Regulation notes

5

Syllabus:

Unit -1

An overview of Indian Securities Market:

Nature of Savings and Investment

Profile of Indian Investor

Factors affecting investment decisions of an Indian Investor

Unit -2

Need for regulating securities markets in India:

Protection to retail Investor

Vanishing companies of 1990s

Pricing of an IPO and possible economic offences

Unit -3

Entities governing the Securities Markets in India:

Companies Act, 1956

Securities Contracts Regulation Act

SEBI Act

Depositories Act

Insurance Acts

Special Regulatory requirements of Derivative market

Unit -4

Regulatory Bodies

Department of Company Affairs

Department of Economic Affairs

SEBI

Forward Market Commission

RBI

IRDA

Need for Self Regulation

Reference Books:

Company Law Avtar Singh

Finance and Profits N.J. Yasawaj

Finance Sense Dr. Prasanna Chandra

Regulation:

1. Regulation is "controlling human or societal behavior by rules or restrictions."

2. Regulation can take many forms: legal restrictions promulgated by a government authority, self-regulation by an industry such as through a trade association, social regulation (e.g. norms), co-regulation and market regulation. 3. One can consider regulation as actions of conduct imposing sanctions (such as a fine). 4. This action of administrative law, or implementing regulatory law, may be contrasted with statutory or case law.

5. Regulation mandated by a state attempts to produce outcomes which might not otherwise occur, produce or prevent outcomes in different places to what might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur. 6. In this way, regulations can be seen as implementation artifacts of policy statements. 7. Common examples of regulation include controls on market entries, prices, wages, Development approvals, pollution effects, employment for certain people in certain industries, standards of production for certain goods, the military forces and services. 8. The economics of imposing or removing regulations relating to markets is analyzed in regulatory economics.

Regulating Financial Markets:

1. The theoretical underpinning for public intervention in economic matters is traditionally based on the need to correct market imperfections and unfair distribution of the resources.2. Three more general objectives of public intervention derive thereby: the pursuit of stability, equity in the distribution of resources and the efficient use of those resources.3. The regulation of the financial system can be viewed as a particularly important case of public control over the economy.4. The accumulation of capital and the allocation of financial resources constitute an essential aspect in the process of the economic development of a nation. 5. The peculiarities of financial intermediation and of the operators who perform this function justify the existence of a broader system of controls with respect to other forms of economic activity.

6. Various theoretical motivations have been advanced to support the opportunity of a particularly stringent regulation for banks and other financial intermediaries. 7. Such motivations are based on the existence of particular forms of market failure in the credit and financial sectors.

The NEED/ OBJECTIVES for regulating financial market:

The definition of the term 'financial market' has traditionally included the banking, financial and insurance segments. The bounds dividing institutions, instruments and markets were clear-cut, so that further distinctions were drawn within the different classes of intermediaries (with banks specialized in short or medium/long term maturities, functional/commercial operations, deposits and investments; with financial intermediaries handling broker-dealer negotiations, asset management and advisory functions, and with insurance companies dealing in life and other insurance policies).

A primary objective of financial market regulation is the pursuit of macroeconomic and microeconomic stability. Safeguarding of the stability of the system translates into macro-controls over the financial exchanges, clearing houses and securities settlement systems. Measures pertaining to the microstability of the intermediaries can be subdivided into two categories: general rules on the stability of all business enterprises and entrepreneurial activities, such as the legally required amount of capital, borrowing limits and integrity requirements; and more specific rules due to the special nature of financial intermediation, such as risk based capital ratios, limits to portfolio investments and the regulation of off-balance activities.

Secondary objective of financial regulation is transparency in the market and in intermediaries and investor protection. This is linked to the more general objective of equity in the distribution of the available resources and may be mapped into the search for "equity in the distribution of information as a precious good" among operators. At the macro level, transparency rules impose equal treatment (for example, rules regarding takeovers and public offers) and the correct dissemination of information (insider trading, manipulation and, more generally, the rules dealing with exchanges microstructure and price-discovery mechanisms). At the micro level, such rules aim at non-discrimination in relationships among intermediaries and different customers (conduct of business rules).

A third objective of financial market regulation, linked with the general objective of efficiency, is the safeguarding and promotion of competition in the financial intermediation sector. This requires rules for control over the structure of competition in the markets and, at the micro level, regulations in the matter of concentrations, cartels and abuse of dominant positions. Specific controls over financial intermediation are justified by the forms that competition can assume in that field. They are related to the promotion of competition as well as to limiting possible destabilizing excesses generated by competition itself

Benefits of Regulation:

Regulations, like any other form of coercive action, have costs for some and benefits for others. Efficient regulations are defined as those where the total benefits to some people exceed the total costs to others. Regulations are justified using a variety of reasons and therefore can be classified in several broad categories:

A. Market failures - regulation due to inefficiency. Intervention due to a classical economics argument to market failure.

Risk of monopoly

Collective action, or public good

Inadequate information

Unseen externalizations

Collective desires - regulation about collective desires or considered judgements on the part of a significant segments of society Diverse experiences - regulation with a view of eliminating or enhancing opportunities for the formation of diverse preferences and beliefs

Social subordination - regulation aimed to increase or reduce social subordination of various social groups

Endogenous preferences - regulation's purpose is to affect the development of certain preferences on an aggregate level

Irreversibility - regulation that deals with the problem of irreversibility the problem in which a certain type of conduct from current generations results in outcomes from which future generations may not recover from at all.

Interest group transfers - regulation that results from efforts by self-interest groups to redistribute wealth in their favor, which may disguise itself as one or more of the justifications above.The study of formal (legal and/or official) and informal (extra-legal and/or unofficial) regulation constitutes one of the central concerns of the Sociology of law. Legal sociologists have in particular been interested in exploring the limits of formal and legal regulation in changing patterns of social behavior.

Regulated (Controlled) Market-

A regulated market or controlled market is the provision of goods or services that is

regulated by a government appointed body. The regulation may cover the terms and

conditions of supplying the goods and services and in particular the price allowed to be

charged. It is common for a regulated market to control natural monopolies such as

aspects of telecommunications, water, gas and electricity supply. Often regulated

markets are established during the privatization of government controlled utility assets.

A variety of forms of regulations exist in a regulated market. These include controls,

oversights, anti-discrimination, environmental protection, taxation and labor laws.

In a regulated market, the government regulatory agency may legislate regulations that

privilege special interests, known as regulatory capture.

Financial regulations are a form of regulation or supervision, which subjects financial

institutions to certain requirements, restrictions and guidelines, aiming to maintain the

integrity of the financial system. This may be handled by either a government or non-

government organization.

AIMS of Regulation:

The specific aims of financial regulators are usually:

To enforce applicable laws

To prosecute cases of market misconduct, such as insider trading

To license providers of financial services

To protect clients, and investigate complaints

To maintain confidence in the financial systemInsider Trading:

Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Insider Trading :

1. The illegal kind of Insider Trading is the trading in a security (buying or selling a stock) based on material information that is not available to the general public. 2. It is prohibited by the US Securities and Exchange Commission (SEC) and SEBI (India) because it is unfair and would destroy the securities markets by destroying investor confidence.

3. The prevention of insider trading is widely treated as an important function of securities regulation. In the United States, which has the most studied financial markets of the world, regulators appear to devote significant resources to combat insider trading. 4. This has led many observers in India to mechanically accept the notion that the prohibition of insider trading is an important function of SEBI. 5. In most countries other than the US, government actions against insider trading are much more limited. Many countries pay lip service to the idea that insider trading must be prevented, while doing little by way of enforcement.

6. In order to make sense of insider trading, we must go back to a basic understanding of markets, prices and the role of markets in the economy. 7. The ideal securities market is one which does a good job of allocating capital in the economy. 8. This function is enabled by "market efficiency", the situation where the market price of each security accurately reflects the risk and return in its future. 9. The primary function of regulation and policy is to foster market efficiency; hence we must evaluate the impact of insider trading upon market efficiency.

10. Insider trading is often equated with market manipulation, yet the two phenomena are completely different. 11. Manipulation is intrinsically about making market prices move away from their fair values; manipulators reduce market efficiency. 12. Insider trading brings prices closer to their fair values; insiders enhance market efficiency.

13. Once again, a mechanical adoption of regulation from the US is inappropriate. 14. Given the higher degree of automation of the Indian markets, it is not difficult to imagine a situation where trades by insiders are disclosed to the market within five minutes of the trade being matched by the computer. 15. Such a reporting requirement would harness the informational potential of insider trading, and enhance market efficiency by speeding up the full impact of the trade upon market prices.

16. Our prime focus here is the widely--held viewpoint that insider trading is a problem which should be a priority on SEBI's agenda. 17. This viewpoint is not supported by economic reasoning. 18. Insider trading might indeed have negative consequences, but there is no simple argument which links up higher levels of insider trading to reduced levels of market efficiency. 19. There are many alternative ways through which SEBI can improve market efficiency, avenues where the impact of policy interventions is less ambiguous and where the cost of intervention is lower.

Indian Securities Market: An Overview

1. Indian Stock Markets are one of the oldest in Asia.2. Its history dates back to nearly 200 years ago. 3. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. 4. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. 5. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. 6. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. 7. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. 8. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). 9. At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as The Stock Exchange "). 10. In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. 11. Thus, the Stock Exchange at Bombay was consolidated. Ahmedabad gained importance next to Bombay with respect to cotton textile industry. 12. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. 13. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realized and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association". 14. What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. 15. Also tea and coal industries were the other major industrial groups in Calcutta. 16. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. 17. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". 18. In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and 19. Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached. 20. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War. 21. In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. 22. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence. 23. In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. 24. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt.) Limited.25. (In 1957 the name was changed to Madras Stock Exchange Limited). Lahore Stock Exchange was formed in 1934 and it had a brief life. 26. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.

Nature of Savings and Investment:

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies lowrisk preservation of money, as in a deposit account, versus investment, wherein risk is higher. It is a well-established fact that growth of output of an economy depends on the amount of capital accumulation and the amount of capital accumulation in an economy is ultimately constrained by its rate of saving. As savings increase in the economy, more funds will be available for investment. Hence, the issue of ways and means to stimulate investment and bring about an increase in the level of savings and increased investment has assumed importance. Savings depend on the following factors:

1. The ability to save: This mainly depends on the income levels of the people and the kind of tax benefits that the government provides.

2. Willingness to Save: This is the most subjective factor and this depends on motive, love for family, provision for rainy days etc. and moreover the willingness to save likely to be the existence of financial Institutions, interest rates and the range and availability of financial assets to suit savers with different needs. Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption.Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control.

The features of an Investment are:

1) Realistic: An investment must be realistic in nature i.e., it must be practical

2) Simplicity: An investment should be simple to understand and operate.

3) Flexibility: An investment should be flexible so that the investor can benefit from the growing opportunities from various asset classes.

4) Provision for contingencies: An investment plan must provide for contingencies that may crop up during the life-time of the investor. A good investment plan must make a provision for unforeseen or unexpected expenses. (E.g. Medical urgencies etc.)

5) An investment plan should be appealing to the investors.

6) Optimum usage of funds: Proper utilization of funds should be ensured as it generates maximum returns on investment.

7) Balance between Safe and Risky investment classes: A balance between all the asset classes should be maintained in order to ensure that the investors money generates optimum returns.

8) Provide safety to investors: A sound investment plan should ensure adequate safety to investors funds.

9) Should be timely controlled: An investment should be timely controlled so that an investor can shift from one asset class to another.

10) An investment should be done with a Long-term view in order to attain optimum returns from investments.

Nature of Saving and Investment in India:

There is a lot of literature focusing on the relationship between savings and investment. To our knowledge only a few studies made an attempt to assess the relationship between savings and investment in developing countries and India, in particular. It will be more interesting to test the applicability of theory to the countries like India because of the following reasons:

1. India is thickly populated country and for ages it believed in savings management

2. Two-thirds of the population depends on agricultural sector and this sector constantly faces the peril of either drought or floods. Therefore savings became a question mark in this sector.

3. For decades, the unorganized sector has been dominating the organized sector and people engaged in agriculture have been exploited by higher interest rates, hence money has been moving from urban to rural sector.

4. Political instability for the past one and half decade has been the cause of low confidence of the public and investors in the economy as a result of uncertainty regarding economic policies.

In this section we present theory related to the relationship between Savings, Investment and growth of the economy and intuitive discussion for the failure of classical view planned of savings being equal to planned investment before and after liberalization and also a brief on the Indian financial system.

Profile of Indian Investor

An investor profile or style defines an individual's preferences in investment decisions, for example:

Short term trading (active management) or long term holding (buy and hold)

Risk averse or risk tolerant / seeker

All classes of assets or just one (stocks for example)

Value stock, growth stocks, quality stocks, defensive or cyclical stocks...

Big cap or small cap stocks,

Use of derivatives

Home turf or international diversification

Hands on, or via investment funds and so on.

Factors determining the investor profile:The investor style / profile is determined by

Objective personal or social traits such as age, gender, income, wealth, family, tax situation...

Subjective attitudes, linked to the temper (emotions) and the beliefs (cognition) of the investor.

Generally, the investor's financial return / risk objectives, assuming they are precisely set and fully rational.

INDIAN INVESTOR PROFILE = LOW RISK + HIGH RETURNS

Is the profile of Indian Investor changing?

There seems to be a revolution in the Indian stock markets. From the tumultuous, unpredictable times, the stock market has come a long way. More people are investing in more instruments than ever before; and doing it intelligently. Are reforms, a proactive regulator and a fantastic bull run empowering the average Indian? Turmoil of the nineties

If you watched the roller coaster of the Indian stock market in the nervous nineties, you would swear that this was no way to make a living. Your hard-earned money was probably safer in nationalized banks, post offices or fixed deposits.

Did the average Indian invest in the stock market? Oh, yes. Look carefully, and near the ground floor of todays investment skyscraper, youll see the wreckage of several peoples investment plans.

Youd watch a bull run with mounting excitement then, counter-intuitively, throw your money in without real knowledge, right at the end. Before you knew it, the market collapsed, taking your savings with it.

Winds of change

Well, all thats changing. Theres a new breed of Indian investor younger, more informed, more confident and well paid. The days of going to your broker are gone. Demat is in; and with it a world of possibility. You can have the cake of equity and eat it, with mutual funds.

Theres another quiet revolution, one thats significant in the Indian context. More and more women are educating themselves and investing online, and are smilingly successful.

Financial reforms

Have financial reforms helped? You bet they have. The market is open, is mostly free and fair, theres honest competition and you can find information on any aspect online.

Investor education is on the rise and resources are available on every self-respecting website.What about SEBI? The board is deadly serious about cleaning up the marketplace and is proactively offering you more avenues, while policing old ones. Even if a little tentative in some steps, such as allowing short-sell, its moving in the right direction. The sign Short-term volatility isnt scaring you back to the post-office. This is a sure sign that the investor has arrived.

Indian investors are blooming at the right time, in the right place.

Factors affecting investment decisions of an Indian Investor:

Investment

Investment refers to the accumulation of some kind of asset in hopes to get a future return from it. The fundamentals for all types of investment are the same. The investors basically are buying risk from their investment, the more risk they take from their investment, the higher price they can sell for it. Different persons of varied ages also need different type of investment plan to give them better return. Conservative & old people prefer investing in gradually growing companies with low risks like utility and consumer goods. Aggressive investors prefer fast and high earning stocks with high investment risks like foreign and technology sectors.

An investment plan can be short-term, medium-term or long-term.

1) A short term investment plan is prepared for a maximum period of one year. Normally the short-term investment plan estimates the short-term needs of the investors and determines the sources for financing these needs.

2) Medium-term investment plan is prepared for a period of one to five years.

3) Long-term investment planning is done for a period of more than five years. It is prepared keeping in mind the long-term financial objectives of an individual.

Financial Planning:

Financial planning is usually a multi-step process, and involves considering the client's situation from all relevant angles to produce integrated solutions. Financial planners are also known by the title financial adviser in India, although these two terms are technically not synonymous, and their roles have some functional differences. Although there are many types of 'financial planners,' the term is used largely to describe those who consider the entire financial picture of a client and then provide a comprehensive solution. To differentiate from the other types of financial planners, some planners may be called 'comprehensive' or 'holistic' financial planners. Other financial planners may specialize in one or more areas, such as insurance planning (risk management) and retirement planning. Financial planning is a growing industry with projected faster than average job growth through 2014.

Factors determining investment decisions / Canons of financial planning of an Indian Investor: (from tex bk)Unit -2

PROTECTION TO RETAIL INVESTORS:

Higher retail investor participation is required for Gross Domestic Product (GDP) growth.

There is a need to spread the ownership of equity.

The investors should benefit from the various initiatives of the Government meant for investors education and protection

A well informed investor is a well protected investor.

The nature of Indian markets is unique with a large retail investor population that saves money worth over $ 300 billion but allocates less than 5% to financial market instruments other than bank deposits.

Despite a long history and maturity of Indian stock markets, the penetration level remains very low.

The number of retail investors in the financial market has not materially grown over the last 10 years. More than 90% of exchange trade is largely confined to 10 cities and 100 companies while mutual fund penetration is just around 4%

KEY CHALLENGES:

Low depth in equity markets,

low retail equity ownership,

dominance of top cities in trading volumes,

limited capital formation and

higher costs per trade

Today, India is experiencing rapid economic growth. If we want to share this prosperity with a cross-section of our society, we must ensure that the ownership of equity is spread as widely as possible

Regulatory Authorities should advocate certain macro\market level reforms which will have a positive cascading effect on the retail investors

These Reforms include:

Increased financial literacy for multiple asset class including equity,

higher retail portion in the IPOs,

simplified documentation such as readable simple DRHP, KYC forms etc,

simplifying the procedures and cost of opening demat accounts to encourage people beyond the top 10 centers to invest directly in equities,

increased indirect investor participation through mutual funds and long term retirement products such as the new pension scheme 2009 and

Targeting high net worth NRIs by facilitating account opening and introducing reforms to simplify profit repatriation.

Investor awareness program held under the theme -

Informed investor- an asset to corporate India,

- Ministry of Corporate Affairs

VANISHING COMPANIES OF THE NINETIES:

As per the Ministry of Corporate Affairs (MCA), Government of India, a company would

be deemed to be a vanishing company, if it is found to have:

1. Failed to file returns with Registrar of Companies (ROC) for a period of 2 years;

2. Failed to file returns with Stock Exchange (SE) for a period of 2 years (if it continues to be a listed company);

3. It is not maintaining its registered office at the address notified with the ROC / SE; and

4. None of its Directors are traceable.

Ministry of Corporate Affairs has clarified that all the conditions mentioned above

would have to be satisfied before a listed company is declared as a vanishing company.

Further, the conditions mentioned at (1), (3) & (4) would suffice to declare a company as

vanishing if such company has been de-listed from the SE.

Out of the companies that went public during 1992-2001, a total of 238 firms were

identified as vanishing companies. However, 117 companies have been traced out

leaving the number of vanishing companies to 121. FIRs have been filed in 112

cases under the Indian Penal Code (IPC). SEBI has debarred 100 companies and 378

directors under section 11B of the SEBI Act from entering capital market for a period

of five years.

Interestingly enough, Satyam is not the only company based in Hyderabad to have

siphoned off investors money. There are at least 12 firms, though not in the same

league as Satyam, which have been recently declared vanishing companies.

Although the magnitude of fraud by these companies from Hyderabad is paltry, at

around Rs 47 crore, it is not insignificant.

Many vanishing companies had raised money from the market during the capital

market boom period, and then simply vanished. By the corporate affairs ministrys

own admission, there are at least 115 vanishing companies, which have failed to file

any report on accounts with Sebi for the last two years.

PC Gupta, the Union minister for corporate affairs, in a recent interaction with

Express staff, had stated that we have identified almost 100 odd companies and

prosecuted their directors and promoters, and some of them are behind bars.

However, there is another huge scandal from the 1990s, when thousands of crore of

rupees just vanished as thousands of plantation companies disappeared with

investors money. These plantation companies, through glossy, high profile

advertisement campaigns and exaggerated profit projections, managed to attract

gullible investors in large numbers.

Most of the 7,983 plantation companies listed on the corporate affairs ministry

website have closed down while investors try to recover their hard-earned money.

Unfortunately, by the time the government or regulators woke up to this huge fraud

in late 1990s, almost all these companies had gone underground with the publics

money. Meanwhile, the corporate affairs ministry website states that a coordination

and monitoring committee set up by corporate affairs ministry and Sebi for initiating

action against vanishing companies held its 20th and last meeting back on April 23,

2007, almost two years ago. While the various organs of government debate the

action to be taken against companies doing the vanishing act, investors suffer

silently.

Some action needs to be taken against these firms which will be left untouched by

all the investigations into Satyam.

PRICING of an IPO and possible economic offences:

WHAT IS AN IPO?

An IPO is the first sale of an entity's common shares to public investors. When an entity wants to enter the market, it makes its share available to common investors in

form of an auction sale.

Each application for an IPO has to be within a cut-off figure, which is eligible for

allotment in the retail investors category. But in this case, financiers and market players

illegally cornered these retail investors' shares.

An Initial Public Offering (IPO) referred to simply as an "offering" or "flotation,"

is when a company (called the issuer) issues common stock or shares to the public for

the first time. They are often issued by smaller, younger companies seeking capital to

expand, but can also be done by large privately-owned companies looking to

become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it

determine what type of security to issue (common or preferred), best offering price and

time to bring it to market.

An IPO can be a risky investment. For the individual investor it is tough to predict what

the stock or shares will do on its initial day of trading and in the near future since there

is often little historical data with which to analyze the company. Also, most IPOs are of

companies going through a transitory growth period, and they are therefore subject to

additional uncertainty regarding their future value.

REASONS FOR LISTING:

When a company lists its shares on a public exchange, it will almost invariably

look to issue additional new shares in order at the same time.

The money paid by investors for the newly-issued shares goes directly to the

company (in contrast to a later trade of shares on the exchange, where the

money passes between investors).

An IPO, therefore, allows a company to tap a wide pool of stock market investors

to provide it with large volumes of capital for future growth.

The company is never required to repay the capital, but instead the new

shareholders have a right to future profits distributed by the company and the

right to a capital distribution in case of dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of

the company's shares.

However, they hope that the capital investment will make their shareholdings

more valuable in absolute terms.

In addition, once a company is listed, it will be able to issue further shares via

a rights issue, thereby again providing itself with capital for expansion without

incurring any debt.

This regular ability to raise large amounts of capital from the general market,

rather than having to seek and negotiate with individual investors, is a key

incentive for many companies seeking to list.

There are several benefits to being a public company, namely:

Bolstering and diversifying equity base

Enabling cheaper access to capital

Exposure and prestige

Attracting and retaining the best management and employees

Facilitating acquisitions

Creating multiple financing opportunities: equity, convertible debt, cheaper bank

loans, etc.

STEP BY STEP PROCESS:

The process for conducting an IPO generally involves a firm taking the following steps:

1. It registers with the Securities and Exchange Commission (SEC),

2. It seeks the help of one or more investment banks as underwriters to pursue a

coterie of institutional investors and the general public to purchase the firms

stock,

3. It presents the IPO fact file and prospects to the investor community,

4. It determines the number and price of shares to be offered in the IPO, and

5. It works out the aftermarket position, after observing the quiet period.

When the Securities Exchange Board of India (Sebi) started scanning an entire spectrum

of IPOs launched over 2003, 2004 and 2005, it ended digging up more dirt and probably

prevented a larger conspiracy to hijack the market.

Here is a lowdown on the IPO scam:

What is the scam?

It involved manipulation of the primary marketread initial public offers (IPOs)by

financiers and market players by using fictitious or benaami demat accounts.

While investigating the Yes Bank scam, Sebi found that certain entities had illegally

obtained IPO shares reserved for retail applicants through thousands of benaami demat

accounts.

They then transferred the shares to financiers, who sold on the first day of listing,

making windfall gains from the price difference between the IPO price and the listing

price.

When was the scam detected?

The IPO scam came to light in 2005 when the private 'Yes Bank' launched its initial public

offering. Roopalben Panchal, a resident of Ahmedabad, had allegedly opened several

fake demat accounts and subsequently raised finances on the shares allotted to her

through Bharat Overseas Bank branches.

The Sebi started a broad investigation into IPO allotments after it detected irregularities

in the buying of shares of YES Banks IPO in 2005.

What triggered the Sebi probe?

On October 10, 2005 an Income Tax raid on businessman Purushottam Budhwani

accidentally found he was controlling over 5,000 demat accounts. Sebi finds this

suspicious.

On December 15, Sebi declared results of its probe, how a few people cornered a large

chunk of YES Bank IPO shares.

On January 11 this year, Sebi discovered huge rigging in the IDFC IPO.

Roopalben Panchal was found to be controlling nearly 15,000 demat accounts.

It was found that once they obtained these shares, the fictitious investors transferred

them to financiers.

The financiers then sold these shares on the first day of listing, reaping huge profits

between the IPO price and the listing price. The Sebi report covered 105 IPOs from

2003-2005.

The Sebi probe covered several IPOs dating back to 2005, 2004 and 2003 to detect

misuse. These included the offerings of Jet Airways, Sasken Communications, Suzlon

Energy, Punj Lloyds, JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and others. A

lot more dubious accounts across several IPOs are expected to tumble out in the next

few days.

It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the

allotment in the retail segment was cornered by fictitious applicants through multiple

demat accounts.

Who is Roopalben Panchal?

Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam.

Finance Ministry officials are expected to act against her soon.

How is this different from Harshad Mehtas scam?

The securities scam involved price manipulation in the secondary market, read stocks.

Whereas in this case, the manipulation happened in the primary marketeven before

the shares (IPOs) entered the stocks market.

This time, fraudsters targeted the primary market to make a quick buck at the expense

of the gullible small investors.

Direct Participants (DPs) used retail applicants shares for reaping benefits in the stock

market.

How big is the scam?

Apart from the YES Bank fraud, Sebi reportedly has definite data about two IPOs where

retail allotments were rigged, but market observers believe the scam is far bigger. The

Yes Bank and IDFC cases are only a tip of an iceberg, say analysts.

The Sebi probe has identified more operators and some market intermediaries involved

in the misuse of the initial allotment process in public offerings dating back to 04-05.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

Page23 Prof. Abdul Kadir Khan

The Income-Tax Department in Ahmedabad has found that two major accused, Panchal

and Sugandh Investments, have together made Rs 60.62 crore in 18 months.

ROLE OF DPS:

Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005)

Key operators used 21,692 fictitious accounts to corner 3,23,023 shares which is equal

to 3.74 per cent of the total number of shares allotted to retail individual investors.

Jet Airways IPO: Rs 1899.3 crore (Feb 18-24, 2005)

Key operators used 1,186 fake accounts for cornering 20,901 shares which is equal to

0.52 per cent of the total number of shares allotted to retail investors.

National Thermal Power Corporation IPO Rs 5,368.14 crore (Oct 7-14, 2004).

12,853 afferent accounts were used for cornering 27,50,730 shares representing 1.3 per

cent of the total number of shares allotted to retail investors.

Tata Consultancy Services IPO: Rs 4,713.47 crore

14,619 'benami' accounts were used to corner 2,61,294 shares representing 2.09 per

cent of the total shares allotted to retail individual investors.

Unit -3

Entities governing the Securities Markets in India:

Companies Act, 1956

Securities Contracts Regulation Act

SEBI Act

Depositories Act

Insurance Acts

Special Regulatory requirements of Derivative market

The Indian Companies Act of 1956

Companies act 1956, is one of the most important LAW in Indian corporate legislature.

It has a far reaching effect on the Indian industry. It was enacted with the objective of

controlling and regulating every conceivable facet of the corporate sector. The

Companys Act 1956 was drafted retaining certain section of the earlier act. It was

incorporated as a whole new spectrum of legislation that would correspond to

independent Indias socialistic ideals and policy.

The act consists of 13 parts and 14 schedules.

The important provision pertaining to Indian capital market/financial market are given

below:-

1. PART 3:-

It is relevant to capital market. It relates to a companys:

Issue of capital

Issue of prospectus

Allotment and other matter relating to the issue of shares and debentures.

Section 55 to 58 deals with this matter. These section stipulates that

misstatements in prospectus is subject to civil liability in terms of compensation to

persons aggrieved, who subscribe to the issue in good faith and has sustained a loss.

There are sufficient numbers of provisions to enable the unscrupulous or officers

of company from evading any regulation and undertaking fraudulent activities. Section

63 relates to the criminal liability for miss presentation in the prospectus. Section 68

relates to penalty for fraudulently inducing person to invest money; this section also

deals with speculation in shares and debentures in secondary market.

1. Buy-Back of Shares:-

Section 77 of the companies Act 1956 (amended) provides for the purchases of

its own shares by a company. Buyback of shares is legal and common practice in

USA. It is done to reward the share holders. The price paid is usually higher than

the market rate which is given as an incentive to share holders. The company

wants to bring down the paid up capital to reduce the dividend servicing the

outflow.

2. Insider trading:-

Insiders are those who have an access to the confidential information of the

company. BY virtue of the position occupied by them in the said company and

thereby are in a position to manipulate the share prices to the own advantage

with a view to make windfall profits. The action caused wide fluctuations in the

prices of the securities and undermining the trust of investors in capital market.

The provision of the act, section 307 and 308 require full disclosures by board of

directors of the company, regarding purchase and sale of security by any

director, statutory auditor, cost auditor, financial accountant, cost accountant,

tax and management consultant, advisor, solicitors and others who prove to be

effective in controlling such trading.

3. Prospectus:-

Prospectus serves as publicity for corporate enterprises to solicit public

subscription of capital.

The companies Act 1956 contains elaborated details of these documents. The

prospectus usually contains information relating to the proposed offer about the

company. Separate prospectus should be drafted depending upon the issue.

A regular prospectus contains;

a) information about the capital structure

b) terms of issue

c) company management and project risk perception

d) promotors contribution, Financial information, etc.

The concept of abridged prospectus introduced by the companys amended act

1988, aims at making the public issue of shares of shares an inexpensive

preposition accordingly shares application form shall a company only a document

of brief version of the salient feature of the prospectus.

4. Financial disclosure:-

The companys Act 1956 has a number of norms requiring information disclosure

about companies information on market which sound capital market structure is

built.

The efficiency of market is greatly determined by the free flow of unbiased and

reliable market information. Unfortunately, there is no dearth (shortage) of

market information but the quality of reliable information for the investors to

make right and timely decisions.

5. PART 4:-

It relates to the share capital and debentures with regard to type, number,

certificate of shares, capital, etc.

Section 116 : In this part provides for penalty for impersonation of share holders.

SECURITIES CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent

undesirable transactions in securities by regulating the business of dealing therein and

by providing for certain other matters connected therewith. This is the principal Act,

which governs the trading of securities in India.

The definitions of some of the important terms are given below:

Recognized Stock Exchange means a stock exchange, which is for the time being

recognized by the Central Government under Section 4 of the SC(R)A.

Stock Exchange means:

(a) any body of individuals, whether incorporated or not, constituted before

corporatization and demutualization under sections 4A and 4B, or

(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether

under a scheme of corporatization and demutualization or otherwise, for the purpose of

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

As per Section 2(h), the term "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 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 receipts as defined in clause (g) of section 2 of the Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002

(SARFAESI)

(v) units or any other such instrument issued to the investors under any mutual fund

scheme,

(vi) any certificate or instrument 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 maybe.

(vii) government securities,

(viii) such other instruments as may be declared by the Central Government to be

securities, and

(ix) rights or interests in securities.

As per section 2(aa), 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;

Section 18A provides 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-

(i) traded on a recognized stock exchange;

(ii) settled on the clearing house of the recognized stock exchange, in accordance with

the rules and bye-laws of such stock exchanges.

In accordance with the rules and bye-laws of such stock exchange.

"Spot delivery contract" has been defined in Section 2(i) to mean 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 therefore through the post being

excluded from the computation of the period aforesaid if the parties to the contract do

not reside in the same town or locality;



(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.

The SC(R)A deals with1.

stock exchanges, through a process of recognition and continued supervision,

2. contracts & options in securities, and

3. listing of securities on stock exchanges.

Recognition of stock exchanges

By virtue of the provisions of the Act, the business of dealing in securities cannot be

carried out without registration from SEBI. Any Stock Exchange which is desirous of

being recognized has to make an application under Section 3 of the Act to SEBI,

which is empowered to grant recognition and prescribe conditions. This recognition

can be withdrawn in the interest of the trade or public.

Section 4A of the Act was added in the year 2004 for the purpose of corporatization

and demutualization of stock exchange. Under section 4A of the Act, SEBI by

notification in the official gazette may specify an appointed date on and from which

date all recognized stock exchanges have to corporatize and demutualise their stock

exchanges. Each of the Recognized stock exchanges which have not already being

corporatized and demutualised by the appointed date are required to submit a

scheme for corporatization and demutualization for SEBIs approval. After receiving

the scheme SEBI may conduct such enquiry and obtain such information as be may

be required by it and after satisfying that the scheme is in the interest of the trade

and also in the public interest, SEBI may approve the scheme.

SEBI is authorized to call for periodical returns from the recognized Stock Exchanges

and make enquiries in relation to their affairs. Every Stock Exchange is obliged to

furnish annual reports to SEBI. Recognized Stock Exchanges are allowed to make

bylaws for the regulation and control of contracts but subject to the previous

approval of SEBI and SEBI has the power to amend the said bylaws.

The Central Government and SEBI have the power to supersede the governing body

of any recognized stock exchange. The Central Government and SEBI also have

power to suspend the business of the recognized stock exchange to meet any

emergency as and when it arises, by notifying in the official gazette.

Contracts and Options in Securities



Organized trading activity in securities takes place on a recognized stock exchange. If the

Central Government is satisfied, having regard to the nature or the volume of

transactions in securities in any State or States or area, that it is necessary so to do, it

may, by notification in the Official Gazette, declare provisions of section 13 to apply to

such State or States or area, and thereupon every contract in such State or States or

area which is entered into after date of the notification otherwise than between

members of a recognized stock exchange or recognized in stock exchanges in such State

or States or area or through or with such member shall be illegal. The effect of this

provision clearly is that if a transaction in securities has to be validly entered into, such a

transaction has to be either between the members of a recognized stock exchange or

through a member of a Stock Exchange.

Listing of Securities

Where securities are listed on the application of any person in any recognized stock

exchange, such person shall comply with the conditions of the listing agreement with

that stock exchange (Section 21). Where a recognized 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 the company may appeal to Securities Appellate Tribunal (SAT) against such refusal.

Delisting of Securities

A recognized stock exchange may delist the securities of any listed companies on such

grounds as are prescribed under the Act. Before delisting any company from its

exchange, the recognized stock exchange has to give the concerned company a

reasonable opportunity of being heard and has to record the reasons for delisting that

concerned company. The concerned company or any aggrieved investor may appeal to

SAT against such delisting. (Section 21A)

SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

Major part of the liberalization process was the repeal of the Capital Issues (Control)

Act, 1947, in May 1992. With this, Governments control over issues of capital, pricing of

the issues, fixing of premia and rates of interest on debentures etc. ceased, and the

office which administered the Act was abolished: the market was allowed to allocate

resources to competing uses.

However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted to

establish SEBI with statutory powers for:

(a) protecting the interests of investors in securities,

(b) promoting the development of the securities market, and

(c) regulating the securities market.



Its regulatory jurisdiction extends over companies listed on Stock Exchanges and

companies intending to get their securities listed on any recognized stock exchange in

the issuance of securities and transfer of securities, in addition to all intermediaries and

persons associated with securities market. 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 of the securities

market; and can conduct enquiries, audits and inspection of all concerned and

adjudicate offences under the Act. In short, it has been given necessary autonomy and

authority to regulate and develop an orderly securities market. All the intermediaries

and persons associated with securities market, viz., brokers and sub-brokers,

underwriters, merchant bankers, bankers to the issue, share transfer agents and

registrars to the issue, depositories, Participants, portfolio managers, debentures

trustees, foreign institutional investors, custodians, venture capital funds, mutual funds,

collective investments schemes, credit rating agencies, etc., shall be registered with SEBI

and shall be governed by the SEBI Regulations pertaining to respective market

intermediary.

Constitution of SEBI

The Central Government has constituted a Board by the name of SEBI under Section 3 of

SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other places

in India.

SEBI consists of the following members, namely:-

(a) a Chairman;

(b) two members from amongst the officials of the Ministry of the Central Government

dealing with Finance and administration of Companies Act, 1956;

(c) one member from amongst the officials of the Reserve Bank of India;

(d) five other members of whom at least three shall be whole time members to be appointed by the Central Government.



The general superintendence, direction and management of the affairs of SEBI vests in a

Board of Members, which exercises all powers and do all acts and things which may be

exercised or done by SEBI.

The Chairman also has 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 the Board.

The Chairman and members referred to in (a) and (d) above shall be appointed by the

Central Government and the members referred to in (b) and (c) shall be nominated by

the Central Government and the Reserve Bank respectively.

The Chairman and the other members are from amongst the 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 SEBI.Functions of SEBI

SEBI has been obligated to protect the interests of the investors in securities and to

promote and development of, and to regulate the securities market by such measures

as it thinks fit. The measures referred to therein may provide for:-

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer

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

bankers, underwriters, portfolio managers, investment advisers and such other

intermediaries who may be associated with securities markets in any manner;

(c) registering and regulating the working of the depositories, participants, custodians

of securities, foreign institutional investors, credit rating agencies and such other

intermediaries as SEBI may, by notification, specify in this behalf;

(d) registering and regulating the working of venture capital funds and collective

investment schemes including mutual funds;

(e) promoting and regulating self-regulatory organizations;

(f) prohibiting fraudulent and unfair trade practices relating to securities markets;

(g) promoting investors' education and training of intermediaries of securities

markets;

(h) prohibiting insider trading in securities;

(i) regulating substantial acquisition of shares and take-over of companies;

(j) calling for information from, undertaking inspection, conducting inquiries and

audits of the stock exchanges, mutual funds, other persons associated with the

securities market, intermediaries and self- regulatory organizations in the securities

market;

(k) calling for information and record from any bank or any other authority or board or

corporation established or constituted by or under any Central, State or Provincial Act

in respect of any transaction in securities which is under investigation or inquiry by

the Board;

(l) performing such functions and exercising according to Securities Contracts

(Regulation) Act, 1956, as may be delegated to it by the Central Government;

(m) levying fees or other charges for carrying out the purpose of this section;

(n) conducting research for the above purposes;

(o) calling from or furnishing to any such agencies, as may be specified by SEBI, such

information as may be considered necessary by it for the efficient discharge of its

functions;

(p) performing such other functions as may be prescribed.

SEBI may, for the protection of investors,

(a) specify, by regulations for



(i) the matters relating to issue of capital, transfer of securities and other matters

incidental thereto; and

(ii) the manner in which such matters, shall be disclosed by the companies and

(b) by general or special orders :

(i) prohibit any company from issuing of prospectus, any offer document, or

advertisement soliciting money from the public for the issue of securities,

(ii) specify the conditions subject to which the prospectus, such offer document or

advertisement, if not prohibited may be issued. (Section 11A).

SEBI may issue directions to any person or class of persons referred to in section 12, or

associated with the securities market or to any company in respect of matters specified

in section 11A. if it is in the interest of investors, or orderly development of securities

market 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 to secure the proper management of any such intermediary or person (Section

11B).

Registration of Intermediaries

The intermediaries and persons associated with securities market shall buy, sell or deal

in securities after obtaining a certificate of registration from SEBI, as required by Section

12:

1) Stock-broker,

2) Sub- broker,

3) Share transfer agent,

4) Banker to an issue,

5) Trustee of trust deed,

6) Registrar to an issue,

7) Merchant banker,8) Underwriter,

9) Portfolio manager,

10) Investment adviser

11) Depository,

12) Participant

13) Custodian of securities,

14) Foreign institutional investor,

15) Credit rating agency or

16) Collective investment schemes,

17) Venture capital funds,18) Mutual fund, and

19) Any other intermediary associated with the

securities market.THE DEPOSITORIES ACT, 1996

The Depositories Act, 1996 was enacted to provide for regulation of depositories in

securities and for matters connected therewith or incidental thereto. It came into force

from 20th September, 1995. The terms used in the Act are defined as under:

(1) "Beneficial owner" means a person whose name is recorded as such with a

depository.

(2) "Depository" means a company, formed and registered under the Companies Act,

1956 and which has been granted a certificate of registration under sub-section (1A)

of section 12 of the SEBI Act, 1992.

(3) "Issuer" means any person making an issue of securities.

(4) "Participant" means a person registered as such under sub-section (1A) of section 12

of the SEBI Act, 1992.

(5) "Registered owner" means a depository whose name is entered as such in the

register of the issuer.

Agreement between depository and participant

A depository shall enter into an agreement in the specified format with one or more

participants as its agent.

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 with a depository 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 information enter the name of the person in its records,

as the beneficial owner.

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

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. 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.

Securities in depositories to be in fungible form

All securities held by a depository shall be dematerialized and shall be in a fungible

form.

Rights of depositories and beneficial owner

A depository shall 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 shall not have any voting rights or any other rights in respect of

securities held by it. The beneficial owner shall be entitled to all the rights and benefits

and be subjected to all the liabilities in respect of his securities held by a depository.

Pledge or hypothecation of securities held in a depository

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 shall give intimation of such pledge or hypothecation to the depository

and such depository shall thereupon make entries in its records accordingly. Any entry

in the records of a depository under Section 12 (2) shall be evidence of a pledge or

hypothecation.

Furnishing of information and records by depository and issuer

Every 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

If a beneficial owner seeks to opt out of a depository in respect of any security he shall

inform the depository accordingly. The depository shall on receipt of intimation make

appropriate entries in its records and shall 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.

Depository to indemnify loss in certain cases

Any loss caused to the beneficial owner due to the negligence of the depository or the

participant, the depository shall indemnify such beneficial owner. Where the loss due to

the negligence of the participant is indemnified by the depository, the depository shall

have the right to recover the same from such participant.

Securities not liable to stamp duty

As per Section 8-A of Indian Stamp Act, 1899:



a) an issuer, by the issue of securities to one or more depositories shall, in respect of

such issue, be chargeable with duty on the total amount of security issued by it and such

securities need not be stamped;

b) where an issuer issues certificate of security under sub-section (3) of Section 14 of

the Depositories Act, 1996, on such certificate duty shall be payable as is payable on the

issue of duplicate certificate under the Indian Stamp Act, 1899;

c) transfer of registered ownership of securities from a person to a depository or from a

depository to a beneficial owner shall not be liable to any stamp duty;

d) transfer of beneficial ownership of shares, such securities dealt with by a depository

shall not be liable to duty under Article 62 of Schedule I of the Indian Stamp Act, 1899;

e) transfer of beneficial ownership of units, such units being units of mutual fund

including units of the Unit Trust of India, dealt with by a depository shall not be liable to

duty under Article 62 of Schedule I of the Indian Stamp Act, 1899;

INSURANCE ACTS IN INDIA

The insurance sector went through a full circle of phases from being unregulated to

completely regulated and then currently being partly deregulated. It is governed by a

number of acts.

The Insurance Act of 1938 was the first legislation governing all forms of insurance to

provide strict state control over insurance business.

Life insurance in India was completely nationalized on January 19, 1956, through the Life

Insurance Corporation Act. All 245 insurance companies operating then in the country

were merged into one entity, the Life Insurance Corporation of India.

The General Insurance Business Act of 1972 was enacted to nationalize the about 100

general insurance companies then and subsequently merging them into four companies.

All the companies were amalgamated into National Insurance, New India Assurance,

Oriental Insurance and United India Insurance, which were headquartered in each of the

four metropolitan cities.

Until 1999, there were not any private insurance companies in India. The government

then introduced the Insurance Regulatory and Development Authority Act in 1999,

thereby de-regulating the insurance sector and allowing private companies.

Furthermore, foreign investment was also allowed and capped at 26% holding in the

Indian insurance companies.

In 2006, the Actuaries Act was passed by parliament to give the profession statutory

status on par with Chartered Accountants, Notaries, Cost & Works Accountants,

Advocates, Architects & Company Secretaries.Unit -4

Regulatory Bodies

Department of Company Affairs

Department of Economic Affairs

SEBI

Forward Market Commission

RBI

IRDA

Need for Self RegulationSEBI

Securities & Exchange Board of India (SEBI) is the regulator for the securities market in

India. It was formed officially by the Government of India in 1992 with SEBI Act 1992

being passed by the Indian Parliament. Chaired by C B Bhave.

PREAMBLE

The Preamble of the Securities and Exchange Board of India describes the basic

functions of the Securities and Exchange Board of India as

..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

Functions and Responsibilities:

SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities

the investors

the market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasiexecutive.

It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function and it passes rulings and orders in its

judicial capacity. Though this makes it very powerful, there is an appeals process to

create accountability. There is a Securities Appellate Tribunal which is a three-member

tribunal and is presently headed by a former Chief Justice of a High court - Mr. Justice

NK Sodhi. A second appeal lies directly to the Supreme Court.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and

successively (e.g. the quick movement towards making the markets electronic and

paperless rolling settlement on T+2 basis). SEBI has been active in setting up the

regulations as required under law.

SEBI has also been instrumental in taking quick and effective steps in light of the global

meltdown and the Satyam fiasco. It had increased the extent and quantity of disclosures

to be made by Indian corporate promoters. More recently, in light of the global

meltdown, it liberalized the takeover code to facilitate investments by removing

regulatory strictures.

Securities Market Awareness Campaign (SMAC) by SEBI:

The Securities and Exchange Board of India (SEBI) has been mandated to protect the

interests of investors in securities and to promote the development and to regulate the

securities market so as to establish a dynamic and efficient Securities Market

contributing to Indian Economy.

SEBI strongly believes that investors are the backbone of the securities market. They not

only determine the level of activity in the securities market but also the level of activity

in the economy.

However, many investors may not possess adequate expertise/knowledge to take

informed investment decisions. Some of them may not be aware of the complete riskreturn

profile of the different investment options. Some investors may not be fully

aware of the precautions they should take while dealing with market intermediaries and

dealing in different securities. They may not be familiar with the market mechanism and

the practices as well as their rights and obligations.

In this backdrop, SEBI launched a comprehensive education campaign aimed at creating

awareness among investors about securities market, which has been christened

Securities Market Awareness Campaign (SMAC). The motto of the campaign is An

Educated Investor is a Protected Investor. The campaign was launched at the national

level by the then Prime Minister, Shri Atal Bihari Vajpayee, on January 17, 2003.The

national launch was closely followed by launches in 12 states.

The structural foundation of the campaign is based on workshops that are being

conducted all across the country with the continued and active participation of market

participants, market intermediaries, Investors Associations etc., to spread SEBIs

message of Invest With Knowledge.

The Multi-Pronged approach by SMAC:

1. Workshops

2. Advertisements

3. Educative Material

4. Website dedicated to Investor Education

5. All India Radio

6. Cautionary Message on Television

1. Workshops

The workshops are aimed at reaching out to the common investors and are being held

primarily in small and medium towns and cities all over the country. At these

workshops, the aim is to acclimatize the investors with the functioning of the securities

market, the basic fundamentals of investment and risk management and their rights and

responsibilities. You can attend the workshops in your city/town. The message is simple,

and lectures and discussions are conducted in your local/regional language,

Till date, more than 2188 workshops have been conducted in around 500 cities/towns

across the country.

2. Advertisements

SEBI has prepared simple dos and donts for investors relating to various aspects of

the securities market. While these simple messages have been put on the investor

website and have been printed in the form of leaflets to be distributed across the

country, it was felt that these messages could be spread across the investor base by way

of advertisements in newspapers, especially in the regional newspapers.

Till date, over 700 advertisements relating to various aspects of Securities Market have

appeared in 48 different newspapers/ magazines, covering approximately 111 cities and

9 regional languages, apart from English and Hindi.

3. Educative Material

SEBI has prepared a standardized reading material and presentation material for the

workshops. In addition, reference guides on topics concerning investors have also been

prepared.

The reference guides/booklets have been translated into Hindi and the workshop

material has been translated into 10 major regional languages. You can read the

material translated into regional languages on-line or download it in the language of

your choice.

4. Website dedicated to Investor Education

With a view to make information relevant to the investor available at one place, this

dedicated investor website (http://investor.sebi.gov.in) has been operationalized.

A simple and effective internet based response to investor complaints has been set up.

On filing of your complaint electronically, an acknowledgement mail would be sent to

your specified email address and you will be issued a complaint registration number

instantaneously.

5. All India Radio

With regard to educating investors through the medium of radio, SEBI Officials regularly

participate in programmes aired by All India Radio

6. Cautionary Message on Television

With a view to use the electronic media to reach out to a larger number of investors, a

short cautionary message, in the form of a 40 seconds filmlet, has been prepared and

the same is being aired on television.

IRDA (Insurance Regulatory and Development Authority)

Insurance Regulatory and Development Authority (IRDA) was setup under section 4 of

IRDA Act 1999, (IRDA, which was constituted by an act of parliament).

The Authority is a ten member team consisting of

(a) One Chairman;

(b) Five whole-time members;

(c) Four part-time members,

(All appointed by the Government of India)

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. They are as follows:

(1) Subject to the provisions of this Act and any other law for the time being in force,

the Authority shall have the duty to regulate, promote and ensure orderly growth

of the insurance business and re-insurance business.

(2) The powers and functions of the Authority shall include :-

(a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;

(b) Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;

(c) Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents;

(d) Specifying the code of conduct for surveyors and loss assessors;

(e) Promoting efficiency in the conduct of insurance business;

(f) Promoting and regulating professional organizations connected with the insurance and re-insurance business;

(g) Levying fees and other charges for carrying out the purposes of this Act;

(h) Calling for information, undertaking inspection, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business;

(i) Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);

(j) Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;

(k) Regulating investment of funds by insurance companies;

(l) Regulating maintenance of margin of solvency;

(m) Adjudication of disputes between insurers and intermediaries or insurance intermediaries.

(n) Supervising the functioning of the Tariff Advisory Committee;

(o) Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f);

(p) Specifying the percentage of life insurance business and general insurance

business to be undertaken by the insurer in the rural or social sector.

(q) Exercising such other powers as may be prescribed

Department of Economic Affairs (DEA)

Department of Economic Affairs (DEA) is the nodal agency of the Union Government to

formulate and monitor country's economic policies and programmes having a bearing

on domestic and international aspects of economic management. Department of

Economic Affairs works under the Right to Information (RTI) Act.

Main Functions of the Department of Economic Affairs are:

It formulates as well as monitors the economic life of the country at macro

level that is connected with the Capital Market inclusive of Stock Exchange

It manages both the internal and external aspects of the economic policies

and programmes of the country

The department prepares the Union Budget on a yearly basis exclusive of the

Railway Budget system

It also lifts up external resources of the country's economy with the help of

multilateral and bilateral official development assistance along with

commercial borrowings from overseas countries, foreign direct investments,

preserving foreign exchange resources, and balance of payment

The department contributes in raising the internal resources of the country's

economy with the help of market borrowings, taxation, gathering of small

savings, and ordinance of money supply system

It plays a cardinal role in manufacturing bank notes and coins available in

varied denominations

It also makes available the postal stationery, postal stamps, and many more

The department of economic affairs takes substantial interest in cadre

management, career planning and training of the Indian Economic Service

(IES)

It is highly responsible for the disbursement of loans as well debt servicing of the loans

Units working under the Department of Economic Affairs are:

Administrative Division

All administrative and establishment matters, including protocol, and

implementation of Official Language Policy fall within the domain of this Division.

Bilateral Cooperation Division

BC Division deals with Bilateral Development Assistance from all G-8 countries.

One of the main functions of the Division is to extend concessional Lines of

Credit to other developing countries. It also monitors the progress of

implementation of Externally Aided Projects and administers all short term

foreign training programmes.

Budget Division

Apart from preparation of Union Budget and other allied issues like market

borrowings, accounting and auditing procedures and financial relationship with

the State Governments. This Division also deals with mobilization of small

savings through the National Savings Institute (NSI).

Capital Market Division

It is primarily responsible for policy issues related to development of the

securities markets (i.e. share, debt and derivatives), External Commercial

Borrowing and administration of Foreign Exchange Management Act (FEMA),

1999. It also looks after the administrative matters of the Specified Undertaking

of Unit Trust of India (SUUTI), the Securities and Exchange Board of India (SEBI),

Securities Appellate Tribunal (SAT) and Pensions Funds Regulation and

Development Authority (PFRDA).

Economic Division

It tenders economic advice to the Government on important policy issues

relating to macro management of the economy.

Finance Division

The Finance Division is responsible for tendering of financial advice on all

matters involving government expenditure of the Department of Economic

Affairs and the Department of Financial Services. The Division is also responsible

for preparation of the Budget and administering the Detailed Demands for

Grants in respect of these Departments. Coordination, compilation and printing

of the Detailed Demands for Grants and the Outcome Budget of the Ministry of

Finance is also handled by this Division.

Multilateral Relations Division

With a view to provide focused and outcome oriented engagement with

multilateral organizations and Trade Related issues, Multilateral Relations

Division has been created recently by merging Sections from Foreign Trade

Division and Fund Bank Division specifically dealing with related issues. The MR

Division comprises five sections namely, MR-I Section has been assigned the job

of rendering advice and dealing all matters related to G-20, G-24, G-8, ASEM,

OECD and EC, MR-II Section deals with UN related matters, MR-III Section

advises on WTO and SAARC related matters. MR-IV Section is responsible for all

matters related to Colombo Plan and Technical Cooperation framed there under.

MR-V Section renders advice to Ministry of Commerce on issues arising out of

and consequent to implementation of Foreign Trade Policy.

Infrastructure Division

Sectoral responsibilities of infrastructure, including Railways,

Telecommunications, Roads, Ports, Shipping, Civil Aaviation, Power, Coal, Non-

Conventional Energy Resources and Inland Water Transport (IWT) are handled

here.

Aid, Accounts and Audit Division

This Division is responsible for disbursement of loans and grants from

multilateral/ bilateral donor agencies, debt servicing of loans to multilateral/

bilateral donors, accounting of external assistance, export promotion audit and

supply of management information to credit Divisions.

Multilateral Inst

Regulation notes

Documents

Transcript of Regulation notes