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3/20/10

SEBI - an understanding

The clause 45B of section 2 of the Companies Act, 1956 defines the word “Securities and Exchange Board of India” mean the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992. Since the definition in clause (45B) of the act is dependent on section 3 of the Securities and Exchange Board of India Act, 1992, the same is reproduced below:

“3. (1) With effect from such date as the Central Government may, by notification, appoint, there shall be established, for the purpose of this Act, a Board by the name of the Securities and Exchange Board of India.

(2)The Board shall be a body corporate by the name aforesaid, having perpetual succession and a common, seal, with power subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.

(3)The head office of the Board of shall be at Bombay.

(4)The Board may establish offices at other places in India.”

The long cause title of the Securities and Exchange Board of India Act, 1992 has been reproduced below.

“An Act to provide for the establishment of a Board 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”.

Thus, a combined reading of the long cause tile and the definition given under the Section 3 of the Securities and Exchange Board of India Act, 1992 makes it clear that the Securities Exchange Board of India is a “body corporate having perpetual succession, common seal to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for the matters connected therewith or incidental thereto”.

Various provisions of the Securities and Exchange Board of India Act, 1992 gives an insight into the complicated and commendable work/functions discharged by the Securities and Exchange Board of India and the same are extracted below:

Management of the Board.

5. (1) The Board shall consist of the following members, namely;-

a. a Chairman;

b. members from amongst the officials of the Ministry of the Central Government dealing with Finance and administration of the Companies Act, 1956 (1 of 1956);

c. one member from amongst the officials o the Reserve Bank;

d. five other members of whom at lest three shall be whole-time members,

to be appointed by the Central Government.

(2)The general superintendence, direction and management of the affair 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.

(3)Save as otherwise determined by regulations, 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.

(4)The Chairman and members referred to in clause (a) and (d) of sub-section (1) shall be appointed by the Central Government and the members referred to in clauses (b) and (c) of that sub-section shall be nominated by the Central Government and the Reserve Bank respectively.

(5)The Chairman and the other members referred to in clauses (a) and (d) sub-section (1) 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 of the Board.

11. (1) Subject to the revision of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2)Without prejudice to the generality o the foregoing provisions, 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, registering to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with the securities markets in any manner;

(ba)registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;

(c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;

(d) promoting and regulating self-regulatory organizations;

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

(f) promoting investors’ education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

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

(i) calling of 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;

(ia)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;

(j) performing such functions and exercising such powers under the provisions of [***] the Securities Contract (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government;

(k) levying fees or other charges for carrying out the purposes of this section;

(l) conducting research for the above purposes;

(la)calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions;

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

(2A) Without prejudice to the provisions contained in sub-section (2), the Board 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 (not being intermediaries referred to ins section (12), which intends to get it securities listed on any recognized stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.

(3) Notwithstanding anything contained in any other law for the time being in force while exercising the power under clause (i) or clause (ia) of sub-section (2) or sub-section (2A), the Board shall have the same power as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:-

i. the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board;

ii. summoning and enforcing the attendance of persons and examining them on oath;

iii. inspection of any books, registers an other documents of any person referred to in section 12, at any place;

iv. inspection of any book, or register, or other documents or record of the company referred to in sub-section (2a);

(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:-

a. suspend the trading of any security in a recognized stock exchanges;

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-barer of any stock exchange or self-regulatory transaction which is under investigation;

d. attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made there under:

Provided that only the 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;

e. direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienation asset forming part of any transaction which is under investigation:

Provided that the Board may, without prejudice to the provisions contained in sub-section (2) of sub-section (2A), take any of the measures specified in clause (d) or clue (e) or clause (f), in respect of any listed public company or a public company (not being intermarries referred to in section 12) which intends to get its securities listed on any recognized stock exchange where the Board has reasonable ground to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market:

Provided further that the Board shall, either before or after passing such orders, given an opportunity of hearing to such intermediaries or person concerned.”

Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities.

11A. (1) Without prejudice to the provisions of the Companies Act, 1956 (91 of 1956), the Board may, for the protection of investors.-

a. specify, by regulations –

(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;

b. by general or special orders –

(i) prohibit any company from issuing 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.

(2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for listing and transfer of securities sand other maters incidental thereto.”

“Power to issue directions.

11B. Save as otherwise provide in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary, -

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

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person,

it may issue such direction, --

(a)to any person or class of persons referred to in section 12, or associated with the securities market; or

(b)to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investor sin securities and the securities market.”

“Investigation.

11C. (1) Where the Board has reasonable ground to believe that –

(a) the transactions in securities are being dealt with in a manner detrimental to the investor or the securities market; or

(b) 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 direction issued by the Board thereunder,

it may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs of such intermediary or person associated with the securities market and to report thereon to the Board.

(2)Without prejudice to the provisions of section 235 to241 of the Companies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary referred to in section 12 or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorized by it in this behalf, all the books registers, other document sand 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)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 authorized 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)The Investigating Authority may keep in its custody any books, registers, other documents and record produced under sub-section (2) or sub-section (3) 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 an record are produced:

Provide that the Investigating Authority may call for any book, register, other document and record if they are needed again:

Provided further that if the person on whose behalf the books, registers, other documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, 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)Any person, directed to make an investigation under sub-section (1), 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)If any person fails without reasonable cause or refuses-

a. to produce to the Investigating Authority or any person authorized by it in this behalf any book, register, other document and record which is his duty under sub-section (2) or sub-section (3) to produce; or

b. to furnish any information which is his duty under sub-section (3) to furnish; or

c. to appear before the Investigating Authority personally when required to do so under sub-section (5) or to answer any question which is put to him by the Investigating Authority in pursuance of that sub-section; or

d. to sign the notes of any examination referred to in sub-section (7),

he shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to one crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues.

(7)Notes of any examination under sub-section (5) shall be taken down writing and shall be read over to, or by, and signed, by person examined, and may thereafter be sued in evidence against him.

(8) Where in the course of investigation, the Investigating Authority has reasonable ground to believe that the books, registers, other documents and record of, or relating to, 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 Judicial Magistrate of the firs class having jurisdiction for an order for the seizure of such books, registers, other documents and record.

(9)After considering the application and hearing the Investigating Authority, if necessary, the Magistrate 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 document sand record oar kept;

b.to search that place or those places in the manner specified in the order; and

c.to seize books, registers, other documents and record, it consider necessary for the purposes of the investigation:

Provided that the Magistrate shall not authorize seizure of books, reregisters, other documents and record, of any listed public company or a public (non being the intermediaries 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)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 of such return:

Provided that the Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof.

a. Save as otherwise provided in this section, every search or seizure made under his section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code”.

“Registration of stock brokers, sub-brokers, share transfer agents, etc.

12.(1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained form the Board in accordance with the regulations made under this Act:

Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, under writer, portfolio manger, investment adviser, and such other intermediary who maybe associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the said period of three months, till the disposal of such application:

Provided further that any certificate of registration, obtained immediately before the commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been obtained from the Board in accordance with the regulations providing for such registration.

(1A) No depository, participant, custodian of securities, foreign institutional investor, credit rating agency, or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate or registration obtained from the Board in accordance with the regulations made under this Act:

Provided that a person buying or selling securities or otherwise dealing with the securities markets depository, participant, custodian of securities, foreign institutional investor or credit rating agency immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to buy or sell securities or otherwise deal with the securities market until such time regulations are made under clause (d) of sub-section (2) of section 30.

(1B) No person shall sponsor or cause to be sponsored to carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations:

Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried don any venture capital funds or collective investment schemes operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration wa required prior to such commencement, may continue to operate till such time regulations are made under clause (d)of sub-section (2) of section 30.

(2)Every application for registration shall be in such manner and on payment of such fees as may be determined by regulations.

(3)The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations:

Provided that no order under this sub-section shall be made unless the person concerned has been given a reasonable opportunity of being heard.

Prohibition of manipulative and deceptive devices, Insider trading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly –

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device 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 recognize 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 of 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 there under;

(f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the regulations made under this Act.”

The management of board as enshrined in section 4 of the Securities and Exchange Board of India Act, 1992 exposes that the Board is an expert consisting of experts in finance and administration and others. The functions of the board as given in section 11, 11A, 11B, 11C and 12A gives an idea of the complicatedness of transaction in the securities market and also the most difficult functions of regulating various intermediaries from the stage of granting certificate and continuously supervising them in order see that they are not abusing their powers/position. Further, in view of the fact that the security is an marketable interest, in view of the fact that variety of marketable interests can be issued by the companies in the market, in view of speculativeness of the stock market and in view of the ample scope to deceit the investors if the intermediaries co-operates for such deceitfulness, the functions discharged by the Board are really commendable. The functions of the Board can be termed as most complicated among all areas/branches/fields.

The Board also prescribes, under its authority, various rules/regulations/circulars etc. which are applicable to public companies or the companies whose shares are going to be listed. The rules and regulations prescribed by the SEBI are obviously connected with the issue and the trading at the primary and the secondary market. The SEBI does commendable job by co-coordinating with the Government, RBI, various other organs, Intermediaries, Financial Institutions, World Stock Exchanges and various other recognized stock exchange/s in India.

Some important rules/regulations/guidelines prescribed by the SEBI are given hereunder:

  • SEBI (Disclosure and Investor Protection) Guidelines, 2000
  • SEBI (Central Listing Authority) Regulations, 2003
  • SEBI (Delisting of Securities) Guidelines, 2003
  • SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999
  • SEBI (Issue of Sweat Equity) Regulations, 2002
  • SEBI (Buy-Back of Securities) Regulations, 1998
  • SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
  • SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003.
  • SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995
  • SEBI (Mutual Funds) Regulations, 1996
  • SEBI (Collective Investment Schemes) Regulations, 1999
  • SEBI Guidelines for Foreign Institutional Investors
  • SEBI (FIIs) Regulations, 1995
  • SEBI (Venture Capital Funds) Regulations, 1996
  • SEBI (Foreign Venture Capital Funds) Regulations
  • SEBI (Depositories and Participants) Regulations, 1996
  • SEBI (Custodian of Securities) Regulations, 1996
  • SEBI (Credit Rating Agencies) Regulations, 1999
  • SEBI (merchant Bankers) Rules, 192
  • SEBI (Merchant Bankers) Regulations, 1992/SEBI (Registrars to an issue and Share Transfer Agents) Rules, 1993
  • SEBI (Registrars to an issue and Share Transfer Agents)Regulation, 1993
  • SEBI (Underwriters) Rules, 1993
  • SEBI (Underwriters) Regulations, 1993
  • SEBI (Debenture Trustees) Rules, 1993
  • SEBI (Debenture Trustees) Regulations, 1993/SEBI (Bankers to an Issue) Rules, 1994
  • SEBI (Bankers to an Issue) Regulations, 1994
  • SEBI (Stock Brokers and Sub-Brokers) Rules, 1992
  • SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
  • SEBI (Portfolio Manager) Rules, 1993
  • SEBI (Portfolio Manager) Regulations, 1993
  • SEBI (Ombudsman) Regulations, 2003.

Apart from very few prominent rules and regulations framed or prescribed by the SEBI, there are numerous circulars etc. issued by the SEBI for effective discharge of its functions. Among all, the SEBI (DIP) Guidelines will be of great significance when it comes to initial issue. Again, the SEBI will discharge the most of important function of Takeovers and has to prevent the indirect takeovers floating the rules and regulations. Again, insider trading, various schemes, mutual funds etc. the rule and regulations in respect of the public companies like buyback of securities etc. will be effectively prescribed and administered by SEBI. Like RBI which is burdened with the sensitive and complicated functions, the SEBI too discharges a commendable job it was assigned to.

Note: Sebi regulations and few regulations are mentioned just to give an understanding and the reader is advised to be through with all the recent developments, amendments and the regulations.

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