year ending shares are listed and
made any encumbrance, directly or 31st March every the Audit Committee
indirectly, other than those already year. of the Target
disclosed during the financial year. Company.

EXEMPTIONS
While the fundamental objective of the SEBI Takeover Regulations is investor protection, the SEBI Takeover
Regulations also provides for certain exemptions from the open offer obligation without deviating from its objective.

Exemptions

Automatic Exemptions Exemptions by SEBI

(Regulation 10) (Regulation 11)

Regulation 10 - Automatic Exemptions

Regulation 10 of the SEBI Takeover Regulations, 2011 provides for automatic exemptions from the applicability of
making Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the
compliance of certain conditions specified therein.
Further, Regulation 11 of SEBI Takeover Regulations, 2011 provides the provisions whereby the acquirer can apply
to SEBI for availing the exemption from the Open Offer obligations and the Target Company can apply for relaxation
from strict compliance with any procedural requirement relating to Open Offer as provided under Chapter III and
IV of these regulations.
Some of the important exemptions provided therein regulation 10 along with their conditions for exemption is
detailed below.
The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and
regulation 4 subject to fulfillment of the conditions stipulated therefor :
 210  Lesson 6 • EP-SLCM

(1) (a) acquisition pursuant to inter se transfer of shares amongst qualifying persons, being, –
(i) immediate relatives;
(ii) persons named as promoters in the shareholding pattern filed by the target company in terms of the
listing regulations or as the case may be, the listing agreement or these regulations for not less than
three years prior to the proposed acquisition;
It is necessary that promoters should have shown as such in the filing for a period of at least 3
years prior to the acquisition.
(iii) a company, its subsidiaries, its holding company, other subsidiaries of such – holding company, persons
holding not less than fifty per cent of the equity shares of such company, other companies in which
such persons hold not less than fifty per cent of the equity shares, and their subsidiaries subject to
control over such qualifying persons being exclusively held by the same persons;
For this sub-regulation, the company shall include a body corporate, whether Indian or foreign.
(iv) persons acting in concert for not less than three years prior to the proposed acquisition, and disclosed
as such pursuant to filings under the listing regulations or as the case may be, the listing agreement;
It is necessary that persons acting in concert should have shown as such in the filing for a
period of at least 3 years prior to the acquisition.
(v) shareholders of a target company who have been persons acting in concert for a period of not less
than three years prior to the proposed acquisition and are disclosed as such pursuant to fi under the
listing regulations or as the case may be, the listing agreement, and any company in which the entire
equity share capital is owned by such shareholders in the same proportion as their holdings in the
target company without any differential entitlement to exercise voting rights in such company.

However, for purposes of availing of the exemption under this clause, –

(i) If the shares of the target company are frequently traded, the acquisition price per share shall
not be higher by more than twenty-five per cent of the volume-weighted average market price
for a period of sixty trading days preceding the date of issuance of notice for the proposed inter
se transfer, as traded on the stock exchange where the maximum volume of trading in the shares
of the target company are recorded during such period, and if the shares of the target company
are infrequently traded, the acquisition price shall not be higher by more than twenty-five
percent of the price determined; and
(ii) the transferor and the transferee shall have complied with applicable disclosure requirements
set out in these regulations.
(b) acquisition in the ordinary course of business by, –
(i) an underwriter registered with the SEBI by way of allotment pursuant to an underwriting agreement
in terms of the SEBI (ICDR) Regulations, 2018;
(ii) a stock broker registered with SEBI on behalf of his client in exercise of lien over the shares purchased
on behalf of the client under the bye-laws of the stock exchange where such stock broker is a member;
(iii) a merchant banker registered with SEBI or a nominated investor in the process of market making or
subscription to the unsubscribed portion of issue in terms of the SEBI (ICDR) Regulations, 2018;
(iv) any person acquiring shares pursuant to a scheme of safety net in terms of the then existing SEBI
(ICDR) Regulations, 2009;
(v) a merchant banker registered with SEBI acting as a stabilising agent or by the promoter or pre-issue
shareholder in terms of the SEBI (ICDR) Regulations, 2018;
(vi) by a registered market-maker of a stock exchange in respect of shares for which he is the market
maker during the course of market making;
(vii) a Scheduled Commercial Bank, acting as an escrow agent; and
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 211

(viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee.
(c) acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offer for
acquiring shares pursuant to an agreement of disinvestment, as contemplated in such agreement.
However, (i) both the acquirer and the seller are the same at all the stages of acquisition; and (ii) full
disclosures of all the subsequent stages of acquisition, if any, have been made in the public announcement of
the open offer and in the letter of offer.
(d) acquisition pursuant to a scheme, –
(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 or any statutory
modification or re-enactment thereto;
(ii) of arrangement involving the target company as a transferor company or as a transferee company, or
reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an
order of a court or a tribunal under any law or regulation, Indian or foreign; or
(iii) of arrangement not directly involving the target company as a transferor company or as a transferee
company, or reconstruction not involving the target company’s undertaking, including amalgamation,
merger or demerger, pursuant to an order of a court or a tribunal or under any law or regulation,
Indian or foreign, subject to, –
A. the component of cash and cash equivalents in the consideration paid being less than twenty-
five per cent of the consideration paid under the scheme; and
B. where after implementation of the scheme of arrangement, persons directly or indirectly
holding at least thirty-three per cent of the voting rights in the combined entity are the same as
the persons who held the entire voting rights before the implementation of the scheme.
(da) acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code,
2016.
(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
(f) acquisition pursuant to the provisions of SEBI (Delisting of Equity Shares) Regulations, 2009.
(g) acquisition by way of transmission, succession or inheritance.
(h) acquisition of voting rights or preference shares carrying voting rights arising out of the operation of sub-
section (2) of section 47 of the Companies Act, 2013.
(i) acquisition of shares by the lenders pursuant to conversion of their debt as part of a debt restructuring
implemented in accordance with the guidelines specified by RBI.

However, the conditions specified under sub-regulation (6) of regulation 158 of the SEBI (ICDR) Regulations,
2018 are complied with.
(j) increase in voting rights arising out of the operation of sub-section (1) of section 106 of the Companies Act,
2013 or pursuant to a forfeiture of shares by the target company, undertaken in compliance with the
provisions of the Companies Act, 2013 and its articles of association.

(2A) An increase in the voting rights of any shareholder beyond the threshold limits stipulated in sub-regulations
(1) and (2) of regulation 3, without the acquisition of control, pursuant to the conversion of equity shares
with superior voting rights into ordinary equity shares, shall be exempted from the obligation to make an
open offer under regulation 3.
(2B) Any acquisition of shares or voting rights or control of the target company by way of preferential issue in
compliance with regulation 164A of the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018 shall be exempt from the obligation to make an open offer under sub-
regulation (1) of regulation 3 and regulation 4.
 212  Lesson 6 • EP-SLCM

Explanation.- The above exemption from open offer shall also apply to the target company with infrequently traded
shares which is compliant with the provisions of sub-regulations (2), (3), (4), (5),(6), (7) and (8) of regulation 164A
of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
The pricing of such infrequently traded shares shall be in terms of regulation 165 of the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
(3) An increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation
to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of shares by the target
company shall be exempt from the obligation to make an open offer provided such shareholder reduces his
shareholding such that his voting rights fall to below the threshold referred to in regulation 3(1) within ninety
days from the date of the closure of the said buy back offer.
(4) The following acquisitions shall be exempt from the obligation to make an open offer –
(a) acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to a rights issue;
(b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant to a rights
issue, subject to fulfilment of the following conditions, –
(i) the acquirer has not renounced any of his entitlements in such rights issue; and
(ii) the price at which the rights issue is made is not higher than the ex-rights price of the shares of the
target company, being the sum of, –
(A) the volume weighted average market price of the shares of the target company during a period
of sixty ending on the day prior to the date of determination of the rights issue price, multiplied
by the number of shares outstanding prior to the rights issue, divided by the total number of
shares outstanding after allotment under the rights issue. However, such volume weighted
average market price shall be determined on the basis of trading on the stock exchange where the
maximum volume of trading in the shares of such target company is recorded during such period;
and
(B) the price at which the shares are offered in the rights issue, multiplied by the number of shares
so offered in the rights issue divided by the total number of shares outstanding after allotment
under the rights issue.
(c) increase in voting rights in a target company of any shareholder pursuant to buy-back of shares. However:
(i) such shareholder has not voted in favour of the resolution authorising the buy-back of securities
under section 68 of the Companies Act, 2013;
(ii) in the case of a shareholder resolution, voting is by way of postal ballot;
(iii) where a resolution of shareholders is not required for the buy-back, such shareholder, in his capacity
as a director, or any other interested director has not voted in favour of the resolution of the board of
directors of the target company authorising the buy-back of securities under section 68 of the
Companies Act, 2013; and
(iv) the increase in voting rights does not result in an acquisition of control by such shareholder over the
target company.
However, where the aforesaid conditions are not met, in the event such shareholder reduces his shareholding
such that his voting rights fall below the level at which the obligation to make an open offer would be attracted
under sub-regulation (2) of regulation 3, within ninety days from the date of closure of the buy-back offer by
the target company, the shareholder shall be exempt from the obligation to make an open offer.
(d) acquisition of shares in a target company by any person in exchange for shares of another target company
tendered pursuant to an open offer for acquiring shares under these regulations;
(e) acquisition of shares in a target company from state-level financial institutions or their subsidiaries or
companies promoted by them, by promoters of the target company pursuant to an agreement between such
transferors and such promoter;
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 213

(f) acquisition of shares in a target company from a venture capital fund or Category I Alternative Investment
Fund or a foreign venture capital investor registered with the SEBI, by promoters of the target company
pursuant to an agreement between such venture capital fund or category I Alternative Investment Fund or
foreign venture capital investor and such promoters.

(5) In respect of acquisitions under clause (a) of sub-regulation (1), and clauses (e) and (f) of sub-regulation (4),
the acquirer shall intimate the stock exchanges where the shares of the target company are listed, the details
of the proposed acquisition in such form as may be specified, at least four working days prior to the proposed
acquisition, and the stock exchange shall forthwith disseminate such information to the public.
(6) In respect of any acquisition made pursuant to exemption provided for in this regulation, the acquirer shall
file a report with the stock exchanges where the shares of the target company are listed, in such form as may
be specified not later than four working days from the acquisition, and the stock exchange shall forthwith
disseminate such information to the public.
(7) In respect of any acquisition of or increase in voting rights pursuant to exemption provided for in clause (a)
of sub-regulation (1), sub-clause (iii) of clause (d) of sub-regulation (1), clause (h) of sub-regulation (1), sub
regulation (2), sub-regulation (3) and clause (c) of sub-regulation (4), clauses (a), (b) and (f) of sub-regulation
(4), the acquirer shall, within twenty-one working days of the date of acquisition, submit a report in such
form as may be specified along with supporting documents to SEBI giving all details in respect of acquisitions,
along with a non- refundable fee of rupees one lakh fifty thousand by way of direct credit in the bank account
through NEFT/ RTGS/IMPS or any other mode allowed by RBI or by way of a, banker’s cheque or demand
draft payable in Mumbai in favour of SEBI.
Explanation : For the purpose of sub-regulation (5), (6) & (7), in case the convertible securities the date of the
acquisition shall be the date of conversion of such securities.
However, certain exemptions require PRIOR disclosures / intimation to stock exchanges as tabulated below:

Particulars Timeline
Regulation 10(1): At least four working days prior to
the proposed acquisition, intimate
(a) acquisition pursuant to inter se transfer of shares amongst qualifying the Stock Exchanges and the Target
persons, being, – company with details of proposed
(i) immediate relatives; acquisition.

(ii) persons named as promoters in the shareholding pattern filed by the

target company in terms of the listing regulations or as the case may
be, the listing agreement or these regulations for not less than three
years prior to the proposed acquisition;
(iii) a company, its subsidiaries, its holding company, other subsidiaries of
such – holding company, persons holding not less than fifty per cent of
the equity shares of such company, other companies in which such
persons hold not less than fifty per cent of the equity shares, and their
subsidiaries subject to control over such qualifying persons being
exclusively held by the same persons;
(iv) persons acting in concert for not less than three years prior to the
proposed acquisition, and disclosed as such pursuant to filings under the
listing regulations or as the case may be, the listing agreement;
(v) shareholders of a target company who have been persons acting in
concert for a period of not less than three years prior to the proposed
acquisition and are disclosed as such pursuant to fi under the listing
regulations or as the case may be, the listing agreement, and any
company in which the entire equity share capital is owned by such
shareholders in the same proportion as their holdings in the target
company without any differential
 214  Lesson 6 • EP-SLCM

Regulation 10(4) At least four working days prior to

the proposed acquisition, intimate
(e) acquisition of shares in a target company from state-level financial the Stock Exchanges and the Target
institutions or their subsidiaries or companies promoted by them, by company with details of proposed
promoters of the target company pursuant to an agreement between acquisition.
such transferors and such promoter;

(f) acquisition of shares in a target company from a venture capital fund or

Category I Alternative Investment Fund or a foreign venture capital
investor registered with the SEBI, by promoters of the target company
pursuant to an agreement between such venture capital fund or
category I Alternative Investment Fund or foreign venture capital
investor and such promoters.
In all exemptions a report is to be submitted to Stock Exchanges: In respect of any acquisition made pursuant
to exemption provided, the acquirer shall file a report with the stock exchanges where the shares of the target
company are listed, in such form as may be specified not later than four working days from the acquisition.

In certain exemptions a detailed report also to be submitted to stock exchanges: In respect of any acquisition
of or increase in voting rights pursuant to exemption provided for in clause (a) of sub-regulation (1), sub-clause
(iii) of clause (d) of sub-regulation (1), clause (h) of sub-regulation (1), sub-regulation (2),
sub-regulation (3) and clause (c) of sub-regulation (4), clauses (a), (b) and (f) of sub- This Report is in
regulation (4), the acquirer shall, within twenty-one working days of the date of acquisition, addition to Report
submit a report in such form as may be specified along with supporting documents to the which is applicable
Board giving all details in respect of acquisitions, along with a non-refundable fee of rupees for all exemptions.
one lakh fifty thousand.

Question: Mr. X is Promoter of ABC (India) Limited (Target Company). Mr. X is presently holding 53,073 shares
constituting 0.52% of the paid up equity capital of the Target Company. Further, Mr. X has been allotted 75,000
convertible warrants, convertible in to equity. After conversion of warrant in to equity the shareholding of Mr.
X will increase from 0.52% to 1.26% of the paid up equity capital. Further, Ms. Z who is Mr. X's elder sister's
daughter and holding 7,80,000 equity shares constituting 7.76% of the paid up equity share capital of the
Company. Ms. Z is a foreign shareholder and she wanted to gift (Off Market Transaction) her entire shareholding
to her mother Mrs. Y and in turn Mrs. Y wanted to gift the entire shareholding to Mr.

X. If the entire transaction as contemplated, if concluded, then the shareholding of Mr. X will increase from
0.52% to 9.02% and the shareholding of the promoter group will increase from 34.28% to 43.30%. You
have been engaged as Practising Company Secretary by Mr. X to advise on the following:
a) Is this increase in the promoter group shareholding would trigger open offer requirements in
terms of Regulation 3(2) of the SEBI (SAST) Regulation, 2011.
b) Further, Whether such transaction would be exempted under Regulation 10 of the SEBI (SAST)
Regulations, 2011.

Answer: The set of facts as disclosed in the question contains three transactions. First, conversion of convertible
warrants in to equity. Secondly, transfer of shares through off market transaction from Ms. Z to Mrs. Y and
thirdly, transfer of shares through off market transaction from Mrs. Y to Mr. X. Regarding the first transaction,
the trigger and open offer requirements, if any has to be considered at the time of conversion of warrants in to
equity as the same would depends on the shareholding pattern of the promoter and promoter’s group prevailing
at the time of conversion of warrants in to equity shares. Regarding the second and third transaction, considering
that Ms. Z, Mrs. Y and Mr. X are immediate relative thus they would be considered as PAC in terms of Regulation
2(1)(q) of the SEBI (SAST) Regulations, 2011. Therefore, the shareholding of the promoters along with PACs
would increase more than 5% limit and would trigger open offer requirements under Regulation 3(2) of the
SEBI (SAST), 2011. However, the transaction is between immediate relatives, the transaction would be exempt
from the obligation to make an open offer as per Regulation 10(1)(a)(i) of the SEBI (SAST), Regulations, 2011
 Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 215

subject to the compliance with the conditions as mentioned under the proviso to Regulation 10(1)(a)(i) and
Regulation 10(5), (6) and (7) of the SEBI (SAST), Regulations, 2011. Further, SEBI in the interpretative letter
dated 18th September, 2015 issued under the SEBI (Informal Guidance) Scheme, 2003 as requested by M/s
Adani Properties Private Limited has held that an exempt acquisition would not be counted towards computing
acquisitions on a gross basis.

Regulation 11 – Exemption by SEBI

Regulation 11 provides that on an application being made by the acquirer in writing giving the details of the
proposed acquisition and grounds on which the exemption is sought along with duly sworn affidavit, SEBI may
grant exemption to the acquirer from the Open Offer obligations subject to the compliance with such conditions as
it deems fits. For instance, in case where the exemptions is sought from the Open Offer obligations which has been
triggered pursuant to the issue of shares by way preferential allotment, SEBI may require that the approval of
shareholders should be obtained by way of postal ballot. Further, along with the application, the acquirer is also
required to pay a non-refundable fee of Rs.5,00,000,by way of direct credit in the bank account through NEFT/
RTGS/IMPS or any other mode allowed by or by way of banker‘s cheque or demand draft in favour of SEBI payable
at Mumbai. Further SEBI has prescribed a standard format for application under Regulation 11(1) of the SEBI
(SAST) Regulations, 2011 in order to ensure uniformity of disclosures in such application vide circular No. SEBI/
HO/CFD/DCR1/CIR/P/2017/131 dated 22nd December, 2017.
However, it is to be noted that the Acquirer is not exempted from making other compliances related to the disclosure
requirements as provided under regulation 29, 30 and 31 of the SEBI Takeover Regulations, 2011.

Points to ponder:
M/s ABC Ltd is a listed Company on the Bombay Stock Exchange Limited. The promoter of M/s ABC Ltd is M/s
BCD Private Limited which holds 49.84% of the total paid up capital of the M/s ABC Ltd and the remaining
shares are held by the public. M/s BCD Private Limited is in turn promoted by one Mr. X and M/s DEF Private
Limited. The shareholding of M/s BCD is divided between Mr. X and M/s DEF Private Limited in the ratio of
60% and 40% respectively. Mr. X has approached M/s DEF Private Limited to sell 40% of its shares in the M/s
BCD Private Limited to M/s DEF Private Limited. After this transaction the shareholding of M/s BCD Private
Limited will be divided between Mr. X and M/s DEF Private Limited in the ratio of 20% and 80% respectively.
This transaction had resulted in the indirect acquisition of control of M/s ABC Limited in the favour of M/s DEF
Private Limited. Now, M/s DEF Private Limited is planning to make an application to the SEBI under Regulation
11 of the SEBI (SAST), Regulation, 2011 for obtaining the exemption for making an open offer in terms of the
provision of the SEBI (SAST), Regulation, 2011. In these circumstances, you are asked to put your argument, if:
a) you are representing M/s DEF Private Limited before the whole-time Member of SEBI.
b) You are working as a representative of the SEBI and presenting your argument before the whole- time
Member of SEBI.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases

SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations
for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new
products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities
markets.
Any exemption granted by the SEBI shall be subject to the applicant satisfying such conditions as may be specified
by the SEBI including conditions to be complied with on a continuous basis.
 216  Lesson 6 • EP-SLCM

Explanation. — For the purposes of these regulations, “regulatory sandbox” means a live testing environment where
new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for
a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be
specified by the Board.
This exemption is to promoter further innovation and accordingly, SEBI may from time to time grant such relaxations
as stated above. The relaxation may also be provided to acquirer / PAC on application to SEBI, however that has been
covered earlier in this chapter.

CASE LAWS
1 07.07.2020 M/s Sungold Capital Limited vs. SEBI Whole Time Member, Securities and
Exchange Board of India
One of the principles underlying under SAST Regulations is exit opportunity to the public shareholders
of the Target Company at the best price and accordingly, the provisions of SAST Regulations deals with
offer price, that offer price in an open offer highest of the prices of shares of the Target Company derived
through various methods.
Facts of the case:
The respective acquirers/PAC’s after acquiring shares/voting rights of Sungold Capital Limited (“Target
Company”) beyond the threshold of initial/creeping acquisition have failed to make an open offer in terms of
Regulation 10 and 11(1) of SAST Regulations, 1997, on, April 1, 2007 and September 14, 2007, respectively. As
per Regulation 21(19) of SAST Regulations, 1997, the acquirer and the PAC’s were jointly and severally liable for
discharge of obligations under SAST Regulations, 1997.
SAST Regulations, 1997 has been repealed by Regulation 35(1) of SAST Regulations, 2011 and has been replaced
by SAST Regulations, 2011. Regulation 35(2)(b) of SAST Regulations, 2011, provides that all obligations incurred
under the SAST Regulations, 1997, including the obligation to make an open offer, shall remain unaffected as if the
repealed regulations has never been repealed.
Therefore, the obligations to make open offer, incurred by the acquirers/PAC’s under SAST Regulations, 1997,
are saved and can be enforced against them by virtue of Regulation 35 of SAST Regulations, 2011.
Order:
SEBI directed acquirers/PAC’s of the target company to make a public announcement of a combined open offer
for acquiring shares of Sungold Capital Ltd., under Regulation 10 and 11(1) of the SAST Regulations, 1997,
within a period of 45 days from the date when this order comes into force, in accordance with SAST Regulations,
1997. The acquirers/PAC’s shall along with the offer price, pay interest at the rate of 10% per annum for delay
in making of open offer, for the period starting from the date when the Noticees incurred the liability to make
the public announcement and till the date of payment of consideration, to the shareholders who were holding
shares in the Target Company on the date of violation and whose shares are accepted in the open offer, after
adjustment of dividend paid, if any.

2. 17.03.2020 Susheel Somani & Ors. (Appellant) vs. Securities Appellate Tribunal
SEBI (Respondent)
Penalty imposed by SEBI on violating SAST Regulations, further reduced by SAT considering it a technical
breach
Facts of the case:
Aggrieved by the order of the Adjudicating Officer (AO) of the respondent SEBI dated December 27, 2017
imposing a penalty of Rs. 15 lacs for violation of provisions of public announcement of an open offer under
Regulation 3(2) read with Regulation 13(1) of the SEBI (SAST) Regulations, 2011, the present appeal is preferred.
Lesson 6 • An Overview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 217

The appellants contended before the AO that there was no violation of Regulation 3(2) read with Regulation
13(1) of the SAST Regulations, 2011 since the transfer was inter se between the promoters, the same was
exempted from making a public announcement as provided by Regulation 10 of the SAST Regulations.
As regard the exemption, the AO found that while Regulation 10 of the SAST Regulations provides for making
disclosures to the stock exchanges and to the company within a period of two working days. In the present case,
the appellants made the disclosures on 7th day as against the provisions of Regulation 29(3).
[Reg. 29(3) - the disclosures are required to be made within two working days]
Order:
Thus, technically the appellants were not exempted from making public announcement and, thus, are in violation
of the relevant regulations. The AO has observed that as the condition of making disclosures within two working
days is not fulfilled the act was not find for grant of exemption. In the circumstances, the penalty was imposed.
The appellants made the disclosures though belatedly after five days as required by Regulation 29 of the SAST
Regulations.
Thus, it was a technical breach and, therefore, AO instead of imposing a penalty of Rs. 15 lacs, imposed a penalty
of Rs. 5 lacs which would have been just and sufficient. The appeal was partly allowed.

3. 07.09.2017 Mega Resources Ltd. (Appellant) vs. Securities Appellate Tribunal

SEBI (Respondent)
Ignorance of law will not excuse the appellant to escape the liability of violating the law
Facts of the case:
The Appellant, Mega Resources Limited, is aggrieved by the order dated 13.08.2014 passed by the Adjudicating
Officer (AO), SEBI imposing a penalty of Rs. 2,00,000/- under Section 15A(b) of the SEBI Act and Rs. 50,00,000/-
under Section 15 H(ii) of the SEBI Act for failure on the part of the appellant to comply with the provisions of
Regulation 7(1) read with Regulation 7(2) and Regulation 11(1) read with Regulation 14(1) of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The appellant has admitted that pursuant to the acquisition of 25000 equity shares through off-market
transactions the shareholding of the Promoters/Promoter Group of the Company had increased from 50.46% to
60.46% of the Target Company. This triggered Regulation 11(1) of the erstwhile SAST Regulations along
with the requirement of submission of certain disclosures under Regulation 7(1) and 7(2) of the erstwhile
Regulations. It is admitted by the appellant that the non compliance with the disclosure requirements in
respect of acquisition of shares and failure to make an open offer to the shareholders of the Company was
due to lack of awareness of the erstwhile regulations on the part of