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CMSL Part 2

- The document introduces YES Academy for CS and Law, which provides training for Company Secretary (CS) and law courses. - It lists the faculty members and their areas of expertise, including subjects they teach for the CS Executive Program and law entrance exams. - A few passages by the founder CS Vikas Vohra discuss the importance of understanding different perspectives, building deep relationships by understanding others, and empowering students. - The final section provides notes on the Capital Market and Securities Laws syllabus for CS Executive and wishes students good luck in their studies.
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0% found this document useful (0 votes)
201 views326 pages

CMSL Part 2

- The document introduces YES Academy for CS and Law, which provides training for Company Secretary (CS) and law courses. - It lists the faculty members and their areas of expertise, including subjects they teach for the CS Executive Program and law entrance exams. - A few passages by the founder CS Vikas Vohra discuss the importance of understanding different perspectives, building deep relationships by understanding others, and empowering students. - The final section provides notes on the Capital Market and Securities Laws syllabus for CS Executive and wishes students good luck in their studies.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Academy

TEAM YES Most


for CS & LAW
CS | LAW

CS VIKAS VOHRA (FOUNDER) CA CS HARISH A. MATHARIYA (FOUNDER)


CSEET EXECUTIVE PROFESSIONAL CSEET EXECUTIVE PROFESSIONAL
Legal Aptitude Company Law & Drafting, Pleadings & Business Corporate
Practice Appearances Environment Accounting &
Financial
Capital Market &
Management
Securities Laws

ADV CHIRAG CHOTRANI CMA VIPUL SHAH


CSEET EXECUTIVE PROFESSIONAL CSEET EXECUTIVE PROFESSIONAL
Legal Aptitude Setting Up of Governance, Tax Laws & Advanced
Business, Industrial Risk Management, Practice Tax Law
& Labour Laws Compliances & Ethics
Jurisprudence, Corporate Funding &
Interpretation & Listings in
General Laws Stock Exchanges
Economic,
Commercial &
Intellectual
Property Laws

CS MUSKAN GUPTA
CSEET LAW ENTRANCE PROFESSIONAL
Business English Secretarial Audit,
Compliance Management
CS VAIBHAV CHITLANGIA Communication Language and Due Diligence
Legal Resolution of
CSEET LAW ENTRANCE PROFESSIONAL Aptitude Corporate Disputes, Non-
Compliances & Remedies
Logical Logical Multidisciplinary Labour Laws &
Reasoning Reasoning Case Studies Practice
Maths Insolvency – Law &
Practice
Corporate Restructuring,
Insolvency, Liquidation &
Winding - Up

ADV. VISHISHTA NAYAK


CSEET LAW ENTRANCE
ADV. AMRUTA CHHAJED Current Current
Affairs Affairs
LAW COURSE DIRECTOR Economics General
Knowledge
YouTube - YES Academy for CS and Law In Karma, I Believe.. Preface

Whether you like it or not, the inherent question in everyone is – Whats in it for me? It will
be your folly to ignore this aspect of life. Some are motivated by money, some by a sense of
purpose, some by a learning environment, some need cool environments and some need
challenging environments. Nothing works for all. Something works for all. Everybody has a
dominant need, which keeps changing as they keep growing. Every heart has a yearning. In
that sense, we are all the same and we are all different.

The key is to take others perspective into consideration. Unless you see the world the way
other sees it, you cannot empower the world to see it the way you see it. Leadership is to step
into others shoes and then empowering them to walk in the direction that’s right for them
and that’s good for all. There is no one way for all the people. Leadership has to be customized.

People relate to you not for what you are with them but for what they can be when they are
with you. Deep relationships are not built by making you understand me but in giving you the
confidence that I have understood you. Even with children, they find you interesting only if
you talk to them about what they are interested in. once they develop that interest in your
company, then you can empower them.
The secret is – TO SEE THROUGH OTHERS EYES!!!!
MY LOVE AND RESPECT TO…..
To Rajlaxmi – My Soul. You are around
To my Mummy – You are my source of inspiration, your sacrifices showed me the right path
every time I went wrong.
To my Papa – You taught me the ability to bounce back and stand still, come what may.
To every Student – Glad to have found so many teachers in you, my source of happiness, my
strength.
To my Competitors – You added meaning and worth to my name – Vikas. Thank you for being
so strong and amazing. You bring out the best in me.
To my Entire TEAM at YES – With your work, you set up new benchmarks for me each day,
and give me reasons to stride longer. Thank you for being so perfect in every pursuit.
To YES Academy and to every person around, my well wishers, my critics for helping me rise
in every walk. Its your blessings, which lets me survive and go far.

CS VIKAS VOHRA 8888 078 078 | YES ACADEMY, PUNE 8888 235 235 / Happy Learning, Happy Earning
YouTube - YES Academy for CS and Law In Karma, I Believe.. Preface

Some latest abbreviations at DALAL STREET -

BSE – Bombay Se Exit


NSE – Nation Se Exit
F&O – Future Over
NIFTY – No Income For This Year
FII – Fraudulent International Investors
HNI – Has No Idea
PMS – Pre Mediated Scam
SIP – Suicide by Investing Patiently
EBITDA – Exit Before It Tumbles Down Again

Sandesh….
Dear Reader,

At the outset, let me first take this opportunity to thank you for spending some of your
valuable time with my words. I feel pleased to present to you, notes on 1st edition of Capital
Market and Securities Laws (New Syllabus) for CS Executive.

While writing this book, I have taken every possible effort to cover each and every provision as
may be applicable to you and in the most lucid language, so this sums up the entire syllabus.
Howsoever, there is always a scope for improvement. I shall highly appreciate any changes,
corrections, errors, interpretations suggested by you so that the same can be incorporated in
the subsequent editions. You may write to me at vikasvohralectures@gmail.com or get in
touch directly on my cell at +91 8888 078 078.

Many a times, while speaking with students, I come across this question about the opportunities
for a Company Secretary and their scope in the times to come. I shall be wrong; if I simply
quote that life would be simple post completion of the Course. Perhaps, the times ahead poses
a lot of challenges and like I always say the only thing, which shall survive in the long run,

CS VIKAS VOHRA 8888 078 078 | YES ACADEMY, PUNE 8888 235 235 / Happy Learning, Happy Earning
YouTube - YES Academy for CS and Law In Karma, I Believe.. Preface

shall be the Power of Knowledge and the ability to express the same and apply. Readers,
empower yourself so robustly that as and when a challenge arises, it turns its way and says:
let’s catch hold of a weaker one.

It’s said, “Fortune favors the brave”. You give your best shot and leave the rest upon god to
decide. Realize your strengths, work on your weaknesses, grab the best possible opportunity
and overcome your threats. Different people define success differently as it means different to
different. Realize your “Being Successful” factors and start chasing them every morning as
you get up.

“Do everything no matter how unglamorous, to the best of your ability”

Because in the end, what shall matter would be quality of life you spent
and the smiles you lent to the people around you !!!!

With this, I wish you all a happy reading and I hope that you fall in love with this subject. I
wish you all good luck and that you achieve what all you work for. Keep working, keep reading,
keep spreading love, happiness and smile. You shall be a part of my prayers. I promise to serve
you with the best. Someday, we shall once again meet AT THE TOP….

Try to
Reinvent
Yourself

VIKAS VOHRA (Corporate Baba)


Cell: +91 8888 078 078

CS VIKAS VOHRA 8888 078 078 | YES ACADEMY, PUNE 8888 235 235 / Happy Learning, Happy Earning
YouTube - YES Academy for CS and Law In Karma, I Believe.. Index

INDEX
THIS BOOK CONTAINS THE FOLLOWING

PART B: SECURITIES LAWS (60 marks)


(Includes ICDR & Share based Employee Benefits, which is in Part I of the notes)

Chapter Particulars Page No.


No.
10. Issue & Listing of Non Convertible Securities 10.1 - 10.13
11. Listing Obligations & Disclosure Requirements 11.1 – 11.42
12. Acquisition of Shares & Takeovers 12.1 – 12.24
13. Prohibition of Insider Trading 13.1 – 13.22
14. Prohibition of Fraudulent and Unfair Trade Practices 14.1 – 14.10
Relating to Securities Market
15. Delisting of Equity Shares 15.1 – 15.18
16. Buy Back of Securities 16.1 – 16.13
17. Mutual Funds 17.1 – 17.28
18. Collective Investment Schemes 18.1 – 18.15

19. Practical Problems in CMSL 19.1 – 19.54


20. Case Laws 20.1 – 20.78

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YT- YES Academy for CS & Law Think, Believe, Receive! Chapter 10 – Non Convertible Securities

CHAPTER 10 – ISSUE AND LISTING OF NON CONVERTIBLE


SECURITIES

IMPORTANT DEFINITIONS UNDER THE SEBI NCS REGULATIONS

DEBT SECURITIES:
A non-convertible debt security with a fixed maturity period which creates or acknowledge
indebtedness and includes debentures, bonds or any other security whether constituting a
charge on the assets/properties or not, but excludes security receipts, securitized debt
instruments, money market instruments regulated by the Reserve Bank of India, and bonds
issued by the Government or such other bodies as may be specified by the SEBI.

ISSUER:
A company or a body corporate or a statutory corporation or a multilateral institution or a trust
registered with the Board as a Real Estate Investment Trust (REIT) or an Infrastructure
Investment Trust (InvIT), authorised to issue non-convertible securities and/or commercial
paper under the relevant laws and in accordance with these regulations and seeks to list its
non-convertible securities, with any recognized stock exchange(s).

NON-CONVERTIBLE SECURITIES:
These are debt securities, non-convertible redeemable preference shares, perpetual non-
cumulative preference shares, perpetual debt instruments and any other securities as specified
by the Board.

PRIVATE PLACEMENT:
It is an offer or invitation to subscribe or issue of non-convertible securities to a select group
of persons by a company (other than by way of public offer), which satisfies the applicable
conditions specified in Section 42 of the Companies Act, 2013.

PUBLIC ISSUE:
It is an offer or invitation by an issuer to the public to subscribe to its debt securities and/or
nonconvertible redeemable preference shares which is not in the nature of a private placement.

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SECURED DEBT SECURITIES:


These are such debt securities which are secured by creation of a charge on the properties or
assets of the issuer or its subsidiaries or its holding companies or its associate companies
having a value which is sufficient for the due repayment of principal and payment of interest
thereon.

ELECTRONIC BOOK PROVIDER PLATFORM:


An electronic platform for private placement of non-convertible securities provided by a
recognized stock exchange(s) or a recognised depository, pursuant to obtaining approval from
the Board.

NON-CONVERTIBLE REDEEMABLE PREFERENCE SHARE:


A preference share which is redeemable in accordance with the relevant provisions of the
Companies Act, 2013 and does not include a preference share which is convertible into or
exchangeable with equity shares of the issuer at a later date, at the option of the holder or
not.

PERPETUAL DEBT INSTRUMENT:


A perpetual debt instrument issued in accordance with the guidelines framed by the Reserve
Bank of India.

PERPETUAL NON-CUMULATIVE PREFERENCE SHARE:


A perpetual non-cumulative preference share issued in accordance with the guidelines framed
by the Reserve Bank of India.

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SEBI (ISSUE AND LISTING OF NON-CONVERTIBLE SECURITIES) REGULATIONS, 2021

GENERAL CONDITIONS AND ELIGIBILITY CRITERIA [Chapter II]

APPLICABILITY OF THIS CHAPTER (REGULATION 4)


This chapter shall apply to the issuance and listing of:
(a) debt securities and non-convertible redeemable preference shares by an issuer by way of public
issuance;
(b) non-convertible securities by an issuer on private placement basis.

Unless otherwise provided in these regulations, an issuer making an offer of nonconvertible


securities shall satisfy the conditions of these regulations as on:
(a) date of filing of the draft offer document with the Board or stock exchange(s); and
(b) date of filing the offer document with the Registrar of Companies.

ELIGIBLE ISSUERS (REGULATION 5)


1. The issuer shall not make an issue of non-convertible securities if as on the date of filing of
draft offer document or offer document:
(a) The issuer, any of its promoters, promoter group or directors are debarred from accessing the
securities market or dealing in securities by the SEBI;
(b) Any of the promoters or directors of the issuer is a promoter or director of another company
which is debarred from accessing the securities market or dealing in securities by the SEBI;
(c) The issuer or any of its promoters or directors is a wilful defaulter;
(d) Any of the promoters or whole-time directors of the issuer is a promoter or whole-time director
of another company which is a wilful defaulter;
(e) Any of its promoters or directors is a fugitive economic offender; or
(f) Any fine or penalties levied by the SEBI/Stock Exchanges is pending to be paid by the issuer
at the time of filing the offer document.
However, the:

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(i) Restrictions mentioned at (b) and (d) above shall not be applicable in case of a person who
was appointed as a director only by virtue of nomination by a debenture trustee in other
company.
(ii) Restrictions mentioned in (a) and (b) above shall not be applicable if the period of debarment
is over as on date of filing of the draft offer document with the SEBI.
(iii) Restrictions mentioned at (c) and (d) shall not be applicable in case of private placement of
nonconvertible securities.
2. Issuer shall not make a public issue of non-convertible securities if as on the date of filing of
draft offer document or offer document, the issuer is in default of payment of interest or
repayment of principal amount in respect of non-convertible securities, if any, for a period of
more than six months.

IN-PRINCIPLE APPROVAL (REGULATION 6)


The issuer shall make an application to one or more stock exchange(s) and obtain an in-
principle approval for listing of its non-convertible securities from the stock exchange(s) where
such securities are proposed to be listed. However, where the application is made to more than
one stock exchange, the issuer shall choose one among them as the designated stock exchange.

DEPOSITORIES (REGULATION 7)
The issuer shall enter into an arrangement with a depository for dematerialization of the non-
convertible securities in accordance with the Depositories Act, 1996 and also take such steps
to ensure that such securities are admitted on all the depositories.

DEBENTURE TRUSTEE (REGULATION 8)


The issuer shall appoint a debenture trustee in case of an issue of debt securities.

REGISTRAR TO THE ISSUE (REGULATION 9)


The issuer shall appoint a Registrar to the Issue, registered with SEBI. However, if the issuer
itself is a Registrar to the Issue, it shall not appoint itself as a Registrar to the Issue. Provided
further that the lead manager shall not act as a Registrar to the Issue in which it is also
handling the post-issue responsibilities.

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CREDIT RATING (REGULATION 10)


The issuer shall obtain credit rating from at least one credit rating agency, which shall be
disclosed in the offer document. However, where the credit ratings are obtained from more
than one credit rating agency for the issue, all the ratings, including the unaccepted ratings,
shall be disclosed in the offer document.

CREATION OF RECOVERY EXPENSE FUND (REGULATION 11):


The issuer shall create a recovery expense fund with the designated stock exchange, by
depositing such amount and in such form and manner as may be specified in the regulations.

ELECTRONIC ISSUANCES (REGULATION 12)


An issuer proposing to issue non-convertible securities through the on-line system of the stock
exchange and depositories shall comply with the relevant applicable requirements.

REGULATORY FEES (REGULATION 13):


In case of public issue of debt securities and/or non-convertible redeemable preference shares,
the issuer shall while filing a draft offer document with the stock exchange forward a soft
copy of the draft offer document to SEBI for its records along with regulatory fees.

In case of non -convertible securities issued on a private placement basis, the designated stock
exchange shall collect a regulatory fee.

RIGHT TO RECALL OR REDEEM PRIOR TO MATURITY (REGULATION 15)


An issuer making issuance of non-convertible securities shall:
(a) have the right to recall such securities prior to the maturity date (call option); or,
(b) shall have a right to provide such right of redemption of debt securities prior to the maturity
date (put option) to all the investors or only to retail investors.

Such right to recall non-convertible securities or redeem debt securities prior to the maturity
date shall be exercised in accordance with the terms of issue and detailed disclosure in this
regard shall be made in offer document including date from which such right is exercisable,

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YT- YES Academy for CS & Law Think, Believe, Receive! Chapter 10 – Non Convertible Securities

period of exercise (which shall not be less than three working days) and redemption amount
(including the premium or discount at which such redemption shall take place).

In case of partial exercise of such right in accordance with the terms of the issue by the
issuer, it shall be done on proportionate basis only. No such right shall be exercisable before
the expiry of one year from the date of issue of such non-convertible securities. Issuer shall
send notice to all the eligible holders of such non-convertible securities and debenture trustee
at least twenty-one days before the date from which such right is exercisable.

Issuer shall also provide a copy of such notice to the stock exchange(s) where such
nonconvertible securities are listed for wider dissemination and shall make an advertisement in
an english national daily and regional daily having wide circulation, indicating the details of
such rights and eligibility of the holders who are entitled to avail such right. Issuer shall pay
interest at the rate of fifteen percent per annum for the period of delay, if any.

After the completion of the exercise of such right, the issuer shall:
(a) submit a report to the stock exchange(s) for public dissemination regarding the details of non-
convertible securities redeemed during the exercise period and details of redemption thereof;
(b) inform the debenture trustee regarding the debt securities redeemed during the exercise period
and details of redemption thereof; and
(c) inform the depositories for extinguishing the non-convertible securities that have been
redeemed.

DEBENTURE REDEMPTION RESERVE/ CAPITAL REDEMPTION RESERVE (REGULATION 16)


The issuer shall create a debenture redemption reserve or capital redemption reserve in
accordance with the relevant provisions of the Companies Act, 2013.

INTERNATIONAL SECURITIES IDENTIFICATION NUMBER (REGULATION 17)


An issuer issuing non-convertible securities shall comply with the conditions relating to the
issue of International Securities Identification Number.

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YT- YES Academy for CS & Law Think, Believe, Receive! Chapter 10 – Non Convertible Securities

TRUST DEED (REGULATION 18)


The issuer and the debenture trustee shall execute the trust deed. Where an issuer fails to
execute the trust deed within the specified period, the issuer shall also pay interest of at least
2 percent per annum or such other rate, as specified by the SEBI to the holder of debt
securities, over and above the agreed coupon rate, till the execution of the trust deed.

Such trust deed shall consist of two parts:


(a) Part A containing statutory/standard information pertaining to the debt issue.
(b) Part B containing details specific to the particular debt issue.

The trust deed shall not contain any clause which has the effect of:
(a) Limiting or extinguishing the obligations and liabilities of the debenture trustees or the issuer
in relation to any rights or interests of the holders of the debt securities.
(b) Limiting or restricting or waiving the provisions of the Act, these regulations and circulars or
guidelines issued by the SEBI.
(c) Indemnifying the debenture trustees or the issuer for loss or damage caused by their act of
negligence or commission or omission.

LISTING AGREEMENT (REGULATION 19)


Every issuer desirous of listing its non-convertible securities on a recognised stock exchange
shall execute an agreement with such stock exchange.

CONTINUOUS LISTING CONDITIONS (REGULATION 20)


All the issuers of non-convertible securities which are listed on stock exchange shall comply
with the listing regulations and/or such other conditions and disclosure requirements as may
be specified by the SEBI.

TRADING OF NON-CONVERTIBLE SECURITIES (REGULATION 21)


The trades in non-convertible securities listed on stock exchange shall be cleared and settled
through clearing corporation of stock exchange, subject to conditions as specified by the SEBI.

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DISTRIBUTION OF DIVIDEND IN CASE OF DEFAULT IN PAYMENT OF INTEREST OR


REDEMPTION OF DEBT SECURITIES (REGULATION 22)
Where the issuer has defaulted in payment of interest or redemption of debt securities or in
creation of security in accordance with the terms of the offer document, any distribution of
dividend shall require approval of the debenture trustee.

OBLIGATIONS OF THE ISSUER (REGULATION 23)


 The issuer shall treat all applicants to an issue of non-convertible securities in a fair and
equitable manner.
 The issuer shall not employ any device, scheme, or artifice to defraud in connection with issue
or subscription or distribution of non-convertible securities which are listed or proposed to be
listed on the recognized stock exchange.
 The issuer shall apply for SCORES authentication in the format specified by the SEBI and
shall use the same for all issuance of nonconvertible securities.
 In case of a public issue, the issuer shall provide all required information/ documents to the
lead managers for conducting the due diligence, in the form and manner as may be specified
by the SEBI.
 The issuer shall ensure that the secured debt securities are secured by 100% security cover or
higher security cover as per the terms of the offer document and/or Debenture Trust Deed,
sufficient to discharge the principal amount and the interest thereon at all times for the issued
debt securities.

OBLIGATIONS OF DEBENTURE TRUSTEE (REGULATION 24)


 The debenture trustee shall be vested with the requisite powers for protecting the interest of
holders of debt securities including a right to appoint a nominee director on the Board of the
issuer in consultation with holders of such debt securities and in accordance with applicable
law.
 The debenture trustees shall supervise the implementation of the conditions regarding creation
of security for the debt securities, creation of recovery expense fund and debenture redemption
reserve, as applicable.

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 The debenture trustee shall monitor the security cover in relation to secured debt securities in
the manner as specified by the Board.

PUBLIC ISSUE AND LISTING OF DEBT SECURITIES AND NON CONVERTIBLE REDEEMABLE
PREFERENCE SHARES [CHAPTER III]

CONDITIONS FOR PUBLIC ISSUE:


The issuer shall appoint one or more merchant bankers registered with the SEBI, as lead
manager to the issue. Such lead manager shall not issue any due diligence certificate, in relation
to the issue of such debt securities and/or non-convertible redeemable preference shares. In
case there is more than one lead manager, at least one lead manager to the issue shall not be
an associate.

The issuers shall not make a public issue of debt securities and non-convertible redeemable
preference shares for providing loan to or acquisition of shares of any entity who is part of the
promoter group or group companies. However, where the issuer is a Non-Banking Finance
Company, Housing Finance Company or a Public Financial Institution the aforesaid restriction
shall not apply and appropriate disclosures shall be made as specified in the Schedule I of
these regulations.

ISSUANCE OF GREEN DEBT SECURITIES


Green Debt Security means a debt security issued for raising funds that are to be utilised for
project(s) and/ or asset(s) falling under any of the following categories, subject to the
conditions:
(i) Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy
which use clean technology,
(ii) Clean transportation including mass/public transportation,
(iii) Sustainable water management including clean and/or drinking water, water recycling,
(iv) Climate change adaptation,
(v) Energy efficiency including efficient and green buildings,

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(vi) Sustainable waste management including recycling, waste to energy, efficient disposal of
wastage,
(vii) Sustainable land use including sustainable forestry and agriculture, afforestation,
(viii) Biodiversity conservation, or a category as may be specified by the SEBI.

FILING OF DRAFT OFFER DOCUMENT


 Issuer shall not make a public issue of debt securities and/or non-convertible redeemable
preference shares unless a draft offer document has been filed with all the stock exchanges.
 The draft offer document filed with the stock exchange shall be made public by posting the
same on the website of the stock exchange for seeking public comments for a period of 7
working days from the date of filing the draft offer document with stock exchange.
 The draft offer document shall also be displayed on the website of the issuer and the lead
manager.
 The lead manager shall ensure that the draft offer document clearly specifies the names and
contact particulars including the postal and email address and telephone number of the
compliance officer who shall be a Company Secretary of the issuer.
 The lead manager shall ensure that all comments received on the draft offer document are
suitably addressed prior to the filing of the offer document with the Registrar of Companies.
 The lead manager shall, prior to filing of the offer document with the Registrar of Companies,
furnish to the SEBI a due diligence certificate as per the regulations.

DISCLOSURES IN THE OFFER DOCUMENT


The offer document shall contain all material true, fair and adequate disclosures which are
necessary for the subscribers of the debt securities and non-convertible redeemable preference
shares to take an informed investment decision and shall not omit/ include any material fact

ADVERTISEMENTS FOR PUBLIC ISSUES


The issuer shall make an advertisement in an english national daily and regional daily with
wide circulation, on or before the issue opening date.

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PROHIBITION ON PAYMENT OF INCENTIVES


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

PRICE DISCOVERY AND BOOK BUILDING


The issuer may determine the price and/or coupon of debt securities and nonconvertible
redeemable preference shares in consultation with the lead manager. The issue of debt securities
and non-convertible redeemable preference shares may be at fixed price and fixed coupon or
the issuer may determine the demand and price or coupon of the debt securities and non-
convertible redeemable preference shares through book building process.

MINIMUM SUBSCRIPTION
Minimum subscription for a public issue shall not be less than 75% of the base issue size or
as may be specified by the SEBI. In the event of non-receipt of minimum subscription, all
blocked application money shall be unblocked forthwith, but not later than 8 working days
from the date of closure of the issue or such time as may be specified by the SEBI.

ALLOTMENT OF SECURITIES AND PAYMENT OF INTEREST


The issuer shall ensure that in case of listing of debt securities and non-convertible redeemable
preference shares issued to public, allotment of securities offered to public shall be made within
such timeline as may be specified by the SEBI.

Where the debt securities and non-convertible redeemable preference shares are not allotted
and/or application monies are not unblocked within the period stipulated, the issuer shall
undertake to pay interest at the rate of 15% per annum to the investors.

UNDERWRITING
A public issue of debt securities and non-convertible redeemable preference shares may be
underwritten by eligible intermediaries, either in full or part.

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MANDATORY LISTING OF A PUBLIC ISSUE OF DEBT SECURITIES AND NON-CONVERTIBLE


REDEEMABLE PREFERENCE SHARES
An issuer desirous of making an offer of debt securities and non-convertible redeemable
preference shares to the public shall make an application for listing to stock exchange.

OTHER OBLIGATIONS OF THE LEAD MANAGER


 The lead manager shall not employ any device, scheme, or artifice to defraud in connection
with issue or subscription or distribution.
 The lead manager shall ensure that the secured debt securities are secured by hundred percent
security cover or higher security cover as per the terms of the offer document and/or Debenture
Trust Deed, sufficient to discharge the principal amount and the interest thereon at all times
for the issued debt securities.
 The lead manager shall ensure payment of additional interest by the issuer in accordance with
these regulations in case of non-allotment of debt securities and non-convertible redeemable
preference shares.

DUE DILIGENCE BY DEBENTURE TRUSTEE


The debenture trustee shall, at the time of filing the draft offer document with the stock
exchange and prior to opening of the public issue of debt securities, furnish to the SEBI and
stock exchange, a due diligence certificate.

LISTING OF PRIVATE PLACEMENT OF DEBT SECURITIES AND NON-CONVERTIBLE


REDEEMABLE PREFERENCE SHARES [CHAPTER IV]

LISTING APPLICATION
Where the issuer has disclosed the intention to seek listing of debt securities and nonconvertible
redeemable preference shares issued on private placement basis, the issuer shall forward the
listing application along with the disclosures as per this regulation to the stock exchange within
such days as may be specified by the SEBI from the date of closure of the issue.

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ALLOTMENT OF SECURITIES
The issuer shall ensure allotment of debt securities and non-convertible redeemable preference
shares issued on a private placement basis and credit to the dematerialised account of the
investors, is made within such time as may be specified by the SEBI.

ISSUANCE AND LISTING OF PERPETUAL DEBT INSTRUMENTS, PERPETUAL NON-


CUMULATIVE PREFERENCE SHARES AND SIMILAR INSTRUMENTS [CHAPTER V]

GENERAL CONDITIONS
An issuer may issue perpetual debt instruments, perpetual non-cumulative preference shares
and instruments of similar nature in compliance with the guidelines issued by the Reserve Bank
of India and/or any other relevant laws applicable to them.

LISTING OF COMMERCIAL PAPER [CHAPTER VI]

 Issuers desirous of listing of commercial paper shall comply with the conditions as may be
specified by the SEBI from time to time.
 The designated stock exchange shall collect a regulatory fee as specified from an issuer of
commercial paper at the time of their listing.
 The issuer shall apply for SCORES authentication in the format specified by the Board and
shall use the same for issuance and listing of commercial paper.

ROLE OF A COMPANY SECRETARY

A Company Secretary is a vital link between the company and its Board of Directors,
shareholders, government and regulatory authorities and all other stakeholders. A Company
Secretary can play an important role in fulfilling the role as a governance professional for
companies with listed debt securities.

The Company Secretary monitors, manages the information updates and conducts regular
assessment to ensure that company remains abreast of the regulatory standards.

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CHAPTER 11 - LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS

SEBI (LISTING OBLIGATIONS AND DISCLOSURES REQUIREMENTS) REGULATIONS, 2015

Unless otherwise provided, these regulations shall apply to the listed entity which has listed
any of the following designated securities on recognised stock exchange(s):
a) specified securities listed on main board or SME Exchange or institutional trading
platform;
b) non-convertible debt securities, non-convertible redeemable preference shares, perpetual
debt instrument, perpetual non-cumulative preference shares;
c) Security receipts;
d) Indian depository receipts;
e) securitised debt instruments;
f) units issued by mutual funds;
g) any other securities as may be specified by SEBI.

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Company desirous of listing its securities shall enter into a listing agreement with the stock
exchange. Existing listed entities are required to execute a fresh listing agreement within 6
months from date of notification of SEBI Listing Regulations.

According to Section 2 (52) of the Companies Act, 2013, listed company means a
company which has any of its securities listed on any recognised stock exchange. This
means that if a private limited company has its debt securities listed on any recognised
stock exchange, then such company is under the ambit of listed company category for
complying with the Companies Act, 2013 and rules and regulation made thereunder.

According to SEBI (LODR) Regulations, 2015 "listed entity" means an entity which has
listed, on a recognised stock exchange(s), the designated securities issued by it or
designated securities issued under schemes managed by it, in accordance with the listing
agreement entered into between the entity and the recognised stock exchange(s).

REGULATIONS

ONE TIME COMPLIANCES

Regulations Particulars
6(1) A listed entity shall appoint a CS as the Compliance Officer

7(1) The listed entity shall appoint a share transfer agent or the listed entity
registered with SEBI as Category II share transfer agent in case of share
transfer facility in house.
9 The listed entity shall have a policy for preservation of documents, approved by
its Board of Directors.

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QUARTERLY COMPLIANCES

Regulation Particulars Time Limit


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

27 The listed entity shall submit a quarterly within 21 days from close of the
compliance report on corporate governance in quarter
the format as specified by SEBI from time to
time to the recognized stock exchanges.

31(1))(b) The listed entity shall submit to the stock within 21 days from the end of
exchange(s) a statement showing holding each quarter
of securities and shareholding pattern
separately for each class of securities, in the
format specified by SEBI from time to time

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32(1) The listed entity shall submit to the stock Quarterly Basis to the stock
exchange a statement of deviation or variation exchange till such time the
in the utilization of issue proceeds as stated issue proceeds have been
on the objects clause of the offer document fully utilized or the purpose
and the actual utilization of those funds. for which these proceeds
were raised has been
achieved within forty-five days
from the end of each quarter.

33(3) The listed entity shall submit quarterly and within forty-five days of end of
year-to-date financial results to the stock each quarter, other than the last
exchange quarter.

HALF YEARLY COMPLIANCES

Regulation Particulars Time Limit


7(3) The listed entity shall submit a compliance Within one month of end of each
certificate to the exchange, duly signed by half of the financial year.
both the compliance officer of the listed
entity and the authorized representative
of the share transfer agent

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23(9) The listed entity shall submit to the stock fifteen days from the date of
exchange, disclosures of related party on publication of its standalone and
consolidated basis. Provided that a ‘high consolidated financial results:
value debt listed entity’ shall submit such
disclosures along with its standalone financial Provided further that the listed
results for the half year. entity shall make such
disclosures every six months on
the date of publication of its
standalone and consolidated
financial results with effect from
April 1, 2023.
33(3) The listed entity shall also submit as part of Once in six months
its standalone or consolidated financial
results for the half year a statement of
assets and liabilities and a statement of cash
flows by way of a note.

40(9) The listed entity shall ensure that the share within one month of the end of
transfer agent and/or the in-house share each half of the financial year
transfer facility, as the case may be, produces
a certificate from a practicing company
secretary

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YEARLY COMPLIANCES

Regulatio Particulars Time Limit


n
7(3) The listed entity shall submit a compliance within thirty days from the end
Complianc certificate to the exchange, duly signed by both of the financial year. Earlier the
e the compliance officer of the listed entity and same was to be submitted within
Certificat the authorised representative of the share one month of end of each half
e transfer agent. of the financial year.

14 The listed entity shall pay all such fees or within 30 days of the end of
charges, as applicable, to the recognised stock financial year
exchange(s), in the manner specified by SEBI
or the recognised stock
Exchanges.

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33(3) The listed entity shall submit annual audited within 60 days from the end of
standalone financial results with audit report the financial year
and Statement on Impact of Audit
Qualifications applicable only for audit report
with modified opinion to the stock exchange.
If listed entity has subsidiaries, it shall, while
submitting annual audited standalone financial
results, also submit annual audited
consolidated financial results along with the
audit report and Statement on Impact of Audit
Qualifications applicable only for audit report
with modified opinion.
In case of audit reports with unmodified
opinion(s), the listed entity shall furnish a
declaration to that effect to the Stock
Exchange while publishing the annual audited
financial results.
The listed entity shall also submit the audited
or limited reviewed financial results in respect
of the last quarter along-with the results for
the entire financial year)

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34 The listed entity shall submit the annual report Not later than the day of
along with the Notice of the Annual General commencement of dispatch to
Meeting to the stock exchange. its shareholders.

Amongst others, the annual report shall also


consist the following:
audited financial statements i.e. balance sheets,
profit and loss accounts etc and Statement on
Impact of Audit Qualifications as stipulated in
regulation 33(3)(d), if applicable.
The requirement of submitting a business
responsibility report shall be discontinued after
the financial year 2021–22 and thereafter, with
effect from the financial year 2022–23, the top
one thousand listed entities based on market
capitalization shall submit a business
responsibility and sustainability report
describing quantitative and standardized
disclosures on ESG parameters to enable
comparability across companies, sectors and
time, shall form part of the Annual Report.

34(1)(b) In case any changes to the annual report, the within 48 hours after the annual
revised copy along with the details of and general meeting
explanation for the changes shall be sent

36 The listed entity shall send annual report to the Twenty one days before AGM (in
holders of securities soft or hard copy)

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40(9) The listed entity shall ensure that the share within 30 days from the end of
transfer agent and/or the in-house share financial year
transfer facility, as the case may be, produces
a certificate from a practicing company
secretary

24A Every listed entity and its material unlisted within 60 days from end of each
Secretaria subsidiaries incorporated in India shall undertake financial year
l Audit secretarial audit and shall annex a secretarial
and audit report given by a company secretary in
Secretaria practice, in such form as specified, with the
l annual report of the listed entity.
Complianc
e Report

EVENT BASED COMPLIANCES

Regulation Particulars Due date


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

29(1)(a) Prior Intimations of Board Meeting for At least 5 clear days in


read along financial Result viz. quarterly, half yearly or advance (excluding the date of
with proviso annual, to the stock exchange(s) the intimation and the date of
to 29 (2) the meeting)

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29(1) (b), Prior Intimations of Board Meeting for At least 2 working days in
(c),(d), (e) Buyback, Voluntary delisting, Fund raising by advance
& (f) read way of FPO, Rights Issue, ADR, GDR, QIP,
along with FCCB, Preferential issue, debt issue or any
29 (2) other method, Declaration/recommendation of
dividend, issue of convertible securities
carrying a right to subscribe to equity shares
or the passing over of dividend, proposal for
declaration of Bonus securities etc., to the
stock exchange(s)
29(3) Prior Intimations of Board Meeting for At least 11 clear working days
alteration in nature of Securities, alteration in in Advance
the date on which interest on
debentures/bonds/redemption amount, etc.
shall be payable to the stock exchange(s)
30(6) Disclosure of Price Sensitive Information to the Not later than twenty four hours
stock exchange(s) as per Part A of Schedule III
31A (8) The listed entity shall disclose to the stock within 24 hours from the
exchange the deemed material events i.e., occurrence of the event
receipt of request for re-classification by the
listed entity from the promoter(s) seeking re-
classification; Minutes of the board meeting
considering such request which would include
the views of the board on the request; etc.

31(1)(a) The listed entity shall submit to the stock One day prior to listing of
exchange(s) a statement showing holding Securities
of securities and shareholding pattern
separately for each class of securities prior
to listing of securities

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31(1)(c) The listed entity shall submit to the stock Within 10 days of any change in
exchange(s) statement showing holding capital
of securities and shareholding pattern Structure exceeding 2% of the
separately for each class of securities in total paid-up share capital.
case of Capital Restructuring

37(2) The listed entity shall file draft Scheme of Prior approval before filing with
Arrangement to the stock exchange(s) Court
39(2) The listed entity shall issue certificates or within thirty days from the date
receipts or advices, as applicable, of of such lodgement but only in
subdivision, split, consolidation, renewal, dematerialised form.
exchanges, endorsements, issuance of
duplicates thereof or issuance of new
certificates or receipts or advices, as applicable,
in cases of loss or old decrepit or worn out
certificates or receipts or advices, as applicable
39(3) The listed entity shall submit information with Within two days of getting
respect to loss of share certificates and issue information.
of the duplicate certificates to the stock
exchange

40(1) Proviso Transfer or transmission or transposition of Only in dematerialized form with


securities a depository. Further,
transmission or transposition of
securities held in physical or
dematerialised form shall be
effected only in demat form.
40(3) The listed entity shall register transfers of its within fifteen days from the date
securities in the name of the transferee(s) of such receipt of request for
and issue certificates or receipts or advices, as transfer.
applicable, of transfers; or issue any valid
objection or intimation to the transferee or
transferor, as the case may be,

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42(2) The listed entity shall intimate the record date or date of closure of transfer books to

all the stock exchange(s) where it is listed and also where stock derivatives are
available on the stock of the listed entity or where listed entity’s stock form part
of an index on which derivatives are available.

42(2) In case of Right Issue At least three working days in


advance (excluding the date of
intimation and record date)

42(2) Other than Right Issue At least 7 clear working days in


advance (excluding the date of
intimation and record date)

43A Dividend Distribution Policy by the top one To formulate a dividend


thousand listed entities based on market distribution policy which shall be
capitalization (calculated as on March 31 of disclosed in their annual reports
every financial year) and on their websites and also a
web-link shall also be provided in
their annual reports

42(2) The listed entity shall intimate the record date At least 7 clear working days
or date of closure of transfer books to all the in advance
stock exchange(s)
42(3) The listed entity shall give notice to stock At least 5 clear working days
exchange(s) of Record date for declaring in advance
dividend and/or cash Bonus
44(3) The listed entity shall submit to the stock Within two working days of
exchange details regarding voting results by conclusion of its General Meeting
Shareholders
45(3) The listed entity shall allowed to change its Prior approval from Stock
name Exchange(s)

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46 The listed entity shall maintain a functional within two working days from
website containing the basic information about the date of change in content.
the listed entity and update any change in the
content of its website.

47 – Now the listed entity will not be required to


Advertisemen publish the following:
ts 1. Notice of meeting of the board of directors
in where financial results shall be discussed.
Newspapers 2. Statements of deviation(s) or variation(s)
as specified in regulation
32 (1).

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

BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORTING BY LISTED ENTITIES


SEBI came out with disclosure requirements under Business Responsibility and Sustainability
Report (BRSR) covering ESG (Environmental, Social and Governance) parameters.

SEBI has introduced new reporting requirements on ESG parameters called the Business
Responsibility and Sustainability Report (BRSR). The BRSR is accompanied with a guidance
note to enable the companies to interpret the scope of disclosures.

The BRSR seeks disclosures from listed entities on their performance against the nine principles
of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under
each principle is divided into essential and leadership indicators. The essential indicators are
required to be reported on a mandatory basis while the reporting of leadership indicators is on
a voluntary basis. Listed entities should endeavour to report the leadership indictors also.

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The BRSR is intended towards having quantitative and standardized disclosures on ESG
parameters to enable comparability across companies, sectors and time. Such disclosures will
be helpful for investors to make better investment decisions. The BRSR shall also enable
companies to engage more meaningfully with their stakeholders, by encouraging them to look
beyond financials and towards social and environmental impacts.

The filing of BRSR shall be mandatory for the top 1000 listed companies (by market
capitalization) with effect from the financial year 2022-2023 and shall replace the existing
Business Responsibility Report (BRR). Filing of BRSR is voluntary for the financial year 2021-
22.

REGULATION 31A OF SEBI (LODR) REGULATIONS, 2015 – RECLASSIFICATION OF


PROMOTER & PROMOTER GROUP SHAREHOLDERS

1. Promoter shall apply to Company for reclassification along with the supporting documents, if
any.
2. Intimation to Exchange about receipt of such request from the promoter has to be made by
the Company within 24 hours of receipt of such application.
3. The Board of Directors of the listed entity shall analyse the request and place the same before
the shareholders in a general meeting for approval along with their views. There shall be a time
gap of at least three months but not exceeding six months between the date of board meeting
and the shareholders meeting considering the request for reclassification.
4. Outcome of board meeting shall be submitted to the Exchange within 24 hours of the
conclusion of board meeting in which resolution regarding reclassification is approved.
5. The request of the promoter(s) seeking re-classification is required to be approved in the
general meeting by an ordinary resolution in which the promoter(s) seeking reclassification and
persons related to the promoter(s) seeking re-classification shall not vote to approve such re-
classification request. The Outcome of the General Meeting shall be submitted to the Exchange
as required under regulations applicable to the General Meetings.

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6. After obtaining shareholders’ approval in General Meeting, Company will submit the application
for reclassification within 30 days from the date of approval by shareholders in the General
Meeting, to the Stock Exchange.
7. Additionally, disclosure of the fact that such application has been filed with the Exchanges
shall be submitted to the Exchange as intimation of material event within 24 hours of the
filing of such application.
8. Exchange shall process the application subject to the application being complete in all respects
and compliant with all applicable regulations.
9. In case of incomplete applications, company shall be provided opportunity to rectify the
deficiencies. If the deficiencies are not rectified within 30 days of intimation of the same to
the Company, the application shall be liable to be rejected and the processing fee paid by the
company will be forfeited.
10. Letter of acceptance shall be issued to the company by the Exchange to effect the
reclassification in the shareholding pattern subject to compliance with applicable SEBI
regulations.
11. After Exchange approval / rejection of the reclassification application, same is also required to
be disclosed as material event within 24 hours of communication of decision of the Exchange.

SIMPLIFICATION OF PROCEDURE AND STANDARDIZATION OF FORMATS OF DOCUMENTS


FOR ISSUANCE OF DUPLICATE SECURITIES CERTIFICATES
SEBI has simplified the procedure and documentation requirements for issuance of duplicate
securities.
The requirements are as specified below:
1. Submission by the security holder of copy of FIR including e-FIR/Police complaint/Court
injunction order/copy of plaint, necessarily having details of the securities, folio number,
distinctive number range and certificate numbers.
2. Issuance of advertisement regarding loss of securities in a widely circulated newspaper.
However, there shall be no requirement to comply with above mentioned Para 1 and 2, if the
value of securities as on the date of submission of application, along with complete
documentation as prescribed by the SEBI does not exceed Rs. 5 Lakhs.

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3. Submission of Affidavit and Indemnity bond as per the format prescribed by the SEBI. There
shall be no requirement of submission of surety for issuance of duplicate securities.
4. In case of non-availability of Certificate Nos./Distinctive Nos./ Folio nos., the RTA (upon written
request by the security holder) shall provide the same, to the security holder only where the
signature and the address of the security holder matches with the RTA / listed company’s
records. In case the signature and/or the address do not match, the security holder shall first
comply with the KYC procedure and then only the details of the securities shall be provided
to the security holder by the RTA/listed company.

CORPORATE GOVERNANCE UNDER SEBI (LODR) REGULATIONS, 2015

The listed entities which has listed its specified securities on any recognised stock exchange(s)
either on the main board or on SME Exchange or on institutional trading platform has to
comply with certain corporate governance provisions which are specified in Regulations 17 to 27
& 34(3) of the Listing Regulations.

SEBI (LODR) Regulations, 2015 shall also apply to a listed entity which has listed non-
convertible securities on recognised stock exchange(s). The provisions of these regulations
which become applicable to listed entities on the basis of the criterion of the value of
outstanding listed debt securities shall continue to apply to such entities even if they fall
below such thresholds.

The regulation 15 and regulation 16 to regulation 27 of SEBI (LODR) Regulations, 2015, w.r.t.
the corporate governance provisions shall apply to a listed entity which has listed its non-
convertible debt securities and has an outstanding value of listed non-convertible debt securities
of Rs. 500 crore and above.

However, in case an entity that has listed its non-convertible debt securities triggers the
specified threshold of Rs. 500 crore during the course of the year, it shall ensure compliance
with these provisions within six months from the date of such trigger.

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Further, it has been provided that these provisions shall be applicable to a ‘high value debt
listed entity’ on a ‘comply or explain’ basis until March 31, 2023 and on a mandatory basis
thereafter.

Exceptions
1. The listed entity having paid up equity share capital not exceeding rupees 10 crore and net
worth not exceeding rupees 25 crore, as on the last day of the previous financial year.
2. The listed entity which has listed its specified securities on the SME Exchange. However, for
other listed entities which are not companies, but body corporate or are subject to regulations
under other statues, the provisions of corporate governance provisions as specified shall apply
to the extent that it does not violate their respective statutes and guidelines or directives
issued by the relevant authorities.
3. The provisions as specified in regulation 17 shall not be applicable during the insolvency
resolution process period in respect of a listed entity which is undergoing corporate insolvency
resolution process under the Insolvency Code.
4. Regulations 18, 19, 20 and 21 shall not be applicable during the insolvency resolution process
period in respect of a listed entity which is undergoing corporate insolvency resolution process
under the Insolvency Code.

KEY PROVISIONS PERTAINING TO CORPORATE GOVERNANCE

COMPOSITION OF BOARD OF DIRECTORS


Board of Directors shall have optimum combination of executive and non-executive directors
with atleast one-woman director.

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

CHAIRMAN COMPOSITION
- In case chairperson is executive director - not less than fifty percent of the board of directors
shall comprise of non executive directors.

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- In case chairperson is a non-executive director - at least one-third of the board of directors


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

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

With effect from April 1, 2022, the top 500 listed entities shall ensure that the Chairperson
of the board of such listed entity shall –
- be a non-executive director;
- not be related to the Managing Director or the Chief Executive Officer as per the definition of
the term “relative” defined under the Companies Act, 2013.:

The board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the
top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six
directors.

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

The listed entity shall ensure that approval of shareholders for appointment of a person on the
Board of Directors or as a manager is taken at the next general meeting or within a time
period of three months from the date of appointment, whichever is earlier.

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Further, the statement referred to under sub-section (1) of section 102 of the Companies Act,
2013, annexed to the notice to the shareholders, for considering the appointment or re-
appointment of such a person earlier rejected by the shareholders shall contain a detailed
explanation and justification by the Nomination and Remuneration Committee and the Board
of directors for recommending such a person for appointment or re-appointment.

Explanation: The top 1000 and 2000 entities shall be determined on the basis of market
capitalisation as at the end of the immediate previous financial year.

MEETINGS OF BOARD
Board shall meet at least four times a year, with a maximum time gap of one hundred and
twenty days between any two meetings.

QUORUM OF BOARD MEETING


The quorum for every meeting of the board of directors of the top 1000 listed entities with
effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020
shall be one-third of its total strength or three directors, whichever is higher, including at least
one independent director.

KEY COMPLIANCE REQUIREMENTS FOR BOARD


- Periodically review compliance reports pertaining to all laws applicable to the listed entity, as
well as steps taken by the listed entity to rectify instances of non-compliances.
- Satisfy itself that plans are in place for orderly succession for appointment to the board of
directors and senior management.
- Lay down a code of conduct for all members of board of directors and senior management and
incorporate duties of independent directors.
- Recommend all fees or compensation, if any, paid to non-executive directors, including
independent directors and shall require approval of shareholders in general meeting.
- Lay down procedures to inform members of board of directors about risk assessment and
minimization procedures.

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- Responsible for framing, implementing and monitoring the risk management plan for the listed
entity.
- Performance evaluation of independent directors
- The minimum information to be placed before the board of directors is specified in Part A of
Schedule II.
- The chief executive officer and the chief financial officer shall provide the compliance certificate
to the board of directors as specified in Part B of Schedule II.

MAXIMUM NUMBER OF DIRECTORSHIPS


A person shall not be a director in more than eight listed entities with effect from April 1,
2019 and in not more than seven listed entities with effect from April 1, 2020. However a
person shall not serve as an independent director in more than seven listed entities.

Any person who is serving as a whole time director / managing director in any listed entity
shall serve as an independent director in not more than three listed entities.
[For the purpose of this sub-regulation, the count for the number of listed entities on which
a person is a director/independent director shall be only those whose equity shares are listed
on a stock exchange]

BOARD COMMITTEES UNDER THE SEBI LISTING REGULATIONS

AUDIT COMMITTEE

Composition
- The committee shall comprise of atleast three directors.
- Two-thirds of the members of audit committee shall be independent directors and all related
party transactions shall be approved by only independent directors on the Audit Committee.
- In case of a listed entity having outstanding SR equity shares, the audit committee shall only
comprise of independent directors.
- All members of audit committee shall be financially literate and at least one member shall
have accounting or related financial management expertise.

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Chairperson
- The chairperson shall be an independent director
- The Chairperson shall be present at Annual general meeting to answer shareholder queries.

Meetings
The committee shall meet at least four times in a year and not more than one hundred and
twenty days shall elapse between two meetings.

Quorum
The quorum for audit committee meeting shall either be two members or one third of the
members of the audit committee, whichever is greater, with at least two independent directors

Role of Committee
The role of the audit committee and the information to be reviewed by the audit committee
shall be as specified in Part C of Schedule II.

NOMINATION & REMUNERATION COMMITTEE

Composition
- The committee shall comprise of at least three directors;
- all directors of the committee shall be non executive directors;
- at least fifty percent of the directors shall be independent directors
- in case of a listed entity having outstanding SR equity shares, two thirds of the nomination
and remuneration committee shall comprise of independent directors.

Chairperson
- The Chairperson shall be an independent director. Provided that the chairperson of the listed
entity, whether executive or nonexecutive, may be appointed as a member of the Committee
and shall not chair such Committee.
- The Chairperson of may be present at the annual general meeting, to answer the shareholders'
queries; however, it shall be up to the chairperson to decide who shall answer the queries.

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Meetings
The committee shall meet at least once in a year.

Quorum
The quorum for a meeting of the nomination and remuneration committee shall be either two
members or one third of the members of the committee, whichever is greater, including at
least one independent director in attendance

Role of Committee
The role of the nomination and remuneration committee shall be as specified as in Part D of
the Schedule II

STAKEHOLDERS RELATIONSHIP COMMITTEE

Composition
- The committee shall comprise of atleast three directors
- The committee shall have at least one independent director,
- in case of a listed entity having outstanding SR equity shares, at least two thirds of the
Stakeholders Relationship Committee shall comprise of independent directors.

Chairperson
- The chairperson of this committee shall be a non-executive director.
- The Chairperson of the Stakeholders Relationship Committee shall be present at the annual
general meetings to answer queries of the security holders.

Meetings
The committee shall meet at least once in a year.

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Quorum
The quorum for a meeting of the nomination and remuneration committee shall be either two
members or one third of the members of the committee, whichever is greater, including at
least one independent director in attendance.

Role of Committee
The role of the Stakeholders Relationship Committee shall be as specified as in Part D of the
Schedule II.

RISK MANAGEMENT COMMITTEE


Composition
- The majority of members shall consist of members of the board of directors
in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk
Management Committee shall comprise of independent directors.

Chairperson
The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.

Meetings
The committee shall meet at least once in a year.

Quorum
-

Role of Committee
The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit (such function shall specifically cover
cyber security)

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RISK MANAGEMENT COMMITTEE AS PER REGULATIONS 21


Applicability
The provisions of this regulation shall be applicable to top 1000 listed entities earlier the same
was to be applicable to top 500 listed entities.

Composition
The Risk Management Committee shall have minimum three members with majority of them
being members of the board of directors, including at least one independent director and in
case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk
Management Committee shall comprise independent directors.

Number of meetings
At least twice in a year, and not more than one hundred and eighty days shall elapse between
any two consecutive meetings.

Quorum
Two members or one third of the members of the committee, whichever is higher, including
at least one member of the board of directors in attendance.

VIGIL MECHANISM

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

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RELATED PARTY TRANSACTIONS

Under Listing Regulations, 2015


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

Any person or entity forming a part of the promoter or promoter group or any person or any
entity, holding equity shares of 20% or more (10% w.e.f. 1st April, 2023) in the listed entity
either directly or on a beneficial interest basis, at any time, during the immediate preceding
financial year, shall be deemed to be a related party.

Revised definition of related party transaction under regulation 2(1)(zc)-


Related Party Transaction means a transaction involving a transfer of resources, services or
obligations between:
(i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity
or any of its subsidiaries on the other hand; or
(ii) a listed entity or any of its subsidiaries on one hand, and any other person or entity on the
other hand, the purpose and effect of which is to benefit a related party of the listed entity
or any of its subsidiaries, with effect from April 1, 2023;
regardless of whether a price is charged and a “transaction” with a related party shall be
construed to include a single transaction or a group of transactions in a contract:

Provided that the following shall not be a related party transaction:


(a) the issue of specified securities on a preferential basis, subject to compliance of the
requirements under the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018;
(b) the following corporate actions by the listed entity which are uniformly applicable/offered to
all shareholders in proportion to their shareholding:
i. payment of dividend;
ii. subdivision or consolidation of securities;

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iii. issuance of securities by way of a rights issue or a bonus issue; and


iv. buy-back of securities.
(c) acceptance of fixed deposits by banks/Non-Banking Finance Companies at the terms uniformly
applicable/offered to all shareholders/public, subject to disclosure of the same along with the
disclosure of related party transactions every six months to the stock exchange(s), in the
format as specified by the Board.
Provided further that this definition shall not be applicable for the units issued by mutual
funds which are listed on a recognised stock exchange(s).”

Under Companies Act, 2013


According to section 2 (76) “related party”, with reference to a company, means —
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director and manager is a director and holds along with his
relatives, more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to
act in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to
act;
(viii) Any body corporate which is -
a) a holding, subsidiary or an associate company of such company;
b) a subsidiary of a holding company to which it is also a subsidiary; or
c) an investing company or the venturer of the company;”
(ix) such other person as may be prescribed.

Policy on materiality of related party transactions


The listed entity shall formulate a policy on materiality of related party transactions and on
dealing with related party transactions.

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When will a transaction with a related party be material?


A transaction with a related party shall be considered material, if the transaction(s) to be
entered into individually or taken together with previous transactions during a financial year,
exceeds Rs. 1000 crore or 10% of the annual consolidated turnover of the listed entity as per
the last audited financial statements of the listed entity, whichever is lower.

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

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

In case ABC Limited has not entered into any transaction during the financial year 2019-20,
which crosses the overall limit of Rs. 29 Cr including the existing Rs. 26 Cr transaction then
it is not material related party transaction.

Approval of Audit Committee


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

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Omnibus Approval: Audit committee may grant omnibus approval for related party transactions
proposed to be entered into by the listed entity subject to the following conditions-
(a) the audit committee shall lay down the criteria for granting the omnibus approval and such
approval shall be applicable in respect of transactions which are repetitive in nature;
(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that
such approval is in the interest of the listed entity;
(c) the omnibus approval shall specify as much details as possible. However, where the need for
related party transaction cannot be foreseen and aforesaid details are not available, audit
committee may grant omnibus approval for such transactions subject to their value not
exceeding rupees one crore per transaction.
(d) the audit committee shall review, at least on a quarterly basis, the details of related party
transactions entered into by the listed entity pursuant to each of the omnibus approvals given.
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require
fresh approvals after the expiry of one year.

Approval of the shareholders


All material related party transactions shall require approval of the shareholders through
resolution and the related parties shall abstain from voting on such resolutions whether the
entity is a related party to the particular transaction or not.

Exceptions
The approval of Audit committee and shareholders shall not be required in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned subsidiary.

CORPORATE GOVERNANCE REQUIREMENTS RELATED TO SUBSIDIARY

- Material Subsidiary shall mean a subsidiary, whose income or net worth exceeds ten percent
of the consolidated income or net worth respectively, of the listed entity and its subsidiaries
in the immediately preceding accounting year.

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- At least one independent director on the board of directors of the listed entity shall be a
director on the board of directors of an unlisted material subsidiary, whether incorporated in
India or not.
- The audit committee of the listed entity shall review the financial statements, in particular,
the investments made by the unlisted subsidiary.
- The minutes of the meetings of the board of directors of the unlisted subsidiary shall be
placed at the meeting of the board of directors of the listed entity.
- The management of the unlisted subsidiary shall periodically bring to the notice of the board
of directors of the listed entity, a statement of all significant transactions and arrangements
entered into by the unlisted subsidiary.
- As per Regulation 24, a listed entity shall not dispose of shares in its material subsidiary
resulting in reduction of its shareholding (either on its own or together with other subsidiaries)
to less than or equal to fifty percent without passing a special resolution in its General Meeting

Explanation - For the purpose of this regulation, the term “significant transaction or
arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to
exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as
the case may be, of the unlisted subsidiary for the immediately preceding accounting year.

Question:
ABC Limited is having three subsidiaries A Ltd, B Ltd and C Ltd. The consolidated income of
ABC Limited is Rs. 300 Cr and networth is Rs. 600 Cr.

The income and networth of A Ltd, B Ltd and C Ltd. are as follows –
Income Networth
A Ltd 10 Cr 65 Cr
B Ltd 45 Cr 14 Cr
C Ltd 10 Cr 18 Cr

Please examine if there is any material subsidiary of ABC Limited.

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Answer:
In the given case, 10 % of consolidated income and networth of ABC Limited would be 30 Cr
and 60 Cr respectively. Hence, A Ltd since crossed threshold in terms of Networth, would be
a material subsidiary. B Ltd since crossed threshold in terms of income, would be a material
subsidiary. C Ltd since does not cross either of the threshold, would not be a material
subsidiary.

SECRETARIAL AUDIT AND SECRETARIAL COMPLIANCE REPORT

- Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and shall annex a secretarial audit report given by a company secretary in
practice, in such form as specified, with the annual report of the listed entity.
- Every listed entity shall submit a secretarial compliance report in such form as specified, to
stock exchanges, within sixty days from end of each financial year.

OBLIGATIONS IN RESPECT OF INDEPENDENT DIRECTORS


- No person shall be appointed or continue as an alternate director for an independent director
of a listed entity with effect from October 1, 2018.
- The maximum tenure of independent directors shall be in accordance with the Companies Act,
2013 and rules made thereunder.
- The appointment, re-appointment or removal of an independent director of a listed entity, shall
be subject to the approval of shareholders by way of a special resolution.
- The independent directors of the listed entity shall hold at least one meeting in a financial
year, without the presence of non-independent directors and members of the management and
all the independent directors shall strive to be present at such meeting.
- An independent director who resigns or is removed from the board of directors of the listed
entity shall be replaced by a new independent director by listed entity at the earliest but not
later than the immediate next meeting of the board of directors or three months from the
date of such vacancy, whichever is later.

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- No independent director, who resigns from a listed entity, shall be appointed as an executive /
whole time director on the board of the listed entity, its holding, subsidiary or associate
company or on the board of a company belonging to its promoter group, unless a period of one
year has elapsed from the date of resignation as an independent director.
- The listed entity shall familiarise the independent directors through various programmes about
the listed entity, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
(c) roles, rights, responsibilities of independent directors; and
(d) any other relevant information.
- Every independent director shall, at the first meeting of the board in which he participates as
a director and thereafter at the first meeting of the board in every financial year or whenever
there is any change in the circumstances which may affect his status as an independent
director, submit a declaration that he meets the criteria of independence.
- With effect from 1 January 2022, the top 1000 listed entities by market capitalization calculated
as on March 31 of the preceding financial year, shall undertake Directors and Officers insurance
(‘D and O insurance’) for all their independent directors of such quantum and for such risks
as may be determined by its board of directors.

OBLIGATION IN RESPECT OF EMPLOYEES INCLUDING SENIOR MANAGEMENT, KEY


MANAGERIAL PERSONS, DIRECTORS AND PROMOTERS
- Every director shall inform the listed entity about the committee positions he or she occupies
in other listed entities and notify changes as and when they take place.
- All members of the board of directors and senior management personnel shall affirm compliance
with the code of conduct of board of directors and senior management on an annual basis.
- Senior management shall make disclosures to the board of directors relating to all material,
financial and commercial transactions, where they have personal interest that may have a
potential conflict with the interest of the listed entity at large.

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Explanation - For the purpose of this sub-regulation, conflict of interest relates to dealing in
the shares of listed entity, commercial dealings with bodies, which have shareholding of
management and their relatives etc.

OUTCOME OF MEETINGS OF THE BOARD OF DIRECTORS


(to be disclosed to the Exchange within 30 minutes of the closure of the meeting)
a) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend
and the date on which dividend shall be paid/dispatched;
b) any cancellation of dividend with reasons thereof;
c) the decision on buyback of securities;
d) the decision with respect to fund raising proposed to be undertaken
e) increase in capital by issue of bonus shares through capitalization including the date on which
such bonus shares shall be credited/dispatched;
f) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for
future issue or the creation in any form or manner of new shares or securities or any other
rights, privileges or benefits to subscribe to;
g) short particulars of any other alterations of capital, including calls;
h) financial results;
i) decision on voluntary delisting by the listed entity from stock exchange(s).

In case of board meetings being held for more than one day, the financial results shall be
disclosed within thirty minutes of end of the meeting for the day on which it has been
considered

MEETINGS OF SHAREHOLDERS AND VOTING


- The top 100 listed entities by market capitalization, determined as on March 31st of every
financial year, shall hold their annual general meetings within a period of five months from
the date of closing of the financial year.
- The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual
general meetings.

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- The listed entity shall provide the facility of remote e-voting to its shareholders and submit
to the stock exchange, within 2 working days of conclusion of its General Meeting, details
regarding the voting results in the format specified by the Board.

LIABILITY OF A LISTED ENTITY FOR CONTRAVENTION

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

COMPLIANCES UNDER SEBI LISTING REGULATIONS FOR THE LISTED ENTITY WHICH HAS
LISTED ITS NON-CONVER TIBLE DE BT SECURI TIE S OR NON-CONVERTIBLE REDEEMABLE
PREFERENCE SHARES OR BOTH

Regulation Title Intimation to Stock Exchanges Time Limit

50 Intimation
(1) The listed entity shall give prior intimation about Atleast two
of Board the Board meeting in which any of the following working days
meetings proposals is to be considered: in
(a) - an alteration in the form or nature of non- advance
convertible securities that are listed on the stock excluding the
exchange or in the rights or privileges of the date of the
holders thereof; intimation
(b) - an alteration in the date of the interest/ and the date
dividend/ redemption payment of non-convertible of the
securities;

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(c) - financial results viz. quarterly or annual; meeting of


(d) - fund raising by way of issuance of non- the board
convertible securities; or any matter affecting the
rights or interests of holders of non-convertible
securities.
(2) - The listed entity shall also intimate the stock
exchange not later than the date of
commencement of dispatch of notices, in case of:
(a) - any annual general meeting or extraordinary
general meeting that is proposed to be held for
obtaining shareholder approval for the proposals
at clauses (c) and (d) mentioned above;
(b) - any meeting of the holders of non-convertible
securities in relation to the proposal at clause (e)
mentioned above.

54 (1) Security Listed companies have been permitted to


Cover maintain asset cover in respect of its listed non-
convertible debt securities, at 100% asset cover
or asset cover as per the terms of the offer
document/ Information Memorandum and/ or
Debenture Trust Deed, sufficient to discharge the
principal amount and interest thereon at all
times for the non-convertible debt securities
issued.

54(2) Disclosure The listed entity shall disclose to the stock Quarterly,
of exchange the extent and nature of security half yearly,
Security created and maintained with respect to its yearto-date
Cover secured listed non-convertible debt securities. and annual
financial

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statements
as applicable
55 Ratings Each rating obtained by the listed entity with Yearly
respect to non-convertible debt securities shall be
reviewed at least once a year by a credit rating
agency registered by the Board.
56 Annual The listed company shall forward the following to
Report the debenture trustee promptly:
- Copy of annual report
- Copy of all notices, resolutions and
circulars
- Intimations regarding revision in rating,
default in payment of interest
- a half-yearly certificate regarding
maintenance of hundred percent Asset
cover in respect of listed non-convertible
debt securities
57 Intimations/ The listed entity shall submit a certificate to the within one
other stock exchange regarding status of payment in working day
submissions case of non-convertible securities. of the
to stock interest or
exchange(s) dividend or
principal
becoming due

Financial Results [Regulation 52]


(1) The listed entity shall prepare and submit un-audited or audited quarterly and year to date
standalone financial results on a quarterly basis in the format as specified by the Board within
forty- five days from the end of the quarter, other than last quarter, to the recognised stock
exchange(s).

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However, in case of entities which have listed their debt securities, a copy of the financial
results submitted to stock exchanges shall also be provided to Debenture Trustees on the same
day the information is submitted to stock exchanges.
(2) The listed entity shall comply with following requirements with respect to preparation, approval,
authentication and publication of annual and quarterly financial results:
(a) Un-audited financial results on quarterly basis shall be accompanied by limited review report
prepared by the statutory auditors of the listed entity, in the format as specified by the Board.
Provided that in case of issuers whose accounts are audited by the Comptroller and Auditor
General of India, the report shall be provided by any practising Chartered Accountant.
(b) The quarterly results shall be taken on record by the board of directors and signed by the
managing director / executive director.
(c) The audited results for the year shall be submitted to the recognised stock exchange(s) in the
same format as is applicable for quarterly financial results.
(d) The annual audited standalone and consolidated financial results for the financial year shall be
submitted to the stock exchange(s) within sixty days from the end of the financial year along
with the audit report. Provided that issuers, who are being audited by the Comptroller and
Auditor General of India, shall adopt the following two step process for disclosure of the annual
audited financial results:
(i) The first level audit shall be carried out by the auditor appointed by the Comptroller and
Auditor General of India, who shall audit the financials of the listed entity and such financial
results shall be submitted to the Stock Exchange(s) within sixty days from the end of the
financial year.
(ii) After the completion of audit by the Comptroller and Auditor General of India, the financial
results shall be submitted to the Stock exchange(s) within nine months from the end of the
financial year.
(e) Modified opinion(s) in audit reports/limited review reports that have a bearing on the interest
payment/ dividend payment pertaining to non-convertible securities/ redemption or principal
repayment capacity of the listed entity shall be appropriately and adequately addressed by the
board of directors while publishing the accounts for the said period.

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(f) The listed entity shall also submit as part of its standalone or consolidated financial results
for the half year, by way of a note, a statement of assets and liabilities and statement of
cash flows as at the end of the half year.

VARIOUS POLICIES TO BE MAINTAINED BY THE LISTED COMPANIES

Regulation Title of Policy Requirements


9 Preservation of To be classified into two categories:-
documents Policy 1. documents whose preservation shall be permanent in
nature
2. documents with preservation period of not less than
eight years after completion of the relevant transactions
16(1)(c ) Policy on The listed entity shall formulate a policy for determining
determining ‘material’ subsidiary.
"material
subsidiary"
17(9)(b) Risk Management The board of directors shall be responsible for framing,
Policy implementing and monitoring the risk management plan
for the listed entity
17(5) Code of Conduct - The board of directors shall lay down a code of
conduct for all members of board of directors and
senior management of the listed entity.
- The code of conduct shall suitably incorporate the
duties of independent directors as laid down in the
Companies Act, 2013
22 Vigil Mechanism The listed entity shall formulate a vigil mechanism for
directors and employees to report genuine concerns
23(1) Materiality of The listed entity shall formulate a policy on materiality of
related related party transactions and on dealing with related party
party transactions transactions, including clear threshold limits duly approved
and on by the board of directors and such policy shall be reviewed

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dealing with by the board of directors at least once every three years
related party and updated accordingly.
transactions
23(3) Criteria for the audit committee shall lay down the criteria for granting
granting the omnibus approval in line with the policy on related
omnibus approval party transactions of the listed entity and such approval
for Related Party shall be applicable in respect of transactions which are
Transactions repetitive in nature;
30 Policy on The listed entity shall make disclosure of events specified
determination in Para B of Part A of Schedule III, based on application
of materiality of the guidelines for materiality, as specified in sub-
regulation (4)
43A Dividend The top five hundred listed entities based on market
Distribution capitalization (calculated as on March 31 of every financial
Policy year) shall formulate a dividend distribution policy which
shall be disclosed in their annual reports and on their
websites.

Part D of Board Diversity The Board shall devise a policy on diversity of board of
Schedule Policy directors
II

Part D of Criteria for The Nomination and Remuneration Committee shall


Schedule evaluation formulate criteria for evaluation of performance of
II of performance of independent directors and the board of directors
independent
directors
and the board of
directors

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NON-COMPLIANCE WITH PROVISIONS RELATED TO CONTINUOUS DISCLOSURES


In order to ensure effective enforcement of continuous disclosure obligations by issuers of listed
Non-Convertible Debt Securities or NCRPS or Commercial Papers, it has been decided to lay
down a uniform structure for imposing fines for non-compliance with continuous disclosure
requirements.

In view of the above and in the interests of investors and the securities market, it has been
provided that-
- The Stock Exchanges shall levy fine and take action in case of non-compliances with continuous
disclosure requirements by issuers of listed Non-Convertible Debt Securities and/ or NCRPS
and/ or Commercial Papers as specified in Annexure I and Annexure II.
- Stock Exchanges may deviate from the above, if found necessary, only after recording reasons
in writing.
- In case a non-compliant entity is listed on more than one recognized stock exchange, the
concerned recognized stock exchanges shall take uniform action under this circular in
consultation with each other.
- The recognized stock exchanges shall take necessary steps to implement this circular and shall
disclose on their website the action(s) taken against the entities for non-compliance(s);
including the details of the respective requirement, amount of fine levied/ action taken etc.
- The amount of fine realized as per the structure provided in Annexure I of this circular shall
be credited to the "Investor Protection Fund" of the concerned recognized stock exchange.
- The fines specified in Annexure I of this circular shall continue to accrue till the time of
rectification of the non-compliance and to the satisfaction of the concerned recognized stock
exchange. Such accrual shall be irrespective of any other disciplinary/enforcement action(s)
initiated by recognized stock exchange(s)/SEBI.
- The recognized stock exchanges may keep in abeyance the action or withdraw the action in
specific cases where specific exemption from compliance with the requirements for continuous
disclosures /moratorium on enforcement proceedings has been provided for under any Act,
Court/Tribunal Orders etc.
- The above provisions are without prejudice to the power of SEBI to take action under the
securities laws.

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ROLE OF COMPANY SECRETARY IN EMPLOYMENT

A listed entity shall appoint a Qualified Company Secretary as the Compliance Officer. The
compliance officer of the listed entity shall be responsible for –
- ensuring conformity with the regulatory provisions applicable to the listed entity in letter and
spirit.
- co-ordination with and reporting to SEBI, recognised stock exchange(s) and depositories with
respect to compliance with rules, regulations and other directives of these authorities in manner
as specified from time to time.
- ensuring that the correct procedures have been followed that would result in the correctness,
- authenticity and comprehensiveness of the information, statements and reports filed by the
listed entity under these regulations.
- monitoring email address of grievance redressal division as designated by the listed entity for
the purpose of registering complaints by investors.

The listed entity shall submit a compliance certificate to the exchange, duly signed by both
the compliance officer of the listed entity and the authorised representative of the share
transfer agent, wherever applicable, within one month of end of each half of the financial year,
certifying that all activities in relation to both physical and electronic share transfer facility
are maintained either in house or by Registrar to an issue and share transfer agent registered
with SEBI.

“Senior Management” shall mean Officers/Personnel of the listed entity who are members of
its core management team excluding Board of directors and normally this shall comprise all
members of management one level below Chief Executive Officer/ Managing Director/ Whole
Time Director/Manager (including Chief Executive Officer/Manager, in case they are not part
of the board) and shall specifically include Company Secretary and Chief Financial Officer.

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ROLE OF A COMPANY SECRETARY IN PRACTICE

Certificate regarding Transfer of Securities


Certification to the effect that all transfers have been completed within the stipulated time.
[Regulation 40(9)]

Certificate Regarding Compliance of Conditions of Corporate Governance under SEBI Listing


Regulations
SEBI listing regulations authorizes Company Secretary in Practice to issue certificate regarding
compliance of conditions of Corporate Governance. [Schedule V, clause E]

Certificate Regarding Maintenance of 100% Asset Cover


To issue half yearly certificate regarding maintenance of 100% security cover in respect of
listed non- convertible debt securities. [Regulation 56(1)] (d)]

Secretarial Audit Report


Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
Secretarial Audit and shall annex with its Annual Report, a Secretarial Audit Report, given by
a Company Secretary in Practice, in such form as may be specified with effect from the year
ended March 31, 2019.[ Regulation 24A]

Certification regarding Director’s Disqualification


A certificate from a Company Secretary in Practice that none of the directors on the board of
the company have been debarred or disqualified from being appointed or continuing as Directors
of Companies by the Board/ Ministry of Corporate Affairs or any such Statutory Authority.
[Schedule V, Part C, Clause 10 (i)]

COMMITTEE POSITIONS OF DIRECTORS IN A LISTED COMPANY


A director shall not be a member in more than ten committees or act as chairperson of more
than five committees across all listed entities in which he / she is a director which shall be
determined as follows:

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

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

In view of the above, his total chairperson is 4 which is within the limit of 5 committee
chairpersonship as permitted.

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CHAPTER 12 – ACQUISITION OF SHARES & TAKEOVERS

MEANING AND CONCEPT OF TAKEOVER

The term takeover is not defined in the Companies Act, 2013. Broadly speaking, takeover
refers to acquisition of company by another company.

Takeover is an acquisition of shares carrying voting rights in a company in order to gain control
over the management of the company. It takes place when an individual or a group of individuals
or a company acquires control over the assets of a' company either by acquiring majority of its
shares or by obtaining control of the management of the business and affairs of the company.

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KINDS OF TAKEOVER

Friendly takeover
Friendly takeover means a takeover done with the consent of board of directors of both the
parties ie the Acquirer and the Target Company. In friendly takeover, there is an agreement
between the management of two companies through negotiations and the takeover bid may be
with the consent of majority or all the shareholders of the target company. This kind of
takeover is done through negotiations between two groups. Therefore, it is also called negotiated
takeover.

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Hostile takeover
The word hostile means without the will and intention of the management of the Target
Company. When an acquirer company does not offer the target company the proposal to acquire
its undertaking but silently takes efforts to gain control against the wishes of existing
management, such acts of acquirer are known as 'hostile takeover’. Such takeovers a re hostile
on management and are thus called hostile takeover. Hostile takeovers directly made to the
shareholders of Target Company has resulted in a multiple defensive strategies-by corporate
from being taken over by the company

Bailout takeover
Takeover of a financially sick company by a profit earning company to bail out the weak
company is known as bail out takeover. A bail out takeover takes place with the approval of
the Financial Institutions and banks since the objective is to revive the financially weak
company and banks normally have a charge on the assets of the company.

LEGAL ASPECTS OF TAKEOVER

The legislations/regulations that mainly govern takeover is as under:


1. SEBI (SAST) Regulations 2011
2. Companies Act, 2013
3. Listing Agreement

IMPORTANT DEFINITIONS [REGULATION 2]

ACQUIRER [REG. 2(1) (A)]


"Acquirer" means any person who, directly or indirectly, acquires or agrees to acquire whether
by himself, or through, or with persons acting in concert with him, shares or voting rights in,
or control over a target company.

Thus, acquirer may be "any person "-even a foreign company-i.e. company incorporated outside
India. If a foreign company acquires shares of its listed Indian subsidiary company, the acquirer

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(foreign company) is bound to -make open offer by way of Public announcement before
acquiring shares or voting rights in the listed Indian subsidiary company.

Further, the term 'any person' will encompass natural persons as well as artificial persons.

The mere fact that a person is a promoter does not make him an acquirer, unless it is shown
that he either intends to acquire or is acting in concert with the acquirer for the acquisition
of shares of the target company. The definition of acquirer does not include a promoter, but
includes persons acting in concert with an acquirer. The question as to whether a person is
acting in concert with the acquirer is essentially a question of fact. A promoter may not act
in concert with the acquirer, whereas a stranger might

ACQUISITION [REG. 2(1)(B)]


"Acquisition" means, directly or indirectly, acquiring or agreeing to acquire shares or voting
rights in, or control over, a target company.

CONTROL [REG. 2(1) (E)]


"Control" includes the right to appoint majority of the directors or to control the management
or policy decisions exercisable -by a person or persons acting individually or in concert, directly
or indirectly, including by virtue of their shareholding or management rights or sha reholders
agreements or voting agreements or in any other manner:

Provided that a director or officer of a target company shall not be considered to be in control
over such target company, merely by virtue of holding such position.

FREQUENTLY TRADED SHARES [REG. 2(1)(J)]


"Frequently Traded Shares" means shares of a target company, in which the traded turnover
on any stock exchange during the twelve calendar months preceding the * calendar month in
which the public announcement is made, is at least ten per cent of the total number of shares
of such class of the target company:

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Provided that where the share capital of a particular class of shares of the target company is
not identical throughout such period, the weighted average number of total shares of such
class of the target company shall represent the total number of shares.

FUGITIVE ECONOMIC OFFENDER


Fugitive economic offender” shall mean an individual who is declared a fugitive economic
offender under section 12 of the Fugitive Economic Offenders Act, 2018 (17 of 2018)] [Reg.
2(1)(ja)]

IDENTIFIED DATE [REG. 2(1)(K)]


"Identified Date" means the date falling on the4enth working day prior to the commencement
of the tendering period, for the purposes of determining the shareholders to whom the letter
of offer shall be sent.

IMMEDIATE RELATIVE [REG. 2(1)(L)]


"Immediate Relative” means any spouse of a person, and includes parent, brother, sister or
child of such person or of the spouse.
It may be noted that grant-parents, father-in-law/mother-in-law/brother-in-law, uncles,
nephews, grandparents, great grandparents, etc. are not "immediate relatives”.

PERSON ACTING IN CONCERT [REG. 2(1)(G)]


"Person acting in concert" means.—
Persons who, with a common objective or purpose of acquisition of shares or voting rights in,
or exercising control over a target company, pursuant to an agreement or understanding, formal
or informal, directly or indirectly co-operate for acquisition of shares or voting rights" in, or
exercise of control over the target company.

Without prejudice to the generality of the foregoing, the persons falling within the following
categories shall be deemed to be persons acting in concert with other persons within the same
category, unless the contrary is established,-

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 A company, its holding company, subsidiary company and any company under the same
management or control;
 A company, its directors, and any person entrusted with the management of the company;
 Directors of companies referred to in items (i) and (ii) of this sub-clause and associates of
such directors;
 Promoters and members of the promoter group;
 A mutual fund, its sponsor, trustees, trustee company, and asset management company;
 A collective investment scheme and its collective investment management company, trustees
and trustee company;
 A venture capital fund and its sponsor, trustees, .trustee company and asset management
company;
 A foreign institutional investor and its subaccounts;
 A merchant banker and its client, who is an acquirer;
 A portfolio manager and its client, who is an acquirer;
 Banks, financial advisors and stock brokers of the acquirer, or of any company which is a
holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the
immediate relative of such individual

JUDICIAL PRONOUNCEMENT
- Supreme Court in the case of M/S Daiichi Sankyo Company v. Jayaram Chigurupati & Ors held
that what does the deeming provision do?
- The deeming provision simply says that in case of specified kinds of relationships, in each
category, the person paired with the other would be deemed to be acting in concert with
him/it.
- What it means is that if one partner in the pair makes or agrees to make substantial acquisition
of shares etc. in a company it would be presumed that he/it was acting in pursuance of a
common objective or purpose shared with the other partner of the pair.
- For example, if a company or its holding company makes or agrees to make a move for
substantial acquisition of shares etc. of a certain target company then it would be presumed
that the move is in pursuance of a common objective and purpose jointly shared by the holding
company and the subsidiary company. But the mere fact that two companies are in the

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relationship of a holding company and a subsidiary company, without anything else, is not
sufficient to comprise "persons acting in concert". Something more is required to comprise
"persons acting in concert" than the mere relationship of a holding company and a subsidiary
company.
- There may be hundreds of instances of a company having a subsidiary company but to dub
them as "persons acting in concert" would be quite ridiculous unless another company is
identified as the target company and either the holding company or the subsidiary make some
positive move or show some definite inclination for substantial acquisition of shares etc. of the
target company.

TARGET COMPANY [REG. 2(1)(Z)]


"Target Company" means a LISTED INDIAN COMPANY/ LISTED INDIAN BODY CORPORATE
OR corporation established under a Central legislation, State legislation or Provincial legislation.

TENDERING PERIOD [REG. 2(1)(ZA)]


"Tendering Period" means the period within which shareholders may ten der their shares in
acceptance of an open offer to acquire shares made under these regulations.

VOLUME WEIGHTED AVERAGE MARKET PRICE [REG 2(1)(ZB)]


"Volume Weighted Average Market Price" means the product of the number of equity shares
traded on a stock exchange and the price of each equity share divided by the total number of
equity shares traded on the stock exchange.

VOLUME WEIGHTED AVERAGE PRICE [REG. 2(1)(ZC)]


"Volume Weighted Average Price” means the product of the number of equity shares bought
and price of each such equity share divided by the total number of equity shares bought.

WEIGHTED AVERAGE NUMBER OF TOTAL SHARES [REG. 2(1)(ZD)]


"Weighted Average Number of Total Shares" means the number of shares at the -beginning of
a period, adjusted for shares cancelled, bought back or issued during the aforesaid period*
multiplied by a time-weighing factor.

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WILFUL DEFAULLTER
“wilful defaulter” means any person who is categorized as a wilful defaulter by any bank or
financial institution or consortium thereof, in accordance with the guidelines on wilful defaulters
issued by the Reserve Bank of India and includes any person whose director, promoter or partner
is categorized as such [Reg. 2(1)(ze)]

SUBSTANTIAL ACQUISITION OF SHARES, VOTING RIGHTS OR CONTROL OR INITIAL TRIGGER


THRESHOLD [REGULATIONS 3-9]

1) Without giving a public announcement for open offer, no acquirer shall acquire shares or voting
rights in a target company along with shares or voting rights, if any, held by him in person or
with persons acting in concert, entitle them to exercise twenty-five per cent or more of the
voting rights of such target company.

2) Without giving a public announcement for open offer, any acquirer along with his PAC’s, who
already holds twenty-five per cent or more of the voting rights in the target company but less
than the maximum permissible non-public shareholding (75% or 90%), shall not acquire any
shares or voting rights more than five percent within any financial year in such target
company.

CREEPING ACQUISITION TRIGGER [REG. 3(2)]

CREEPING ACQUISITION MEANS SLOW AND STEADY ACQUISTION OF SHARES BY THE


ACQUIRER IN TARGET COMPANY. IN CREEPING ACQUISITION ACQUIRER CAN ACQUIRE
MAX 5% VOTING RIGHTS OF TARGET CO IN EACH FINANCIAL YEAR.

The creeping acquisition route is meant to facilitate consolidation by persons already in control
or holding substantial number of shares.

An acquirer who (together with PACs) holds 25% or more voting rights in a target company,
but less than the maximum permissible non-public shareholding [i.e., Maximum Permissible

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Non-Public (Promoters') Shareholding is 75% and Minimum Permissible Public shareholding is


25%], is allowed to acquire additional voting rights in the target company to the extent of
upto 5% within a financial year ending on 31st March, without making an open offer [Regulation
3(2)]. If he acquires more than 5% additional voting rights in a financial year ending on 3Ist
March, he will have to make an open offer. This is subject to their (acquirer and PACs)
aggregate post acquisition shareholding not exceeding the maximum permissible non -public
shareholding.

Thus, creeping acquisition can be made at the maximum rate of 5% in any one financial year
without complying with the requirement of mandatory public offer by way of public
announcement, provided that the post-acquisition shareholding of acquirer together with persons
acting in concert with him shall not increase beyond 75%.

The open offer obligation would also apply to acquisition of shares by any person from other
persons acting in concert with him such that the individual shareholding of the person acquiring
shares equals or exceeds the stipulated threshold of 5% although the aggregate shareholding
along with persons acting in concert may remain unchanged. [Reg. 3(3)]

It may be noted that Regulations 3(1) and 3(2) are mutually exclusive so that an acquisition
can trigger either regulation 3(1) or (but not and) regulation 3(2). It is the percentage of
the acquirer's shareholding before and after an acquisition that determines whether the
acquisition triggers regulation 3(1) or regulation 3(2).

ONE TIME EXEMPTION FOR CREEPING ACQUISITION


The acquisition beyond 5% but up to 10% of the voting rights in the target company shall be
permitted for the financial year 2020-21 only in respect of acquisition by a promoter pursuant
to preferential issue of equity shares by the target company. This exemption was only permitted
through preferential issue to promoters and not otherwise.

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Question:
What is the basis of computation of the creeping acquisitions limit under Regulation 3(2) of
Takeover Regulations 2011?

Answer:
For computing acquisitions limits for creeping acquisition specified under regulation 3(2), gross
acquisitions/ purchases shall be taken in to account thereby ignoring any intermittent fall in
shareholding or voting rights whether owing to disposal of shares or dilution of voting rights
on account of fresh issue of shares by the target company. SEBI in the interpretative letter
dated 18th September, 2015 issued under the SEBI (Informal Guidance) Scheme, 2003 as
requested by M/s Adani Properties Private Limited has held that an exempt acquisition would
not be counted towards computing acquisitions on a gross basis.

Example:
Mr. A is contemplating acquisition of XYZ Limited, a listed entity. He presently holds 23%
and his brother, who is having common objective holds 3%. Together their holding is 26%. Mr.
A, in view of creeping acquisition limits, desires to further acquire 3% assuming the 5% ceiling
in every financial year.

Answer:
In view of Regulation 3(3) as discussed above, though together they hold 26% and can avail
5% ceiling, but in case Mr. A on individual basis crossing the threshold of 25% or more (since
presently he holds 23% and further contemplates to acquire 3% more), he will be required to
make open offer. However, in given case, if his brother only acquires 3% and increase their
total holding to 29% then there will be no requirement of Open Offer.

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ACQUISITION OF CONTROL [REGULATION 4]

Regulation 4 provides the following:


Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer
shall acquire, directly or indirectly, control over such target company unless the acquirer makes
a public announcement of an open offer for acquiring shares of such target, company, in
accordance with these-regulations.

Explanation
If any acquirer wants to acquire control over a target company, he has to make public
announcement to acquire shares from the shareholders of the target company.
As per Reg. 2(1) (e), Control includes acquisition, directly or indirectly, of any of the following
rights by the acquirer:
1) Right to appoint majority of the directors;
2) Right to control the management;
3) Right to control the policy decisions.

VOLUNTARY OFFER [REGULATION 6]

Shareholders holding shares entitling them to exercise 25% or more of the voting rights in the
target company may, without breaching minimum public shareholding requirements under the
listing agreement, voluntarily make an open offer to consolidate their shareholding subject to
their aggregate shareholding after completion of the open offer not exceeding the maximum
permissible non-public shareholding. [Regulation 6(1)]

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The facility to voluntarily make an open offer shall not be available if in the proximate past
(preceding 52 weeks), such persons (acquire to and PACs holding 25% or more voting rights)
have made acquisitions without open offer within the creeping acquisition limit of 5%. [The
first proviso to Regulation 6(1)]

Such an acquirer is prohibited from making acquisitions outside the open offer during the offer
period and also prohibited from any further acquisitions for six months after the open offer
except pursuant to another voluntary open offer. [Regulation 6(2)]

Wilful Defaulter
Notwithstanding anything contained in these regulations, no person who is a wilful defaulter
shall make a public announcement of an open offer for acquiring shares or enter into any
transaction that would attract the obligation to make a public announcement of an open offer
for acquiring shares under these regulations. However, this regulation shall not prohibit the
wilful defaulter from making a competing offer in accordance with regulation 20 of these
regulations upon any other person making an open offer for acquiring shares of the target
company.

Fugitive Economic Offender


Notwithstanding anything contained in these regulations, no person who is a fugitive economic
offender shall make a public announcement of an open offer or make a competing offer for
acquiring shares or enter into any transaction, either directly or indirectly, for acquiring any
shares or voting rights or control of a target company.

OFFER SIZE [REGULATION 7]

Regulation 7 provides the following:


Any mandatory open offer would be for at least 26%, of total shares of the target company,
as of tenth working day from the closure of the tendering period [Regulation 7(1)].

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A voluntary open offer can be made for the acquisition of shares representing at least 10%
but shall not exceed 'such number of shares which will take the holding of the acquirer and
PACs to beyond maximum non-public shareholding permitted under the listing agreement. [Reg.
7(2)] Upon a competing offer being made, such an acquirer would be permitted to increase
his offer size to a normal full-sized open offer within fifteen working days. [Proviso to Reg.
7(2)].

DISCLOSURE OF ACQUISITION AND DISPOSAL [REGULATION 29]

Regulation 29(1) provides that any acquirer along with any PAC, who acquires shares or voting
rights in a target company entitle them to 5% cent or more of the voting rights in such target
company shall disclose their aggregate shareholding and voting rights in such target company
in a specified form.

Regulation 29(2) provides that any acquirer, who together with PACs holds 5% or more of
the voting rights in a target -company, shall disclose every acquisition or disposal of shares of
such target company representing 2% or more change of the voting rights in such target
company along with their aggregate shareholding and voting rights.

Shares taken by way of encumbrance shall be treated as an acquisition; shares given upon
release of encumbrance pledge shall be treated as a disposal. However, this requirement shall
not apply to a scheduled commercial bank or public financial institution in connection with a
pledge of shares for securing indebtedness in-the ordinary course of business. The word
encumbrance means taking loan against such shares.

Regulation 29(3) provides that the above disclosures shall be made within two working days
of the receipt of intimation of allotment of shares, or the acquisition of shares or voting rights
in the target company to,-
a. every stock exchange where the shares of the target company are listed; and
b. The target company at its registered office.

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Note:
- Shares taken by way of encumbrance shall be treated as an “acquisition”.
- Share given upon release of encumbrance shall be treated as a “disposal”
- The requirement as listed above shall not apply to a Scheduled Commercial bank or public
financial institution or a housing finance company or a systematically important non -banking
financial company as pledgee in connection with a pledge of shares for securing indebtness in
the ordinary course of business.

CONTINUAL DISCLOSURES [REGULATION 30]

Regulation 30(1) provides that every person, who together with PACs holds 25% shares or
voting rights them to exercise of the voting rights in a target company (substantial
shareholder), shall disclose their aggregate shareholding as of 31st of March, in such target
company in such form as may be specified. Disclosure shall be made within 7 working days
from the end of each financial year to-
a. every stock exchange where the shares of the target company are listed; and
b. The target company at its registered office.

Regulation 30(2) provides that the promoter of every target company shall together with
persons acting in concert with him, disclose their aggregate shareholding and voting rights as
of the 31s day of March, in such target company in such form as may be specified Disclosure
shall be made within 7 working days from the end of each financial year to,-
a. every stock exchange where the shares of the target company are listed; and
b. The target company at its registered office.

DISCLOSURE OF ENCUMBERED SHARES [REGULATION 31]

The word encumbrance means loan against a particular asset. Here it means loan obtained or
repaid against shares. The promoter of every target company shall disclose the following:
 details of shares in such -target company encumbered by him or by persons acting in concert
with him;

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 details of any invocation of such encumbrance; and


 Details of release of such encumbrance.
The disclosures required as above shall be made within seven working days from the creation
or invocation or release of encumbrance, as the case may be to,-
a. every stock exchange where the shares of the target company are listed; and
b. The target company at its registered office.

The promoter of every target company shall declare on a yearly basis that he, along with
persons acting in concert, has not made any encumbrance, directly or indirectly, other than
those already disclosed during the financial year.

The declaration required under sub-regulation (4) shall be made within seven working days
from the end of each financial year to –
(a) every stock exchange where the shares of the target company are listed; and
(b) the audit committee of the target company.

INDIRECT ACQUISITION OF SHARES OR CONTROL

Indirect acquisition means the acquisition of shares, voting rights or control over any other
company which would enable the acquirer of shares, voting rights or control to exercise such
percentage of voting rights, which would otherwise have triggered an open offer process.

Certain indirect acquisitions are regarded as ‘deemed direct acquisitions’ if such indirect
acquisition satisfy the following conditions such as:
(a) the proportionate net asset value of the target company as a percentage of the consolidated
net asset value of the entity or business being acquired exceeds 80 percent; or
(b) the proportionate sales turnover of target company as a percentage of the consolidated sales
turnover of the entity or business being acquired exceeds 80 percent; or
(c) the proportionate market capitalisation of the target company as a percentage of the enterprise
value for the entity or business being acquired exceeds 80 percent;

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In case of indirect acquisitions where public announcement has been made, an amount
equivalent to hundred per cent of the consideration payable in the open offer shall be deposited
in the escrow account.

Further, under regulation 18(11) in case, the acquirer is unable to make payment to the
shareholders who have accepted the open offer within such period, the acquirer shall pay
interest for the period of delay to all such shareholders whose shares have been accepted in
the open offer, at the rate of 10% per annum.

OPEN OFFER PROCESS [REGULATIONS 12-23]

1. Appointment of merchant banker prior to the Public Announcement (PA).


2. The Public Announcement of an open offer shall be sent to all the stock exchanges
on which the shares of the target company are listed.
3. Opening of Escrow Account – 2 working days prior to the date of the detailed public statement
towards security for performance of his obligations under these regulations.
4. Detailed public statement – within 5 working days from the date of public announcement.
5. Filing of Draft Letter of Offer with SEBI and send copy to Target company and Stock Exchanges
- within 5 working days from detailed public statement.
6. Dispatch Letter of Offer – within 7 working days of receiving comments from SEBI.
7. Upward revision of Offer price, if any by Acquirer – prior to the commencement of the last 1
working day before the commenement of the tendering period.
8. Recommendation of Committee of Independent Directors to be published – atleast 2 working
days before the commencement of the tendering period.
9. Tendering period: commencment – shall start not later than 12 working days from the date of
reciept of comments from the Board and to remain open for 10 working days.
10. Tendering period to be closed after 10 working days.
11. Payment of Consideration- within 10 working days from the last day of tendering period.
12. Post offer Advertisement – within 5 working days from closure of offer period.

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AUTOMATIC EXEMPTIONS

(1) (a) acquisition pursuant to inter se transfer of shares amongst qualifying persons, being–
(i) immediate relatives;
(ii)persons named as promoters in the shareholding pattern filed by the target company in terms
of the listing regulations, the listing agreement or these regulations for not less than three
years prior to the proposed acquisition;
(iii)a company, its subsidiaries, its holding company, other subsidiaries of such – holding company,
persons holding not less than fifty per cent of the equity shares of such company, other
companies in which such persons hold not less than fifty per cent of the equity shares, and
their subsidiaries subject to control over such qualifying persons being exclusively held by the
same persons;
(iv) persons acting in concert for not less than three years prior to the proposed acquisition, and
disclosed as such pursuant to filings under the listing regulations or the listing agreement;
(v) shareholders of a target company who have been persons acting in concert for a period of not
less than three years prior to the proposed acquisition and are disclosed as such pursua nt to
filings under the listing regulations or as the case may be, the listing agreement, and any
company in which the entire equity share capital is owned by such shareholders in the same
proportion as their holdings in the target company without any differential entitlement to
exercise voting rights in such company:

However, for purposes of availing of the exemption under this clause, –


(i) If the shares of the target company are frequently traded, the acquisition price per share shall
not be higher by more than twenty-five per cent of the volume-weighted average market price
for a period of sixty trading days preceding the date of issuance of notice for the proposed inter
se transfer, as traded on the stock exchange where the maximum volume of trading in the
shares of the target company are recorded during such period, and if the shares of the target
company are infrequently traded, the acquisition price shall not be higher by more than twenty -
five percent of the price determined; and
(ii) The transferor and the transferee shall have complied with applicable disclosure requirements
set out in these regulations.

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(b) acquisition in the ordinary course of business by, –


(i) an underwriter registered with the SEBI by way of allotment pursuant to an underwriting
agreement in terms of the SEBI (ICDR) Regulations, 2018;
(ii) a stock broker registered with SEBI on behalf of his client in exercise of lien over the shares
purchased on behalf of the client under the bye-laws of the stock exchange where such stock
broker is a member;
(iii)a merchant banker registered with SEBI or a nominated investor in the process of market
making or subscription to the unsubscribed portion of issue in terms of the SEBI (ICDR)
Regulations, 2018;
(iv) any person acquiring shares pursuant to a scheme of safety net in terms of the then existing
SEBI (ICDR) Regulations, 2018;
(v) a merchant banker registered with SEBI acting as a stabilising agent or by the promoter or
re-issue shareholder in terms of the SEBI (ICDR) Regulations, 2018;
(vi) by a registered market-maker of a stock exchange in respect of shares for which he is the
market maker during the course of market making;
(vii) a Scheduled Commercial Bank, acting as an escrow agent; and
(viii)invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a
pledgee.

(c) acquisitions at subsequent stages, by an acquirer who has made a public announcement of an
open offer for acquiring shares pursuant to an agreement of disinvestment, as contemplated in
such agreement. However, both the acquirer and the seller are the same at all the stages of
acquisition; and full disclosures of all the subsequent stages of acquisition, if any, have been
made in the public announcement of the open offer and in the letter of offer.

(d) acquisition pursuant to a scheme, –


(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 or any
statutory modification or re-enactment thereto;
(ii) of arrangement involving the target company as a transferor company or as a transferee
company, or reconstruction of the target company, including amalgamation, merger or demerger,

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pursuant to an order of a court or a tribunal or a competent authority under any law or


regulation, Indian or foreign; or
(iii)of arrangement not directly involving the target company as a transferor company or as a
transferee company, or reconstruction not involving the target company’s undertaking, including
amalgamation, merger or demerger, pursuant to an order of a court or a tribunal under any law
or regulation, Indian or foreign, subject to, –
A. the component of cash and cash equivalents in the consideration paid being less than twenty-
five per cent of the consideration paid under the scheme; and
B. where after implementation of the scheme of arrangement, persons directly or indirectly holding
at least thirty-three per cent of the voting rights in the combined entity are the same as the
persons who held the entire voting rights before the implementation of the scheme.

(da) acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and
Bankruptcy Code, 2016.

(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002;

(f) acquisition pursuant to the provisions of SEBI (Delisting of Equity Shares) Regulations, 2021;

(g) acquisition by way of transmission, succession or inheritance;

(h) acquisition of voting rights or preference shares carrying voting rights arising out of the
operation of sub-section (2) of section 47 of the Companies Act, 2013;

(i) acquisition of shares by the lenders pursuant to conversion of their debt as part of a debt
restructuring implemented in accordance with the guidelines specified by RBI; However, the
conditions specified under sub-regulation (6) of regulation 158 of the SEBI (ICDR) Regulations,
2018 are complied with;

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(j) increase in voting rights arising out of the operation of sub-section (1) of section 106 of the
Companies Act, 2013 or pursuant to a forfeiture of shares by the target company, undertaken
in compliance with the provisions of the Companies Act, 2013 and its articles of association.

(1) An increase in the voting rights of any shareholder beyond the threshold limits stipulated in
sub-regulations (1) and (2) of regulation 3, without the acquisition of control, pursuant to the
conversion of equity shares with superior voting rights into ordinary equity shares, shall be
exempted from the obligation to make an open offer under regulation 3.

(2) Any acquisition of shares or voting rights or control of the target company by way of preferential
issue in compliance with regulation 164A of the Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2018 shall be exempt from the obligation
to make an open offer under subregulation (1) of regulation 3 and regulation 4.

(3) An increase in voting rights in a target company of any shareholder beyond the limit attracting
an obligation to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-
back of shares by the target company shall be exempt from the obligation to make an open
offer provided such shareholder reduces his shareholding such that his voting rights fall to
below the threshold referred to in regulation 3(1) within ninety days from the date of the
closure of the said buy back offer.

(4) The following acquisitions shall be exempt from the obligation to make an open offer-
(a) acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant
to a rights issue;
(b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant
to a rights issue, subject to fulfilment of the following conditions, –
(i) the acquirer has not renounced any of his entitlements in such rights issue; and
(ii) the price at which the rights issue is made is not higher than the ex-rights price of the shares
of the target company, being the sum of, –
A) the volume weighted average market price of the shares of the target company during a period
of sixty ending on the day prior to the date of determination of the rights issue price, multiplied
by the number of shares outstanding prior to the rights issue, divided by the total number of

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shares outstanding after allotment under the rights issue. However, such volume weighted
average market price shall be determined on the basis of trading on the stock exchange where
the maximum volume of trading in the shares of such target company is recorded during such
period; and
B) the price at which the shares are offered in the rights issue, multiplied by the number of
shares so offered in the rights issue divided by the total number of shares outstanding after
allotment under the rights issue.
C) increase in voting rights in a target company of any shareholder pursuant to buy -back of
shares. However:
(i) such shareholder has not voted in favour of the resolution authorising the buy -back of securities
under section 68 of the Companies Act, 2013;
(ii) in the case of a shareholder resolution, voting is by way of postal ballot;
(iii) where a resolution of shareholders is not required for the buy-back, such shareholder, in his
capacity as a director, or any other interested director has not voted in favour of the resolution
of the board of directors of the target company authorising the buy-back of securities under
section 68 of the Companies Act, 2013; and
(iv) the increase in voting rights does not result in an acquisition of control by such shareholder
over the target company. However, where the aforesaid conditions are not met, in the event
such shareholder reduces his shareholding such that his voting rights fall below the level at
which the obligation to make an open offer would be attracted under sub-regulation (2) of
regulation 3, within ninety days from the date of closure of the buy-back offer by the target
company, the shareholder shall be exempt from the obligation to make an open offer;
D) acquisition of shares in a target company by any person in exchange for shares of another
target company tendered pursuant to an open offer for acquiring shares under these regulations;
E) acquisition of shares in a target company from state-level financial institutions or their
subsidiaries or companies promoted by them, by promoters of the target company pursuant to
an agreement between such transferors and such promoter;
F) acquisition of shares in a target company from a venture capital fund or Category I Alternative
Investment Fund or a foreign venture capital investor registered with the SEBI, by promoters
of the target company pursuant to an agreement between such venture capital fund or category
I Alternative Investment Fund or foreign venture capital investor and such promoters.

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(5) In respect of acquisitions under clause (a) of sub-regulation (1), and clauses (e) and (f) of
sub-regulation (4), the acquirer shall intimate the stock exchanges where the shares of the
target company are listed, the details of the proposed acquisition in such form as may be
specified, at least four working days prior to the proposed acquisition, and the stock exchange
shall forthwith disseminate such information to the public.

(6) In respect of any acquisition made pursuant to exemption provided for in this regulation, the
acquirer shall file a report with the stock exchanges where the shares of the target company
are listed, in such form as may be specified not later than four working days from the
acquisition, and the stock exchange shall forthwith disseminate such information to the public.

(7) In respect of any acquisition of or increase in voting rights pursuant to exemption provided for
in clause (a) of sub-regulation (1), sub-clause (iii) of clause (d) of sub-regulation (1), clause
(h) of sub-regulation (1), sub regulation (2), sub-regulation (3) and clause (c) of sub-
regulation (4), clauses (a), (b) and (f) of sub-regulation (4), the acquirer shall, within
twenty-one working days of the date of acquisition, submit a report in such form as may be
specified along with supporting documents to SEBI giving all details in respect of acquisitions,
along with a non- refundable fee of rupees one lakh fifty thousand by way of direct credit in
the bank account through NEFT/ RTGS/IMPS or any other mode allowed by RBI or by way of
a, banker’s cheque or demand draft payable in Mumbai in favour of SEBI.

Question: Mr. X is Promoter of ABC (India) Limited (Target Company). Mr. X is presently
holding 53,073 shares constituting 0.52% of the paid up equity capital of the Target Company.
Further, Mr. X has been allotted 75,000 convertible warrants, convertible in to equity. After
conversion of warrant in to equity the shareholding of Mr. X will increase from 0.52% to 1.26%
of the paid up equity capital. Further, Ms. Z who is Mr. X's elder sister's daughter and holding
7,80,000 equity shares constituting 7.76% of the paid up equity share capital of the Company.
Ms. Z is a foreign shareholder and she wanted to gift (Off Market Transaction) her entire
shareholding to her mother Mrs. Y and in turn Mrs. Y wanted to gift the entire shareholding
to Mr. X. If the entire transaction as contemplated, if concluded, then the shareholding of Mr.
X will increase from 0.52% to 9.02% and the shareholding of the promoter group will increase

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from 34.28% to 43.30%. You have been engaged as Practising Company Secretary by Mr. X
to advise on the following:
a) Is this increase in the promoter group shareholding would trigger open offer requirements in
terms of Regulation 3(2) of the SEBI (SAST) Regulation, 2011.
b) Further, Whether such transaction would be exempted under Regulation 10 of the SEBI (SAST)
Regulations, 2011.

Answer: The set of facts as disclosed in the question contains three transactions. First,
conversion of convertible warrants in to equity. Secondly, transfer of shares through off market
transaction from Ms. Z to Mrs. Y and thirdly, transfer of shares through off market transaction
from Mrs. Y to Mr. X. Regarding the first transaction, the trigger and open offer requirements,
if any has to be considered at the time of conversion of warrants in to equity as the same
would depends on the shareholding pattern of the promoter and promoter’s group prevailing at
the time of conversion of warrants in to equity shares. Regarding the second and third
transaction, considering that Ms. Z, Mrs. Y and Mr. X are immediate relative thus they would
be considered as PAC in terms of Regulation 2(1)(q) of the SEBI (SAST) Regulations, 2011.
Therefore, the shareholding of the promoters along with PACs would increase more than 5%
limit and would trigger open offer requirements under Regulation 3(2) of the SEBI (SAST),
2011. However, the transaction is between immediate relatives, the transaction would be exempt
from the obligation to make an open offer as per Regulation 10(1)(a)(i) of the SEBI (SAST),
Regulations, 2011 subject to the compliance with the conditions as mentioned under the proviso
to Regulation 10(1)(a)(i) and Regulation 10(5), (6) and (7) of the SEBI (SAST), Regulations,
2011. Further, SEBI in the interpretative letter dated 18th September, 2015 issued under the
SEBI (Informal Guidance) Scheme, 2003 as requested by M/s Adani Properties Private Limited
has held that an exempt acquisition would not be counted towards computing acquisitions on
a gross basis.

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POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

Exemption from enforcement of the regulations in special cases


SEBI may, exempt any person or class of persons from the operation of all or any of the
provisions of these regulations for a period as may be specified but not exceeding twelve
months, for furthering innovation in technological aspects relating to testing new products,
processes, services, business models, etc. in live environment of regulatory sandbox in the
securities markets. Any exemption granted by the SEBI shall be subject to the applicant
satisfying such conditions as may be specified by the SEBI including conditions to be complied
with on a continuous basis.

Explanation . — For the purposes of these regulations, “regulatory sandbox” means a live testing
environment where new products, processes, services, business models, etc. may be deployed
on a limited set of eligible customers for a specified period of time, for furthering innovation
in the securities market, subject to such conditions as may be specified by the Board.

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CHAPTER 13 – PROHIBITION OF INSIDER TRADING

INTRODUCTION

Insider trading came into existence from the very inception of trading of securities of a company
and is now a challenge faced by investors all over the world. U.S. was the first country to
formally enact legislation. In India, many committees were formed which made regulations to
keep a check on the practice of insider trading.

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

The previous regulations which were formulated in 1992 – SEBI (Insider Trading) Regulations
were punitive and were amended in 2002. The amendment in 2002 came to be known as SEBI
(Prohibition of) Insider Trading) Regulations, 1992 and they were preventive in nature.

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IMPORTANT DEFINITIONS

Insider

"Insider" means any person who is:


i) a connected person; or
ii) in possession of or having access to unpublished price sensitive information;

Connected person
Connected person" means,-
Any person who is or has during the six months prior to the concerned act been
associated with a company, directly or indirectly, in any capacity including by
reason of frequent communication with its officers or by being in any contractual,
fiduciary or employment relationship or by being a director, officer or an employee
of the company or holds any position including a professional or
business relationship between himself and the company whether temporary or
permanent, that allows such person, directly or indirectly, access to unpublished
price sensitive information or is reasonably expected to allow such access.

Person deemed to be connected person


“Person is deemed to be a connected person”, if such person-
(a) an immediate relative of connected persons specified in clause (i); or
(b) a holding company or associate company or subsidiary company; or
(c) an intermediary as specified in section 12 of the Act or an employee or director thereof; or

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(d) an investment company, trustee company, asset management company or an


employee or director thereof; or
(e) an official of a stock exchange or of clearing house or corporation; or
(f) a member of board of trustees of a mutual fund or a member of the board of
directors of the asset management company of a mutual fund or is an employee
thereof; or
(g) a member of the board of directors or an employee, of a public financial
institution as defined in section 2 (72) of the Companies Act, 2013; or
(h) an official or an employee of a self-regulatory organization recognised or
authorized by SEBI; or
(i) a banker of the company; or
(j) a concern, firm, trust, Hindu undivided family, company or association of
persons wherein a director of a company or his immediate relative or banker
of the company, has more than ten per cent of the holding or interest;

Generally available information


"Generally available information" means information that is accessible to the public on a non-
discriminatory basis.

Immediate relative
“Immediate relative” means a spouse of a person, and includes parent, sibling, and
child of such person or of the spouse, any of whom is either dependent financially
on such person, or consults such person in taking decisions relating to trading in
securities;

Trading
"trading" means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy,
sell, deal in any securities, and "trade" shall be construed accordingly;

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Unpublished price sensitive information


"Unpublished price sensitive information" means any information, relating to a company or its
securities, directly or indirectly, that is not generally available which upon becoming generally
available, is likely to materially affect the price of the securities and shall, ordinarily including
but not restricted to, information relating to the following: -
(i) Financial results;
(ii) Dividends;
(iii) Change in capital structure;
(iv) Mergers, de-mergers, acquisitions, delisting, disposals and expansion of
business and such other transactions;
(v) Changes in key managerial personnel; and

Extracts from SAT Order dated 12th July 2019 in the matter of Mr. G. Bala Reddy v/s SEBI
In this case a Company had secured work orders but the same were not disclosed to stock
exchange as the contract was not yet issued to the Company and the Company was only found
to be the lowest price bidder. During this period, certain entities had dealt in the shares of
this Company with a contention that being the lowest bidder of a contract is a usual course
of business and hence, does not amount to UPSI. SAT held that considering that the promoter
was aware that the Company was L1 (lowest bidder), this information was UPSI and hence it
was incumbent upon Promoters not to deal in the scrips of the Company directly or indirectly.

Compliance officer
Compliance Officer means
- any senior officer, designated so and reporting to the board of directors or
head of the organization in case board is not there,
- who is financially literate and is capable of appreciating requirements for
legal and regulatory compliance under these regulations and
- who shall be responsible for compliance of policies, procedures, maintenance of records,
monitoring adherence to the rules for the preservation of unpublished price sensitive
information,

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- monitoring of trades and the implementation of the codes specified in these regulations under
the overall supervision of the board of directors of the listed company or the head of an
organization, as the case may be.

COMMUNICATION OR PROCUREMENT OF UNPUBLISHED PRICE SENSITIVE INFORMATION

Regulation 3 provides that any person shall not:


- communicate, provide, or allow access to any unpublished price sensitive information; or
- procure from or cause the communication by any insider of unpublished price sensitive
information;
- relating to a company or securities listed or proposed to be listed except in furtherance of
legitimate purposes, performance of duties or discharge of legal obligations.
- the board of directors of a listed company shall make a policy for determination of “legitimate
purposes” as a part of Code of Fair Disclosure and Conduct. The term “legitimate purpose”
shall include sharing of unpublished price sensitive information in the ordinary course of
business by an insider with partners, collaborators, lenders, customers, suppliers, merchant
bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants,
provided that such sharing has not been carried out to evade or circumvent the prohibitions of
these regulations.
- Any person in receipt of unpublished price sensitive information pursuant to a “legitimate
purpose” shall be considered an “insider” for purposes of these regulations and due notice shall

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be given to such persons to maintain confidentiality of such unpublished price sensitive


information in compliance with these regulations.
- An unpublished price sensitive information may be communicated, provided, allowed access to
or procured, in connection with a transaction that would:-
(i) entail an obligation to make an open offer under the takeover regulations where the board of
directors of the listed company is of informed opinion that sharing of such information is in
the best interests of the company;
(ii) not attract the obligation to make an open offer under the takeover regulations but where the
board of directors of the listed company is of informed opinion that sharing of such information
is in the best interests of the company and the information that constitute unpublished price
sensitive information is disseminated to be made generally available at least two trading days
prior to the proposed transaction being effected in such form as the board of directors may
determine to be adequate and fair to cover all relevant and material facts.
- The board of directors shall require the parties to execute agreements to contract confidentiality
and non-disclosure obligations and such parties shall keep information so received confidential,
except for the purpose specified above and shall not otherwise trade in securities of the
company when in possession of unpublished price sensitive information.
- The board of directors shall ensure that a structured digital database is maintained containing
the names of such persons or entities with whom information is shared under this regulation
along with the Permanent Account Number or any other identifier authorized by law where
Permanent Account Number is not available. Such databases shall be maintained with adequate
internal controls and checks such as time stamping and audit trails to ensure non-tampering
of the database.

Question: What information should a listed Company maintain in its structured digital database
under Regulation 3(5), in case the designated person is a fiduciary or intermediary?

Answer: The listed company should maintain the names of the fiduciary or intermediary with
whom they have shared information along with the Permanent Account Number (PAN) or
other unique identifier authorized by law, in case PAN is not available. The fiduciary /

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intermediary, shall at their end, be required to maintain details as required under the Schedule
C in respect of persons having access to UPSI.

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

TRADING WHEN IN POSSESSION OF UNPUBLISHED PRICE SENSITIVE INFORMATION

Regulation 4 prescribes that insider shall not trade in securities which are listed or proposed
to be listed on stock exchange when in possession of unpublished price sensitive information.

However there are certain exemptions:


1. When there is an off-market transfer between promoters who are aware of price sensitive
information and both parties had made a conscious and informed trade decision. Such off-
market trades shall be reported by the insiders to the company within two working days. Every
company shall notify the particulars of such trades to the stock exchange on which the
securities are listed within two trading days from receipt of the disclosure or from becoming
aware of such information.

2. In the case of non-individual insiders, the individuals who were in possession of such
unpublished price sensitive information were different from the individuals taking trading
decisions and such decision-making individuals were not in possession of such unpublished
price sensitive information when they took the decision to trade; with an assurance that no
unpublished price sensitive information was communicated by the individuals possessing
the information to the individuals taking trading decisions;

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3. The transaction was carried out through the block deal window mechanism between persons
who were in possession of the unpublished price sensitive information without being in breach
of regulation 3 and both parties had made a conscious and informed trade decision;

4. The transaction in question was carried out pursuant to a statutory or regulatory obligation to
carry out a bona fide transaction.

5. The transaction in question was undertaken pursuant to the exercise of stock options in respect
of which the exercise price was pre-determined in compliance with applicable regulations.

6. The trades were pursuant to a trading plan.

In the case of connected persons, the onus of establishing, that they were not in possession
of unpublished price sensitive information, shall be on such connected persons and in other
cases, the onus would be on SEBI. SEBI may specify such standards and requirements, from
time to time, as it may deem necessary for the purpose of these regulations.

Whether creation of a pledge or invocation of pledge is allowed when trading window is


closed?
Yes, however, the pledgor or pledgee may demonstrate that the creation of the pledge or
invocation of pledge was bonafide and prove this innocence under proviso to sub-regulation (1)
of regulation 4.

TRADING PLANS

Regulation 5 states that an insider would be required to submit trading plan in advance to the
compliance officer for his approval. The compliance officer is also empowered to take additional
undertakings from the insiders for approval of the trading plan. Such trading plan on approval
will also be disclosed to the Stock Exchanges, where the securities of the company are listed.

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The trading plan shall comply with requirements as follows:


 It shall be submitted for a minimum period of 12 months.
 No overlapping of plan with the existing plan submitted by Insider.
 It shall set out either the value of trades to be effected or the number of securities to be
traded along with the nature of the trade and the intervals at, or dates on which such trades
shall be effected.
 Trading can commence only after 6 months from public disclosure of plan.
 No trading between 20th day prior to closure of financial period and 2 nd trading day after
disclosure of financial results.
 Compliance officer to approve the plan.
 not entail trading in securities for market abuse.

Rules regarding implementation of Trading Plan


- Pre-clearance of trades shall not be required for a trade executed as per an approved trading
plan.
- Trading window norms and restrictions on contra trade shall not be applicable for trades carried
out in accordance with an approved trading plan.
- The trading plan once approved shall be irrevocable and the insider shall mandatorily have to
implement the plan.
- However, the implementation of the trading plan shall not be commenced if any unpublished
price sensitive information in possession of the insider at the time of formulation of the plan
has not become generally available at the time of the commencement of implementation and
in such event the compliance officer shall confirm that the commencement ought to be deferred
until such unpublished price sensitive information becomes generally available information so
as to avoid a violation of sub-regulation (1) of regulation 4.
- Upon approval of the trading plan, the compliance officer shall notify the plan to the stock
exchanges on which the securities are listed

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Question: Who will be approving authority for trades done by the Compliance Officer or his
immediate relatives, as Insiders?

Guidance: The Board of Directors of the company shall be the approving authority in such
cases and may stipulate such procedures as are deemed necessary to ensure compliance with
these regulations.

Extracts from SEBI’s Interpretive Letter dated 19th July, 2018 issued under the SEBI
(Informal Guidance) Scheme, 2003 in the matter of Hawkins Cookers Ltd. (HCL) regarding
sale of shares by an Independent Director.

Facts of the case:


a) One of the company’s independent directors wants to sell his equity shares of the company.
b) The sale shall be done as per a trading plan in accordance with regulation 4(iii) of the SEBI
(PIT) Regulations, 2015.
c) As per para 8 of Schedule B to the PIT Regulations, while applying for preclearance, the said
director will have to submit an undertaking to the company to the effect that he is not in
possession of any Unpublished Price Sensitive Information (UPSI).
d) By virtue of participation in the Board meetings and access to the information that is shared
at such meetings, the said director is deemed to be perpetually in possession of UPSI. Therefore,
the said undertaking is not possible.

Question:
a) Whether the said director may submit a trading plan as required for a plan to trade shares
above INR 20 lakh in value and proceed with executing the same without giving the said
undertaking.
b) What procedure should be followed by the company and/ or the said director such that the
said director may lawfully execute the trade?

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Guidance from SEBI:


a) Regulation 5 of the PIT Regulations provides exception to the general rule that prohibits trading
by insiders when in possession of UPSI. Further, regulation 5, inter alia, sta tes that the trading
plan shall be approved by the compliance officer and shall not entail trading in securities for
market abuse. In this regard, regulation 5 (3) especially states that the compliance officer
shall review the trading plan to assess whether the plan would have any potential for violation
of PIT Regulations and shall be entitled to seek such express undertakings as may be necessary
to enable such assessment and to approve and monitor the implementation of the plan.
b) In the absence of an approved trading plan, designated persons are subject to the requirements
of code of conduct formulated by the company in terms of regulation 9 read with schedule B
to the PIT Regulations.

DISCLOSURES OF TRADING BY INSIDERS

Regulations 6 (2)
The disclosures to be made by any person shall include those relating to trading by such
person’s immediate relatives, and by any other person for whom such person takes trading
decisions.

Regulations 6(3)
The disclosures of trading in securities shall also include trading in derivatives of securities and
the traded value of the derivatives shall be taken into account for purposes of this Chapter,
provided that trading in derivatives of securities is permitted by any law for the time being in
force.

Regulations 6(4)
The disclosures made shall be maintained by the company, for a minimum period of five years,
in such form as may be specified.

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DISCLOSURES BY CERTAIN PERSONS


Initial Disclosure [Regulation 7 (1)]
(a) Every promoter, key managerial personnel and director of every company whose securities are
listed on any recognised stock exchange shall disclose his holding of securities of the company
as on the date of these regulations taking effect, to the company within thirty days of these
regulations taking effect;
(b) Every person on appointment as a key managerial personnel or a director of the company or
upon becoming a promoter shall disclose his holding of securities of the company as on the
date of appointment or becoming a promoter, to the company within seven days of such
appointment or becoming a promoter.

Continual Disclosures [Regulation 7(2)]


(a) Every promoter, member of the promoter group, designated person and the director of every
company shall disclose to the company the number of such securities acquired or disposed of
within two trading days of such transaction if the value of the securities traded, whether in
one transaction or a series of transactions over any calendar quarter, aggregates to a traded
value in excess of ten lakh rupees or such other value as may be specified;
(b) Every company shall notify the particulars of such trading to the stock exchange on which the
securities are listed within two trading days of receipt of the disclosure or from becoming
aware of such information.

AUTOMATION OF CONTINUAL DISCLOSURES UNDER REGULATION 7(2) – SYSTEM DRIVEN


DISCLOSURES

To begin with, the system driven disclosures shall pertain to trading in equity shares and equity
derivative instruments by the entities.

The Depositories and Stock Exchanges shall make necessary arrangements such that the
disclosures pertaining to PIT Regulations are disseminated on the websites of respective stock
exchanges with effect from October 01, 2020.

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The system would continue to run parallel with the existing system i.e. entities shall continue
to independently comply with the disclosure obligations under PIT Regulations as applicable to
them till March 31, 2021. As currently done, the disclosures generated through the system
shall be displayed separately from the regular disclosures filed with the exchanges.

DISCLOSURES BY OTHER CONNECTED PERSONS


Any company whose securities are listed on a stock exchange may require any other connected
person or class of connected persons to make disclosures of holdings and trading in securities
of the company in such form and at such frequency as may be determined by the company.

This is an enabling provision for listed companies to seek information from those to whom it
has to provide unpublished price sensitive information. This provision confers discretion on any
company to seek such information. For example, a listed company may ask that a management
consultant who would advise it on corporate strategy and would need to review unpublished
price sensitive information, should make disclosures of his trades to the company.

CODE OF FAIR DISCLOSURE (REGULATION 8)

(1) The board of directors of every company, whose securities are listed on a stock exchange, shall
formulate and publish on its official website, a code of practices and procedures for fair
disclosure of unpublished price sensitive information that it would follow in order to adhere to
each of the principles set out in Schedule A to these regulations, without diluting the provisions
of these regulations in any manner.
(2) Every such code of practices and procedures for fair disclosure of unpublished price sensitive
information and every amendment thereto shall be promptly intimated to the stock exchanges
where the securities are listed.

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PRINCIPLES OF FAIR DISCLOSURE FOR PURPOSES OF CODE OF PRACTICES AND


PROCEDURES FOR FAIR DISCLOSURE OF UNPUBLISHED PRICE SENSITIVE INFORMATION -
SCHEDULE A [Sub-regulation (1) of Regulation 8]:
1. Prompt public disclosure of unpublished price sensitive information that would impact price
discovery.
2. Uniform dissemination of unpublished price sensitive information to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination
of information and disclosure of unpublished price sensitive information.
4. Appropriate and fair response to queries on news reports and requests for verification of market
rumours by regulatory authorities.
5. Ensuring that information shared with analysts and research personnel is not unpublished price
sensitive information.
6. Developing best practices to make transcripts or records of proceedings of meetings with
analysts and other investor relations conferences on the official website to ensure official
confirmation and documentation of disclosures made.
7. Handling of all unpublished price sensitive information on a need-to-know basis.

MINIMUM STANDARDS FOR CODE OF CONDUCT

The regulations lay down the following minimum standards for Code of Conduct to regulate,
monitor and report trading by insiders :-
1. The compliance officer shall report to the board of directors and in particular, shall provide
reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of
directors at such frequency as may be stipulated by the board of directors.
2. All information shall be handled within the organisation on a need-to-know basis and no
unpublished price sensitive information shall be communicated to any person except in
furtherance of the insider’s legitimate purposes, performance of duties or discharge of his legal
obligations.
3. The code of conduct shall contain norms for appropriate Chinese Walls
procedures, and processes for permitting any designated person to “cross the wall”.

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4. Employees and connected persons designated on the basis of their


functional role (“designated persons”) in the organisation shall be governed by an
internal code of conduct governing dealing in securities.
5. The trading window shall be closed when the compliance officer determines
that a designated person or class of designated persons can reasonably be
expected to have possession of unpublished price sensitive information.
Such closure shall be imposed in relation to such securities to which such
unpublished price sensitive information relates.
6. Designated persons and their immediate relatives shall not trade in
securities when the trading window is closed.
7. The timing for re-opening of the trading window shall be determined by the
compliance officer taking into account various factors including the
unpublished price sensitive information in question becoming generally
available and being capable of assimilation by the market, which in any
event shall not be earlier than forty-eight hours after the information
becomes generally available.
8. The trading window shall also be applicable to any person having
contractual or fiduciary relation with the company, such as auditors,
accountancy firms, law firms, analysts, consultants etc., assisting, or
advising the company.
9. When the trading window is open, trading by designated persons shall be
subject to preclearance by the compliance officer, if the value of the
proposed trades is above such thresholds as the board of directors may
stipulate. No designated person shall apply for pre-clearance of any proposed trade if
such designated person is in possession of unpublished price sensitive information even if the
trading window is not closed.
10. The compliance officer shall confidentially maintain a list of such securities
as a “restricted list” which shall be used as the basis for approving or
rejecting applications for preclearance of trades.
11. Prior to approving any trades, the compliance officer shall be entitled to
seek declarations to the effect that the applicant for pre-clearance is not in

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possession of any unpublished price sensitive information. He shall also


have regard to whether any such declaration is reasonably capable of being
rendered inaccurate.
12. The code of conduct shall specify any reasonable timeframe, which in any
event shall not be more than seven trading days, within which trades that
have been pre-cleared have to be executed by the designated person, failing
which fresh pre-clearance would be needed for the trades to be executed.
13. The code of conduct shall specify the period, which in any event shall not
be less than six months, within which a designated person who is permitted
to trade shall not execute a contra trade. The compliance officer may be
empowered to grant relaxation from strict application of such restriction for
reasons to be recorded in writing provided that such relaxation does not
violate these regulations. Should a contra trade be executed, inadvertently or
otherwise, in violation of such a restriction, the profits from such trade shall be liable to be
disgorged for remittance to SEBI for credit to the Investor Protection and Education Fund
administered by SEBI under the Act.
14. Designated persons shall be required to disclose names and Permanent Account Number or any
other identifier authorized by law of the following persons to the company on an annual basis
and as and when the information changes:
a) immediate relatives
b) persons with whom such designated person(s) shares a material financial relationship
c) Phone, mobile and cell numbers which are used by them.
d) the names of educational institutions from which designated persons have graduated and names
of their past employers shall also be disclosed on a one time basis.
Explanation - The term “material financial relationship” shall mean a relationship in which one
person is a recipient of any kind of payment such as by way of a loan or gift during the
immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income
but shall exclude relationships in which the payment is based on arm’s length transactions.

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ALLOWING OFFER FOR SALE (OFS) AND RIGHTS ENTITLEMENTS (RE) TRANSACTIONS
DURING TRADING WINDOW CLOSURE PERIOD
It has been decided that trading window restrictions shall not apply in respect of OFS and RE
transactions carried out in accordance with the framework specified by the Board.

REPORTING TO STOCK EXCHANGES REGARDING VIOLATIONS RELATING TO THE CODE OF


CONDUCT (COC)
The listed companies, intermediaries and fiduciaries shall promptly inform the Stock
Exchange(s) where the concerned securities are traded, regarding violations relating to CoC
under PIT Regulations in such modified form and manner as may be specified by the Board.

PENALTY FOR INSIDER TRADING UNDER SECTION 15G OF SEBI ACT

If any Insider who either on his own behalf or on behalf of any other person, deals in securities
of a body corporate listed on any stock exchange on the basis of any unpublished price
sensitive information; or communicates any unpublished price sensitive information to any
person, he shall be liable to a penalty, which shall not be less than ten lakh rupees but which
may extend to twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher.

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Violation of the provisions of these regulations attract huge monetary penalty and may lead to
criminal prosecution. However those aggrieved by an order of SEBI, may prefer an appeal to
the Securities Appellate Tribunal within a period of forty-five days of the order.

AMOUNT REMITTED TO INVESTOR PROTECTION AND EDUCATION FUND (IPEF)


Any amount collected by the listed companies, intermediaries and fiduciaries for violation(s)
of CoC shall be remitted to the Board for credit to the Investor Protection and Education Fund
(IPEF) administered by the Board under SEBI Act, 1992.

Such amounts shall be credited to the IPEF through the online mode or by way of a demand
draft (DD) in favour of the Board (i.e. SEBI – IPEF) payable at Mumbai.

ROLE OF COMPANY SECRETARY IN COMPLIANCE REQUIREMENTS

 The Company Secretary shall act as Compliance Officer and ensure


compliance with SEBI (Prohibition of insider Trading) Regulations, 2015
including maintenance of various documents.
 To frame a code of fair disclosure and conduct in line with the model code
specified in the Schedule A of the regulations and get the same approved
by the board of directors of the company.

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 To place before the board the “minimum standards for Code of Conduct”
to regulate, monitor and report trading by insiders as enumerated in the
Schedule B of the regulations.
 To receive initial disclosure from every Promoter, KMP and director or
every person on appointment as KMP or director or becoming a Promoter
 To receive from every Promoter, employee and director, continual
disclosures of the number of securities acquired or disposed of and changes
therein, even if the value of the securities traded, exceeds Rs 10 lakh with
single or series of transaction in any calendar quarter in prescribed form.
 To ensure that no trading shall between 20th day prior to closure of
financial period and 2nd trading day after disclosure of financial results.
 The compliance officer shall approve the trading plan and after the approval of the trading
plan, the compliance officer shall notify the plan to the stock exchanges on which the
securities are listed.
 The Compliance Officer shall maintain records of all the declarations given
by the directors/designated employees/partners in the appropriate form for
a minimum period of three years.

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INFORMANT INCENTIVES AND REWARDS

A new Chapter IIIA has been prescribed under the Regulation for incentive and reward for the
informants who submits to the SEBI a Voluntary Information Disclosure relating to any alleged
violation of insider trading laws that has occurred, in occurring or has a reasonable belief that
it is about to occur. The new provisions prescribes the manner of submitting information,
various forms and procedure for determination of rewards and confidentiality of informants.

INFORMANT

‘Informant’ means an individual(s), who voluntarily submits to the SEBI a Voluntary


Information Disclosure Form relating to an alleged violation of insider trading laws that has
occurred, is occurring or has a reasonable belief that it is about to occur, in a manner provided
under these regulations, regardless of whether such individual(s) satisfies the requirements,
procedures and conditions to qualify for a reward.

SUBMISSION OF ORIGINAL INFORMATION TO THE BOARD [REGULATION 7 (B)]

An Informant shall submit Original Information by furnishing the Voluntary Information


Disclosure Form to the Office of Informant Protection of the SEBI in the format and manner
set out in Schedule D. The Voluntary Information Disclosure Form may be submitted through
informant’s legal representative.

However where the Informant does not submit the Voluntary Information Disclosure Form
through a legal representative, the SEBI may require such Informant to appear in person to
ascertain his/her identity and the veracity of the information so provided.

The legal representative shall,-


i. Verify the identity and contact details of the Informant;
ii. Unless otherwise required by the SEBI, maintain confidentiality of the identity and existence
of the Informant, including the original Voluntary Information Disclosure Form;

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iii. Undertake and certify that he/she,-


(a) Has reviewed the completed and signed Voluntary Information Disclosure Form for completeness
and accuracy and that the information contained therein is true, correct and complete to the
best of his/her knowledge;
(b) Has obtained a irrevocable consent from the Informant to provide to the Board with original
Voluntary Information Disclosure Form whenever required by the SEBI; and
(c) Agrees to be legally obligated to provide the original Voluntary Information Disclosure Form
within seven (7) calendar days of receiving such requests from the SEBI
iv. Submits to the SEBI, the copy of the Voluntary Information Disclosure Form in the manner
provided in Schedule D of these regulations along with a signed certificate as required under
clause (iii).

An Informant shall while submitting the Voluntary Information Disclosure Form shall expunge
such information from the content of the information which could reasonably be expected to
reveal his or her identity and in case where such information cannot be expunged, the Informant
may identify such part of information or any document that the Informant believes could
reasonably be expected to reveal his or her identity.

INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING [REGULATION 9A]

- The Chief Executive Officer, Managing Director or such other analogous person of a listed
company, intermediary or fiduciary shall put in place adequate and effective system of internal
controls to ensure compliance with the requirements given in these regulations to prevent
insider trading. The internal controls shall include the following:
(a) all employees who have access to unpublished price sensitive information are identified as
designated person;
(b) all the unpublished price sensitive information shall be identified and its confidentiality shall
be maintained as per the requirements of these regulations;
(a) adequate restrictions shall be placed on communication or procurement of unpublished price
sensitive information as required by these regulations;

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(c) lists of all employees and other persons with whom unpublished price sensitive information is
shared shall be maintained and confidentiality agreements shall be signed or notice shall be
served to all such employees and persons;
(b) all other relevant requirements specified under these regulations shall be complied with;
(d) periodic process review to evaluate effectiveness of such internal controls.
- The board of directors of every listed company and the board of directors or head(s) of the
organisation of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or
the Managing Director or such other analogous person ensures compliance with these
regulations.
- The Audit Committee of a listed company or other analogous body for intermediary or fiduciary
shall review compliance with the provisions of these regulations at least once in a financial
year and shall verify that the systems for internal control are adequate and are operating
effectively.
- Every listed company shall formulate written policies and procedures for inquiry in case of leak
of unpublished price sensitive information or suspected leak of unpublished price sensitive
information, which shall be approved by board of directors of the company and accordingly
initiate appropriate inquiries on becoming aware of leak of unpublished price sensitive
information or suspected leak of unpublished price sensitive information and inform the Board
promptly of such leaks, inquiries and results of such inquiries.
- The listed company shall have a whistle-blower policy and make employees aware of such policy
to enable employees to report instances of leak of unpublished price sensitive information.
- If an inquiry has been initiated by a listed company in case of leak of unpublished price
sensitive information or suspected leak of unpublished price sensitive information, the relevant
intermediaries and fiduciaries shall co-operate with the listed company in connection with such
inquiry conducted by listed company.

APPEAL TO SECURITIES APPELLATE TRIBUNAL

Violation of the provisions of these regulations attract huge monetary penalty and may lead to
criminal prosecution. However those aggrieved by an order of SEBI, may prefer an appeal to
the Securities Appellate Tribunal within a period of forty-five days of the order.

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CHAPTER 14 – PROHIBITION OF FRAUDULENT AND UNFAIR TRADE


PRACTICES RELATING TO SECURITIES MARKET

SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO


SECURITIES MARKET) REGULATIONS, 2003

Dealing in Securities
Dealing in Securities includes:
(a) an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to
buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any
security by any persons including as principal, agent, or intermediary referred to in section 12
of the SEBI Act;
(b) such acts which may be knowingly designed to influence the decision of investors in securities;
and
(c) any act of providing assistance to carry out the aforementioned acts.

Fraud
Fraud includes any act, expression, omission or concealment committed whether in a deceitful
manner or not by a person or by any other person with his connivance or by his agent while
dealing in securities in order to induce another person or his agent to deal in securities, whether
or not there is any wrongful gain or avoidance of any loss, and shall also include—
(1) a knowing misrepresentation of the truth or concealment of material fact in order that another
person may act to his detriment;
(2) a suggestion as to a fact which is not true by one who does not believe it to be true;
(3) an active concealment of a fact by a person having knowledge or belief of the fact;
(4) a promise made without any intention of performing it;
(5) a representation made in a reckless and careless manner whether it be true or false;
(6) any such act or omission as any other law specifically declares to be fraudulent;
(7) deceptive behaviour by a person depriving another of informed consent or full participation;
(8) a false statement made without reasonable ground for believing it to be true;
(9) the act of an issuer of securities giving out misinformation that affects the market price of
the security, resulting in investors being effectively misled even though they did not rely on
the statement itself or anything derived from it other than the market price

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Exceptions to ‘Fraud’
Regulation 2 (1) (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 provides for certain exceptions to ‘Fraud’ and states that nothing contained
in the clause shall apply to any general comments made in good faith in regard to-
(a) the economic policy of the government
(b) the economic situation of the country
(c) trends in the securities market or
(d) any other matter of a like nature
whether such comments are made in public or in private.

Investigating Authority
“Investigating Authority” means any person authorized by the SEBI to undertake investigation.

PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO THE


SECURITIES MARKET

Prohibition of certain dealings in securities [Regulation 3]:


No person shall directly or indirectly –
(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to
be listed, any manipulative or deceptive device or contrivance in contravention of the provisions
of the SEBI Act or the rules or the regulations;
(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of
securities which are listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which operates or would operate as fraud or
deceit upon any person in connection with any dealing in or issue of securities which are listed
or proposed to be listed on a recognized stock exchange in contravention of the provisions of
the SEBI Act or the rules and the regulations made there under.

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Prohibition of Manipulative, Fraudulent and Unfair Trade Practices [Regulation 4]:


(1) Any act of diversion, mis-utilisation or siphoning off of assets or earnings of a company whose
securities are listed or any concealment of such act or any device, scheme or artifice to
manipulate the books of accounts or financial statement of such a company that would directly
or indirectly manipulate the price of securities of that company shall be and shall always be
deemed to have been considered as manipulative, fraudulent and an unfair trade practice in
the securities market.

(2) Further, any dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair
trade practice if it involves any of the following:—
(a) knowingly indulging in an act which creates false or misleading appearance of trading in the
securities market;
(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to
operate only as a device to inflate, depress or cause fluctuations in the price of such security
for wrongful gain or avoidance of loss;
(c) inducing any person to subscribe to an issue of the securities for fraudulently securing the
minimum subscription to such issue of securities, by advancing or agreeing to advance any
money to any other person or through any other means;
(d) inducing any person for dealing in any securities for artificially inflating, depressing, maintaining
or causing fluctuation in the price of securities through any means including by paying, offering
or agreeing to pay or offer any money or money’s worth, directly or indirectly, to any person;
(e) any act or omission amounting to manipulation of the price of a security including, influencing
or manipulating the reference price or bench mark price of any securities;
(f) knowingly publishing or causing to publish or reporting or causing to report by a person dealing
in securities any information relating to securities, including financial results, financial
statements, mergers and acquisitions, regulatory approvals, which is not true or which he does
not believe to be true prior to or in the course of dealing in securities;
(g) entering into a transaction in securities without intention of performing it or without intention
of change of ownership of such security;
(h) selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities whether in
physical or dematerialized form;

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Provided that if:-


(1) the person selling, dealing in or pledging stolen, counterfeit or fraudulently issued securities
was a holder in due course; or
(2) the stolen, counterfeit or fraudulently issued securities were previously traded on the market
through a bonafide transaction;
(3) such selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities shall not
be considered as a manipulative, fraudulent, or unfair trade practice.
(i) disseminating information or advice through any media, whether physical or digital, which the
disseminator knows to be false or misleading in a reckless or careless manner and which is
designed to, or likely to influence the decision of investors dealing in securities;
(j) a market participant entering into transactions on behalf of client without the knowledge of
or instructions from client or misutilizing or diverting the funds or securities of the client held
in fiduciary capacity;
(k) circular transactions in respect of a security entered into between persons including
intermediaries to artificially provide a false appearance of trading in such security or to inflate,
depress or cause fluctuations in the price of such security;
(l) fraudulent inducement of any person by a market participant to deal in securities with the
objective of enhancing his brokerage or commission or income;
(m) an intermediary predating or otherwise falsifying records including contract notes, client
instructions, balance of securities statement, client account statements;
(n) any order in securities placed by a person, while directly or indirectly in possession of
information that is not publically available, regarding a substantial impending transaction in
that securities, its underlying securities or its derivative;
(o) Knowingly planting false or misleading news which may induce sale or purchase of securities;
(p) mis-selling of securities or services relating to securities market;
Mis-selling means sale of securities or services relating to securities market by any person,
directly or indirectly, by-
- knowingly making a false or misleading statement, or
- knowingly concealing or omitting material facts, or
- knowingly concealing the associated risk, or
- not taking reasonable care to ensure suitability of the securities or service to the buyer.

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(q) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing


to be carried on any collective investment scheme by any person.
ONE PERSON COMPANY (OPC) [SECTION 2(62)]
INVESTIGATION

Power of the SEBI to order investigation [Regulation 5]:


Where the SEBI, the Chairman, the member or the Executive Director (hereinafter referred to
as “appointing authority”) has reasonable ground to believe that—
(a) the transactions in securities are being dealt with in a manner detrimental to the investors or
the securities market in violation of these regulations;
(b) any intermediary or any person associated with the securities market has violated any of the
provisions of the Act or the rules or the regulations,
it may, at any time by order in writing, direct any person (Investigating Authority) specified
in the order to investigate the affairs of such intermediary or persons associated with the
securities market or any other person and to report thereon to the SEBI.

Powers of Investigating Authority [Regulation 6]:


Without prejudice to the powers conferred under the SEBI Act, the Investigating Authority shall
have the following powers for the conduct of investigation, namely:—
(1) to call for information or records from any person;
(2) 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 in section 12 of the
Act) which intends to get its securities listed on any recognized stock exchange where the
Investigating Authority has reasonable grounds to believe that such company has been
conducting its activities in violation of these regulations;
(3) to 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 him in this behalf as he 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 the investigation;

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(4) to keep in his custody any books, registers, other documents and record produced for a
maximum period of six months. However, the Investigating Authority may call for any book,
register, other document or record if the same is needed again. Further, if the person on whose
behalf the books, registers, other documents and record are produced requires certified copies
of the books, registers, other documents and record produced before the Investigating
Authority, he 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) to examine orally and to record the statement of the person concerned or any director, partner,
member or employee of such person and to take notes of such oral examination to be used
as an evidence against such person. However, the said notes shall be read over to, or by, and
signed by, the person so examined;
(6) to examine on oath any manager, managing director, officer or 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 him personally;
(7) to call for information and record from any person including 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 are under investigation;
(8) to make an application to the Judge of the designated court in Mumbai as notified by the
Central Government for an order for the seizure of any books, registers, other documents and
record, if in the course of investigation, the Investigating Authority has reasonable ground to
believe that such 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;
(9) to keep in his custody the books, registers, other documents and record seized under these
regulations for such period not later than the conclusion of the investigation as he considers
necessary and thereafter to return the same to the person, 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. However, the Investigating Authority

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may, before returning such books, registers, other documents and record as aforesaid, place
identification marks on them or any part thereof;
(10) every search or seizure made under this regulation shall be carried out in accordance with the
provisions of the Code of Criminal Procedure, 1973 relating to searches or seizures made under
that Code.

Duty to co-operate, etc. [Regulation 8]:


(1) It shall be the duty of every person in respect of whom an investigation has been ordered –
(a) to produce to the Investigating Authority or any person authorized by him such books, accounts
and other documents and record in his custody or control and to furnish such statements and
information as the Investigating Authority or the person so authorized by him may reasonably
require for the purposes of the investigation;
(b) to appear before the Investigating Authority personally when required to do so by him under
regulation 6 to answer any question which is put to him by the Investigating Authority.
(2) Without prejudice to the provisions of the Companies Act, 2013, 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 of the SEBI Act or every person associated with the securities market
to preserve and to produce to the Investigating Authority or any person authorized by him in
this behalf, all the books, registers, other documents and record of, or relating to, the company
or, as the case may be, of or relating to, the intermediary or such person, which are in their
custody or power.
(3) Such person shall—
(a) allow the Investigating Authority or any person authorized by him in this behalf to have access
to the premises occupied by such person at all reasonable times for the purpose of investigation;
(b) extend to the Investigating Authority or any person authorized by him in this behalf reasonable
facilities for examining any books, accounts and other documents in his custody or control
(whether kept manually or in computer or in any other form) reasonably required for the
purposes of the investigation;
(c) provide to such Investigating Authority or any person authorized by him in this behalf any
such books, accounts and records which, in the opinion of the Investigating Authority, are

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relevant to the investigation or, as the case may be, allow the Investigating Authority or any
person authorized by him in this behalf to take computer print-outs thereof.

Submission of report to SEBI [Regulation 9]:


The Investigating Authority shall, on completion of investigation, after taking into account all
relevant facts, submit a report to the appointing authority. However, the Investigating Authority
may submit an interim report pending completion of investigations if he considers necessary.

Enforcement by the SEBI [Regulation 10 and 11]:


If SEBI is satisfied that there is a violation of these regulations and after giving a reasonable
opportunity of hearing to the persons concerned, may issue directions or take action.

Further, the SEBI may, in the interest of investors and securities market, dispense with the
opportunity of predecisional hearing by recording reasons in writing and shall give an opportunity
of post-decisional hearing to the persons concerned as expeditiously as possible.

SEBI may, by an order, for reasons to be recorded in writing, issue or take any of the following
actions or directions, either pending investigation or enquiry or on completion of such
investigation or enquiry, namely:—
(a) suspend the trading of the security found to be or prima facie found to be involved in fraudulent
and unfair trade practice in a recognized stock exchange;
(b) restrain persons from accessing the securities market and prohibit any person associated with
securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self-regulatory organization from holding
such position;
(d) impound and retain the proceeds or securities in respect of any transaction which is in violation
or prima facie in violation of these regulations;
(e) direct any intermediary or any person associated with the securities market in any manner not
to dispose of or alienate an asset forming part of a fraudulent and unfair transaction;
(f) require the person concerned to call upon any of its officers, other employees or representatives
to refrain from dealing in securities in any particular manner;

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(g) prohibit the person concerned from disposing of any of the securities acquired in contravention
of these regulations;
(h) direct the person concerned to dispose of any such securities acquired in contravention of these
regulations, in such manner as the SEBI may deem fit, for restoring the status quo ante.

Any final order passed under sub-regulation (1) shall be put on the website of the SEBI.

Manner of service of summons and notices issued by the SEBI [Regulation 11A]:
(1) A summons or notice issued by the SEBI shall be served on the person through any of the
following modes, namely—
(a) by delivering or tendering it to that person or his duly authorised agent; or
(b) by sending it to the person by fax or electronic mail or electronic instant messaging services
along with electronic mail or by courier or speed post or registered post;

However, the courier or speed post or registered post shall be sent to the address of his place
of residence or his last known place of residence or the place where he carried on, or last
carried on, business or personally works, or last worked, for gain, with acknowledgment due;

Further, a summons or notice sent by fax shall bear a note that the same is being sent by
fax and in case the document contains annexure, the number of pages being sent shall also
be mentioned;

Also, a summons or notice sent through electronic mail or electronic instant messaging services
along with electronic mail shall be digitally signed by the competent authority and bouncing
of the electronic mail shall not constitute valid service.

(2) In case of failure to serve a summons or notice through any one of the modes as mentioned
above, the summons or notice may be affixed on the outer door or some other conspicuous
part of the premises in which the person resides or is known to have last resided, or carried
on business or personally works, or last worked, for gain and a written report thereof shall be
prepared in the presence of two witnesses.

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(3) In case of failure to affix the summons or notice on the outer door as provided under sub-
regulation (2), the summons or notice shall be published in at least two newspapers, one of
which shall be in an English daily newspaper having nationwide circulation and another shall
be in a newspaper having wide circulation published in the language of the region where that
person was last known to have resided or carried on business or personally worked for gain.

SUSPENSION OR CANCELLATION OF REGISTRATION [REGULATION 12]

The SEBI may, without prejudice to any action under the securities laws or directions or
circulars issued thereunder, by an order, for reasons to be recorded in writing, in the interests
of investors and securities market take the following action against an intermediary:
(a) issue a warning or censure;
(b) suspend the registration of the intermediary; or
(c) cancel of the registration of the intermediary.

However, no final order of suspension or cancellation of an intermediary for violation of these


regulations shall be passed unless the procedure specified applicable to such intermediary under
the SEBI [(Intermediaries) Regulations, 2008] is complied with.

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CHAPTER 15 - DELISTING OF EQUITY SHARES

Delisting denotes removal of the listing of the securities of a listed company from the Stock
Exchange. Delisting differs from suspension or withdrawal of admission to dealings of listed
securities, which is for a limited period.

‘Suspension’ of trading in securities means that no trade can take place in the securities of
the company suspended for a temporary period. Suspension is not done at the instance of
company but it is action taken by the Stock Exchanges against the company, generally for
non-compliance of listing conditions.

‘Delisting’ of securities means removal of the name of the company from the stock exchange
and no trade can take place in the securities of the company delisted. Delisting of securities
can be done either by company voluntarily or by the stock exchange, compulsorily.

Delisting of securities may be of two types, namely, voluntary delisting and compulsory delisting.
In the case of voluntary delisting, a listed company seeks of its own volition for the delisting
of its securities; while in case of compulsory delisting, the Stock Exchange itself delists the
securities of such Company.

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VOLUNTARY DELISTING

In voluntary delisting, a listed company decides on its own to permanently remove its securities
from a stock exchange. SEBI (Delisting of Shares) Regulations 2009 gives an option to the
listed company to either get itself delisted from all the recognised stock exchanges where it is
listed or only from some of the few stock exchanges and continue to be listed on the
exchange(s) having nation wide terminals.

The difference between two options is that of giving ‘exit opportunity’ to the shareholders.

- No exit opportunity required to be given: In this option, if after the proposed delisting from
any one or more recognised stock exchanges, the equity shares still remain listed on any
recognised stock exchange which has nation-wide trading terminals, no exit opportunity
needs to be given to the public shareholders.

- Exit opportunity must be given: This option requires that if after the proposed
delisting, the equity shares do not remain listed on any recognised stock exchange having
nation-wide trading terminals, exit opportunity shall be given to all the public shareholders.

DELISTING FROM All THE STOCK EXCHANGES EXCEPT ONE

A company may delist its equity shares from one or more stock exchanges where they are
listed and continue their listing on other stock exchanges, if after the proposed delisting the
equity shares would:
(i) Remain listed on any recognized stock exchange which has nationwide trading terminals,
no exit opportunity needs to be given to the public shareholders; and
(ii) Not remain listed on any recognized stock exchange having nationwide trading terminals, exit
opportunity shall be given to all the public shareholders holding the equity shares sought to be
delisted.

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PROCEDURE FOR DELISTING FROM ALL THE STOCK EXCHANGES EXCEPT ONE

(i) The Company shall obtain approval from the Board of Directors with regard to delisting of
equity shares from one or more stock exchanges.
(ii) Thereafter, the company shall give a public notice of the proposed delisting in at least one
English national daily with wide circulation, one Hindi national daily with wide circulation and
one regional language newspaper of the region where the concerned stock exchanges are located.
(iii) The Company shall make an application to the stock exchange for delisting of shares.
(iv) Concerned Stock Exchange shall dispose the application within 30 working days from the date
of receipt of complete application.

DELISTING FROM ALL STOCK EXCHANGES

CONDITIONS AND PROCEDURE FOR DELISTING WHERE EXIT OPPORTUNITY IS REQUIRED


Regulation 7 provides that the equity shares of a company may be delisted from all the
recognised stock exchanges having nationwide trading terminals on which they are listed, after
an exit opportunity has been provided by the acquirer.

Initial public announcement (Regulation 8)


On the date when the acquirer decides to voluntarily delist the equity shares of the company,
it shall make an initial public announcement to all the stock exchanges on which the shares
of the company are listed and the stock exchanges shall forthwith disseminate the same to
the public.

A copy of the initial public announcement shall also be sent to the company at its registered
office not later than one working day from the date of the initial public announcement.

Appointment of the manager to the offer (Regulation 9)


Prior to making an initial public announcement, the acquirer shall appoint a merchant banker
registered with the SEBI as the Manager to the offer. The Manager to the offer shall not be
an associate of the acquirer.

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Obligation of the manager to the offer (Regulation 29)


Before making the detailed public announcement, the Manager to the offer for delisting of
equity shares shall ensure that, —
- the acquirer is able to implement the delisting offer.
- firm arrangements for funds through verifiable means have been made by the acquirer to meet
the payment obligations under the delisting offer.
- the contents of the initial public announcement, the detailed public announcement, the letter
of offer and the post-bidding advertisement(s) are complete, true, fair and adequate in all
material aspects.
- market intermediaries are registered with the SEBI.
- the Manager to the offer shall exercise due diligence, care and professional judgment to ensure
compliance with these regulations.
- the Manager to the offer shall not, either directly or indirectly through its associates, deal in
its own account in the shares of the company after its appointment as Manager to the offer
till the conclusion of the delisting offer.
- the Manager to the offer to ensure that the acquirer complies with the provisions of these
regulations.

Approval by the Board of Directors (Regulation 10)


The company shall obtain the approval of its Board of Directors in respect of the proposal, not
later than twenty one days from the date of the initial public announcement.

The Board of Directors of the company, while considering the proposal for delisting, shall certify
that—
(a) the company is in compliance with the applicable provisions of securities laws;
(b) the acquirer and its related entities are in compliance with the applicable provisions of securities
laws;
(c) the delisting is in the interest of the shareholders of the company.

While communicating the decision of the Board of Directors on the proposal for delisting of
equity shares, the company shall also submit to the recognized stock exchanges on which the

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equity shares of the company are listed, the due - diligence report of the Company Secretary
and the audit report under SEBI (Depositories and Participants) Regulations, 2018.

Upon receipt of the above mentioned communication, the stock exchanges shall forthwith
disseminate the same to the public.

Appointment of peer reviewer Company Secretary to carry out the Due-Diligence


The Board of Directors of the company, before considering the proposal of delisting, shall
appoint a Peer Reviewer Company Secretary and provide the following information to such
Company Secretary for carrying out due-diligence: -
(a) the details of buying, selling and dealing in the equity shares of the company by the acquirer
or its related entities during the period of two years prior to the date of board meeting held
to consider the proposal for delisting, including the details of the top twenty five shareholders,
for the said period;
(b) the details of off-market transactions of all the shareholders mentioned in clause (a) for a
period of two years;
(c) additional information, if any. Company Secretary is of the opinion that the information provided
under clauses (a) and (b) is not sufficient for providing the certification.

After obtaining the information from the Board of Directors, the Company Secretary shall carry
out the due-diligence and submit a report to the Board of Directors of the company certifying
that the buying, selling and dealing in the equity shares of the company carried out by the
acquirer or its related entities and the top twenty five shareholders is in compliance with the
applicable provisions of securities laws including these regulations.

Approval by shareholders (Regulation 11)


The company shall obtain the approval of the shareholders through a special resolution, not
later than forty five days from the date of obtaining the approval of Board of Directors. The
special resolution shall be passed through postal ballot and / or e-voting as per the applicable
provisions of the Companies Act, 2013.

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In-principle approval of the stock exchange (Regulation 12)


The company shall make an application to the relevant recognised stock exchange for in-
principle approval of the proposed delisting of its equity shares in the Form specified, not later
than fifteen working days from the date of passing of the special resolution or receipt of any
other statutory or regulatory approval, whichever is later.

The application seeking in-principle approval for the delisting of equity shares shall be
accompanied by an audit report as required under regulation 76 of the SEBI (Depositories and
Participants) Regulations, 2018 in respect of the equity shares sought to be delisted, covering
a period of six months prior to the date of the application.

Such application seeking in-principle approval for the delisting of the equity shares shall be
disposed of by the recognised stock exchange within a period not exceeding, fifteen working
days from the date of receipt of such application that is complete in all respects.

Escrow account (Regulation 14)


The acquirer shall open an interest bearing escrow account with a Scheduled Commercial Bank,
not later than seven working days from the date of obtaining the shareholders’ approval, and
deposit therein an amount equivalent to twenty five percent of the total consideration,
calculated on the basis of the number of equity shares outstanding with the public shareholders
multiplied with the floor price or the indicative price, if any given by the acquirer in terms of
these regulations, whichever is higher.

Before making the detailed public announcement, the acquirer shall deposit in the escrow
account, the remaining consideration amount being seventy five percent calculated on the basis
of the number of equity shares outstanding with the public shareholders multiplied with the
floor price or the indicative price, if any given by the acquirer in terms of these regulations,
whichever is higher.

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On determination of the discovered price and making of the public announcement accepting
the discovered price, the acquirer shall forthwith deposit in the escrow account such additional
sum as may be sufficient to make up the entire sum due and payable as consideration in
respect of equity shares outstanding with the public shareholders.

In case of failure of the delisting offer, ninety nine percent of the amount lying in the escrow
account shall be released to the acquirer within one working day from the date of public
announcement of such failure. The remaining one percent amount lying in the escrow account
shall be released post return of the shares to the public shareholders or confirmation of
revocation of lien marked on their shares by the Manager to the offer as per the timelines
provided in these regulations.

Detailed public announcement (Regulation 15)


The acquirer shall, within one working day from the date of receipt of in-principle approval for
delisting of equity shares from the recognised stock exchange, make a detailed public
announcement in at least one English national newspaper with wide circulation, one Hindi
national newspaper with wide circulation in their all India editions and one vernacular newspaper
of the region where the relevant recognised stock exchange is located.

The detailed public announcement shall also specify a date, being a day not later than one
working day from the date of the detailed public announcement, which shall be the ‘specified
date’ for determining the names of the shareholders to whom the letter of offer shall be sent.

Letter of offer (Regulation 16)


The acquirer shall dispatch the letter of offer to the public shareholders not later than two
working days from the date of the detailed public announcement made. The letter of offer
shall be sent to all public shareholders, holding equity shares of the class sought to be delisted,
whose names appear on the register of the company or depository as on the date specified in
the detailed public announcement.

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Bidding mechanism (Regulation 17)


The bidding period shall start not later than seven working days from the date of the detailed
public announcement and shall remain open for five working days. The acquirer shall facilitate
tendering of shares by the shareholders and settlement of the same, through the stock
exchange mechanism as specified by the SEBI.

The Manager to the offer shall ensure that the outcome of the reverse book building process
is announced within two hours of the closure of the bidding period. Within two working days
from the closure of the bidding period, the acquirer shall, through the Manager to the offer,
make a public announcement in the same newspapers in which the detailed public
announcement was made, disclosing the success or failure of the reverse book building process,
along with the discovered price accepted by the acquirer in the event of success of the said
process.

Manner of tendering shares (Regulation 18)


The equity shares shall be tendered/offered by the public shareholders, including by way of
marking a lien through the stock exchange mechanism, in the manner specified by the SEBI.

Right of shareholders to participate in the reverse book building process (Regulation 19)
Public shareholders holding the equity shares of the company, which are sought to be delisted,
shall be entitled to participate in the reverse book building process in the manner specified
in Schedule II of these regulations.

Any holder of depository receipts issued on the basis of underlying equity shares and a custodian
keeping custody of such equity shares shall not be entitled to participate in the reverse book
building process.

However, any holder of depository receipts may participate in the reverse book building process
after converting such depository receipts into equity shares of the company that are proposed
to be delisted.

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Discovered price (Regulation 20)


The floor price shall be determined in terms of regulation 8 of Takeover Regulations as may
be applicable.

After fixation of the floor price, the discovered price shall be determined through the reverse
book building process in the manner specified in Schedule II of these regulations, and the
Manager to the offer shall disclose the same in the detailed public announcement and the
letter of offer.

The acquirer shall have the option to provide an indicative price in respect of the delisting
offer, which shall be higher than the floor price. The acquirer shall also have the option to
revise the indicative price upwards before the start of the bidding period and the same shall
be duly disclosed to the shareholders.

The acquirer may, if it deems fit, pay a price higher than the discovered price.

Minimum number of equity shares to be acquired (Regulation 21)


An offer made or a counter offer made by the acquirer, as the case may be, shall be deemed
to be successful if the post offer promoter shareholding (along with the persons acting in
concert with the promoter) taken together with the shares accepted through eligible bids at
the final price determined, reaches 90% of the total issued shares of that class excluding the
following:
(i) shares which are held by a custodian and against which depository receipts have been issued
overseas; and
(ii) shares held by a Trust set up for implementing an Employee Benefit Scheme under the
Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014;
(iii) shares held by inactive shareholders such as vanishing companies and struck off companies,
shares transferred to the Investor Education and Protection Fund’s account and shares held
in terms of regulation 39 (4) read with Schedule VI of the SEBI (LODR) Regulations 2015.

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However, such shareholders shall be certified by the Peer Review Company Secretary appointed
by the Board of Directors of the company for due-diligence.

Explanation— The cut-off date for determination of inactive shareholders shall be the date on
which the in-principle approval of the Stock Exchange is received, which shall be adequately
disclosed in the public announcement.

Option to accept or reject the discovered price or counter offer (Regulation 22)
The acquirer shall be bound to accept the equity shares tendered or offered in the delisting
offer, if the discovered price determined through the reverse book building process is equal to
the floor price or the indicative price, if any, offered by the acquirer.

The acquirer shall be bound to accept the equity shares, at the indicative price, if any offered
by the acquirer, even if the price determined through the reverse book building process is higher
than the floor price but less than the indicative price.

However, the abovementioned provisions shall not apply if the discovered price is higher than
the indicative price.

In case the discovered price is not acceptable to the acquirer, a counter offer may be made by
the acquirer to the public shareholders within two working days of the closure of bidding period
and thereafter, the acquirer shall ensure compliance with the provisions of these regulations in
accordance with the timelines provided in Schedule IV.

Failure of offer (Regulation 23)


The delisting offer shall be considered to have failed
- if the minimum number of shares are not tendered/offered.
- if the price discovered through the reverse book building process is rejected by the acquirer.

1) Where the delisting offer fails, the equity shares tendered / offered as the case may be, shall
be released on the date of disclosure of the outcome of the reverse book building process if

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the minimum number of shares are not tendered / offered. On the date of making public
announcement for the failure of the delisting offer if the price discovered through the reverse
book building process is rejected by the acquirer; in accordance with Schedule IV of these
regulations if a counter offer has been made by the acquirer.

However, the acquirer shall not be required to return the shares if the offer is made pursuant
to regulation 5A of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011.

2) Where the delisting offer fails-


The expenses relating to the offer for delisting shall be borne by the acquirer. The acquirer,
whose delisting offer has failed, shall not make another delisting offer until the expiry of six
months

Payment upon success of the offer (Regulation 24)


All the public shareholders, whose bids are accepted, shall be paid the discovered price or a
higher price, if any, offered by the acquirer, as stated in the public announcement in the
following manner -
(i) In case the discovered price is equal to the floor price or the indicative price or in case the
acquirer is bound to accept the equity shares in the delisting offer, the payment shall be made
through the secondary market settlement mechanism;
(ii) In case the discovered price or the price, if any, offered by the acquirer, is higher than the
floor price or the indicative price, as the case may be, the payment shall be made within five
working days from the date of the public announcement.

The acquirer shall be liable to pay interest at the rate of ten percent per annum to all the
shareholders, whose bids have been accepted in the delisting offer, if the price payable is not
paid to all the shareholders within the time specified thereunder.

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However, in case the delay was not attributable to any act or omission of the acquirer or was
caused due to the circumstances beyond the control of the acquirer, the SEBI may grant waiver
from the payment of such interest.

Final application to the stock exchange after successful delisting (Regulation 25)
Within 5 working days from the date of making the payment to the public shareholders, the
acquirer shall make the final application for delisting to the relevant recognised stock exchange
in the Form specified by such stock exchange from time to time.

The final application for delisting shall be accompanied with necessary details / information,
as the recognised stock exchange may require, of having provided the exit opportunity.

The final application for delisting shall be disposed of by the recognised stock exchange within
15 working days from the date of receipt of such application that is complete in all respects.
Upon disposal of the final application for delisting by the stock exchange, the equity shares of
the company shall be permanently delisted from the stock exchange.

Right of the remaining public shareholders to tender equity shares (Regulation 26)
The remaining public shareholders, whose shares were either not accepted or were not tendered
at all during the bidding period, shall have a right to tender their equity shares for a minimum
period of 1 year from the date of delisting.

The acquirer shall be under an obligation during such period to accept the shares of the
remaining public shareholders, at the same price at which the equity shares had been delisted.

The payment of consideration for equity shares accepted shall be made out of the balance
amount lying in the escrow account.

The Manager to the offer shall ensure that the amount lying in the escrow account or the
bank guarantee shall not be released to the acquirer for a minimum period of one year or till
the time payment has been made to the remaining public shareholders, whichever is earlier.

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Cancellation of outstanding depository receipts (Regulation 31)


After delisting of equity shares from all the recognized stock exchanges having nationwide
trading terminals, the company shall be required to compulsorily cancel all the outstanding
depository receipts issued overseas and change them into the underlying equity shares in the
home jurisdiction after termination of the depository receipts program(s), within 1 year of such
delisting.

OBLIGATIONS OF THE COMPANY (REGULATION 28)

- Upon receipt of the detailed public announcement, the Board of Directors of the company shall
constitute a Committee of independent directors to provide reasoned recommendations on the
delisting offer.

- The Committee of independent directors shall provide its written reasoned recommendations
on the proposal for delisting of equity shares to the Board of Directors of the company and in
relation thereto, the Committee may also seek external professional advice at the expense of
the company.

- The Committee of independent directors, while providing reasoned recommendations on the


delisting proposal, shall disclose the voting pattern of the meeting in which the said proposal
was discussed.

- The company shall publish such recommendations of the Committee of independent directors,
along with the details of the voting pattern, at least 2 working days before the commencement
of the bidding period, in the same newspapers in which the detailed public announcement of
the offer for delisting of equity shares was published, and simultaneously, a copy of the same
shall be sent to the stock exchange(s) and the Manager to the offer.

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OBLIGATIONS OF THE ACQUIRER (REGULATION 30)


- Prior to making the initial public announcement of the offer for the delisting of equity shares,
the acquirer shall ensure that firm financial arrangements have been made for fulfilling the
payment obligations under the delisting offer and that the acquirer is able to implement the
delisting offer, subject to any statutory approvals for the delisting offer that may be necessary.

- The acquirer shall ensure that the contents of the initial public announcement, the detailed
public announcement, the letter of offer and announcement about success or failure of the
offer for delisting are true, fair and adequate in all material aspects, not misleading and based
on reliable sources that shall be mentioned wherever necessary.

- The acquirer and the persons acting in concert with it shall be jointly and severally responsible
for the fulfilment of the applicable obligations under these regulations.

- The acquirer shall ensure to acquire the shares offered by the remaining public shareholders at
the same price at which the equity shares had been delisted for a minimum period of one year.

- No acquirer or persons acting in concert with it shall sell shares of the company during the
delisting period.

COMPULSORY DELISTING

Compulsory delisting refers to permanent removal of securities of a listed company from a


stock exchange as a penalizing measure by the stock exchange for not making
submissions/comply with various requirements in the Listing agreement within the time frames
prescribed.

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CONSTITUTION OF A PANEL

The decision regarding compulsory delisting shall be taken by a panel to be constituted by the
recognized stock exchange consisting of -
a. Two directors of the recognized stock exchange (one of whom shall be a public representative);
b. One representative of the investors;
c. One representative of the Ministry of Corporate Affairs or Registrar of Companies;
d. The Executive Director or Secretary of the recognized stock exchange.

PROCEDURE FOR COMPULSORY DELISTING

- Constitution of Panel by Recognised stock exchange to take decision regarding


the compulsory delisting by the exchange.
- Public notice of compulsory delisting by recognized stock exchange in one English and one
regional language newspaper of the region where the concerned recognized stock exchange is
located.
- Within 15 days, representation by the any person who may be aggrieved by the proposed
delisting.
- Delisting order by the recognized stock exchange.
- Public notice after delisting order by recognized stock exchange in one English and regional
language newspaper of the region where the concerned recognized stock exchanges is located
and information to all the stock exchanges where the shares of the company listed and also
on its trading systems and website.
- Appointment of independent Valuer
- Determination of the fair value of shares by the independent valuers appointed by the
recognized stock exchange.
- Acquisition of shares by the promoters at determined fair value.
- Company Promoters/PAC/ Directors can neither access securities market nor
seek listing for a period of 10 years.

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DELISTING OF SMALL COMPANIES

Equity shares of a company may be delisted from all the recognised stock exchanges
where they are listed, if:
(i) If a company has paid - up capital not exceeding Rs.10 crores and Net Worth not exceeding
25 Crores as on the last date of preceding year and
(ii) the number of equity shares of the company traded on each such recognised stock exchange
during the twelve calendar months immediately preceding the date of board meeting
is less than ten per cent of the total number of shares of such company.
(iii) the company has not been suspended by any of the recognised stock exchanges having
nationwide trading terminals for any non-compliance in the preceding one year
(iv) at least ninety per cent. of such public shareholders give their positive consent in
writing to the proposal for delisting, and have consented either to sell their equity
shares at the price offered by the promoter or to remain holders of the equity shares
even if they are delisted.
(v) the promoter writes individually to all public shareholders in the company informing
them of his intention to get the equity shares delisted, indicating the exit price
together with then justification therefore and seeking their consent for the
proposal for delisting.
(vi) the promoter completes the process of inviting the positive consent and finalization of the
proposal for delisting of equity shares within seventy five working days of the first
communication.
(vii) the promoter makes payment of consideration in cash within fifteen working days from the
date of expiry of seventy five working days.

DELISTING OF EQUITY SHARES OF COMPANIES LISTED ON INNOVATORS GROWTH


PLATFORM AFTER MAKING AN INITIAL PUBLIC OFFER (REGULATION 36)

A company whose equity shares are listed and traded on the innovators growth platform
pursuant to an initial public offer may be delisted from the innovators growth platform, if –
(a) such delisting is approved by the Board of Directors of the company;

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(b) such delisting is approved by the shareholders of the company by a special resolution passed
through postal ballot or e-voting. However, the special resolution shall be acted upon only if
the votes cast by the majority of public shareholders are in favour of such exit proposal;
(c) delisting price is based on a floor price determined in terms of regulation 8 of Takeover
Regulations, as may be applicable, and an additional delisting premium justified by the acquirer;
(d) the post offer shareholding of the acquirer along with the persons acting in concert with it,
taken together with the shares tendered reaches seventy five per cent of the total issued
shares of that class and at least fifty per cent shares of the public shareholders as on date
of the board meeting are tendered and accepted; and
(e) the recognised stock exchange, on which its shares are listed, approves of such delisting.

DELISTING IN CASE OF WINDING UP OF A COMPANY AND DE-RECOGNITION OF A STOCK


EXCHANGE
In case of winding up proceedings of a company whose equity shares are listed on a recognised
stock exchange, the rights, if any, of the shareholders of such company shall be in accordance
with the laws applicable to those proceedings. Where the SEBI withdraws recognition granted
to a stock exchange or refuses renewal of recognition to it, the SEBI may, in the interest of
investors pass appropriate order in respect of the status of equity shares of the companies
listed on that stock exchange.

Question:
The equity Shares of XYZ limited have been delisted from the stock exchange. When can
an application be made for listing of equity sahres of XYZ limited?

Answer:
No application for listing shall be made in respect of equity shares of a company which have
been delisted under Chapter III (Voluntary Delisting) or under Chapter VI (Exit Opportunity in
case delisting of equity shares of a company from all the recognised stock exchanges), for a
period of 3 years from the delisting and which have been delisted under Chapter V (Compulsory
Delisting), for a period of 10 years from the delisting, except the following:

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(a) whose equity shares have been delisted pursuant to a resolution plan under section 31 of the
Insolvency Code;
(b) whose equity shares are listed and traded on the innovators growth platform pursuant to an
initial public offer and which is delisted from the said platform;
(c) whose equity shares have been delisted in terms of regulation 35 (Delisting of equity shares
of small companies).

NON APPLICABILITY OF REGULATIONS

These regulation shall not be applicable to :-


- securities listed without making a public issue, on the institutional trading platform of a
recognised stock exchange;
- under a scheme sanctioned by the Board for Industrial and Financial Reconstruction under the
Sick Industrial Companies (Special Provisions) Act, 1985 or by the National Company Law
Tribunal under section 262 of the Companies Act, 2013;
- to any delisting of equity shares of a listed entity made pursuant to a resolution plan approved
under Insolvency and Bankruptcy Code, 2016.
Provided that, exit to the shareholders should be at a price which shall not be less than the
liquidation value as determined under Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016 after paying off dues in the order
of priority.

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CHAPTER 16 - BUY BACK OF SECURITIES

MEANING

Buy back of securities means the company buys its own shares and extinguishes the same
before the name of the company is entered in its register of members.

OBJECTIVES OF BUY BACK

- to improve earnings per share;


- to improve return on capital;
- to provide an additional exit route to shareholders when shares are under-valued or are thinly
traded;
- to enhance consolidation of stake in the company;
- to prevent unwelcome takeover bids;
- to return surplus cash to shareholders;
- to support share price during periods of sluggish market conditions; and
- to service the equity more efficient.

SOURCES OF BUY BACK


A company may purchase its own securities out of:
i) its free reserves; or
ii) the securities premium account; or
iii) the proceeds of any shares or other specified securities.

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AUTHORITY

1. Buy back of securities shall be primarily authorised by the articles of association of the
company.
2. Buy-back can be made with the approval of the Board of directors at a board meeting and/or
by a special resolution passed by shareholders in a general meeting, depending on the quantum
of buy back.
3. In case of a listed company, approval of shareholders shall be obtained only by postal ballot.

QUANTUM OF BUY BACK

Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free
reserves of the company.

Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up
capital and free reserves of the company. However, in case of buy back of equity shares the
limit of 25% of paid up capital shall be construed as 25% of equity paid up capital.

In respect of any financial year, the shareholders can approve buy back by special resolution
upto 25% of total paid up equity share capital in that year.

For the purposes of these regulations, the term “shares” shall include equity shares having
superior voting rights.

Illustration: Extract of Balance Sheet of X Ltd consist of:


Equity Share Capital - Rs. 6,00,000 of Rs. 10 each
12% Preference Share Capital - Rs. 100,000 of Rs. 100 each 14% Debenture Capital - Rs.
300,000 of Rs. 100
What is the maximum equity share capital and number of equity shares that can be bought
back?

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Solution:
(i) Maximum equity share capital that can be bought back
= Rs. 600000*25%
= Rs. 1,50,000

(ii) Maximum number of equity shares that can be bought back


=Rs. 1,50,000/10
= 15000 equity shares

CONDITIONS FOR BUY BACK

1. The ratio of the aggregate of secured and unsecured debts owed by the company to the paid-
up capital and free reserves after buy-back shall,-
a) be less than or equal to 2:1, based on both standalone and consolidated financial statements
of the company. However if a higher ratio of the debt to capital and free reserves for the
company has been notified under the Companies Act, 2013, the same shall prevail; or
b) be less than or equal to 2:1, based on both standalone and consolidated financial statements
of the company, after excluding financial statements of all subsidiaries that are non-banking
financial companies and housing finance companies regulated by Reserve Bank of India or
National Housing Bank. However buy-back of securities shall be permitted only if all such
excluded subsidiaries have their ratio of aggregate of secured and unsecured debts to the paid-
up capital and free reserves of not more than 6:1 on standalone basis.
2. Securities bought back shall only be fully paid securities.
3. A declaration of solvency signed by at least two directors of the company, one of whom shall
be the managing director, if any, in Form No. SH.9 and verified by an affidavit to the effect
that the Board of Directors of the company has made a full inquiry into the affairs of the
company as a result of which they have formed an opinion that it is capable of meeting its
liabilities and will not be rendered insolvent within a period of one year from the date of
declaration adopted by the Board.

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FILING OF LETTER OF OFFER

1. The company which has been authorized by a special resolution shall, before the buy-back of
shares, file with the Registrar of Companies a letter of offer in Form No SH 8, along with the
fee as prescribed.
2. Such letter of offer shall be dated and signed on behalf of the Board of directors of the
company by not less than two directors of the company, one of whom shall be the managing
director, where there is one.

DISPATCH OF LETTER OF OFFER

The letter of offer shall be dispatched to the shareholders or security holders immediately after
filing the same with the Registrar of Companies but not later than 21 days from its filing with
the Registrar of Companies.

TIME PERIOD FOR BUY BACK OFFER

1. The offer for buy-back shall remain open for a period of minimum period of 15 days and for a
maximum period of 30 days from the date of dispatch of the letter of offer.
2. Buy back shall be completed within a period of one year from the date of its approval the
shareholders or board of directors of the company, as the case may be.
3. Where all members of a company agree, the offer for buy-back may remain open for a period
less than fifteen days.

METHODS OF BUY BACK

a) from the existing shareholders or security holders on a proportionate basis;


b) from the open market;
c) from odd-lot holders

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EXTINGUISHMENT OF SECURITIES BOUGHT BACK

Securities bought back shall be extinguished within a period of 7 days from the date of
completion of buy back.

PROHIBITION ON FURTHER ISSUE OF SECURITIES

Once the securities are bought back, it shall not issue securities of the same kind within 6
months except by way of bonus issue.

REGISTER OF BUY BACK

When a company buys back its securities, it shall maintain a register of securities, the
consideration paid for the shares or securities bought back, the date of cancellation of shares
or securities, the date of extinguishing and physically destroying the shares or securities and
such other particulars as may be prescribed. It shall be maintained in Form SH 10.

RETURN OF BUY BACK

A company shall, file with the Registrar and SEBI, a return of buy-back within thirty days of
such completion in Form No. SH.11, a certificate in Form No SH.15 signed by two directors of
the company including the managing director.

ADDITIONAL CONDITIONS FOR BUYBACK OF SHARES OR OTHER SECURITIES

A company shall not buy-back its shares or other specified securities :


a) so as to delist its shares or other specified securities from the stock exchange.
b) from any person through negotiated deals, whether on or off the stock exchange or through
spot transactions or through any private arrangement.
c) A company shall not allow buy-back of its shares unless the consequent reduction of its share
capital is affected.

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FEW WORDS TO REMEMBER

Buyback Period:
The period between :
 the date of board of directors resolution; or
 date of declaration of results of the postal ballot for special resolution,
 to authorize buyback of shares of the company and the date on which the payment of
consideration to shareholders who have accepted the buyback offer is made.

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

Tender offer:
An offer by a company to buy-back its own shares or other specified securities through a letter
of offer from the holders of the shares or other specified securities of the company.

PROCEDURE FOR BUY BACK UNDER DIFFERENT METHODS

Buy back from existing security holders through tender offer


(1) A company making a buy-back offer shall announce a record date for determining the
entitlement and the names of the security holders, who are eligible to participate in the
proposed buy-back offer.
(2) The letter of offer along with the tender form shall be dispatched to the security holders, not
later than five working days from the receipt of communication of comments from SEBI.
(3) The date of the opening of the offer shall be not later than five working days from the date
of dispatch of letter of offer.
(4) The acquirer or promoter shall facilitate tendering of shares by the shareholders and settlement
of the same, through the stock exchange mechanism as specified by SEBI.

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(5) The offer for buy back shall remain open for a period of ten working days.
(6) The company shall accept shares or other specified securities from the security holders on the
basis of their entitlement as on record date.

It may be noted that fifteen per cent of the number of securities which the company proposes
to buy-back or number of securities entitled as per their shareholding, whichever is higher,
shall be reserved for small shareholders.

ESCROW ACCOUNT

The company should on or before the opening of the offer, deposit in an escrow account the
sum as follows:
(i) if the consideration payable does not exceed Rs 100 crores - 25 per cent of the consideration
payable;
(ii) if the consideration payable exceeds Rs 100 crores - 25 per cent upto Rs 100 crores and 10
percent thereafter;
The escrow account referred to above shall consist of:
(a) cash deposited with a scheduled commercial bank, or
(b) bank guarantee in favour of the merchant banker, or
(c) deposit of acceptable securities with appropriate margin, with the merchant banker, or
(d) a combination of (a), (b) and (c) above;

PAYMENT TO THE SECURITY HOLDERS

1. The company shall after the date of closure of the offer, open a special account with a SEBI
registered banker to an issue and deposit such sum as, together with the amount lying in the
escrow account make up the entire sum due and payable as consideration for the buy-back
and may transfer the funds from the escrow account.
2. The company shall complete the verifications of offers received and make payment of
consideration to those security holders whose offer has been accepted or return the shares to
the security holders within seven working days of the closure of the offer.

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EXTINGUISHMENT OF BOUGHT BACK SECURITIES

The company shall extinguish and physically destroy the security certificates so bought back
in the presence of a Registrar to issue or the Merchant Banker and the Statutory Auditor
within fifteen days of the date of acceptance of the shares or other specified securities. The
company shall also ensure that all the securities bought-back are extinguished within seven
days of the last date of completion of buy-back.

POINTS TO BE REMEMBERED
- The shares proposed to be bought back shall be divided into two categories;
a) Reserved category for small shareholders; and
b) General category for other shareholders, and the entitlement of a shareholder in each
category shall be calculated accordingly.
- Holdings of multiple demat accounts would be clubbed together for identification of small
shareholder, if sequence of Permanent Account Number for all holders is matching. Similarly,
in case of physical shareholders, if the sequence of names of joint holders is matching, holding
under such folios should be clubbed together for identification of small shareholder.
- After accepting the shares or other specified securities tendered on the basis of entitlement,
shares or other specified securities left to be bought back, if any in one category shall first be
accepted, in proportion to the shares or other specified securities tendered over and above their
entitlement in the offer by securities holders in that category and thereafter from securities
holders who have tendered over and above their entitlement in other category.

CAN UNREGISTERED SHAREHOLDER TENDER HIS SHARES FOR BUYBACK?


Yes, unregistered shareholder may also tender his shares for buy-back by submitting the duly
executed Transfer deed for transfer of shares in his name, along with the offer form and
other relevant documents as required for transfer, if any. Please note that shareholders holding
shares in physical form will not be eligible to tender shares under the offer, unless the shares
held by them are dematerialised.

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BUY BACK FROM OPEN MARKET

Buy-back of shares from the open market may be in any one of the following methods:
(i) Through stock exchange.
(ii) Book-building process.

BUY BACK THROUGH STOCK EXCHANGE

- The special resolution/ board resolution, should specify the maximum price at which the buy-
back will be made;
- The buy-back of securities should not be from the promoters or persons in control of the
company;
- The company should appoint a merchant banker and make a public announcement within 2
working days from the date of passing special resolution;
- Simultaneously with the issue of such public announcement, the company shall file a copy of
the public announcement with SEBI.
- The company shall submit the information regarding the shares bought back, to the stock
exchange on a daily basis and the stock exchange shall upload the same on its official website
immediately;
- The company shall upload the information regarding the shares or other specified securities
bought back on its website on a daily basis;
- The buy-back offer shall open not later than seven working days from the date of public
announcement and shall close within six months from the date of opening of the offer;
- The buy-back should be made only on stock exchanges having Nationwide Trading Terminal
facility and only through the order matching mechanism except ‘all or none’ order matching
system.
- The identity of the company as a purchaser would appear on the electronic screen when the
order is placed.

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BUY BACK THROUGH BOOK BUILDING

1. The special resolution should specify the maximum price at which the buy-back will be made.
2. The company should appoint a merchant banker.
3. A public announcement shall be made at least seven days prior to the commencement of the
buy-back.
4. The deposit in the escrow account should be made before the date of the public announcement.
5. The amount to be deposited in the escrow account should be determined with reference to the
maximum price as specified in the public announcement.
6. A copy of the public announcement must be filed with SEBI within two days of the
announcement.
7. The book-building process should be made through an electronically linked transparent facility.
8. The number of bidding centres should not be less than thirty and there should be at least one
electronically linked computer terminal at all the bidding centres.
9. The offer for buy-back should be kept open to the security-holders for a period of not less
than fifteen days and not exceeding thirty days.
10. The merchant banker and the company should determine the buy-back price based on the
acceptances received and the final buy-back price, which should be the highest price accepted
should be paid to all holders whose securities have been accepted for the buy-back.

ODD-LOT BUY-BACK

The provisions pertaining to buy-back through tender offer as specified above shall be apply
mutatis mutandis to odd-lot shares or other specified securities.

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OBLIGATIONS OF THE COMPANY

The company shall ensure that,—


a) the letter of offer, the public announcement of the offer or any other advertisement, circular,
brochure, publicity material shall contain true, factual and material information and
shall not contain any misleading information and must state that the directors of the
company accept the responsibility for the information contained in such documents;
b) the company shall not issue any shares or other specified securities including by way of bonus
till the date of expiry of buyback period for the offer made under these regulations;
c) the company shall pay the consideration only by way of cash;
d) the company shall not withdraw the offer to buy-back after the draft letter of offer is
filed with SEBI or public announcement of the offer to buy-back is made;
e) the promoter(s) or his/their associates shall not deal in the shares or other specified securities
of the company in the stock exchange or off-market, including inter- se transfer of shares
among the promoters during the period from the date of passing the resolution of the board
of directors or the special resolution, as the case may be, till the closing of the offer.
f) the company shall not raise further capital for a period of one year from the expiry of
buyback period, except in discharge of its subsisting obligations.
g) No public announcement of buy-back shall be made during the pendency of any scheme of
amalgamation or compromise or arrangement pursuant to the provisions of the Companies Act,
2013.
h) The company shall nominate a compliance officer and investors service centre for
compliance with the buy-back regulations and to redress the grievances of the investors.
i) The particulars of the security certificates extinguished and destroyed shall be
furnished by the company to the stock exchanges where the shares or other
specified securities of the company are listed within seven days of extinguishment and
destruction of the certificates.
j) The company shall not buy-back the locked-in shares or other specified securities and non-
transferable shares or other specified securities till the pendency of the lock-in or till the
shares or other specified securities become transferable.

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k) The company shall within two days of expiry of buy-back period issue a public advertisement
in a national daily, disclose details regarding desucirites bought back, amount paid and change
in capital structure:
l) The company in addition to these regulations shall comply with the provisions of buy-back as
contained in the Companies Act and other applicable laws.

OBLIGATIONS OF THE MERCHANT BANKER

The merchant banker shall ensure that—


- the company is able to implement the offer;
- the provision relating to escrow account has been complied with;
- firm arrangements for monies for payment to fulfill the obligations under the offer are
in place;
- the public announcement of buy-back is made in terms of the regulations;
- the letter of offer has been filed in terms of the regulations;
- a due diligence certificate along with the draft letter of offer has been furnished to SEBI;
- the contents of the public announcement of offer as well as the letter of offer are true, fair
and adequate and quoting the source wherever necessary;
- due compliance of sections 68, 69 and 70 of the Companies Act and any other laws or rules
as may be applicable in this regard has been made;
- the bank with whom the escrow or special amount has been deposited releases the balance
amount to the company only upon fulfilment of all obligations by the company under the
regulations;
- a final report is submitted to SEBI in the form specified within fifteen days from the date of
expiry of buyback period

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BUYBACK VIS-A-VIS COMPLIANCE UNDER SEBI (SAST) REGULATIONS, 2011

In case the acquirer’s initial shareholding was more than 25% and the increase in shareholding
due to buyback is beyond the permissible creeping acquisition limit of 5% per financial year,
the acquirer can get an exemption from making an open offer, subject to the following:
- Such acquirer does not vote in favour of the resolution authorising the buy-back of securities
under section 68 of the Companies Act, 2013;
- In the case of a shareholders resolution, voting is by way of a postal ballot;
- The increase in voting rights does not result in an acquisition of control by such an acquirer
over the target company.

In case the above conditions are not fulfilled, the acquirer may, within 90 days from the date
of increase, dilute his stake so that his voting rights fall below the threshold which requires
an open offer.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

SEBI may, in the interest of investors and the securities market, relax the strict enforcement
of any requirement of these regulations except the provisions incorporated from the Companies
Act, if the SEBI is satisfied that:
(a) the requirement is procedural in nature; or
(b) the requirement may cause undue hardship to investors;

For seeking relaxation as above, the company shall file an application with the SEBI, supported
by a duly sworn affidavit, giving details and the grounds on which such relaxation has been
sought. The company shall along with the application, pay a non-refundable fee of rupees fifty
thousand.

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CHAPTER 17 - MUTUAL FUNDS

CONCEPT, DEFINITION AND MEANING OF MUTUAL FUND

A mutual fund works on a very simple concept. It raises money from a lot of small investors,
creates a pool of such funds and then invests the same money in various financial assets. Over
a period of time, any returns generated out of such investments are distributed amongst the
investors. As a token of security, the investors are issued unit certificates. The investors have
the choice to either transfer, retain or redeem these units depending upon the time of fund.

In other words, Mutual Fund means a fund established in the form of a trust to raise money
through sale of units to the public under one or more schemes for investing in securities,
including money market instruments.

The small investors who generally lack expertise to invest on their own in the securities market
prefer some kind of collective investment vehicle like mutual fund, which pool their marginal
resources, invest in securities, and distribute the returns there from among them on cooperative
principles. The investor benefits in terms of reduced risk and higher returns arising from
professional expertise of fund manager employed by the Mutual Fund.

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Initially only UTI was allowed to do the Mutual Fund business. Thereafter, in the year 1987,
public sector banks and insurance companies were also allowed to do this business. Finally, in
the year 1993 the mutual fund industry was opened to the private sector as well as foreign
institutions.

Every mutual fund is required to have an Asset Management Company, a company incorporated
in the Companies Act, 2013, to manage the funds of the mutual fund. The Asset Management
Company should be approved by SEBI and should enter into an agreement with the trustees
of the mutual funds to formulate schemes, raise money against the issue of units, etc.

Trustees of a mutual fund mean the Board of Trustees or the Trustee Company who holds the
property of the mutual fund trust for the benefit of the unit holders.

Mutual fund is always accompanied with a sponsor. Sponsor means any person who, acting
alone or in combination with another body corporate, establishes a mutual fund.

Mutual fund is always accompanied with a Custodian of Securities. Custodian means a person
who has been granted a certificate of registration to carry on the business of custody of
securities under the SEBI (Custodian of Securities) Regulations, 1996.

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ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a mutual fund are:


1. Professional Management: Mutual funds are managed by a team of skilled professionals, who
are expert in their areas. They also have a research team, which constantly analyses the
performance and prospects of companies and selects suitable investments to achieve the
objectives of the scheme.

2. Diversification: There is a very famous proverb in english, it says: “Do not lay all your eggs
in one basket”. Mutual funds work on an exact similar concept. Mutual funds invest in a
number of companies across sectors. Even if one particular sector collapses, the losses are
covered by some other investment, which is doing well. Investors achieve this diversification
through a Mutual Fund with far less money than one can do on his own.

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

4. Return Potential: Over a medium to long term, mutual funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.

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5. Low Costs: Mutual funds invest huge sums of money and hence the cost of brokerage is less
as compared to a direct investment made by any investor. So the overall brokerage, custodial
and other fees translate into lower costs for investors.

6. Liquidity: Liquidity means readiness to convert investments into cash. In open-ended schemes,
investors can get their money back promptly at net asset value related prices from the mutual
fund itself. With close-ended schemes, investors can sell their units on a stock exchange at
the prevailing market price or avail of the facility of direct repurchase at net asset value (NAV)
related prices.

7. Transparency: As per SEBI Regulations, all the mutual funds are compulsorily required to
disclose the details of the investments made by them from time to time to all its investors.

BASIC CLASSIFICATION OF MUTUAL FUNDS

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All the mutual funds can be broadly classified into


- open ended mutual funds
- close ended mutual funds
As the name suggests, an open-ended mutual fund is a fund wherein, the fund itself buys
and sells units from/to the investors. Since the fund itself buys and sells units, its units are
non-fixed. The fund itself buys back the units surrendered and is ready to sell new units.
Generally, the transaction takes place at the net asset value, which is calculated on a periodical
basis.

A close ended mutual fund is the fund where mutual fund management sells a limited number
of units and does not redeem them ie once the units are issued, they are redeemed only at
the time of end of its tenure. In between, the investors have the choice to sell the units in
the open market. Primary example of such mutual fund is UTI’s Master share. The units of
such mutual funds are traded in the secondary market.
Following are the important differences between close ended and open ended mutual funds :

S.No. Close ended schemes Open ended schemes

1. Fixed corpus : no new units can be Variable corpus due to ongoing purchase and
offered beyond the limit redemption
2. Listed on stock exchange for buying No listing on exchange, transactions done
and selling directly with the fund

3. Two values available namely NAV and Only one price namely NAV
the Market Trading Price

4. Mostly liquid Highly liquid

5. Can be purchased only during NFO Can be purchased on any transaction day

6. Can be redeemed only at maturity Can be redeemed on any transaction day


[Except when units are locked-in in the case
of Equity-Linked Savings Scheme (ELSS)
funds]

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MUTUAL FUND PLANS

Sr No. Regular Plans Direct Plans

1 Sold through a distributor Sold directly by the AMC

2 Higher Expense Ratio due to Lower Expense Ratio as no commission is


commissions paid to distributor paid to distributor

3 Potentially lower returns to the investor Potentially higher returns due to lower
due to higher expenses expenses

TYPES OF MUTUAL FUNDS

Following are the important types of mutual funds:


Income oriented mutual funds: the fund primarily offers fixed income to investors. Naturally,
the main securities in which investments are made by such funds are the fixed yielding ones
like bonds.

Growth oriented mutual funds: These funds offer growth potentialities associated with
investment in capital market namely:
 High source of income by way of dividend and
 Rapid capital appreciation, both from holding of good quality scrips
These funds, with a view to satisfying the growth needs of investors, primarily concentrate on
the low risk and high yielding spectrum of equity scrips of the corporate sector.

High Growth Schemes: An investment in high risk and high return with a high degree of
capital appreciation generating securities in which aggressive investors are willing.

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Tax Saving Schemes: These schemes offer tax rebates to the investors under tax laws as
prescribed from time to time. The Government offers tax incentives for investment in specified
avenues e.g. Equity Linked Saving Schemes (ELSS) and Pensions Schemes. It may be noted
that Equity Linked Saving Schemes (ELSS) have the lock-in period of three years.

Hybrid mutual funds: These funds cater to both the investment needs of the prospective
investors – namely fixed income as well as growth orientation. Therefore, investment targets
of these mutual funds are judicious mix of both the fixed income securities like bonds and
debentures and also sound equity scrips. In fact, these funds utilize the concept of balanced
investment management. These funds are, thus also known as “balanced funds.”

Hedge Funds: There is no exact definition of the term ‘Hedge Funds’. In general, Hedge Funds
are unregistered private investment partnerships, funds or pools that may invest and trade in
many different markets, strategies and instruments. Hedge funds have an investor base
comprising wealthy individuals and institution and relatively high minimum investment limits.
They normally pay performance fees to their managers.

It may be noted that Hedge Funds are sometimes also known as Rich Man’s Mutual Funds.

Leverage Funds: Leverage Funds increase the size and value of portfolio and other benefits to
member through excess gains over cost of borrowed funds. They tend to indulge in speculative
trading and risky investment.

Money market mutual fund: These funds invest in short term debt securities in the money
market like certificates of deposits, commercial papers, government treasury bills etc. owing to
their large size, the funds normally get a higher yield on such short-term investments than an
individual investor.

Real Estate funds: These are closed ended mutual funds, which invest predominantly in real
estate and properties.

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Capital protection oriented scheme: This is a mutual fund scheme which is designed as such
and which endeavors to protect the capital invested therein through suitable orientation of its
portfolio structure.

Fund of Funds: They invest only in units of other mutual funds. Such funds do not operate at
present in India.

Special Schemes: This category includes index schemes that attempt to replicate the
performance of particular index such as the BSE, Sensex or the NSE-50 or industry specific
schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in
segment such as ‘A’ Group or initial public offering). Index fund schemes are ideal for investors
who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes
are ideal for investors who have already decided to invest in particular sector or segment.

Off-shore Funds: Such funds invest in securities of foreign companies with RBI permission.

New Direction Funds: They invest in companies engaged in scientific and technological research
such as birth control, anti-pollution, oceanography etc.

Exchange Trade Funds: ETFs are a new variety of mutual funds that first introduced in 1993.
ETFs are sometimes described as mere “tax efficient” than traditional equity mutual funds,
since in recent years, some large ETFs have made smaller distribution of realized and taxable
capital gains than most mutual funds.

Infrastructure Debt Fund: They invest primarily in the debt securities or securitized debt
investment of infrastructure companies.

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FIVE PRINCIPAL CONSTITUENTS

1. Sponsor
A sponsor is an influential investor who creates demand for a security because of their positive
outlook on it. The sponsor brings in capital and creates a mutual fund trust and sets up the
AMC. The sponsor makes an application for registration of the mutual fund and contributes at
least 40% of the net worth of the AMC.

2. Asset Management Company


An asset management company (AMC) is a company that invests its clients’ pooled funds
into securities that match declared financial objectives. Asset management companies provide
investors with more diversification and investing options than they would have themselves.
AMCs manage mutual funds, hedge funds and pension plans, these companies earn income by
charging service fees or commissions to their clients.

3. Trustee
A trustee is a person or firm that holds and administers property or assets for the benefit of
a third party. A trustee may be appointed for a wide variety of purposes, such as in case of
bankruptcy, for a charity, for a trust fund or for certain types of retirement plans or pensions.

No person shall be eligible to be appointed as a trustee unless—


1. he is a person of ability, integrity and standing; and
2. has not been found guilty of moral turpitude; and
3. has not been convicted of any economic offence or violation of any securities laws; and has
furnished particulars as specified.

No asset management company and no director (including independent director), officer or


employee of an asset management company shall be eligible to be appointed as a trustee of
any mutual fund.

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No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as


a trustee of any other mutual fund

Two-thirds of the trustees shall be independent persons and shall not be associated with the
sponsors or be associated with them in any manner whatsoever.

In case a company is appointed as a trustee then its directors can act as trustees of any other
trust provided that the object of the trust is not in conflict with the object of the mutual
fund.

4. Unit Holders
A unitholder is an investor who owns the units issued by a trust, like a real estate investment
trust or a master limited partnership (MLP). The securities issued by trusts/MF are called
units, and investors in units are called unitholders. The unit in turn reflect share of the investor
in the Net Assets of the fund.

5. Mutual fund
A mutual fund established under the Indian Trust Act to raise money through, the sale of
units to the public for investing in the capital market. The funds thus collected as per the
directions of asset management company for invested. The mutual fund has to be SEBI
registered.

MARKET INTERMEDIARIES

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

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Transfer Agents
A transfer agent is a person who has been granted a Certificate of Registration to conduct the
business of transfer agent under SEBI Regulations. Transfer agents’ services include issue and
redemption of mutual fund units, preparation of transfer documents and maintenance of
updated investment records. They also record transfer of units between investors where
depository does not function. They also facilitate investors to get customized reports.

Depository
A depositor facilitates the smooth flow of trading and ensure the investor`s about their
investment in securities.

RISKS INVOLVED IN MUTUAL FUNDS

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Mutual funds may face the following risks, leading to non-satisfactory performance :
1) Excessive diversification of portfolio, losing focus on the securities of the key segments
2) Too much concentration on blue chip securities which are high priced and which do not offer
more than average return
3) Necessity to effect high turnover through liquidation of portfolio resulting in large payments of
brokerage and commission
4) Poor planning of investment with minimum returns
5) Unresearched forecast on income, profits and Government policies
6) Fund managers being unaccountable for poor results
7) Failure to identify clearly the risk of the scheme as distinct from risk of the market.

TYPES OF RISKS & CAUSE OF RISK

Volatility risk
Typically, equity-based funds invest in the shares of companies that are listed on stock
exchanges. The value of such funds is based on companies’ performance, which often gets
affected due to the prevalent microeconomic factors.

Credit risk
Credit risk in mutual fund investment often results from a situation, wherein, the issuer of the
scheme fails to pay the promised interest. In case of debt funds, typically, fund managers
include investment-grade securities with high credit ratings.

Liquidity risk
Mutual funds with a long-term and rigid lock-in period like ELSS often come with liquidity
risk. Such a risk signifies that investors often find it challenging to redeem their investments
without incurring a loss.

Concentrated risk
This mutual fund risk is also prevalent among investors. It can be described as the situation
when investors tend to put all their money into a single investment scheme or in one sector.

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For instance, investing entirely in just one company’s stocks often bears a substantial risk of
losing capital if caught amidst bad market situations.

Inflation risk
It can be best described as the risk of losing one’s purchasing power, mainly due to the rising
inflation rate. Typically, investors are exposed to the impact of this risk when the rate of
returns earned on investments fails to keep up with the increasing inflationary rate.

OFFER DOCUMENT OF MUTUAL FUND SCHEME

Offer Document

Parts

SAI SI
Statement of Additional Scheme
D
Information Information
Document
 Information relating to particular
Statutory
scheme
information on
 Updation: 3 months
mutual fund
 from end of the FY if scheme
formed in 1st half of year.
 From end of next FY, it
scheme formed in 2nd half of
a year

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MUTUAL FUND TERMINOLOGY

Offer Document
- AMC raises money in new schemes through New Fund Offer (NFO)
- Offer document contains key details about the NFO - open and close dates, scheme objective,
nature of the scheme, etc.
- Filed with SEBI
Two parts:

Scheme Information Document (SID) - A document that contains the details of the scheme.
SID has to be updated every year
Key Contents:
- Scheme name on the cover page, along with scheme structure (open / closed-ended) and
expected scheme nature (equity / debt / balanced / liquid / ETF)
- Highlights of the scheme
- Risk factors
- Due diligence certificate issued by the AMC
- Fees and expenses
- Rights of unit holders
- Penalties, litigations, etc.

Statement of Additional Information - A document that contains statutory information about


the fund house offering the scheme. SAI has to be updated the end of every quarter

Key Contents:
- Information about sponsor, mutual fund, trustees, custodian and registrar & transfer agents
- Condensed financial information for schemes launched in the last three financial years
- Information on how to apply
- Rights of unit holders
- Details of the fund managers
- Tax, legal and other general information

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Net Asset Value


Net asset value is the value of the assets of each unit of the scheme. Thus if the NAV is
more than the face value of Rs. 10/-, there is an appreciation for the investment. If the NAV
is less than the face value, it indicates depreciation of the investment. Every mutual fund shall
compute the NAV of each scheme and publish the same at least in two daily newspapers on
every working day.

How is it calculated:
NAV = Net Asset of the Scheme / number of outstanding units
Net Asset of the Scheme = Market value of investments + Receivables+ other accrued income+
other assets -Accrued Expenses- Other Payables- Other Liabilities

FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)

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

Modes of Holding
- Single
- Either or Survivor
Signature of any of the applicants is sufficient for making transactions
- Joint
Signature of all the applicants is required for making transactions

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Nomination
- Up to 3 nominees can be registered for a folio
- Units get transferred to the nominees (in the proportion specified) in case of the investor’s
demise
- Nomination can be updated as and when required by the investor
– A minor can also be nominated, provided the guardian is specified
- If nomination is not registered, in case of death of the investor, the legal heir has to produce
documents such as Will, Legal Heir Certificate, No-Objection Certificate from other legal heirs,
etc.

EXPENSE RATIO

- The fees charged by the scheme to manage investors’ money. It includes:


- Fees paid to service providers like trustees, Registrar & Transfer Agents, Custodian, Auditor,
etc.
- Asset management expenses
- Commissions paid to distributors
- Other selling expenses including advertising expenses
- Expenses on investor communication, account statements, dividend / redemption cheques /
warrants
- Listing fees and Depository fees
- GST

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur / charge
certain operating expenses for managing a mutual fund scheme - such as sales & marketing /
advertising expenses, administrative expenses, transaction costs, investment management fees,
registrar fees, custodian fees, audit fees - as a percentage of the fund’s daily net assets. This
is commonly referred to as ‘Expense Ratio’.

In short, Expense ratio is the cost of running and managing a mutual fund which is charged
to the scheme.

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For actively managed equity schemes, the total expense ratio (TER) allowed under the
regulations is 2.5 % for the first ₹100 crore of average weekly net assets; 2.25 % for the
next ₹300 crore, 2 % for the subsequent ₹300 crore and 1.75 % for the balance AUM.

For debt schemes, the expense ratio permitted is 0.25 % lower than that allowed for equity
funds. Information on expense ratio applicable to a MF scheme is mentioned in the Scheme
Information Document. For example, an expense ratio of 1% per annum means that each year
1% of a scheme’s total assets will be used to cover the expenses managing and operating a
scheme.

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value
(NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the
TER has a direct bearing on a scheme’s NAV - the lower the expense ratio of a scheme, the
higher the NAV.

However, while expense ratio is important, it should be borne in mind that it is not the only
criterion while selecting mutual fund scheme. A scheme with a consistently decent track record,
but a higher expense ratio may be better than the one which lower expense ratio, but gives
poor returns.

HOLDING PERIOD RETURN

Holding period return is the total return received from holding an asset or portfolio of assets
over a period of time, generally expressed as a percentage.

Holding period return is calculated on the basis of total returns from the asset or portfolio -
i.e. income plus changes in value. It is particularly useful for comparing returns between
investments held for different periods of time

HPR = (Income + (end of period value- original value) x 100


Original Value

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Sales Charges/ Loads: These costs are directly charged to the investors. Mutual funds use the
sales loads for payments of agents’ commission and expenses for distribution and marketing.
Sales charges or loads are of two types:
i) Front end Load (Entry Load) : Front end Load is a onetime fixed fee, which is paid by an
investor while he buys into scheme/buys the units of a scheme of a mutual fund. Front end
Load can be calculated in the following manner:
Purchase Price = Net Asset Value
1 – Front End Load

ii) Back end Load (Exit Load) : This is a fixed fee payable by an investor at the time of
redemption. Back end Load can be calculated in the following manner:
Redemption price = Net Asset Value
1 + Back End Load

EFFICIENCY OF A MUTUAL FUND

The efficiency of mutual funds may be judged on the factors such as –


 Stability of funds;
 Liquidity of funds (listed on exchanges);
 Increase in NAV, consistent growth in dividend and capital appreciation;
 Whether the investment objectives are clearly laid and implemented;
 Whether the issuer has a proven track record and offers assured return not less than a
percentage;
 Whether it observes investment norms to balance risks and profits.

ASSET MANAGEMENT COMPANY (AMC)

Under SEBI Regulations, every mutual fund is required to have an Asset Management Company
(AMC) incorporated as per Companies Act, 2013 to manage the funds of the mutual fund.
The AMC should be approved by SEBI and should enter into an agreement with the trustees
of the mutual fund to formulate schemes, raise money against units, invest the funds and

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after meeting the permissible costs as per norms, distribute income to the shareholders of the
funds.

Eligibility Criteria
In order to obtain a certificate of registration, the applicant must meet the following conditions
as follows:
a) The sponsor should have a sound track record and general reputation of fairness and integrity
in all his business transactions.
The regulations provide that “Sound track record” means the sponsor:-
i) Is carrying on business in financial services for a period of not less than five years; and
ii) The networth is positive in all the immediately preceding five years; and
iii) The networth in the immediately preceding year is more than the capital contribution of the
sponsor in the asset management company; and
iv) The sponsor has profits after providing for depreciation, interest and tax in three out of the
immediately preceding five years, including the fifth year;
a) the applicant is a fit and proper person.
b) In the case of an existing mutual fund, such fund is in the form of a trust and the trust deed
has been approved by SEBI;
c) The sponsor has contributed or contributes at least 40% to the networth of the asset
management company;
d) The sponsor or any of its directors or the principal officer to be employed by the mutual fund
should not have been guilty of fraud or has not been convicted of an offence involving moral
turpitude or has not been found guilty of any economic offence;
e) Appointment of trustees to act as trustees for the mutual fund in accordance with the
provisions of the regulations;
f) Appointment of asset management company to manage the mutual fund and operate the
scheme of such funds in accordance with the provisions of these regulations;
g) Appointment of custodian in order to keep custody of the securities or gold and gold related
instrument or other assets of the mutual fund held in terms of these regulations, and provide
such other custodial services as may be authorized by the trustees.

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h) the board of directors of such asset management company has at least fifty per cent directors,
who are not associate of, or associated in any manner with, the sponsor or any of its subsidiaries
or the trustees;
i) the Chairman of the asset management company is not a trustee of any mutual fund;
j) the asset management company has a networth of not less than rupees fifty crore;

Where the sponsor does not fulfil the requirements provided in regulation 7 at the time of
making application, the asset management company shall be required to have a net worth of
not less than rupees one hundred crore and the asset management company shall maintain
such net worth till it has profits for five consecutive years. However, an asset management
company of a mutual fund eligible to launch only infrastructure debt fund schemes, shall have
a net worth of not less than rupees ten crore.

Regulations now require that the networth of the asset management company shall be
maintained on a continuous basis.

AUDIT COMMITTEE OF ASSET MANAGEMENT COMPANIES (AMCS)


SEBI has prescribed that the AMCs of mutual funds shall be required to constitute an Audit
Committee.

Role
The Audit Committee shall be responsible for oversight of financial reporting process, audit
process, company’s system of internal controls, compliance to laws and regulations and other
related process, with specific reference to operation of its Mutual Fund business.

Membership
(1) The Audit Committee of AMC shall have minimum 3 directors as members.
(2) At least two-third members of the Audit Committee shall be independent directors of AMC.
If two-third of the total strength results into fraction, then higher number after rounding up
shall be considered.
(3) The members of the Audit Committee will be appointed by the Board of Directors of AMC.

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(4) All members of Audit Committee shall be persons with ability to read and understand the
financial statement and at least one member shall have experience and background in finance
and accounts.
(5) The Chairperson of the Committee shall be an independent director, with adequate experience
in the areas of finance and financial services.

Meetings
The Chairperson of the Audit Committee shall call the meeting as and when required. However,
atleast four meetings shall be called in a financial year and not more than one hundred and
twenty days shall elapse between two meetings.

Quorum
The quorum for meeting shall either be two members or one third of the members of the Audit
Committee, whichever is greater, with at least two independent directors.

NORMS FOR SHAREHOLDING & GOVERNANCE IN MUTUAL FUNDS

(1) No sponsor of a mutual fund, its associate or group company including the asset management
company of the fund, through the schemes of the mutual fund or otherwise, individually or
collectively, directly or indirectly, have –
(a) 10% or more of the share-holding or voting rights in the asset management company or the
trustee company of any other mutual fund; or
(b) Representation on the board of the asset management company or the trustee company of
any other mutual fund.
(2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset
management company or the trustee company of a mutual fund, shall not have, directly or
indirectly, -
(a) 10% or more of the share-holding or voting rights in the asset management company or the
trustee company of any other mutual fund; or
(b) representation on the board of the asset management company or the trustee company of any
other mutual fund.

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APPOINTMENT OF CUSTODIAN
- The mutual fund shall appoint a Custodian to carry out the custodial services for the schemes
of the fund and sent intimation of the same to the Board within fifteen days of the
appointment of the Custodian.
- However in case of a gold exchange traded fund scheme, the assets of the scheme being gold
or gold related instruments may be kept in the custody of a custodian registered with the
SEBI.

AGREEMENT WITH CUSTODIAN


- In case of a real estate mutual fund scheme, the title deed of real estate assets held by it
may be kept in the custody of a custodian registered with the SEBI.
- The mutual fund shall enter into a custodian agreement with the custodian, which shall contain
the clauses which are necessary for the efficient and orderly conduct of the affairs of the
custodian.
- However the agreement, the service contract, terms and appointment of the custodian shall be
entered into with the prior approval of the trustees.

PROCEDURE FOR LAUNCHING OF SCHEMES

- No scheme shall be launched by the asset management company unless such scheme is
approved by the trustees and a copy of the offer document has been filed with the SEBI.
- The offer documents shall contain adequate disclosures to enable the investors to make
informed decisions.
- The mutual fund shall pay the minimum filing fee to the SEBI while filing the offer document
and the balance filing fee within such time as may be specified by the SEBI.
- The sponsor or asset management company shall invest not less than one percent of the
amount which would be raised in the new fund offer or fifty lakh rupees, whichever is less,
and such investment shall not be redeemed unless the scheme is wound up. However the
investment by the sponsor or asset management company shall be made in such option of
the scheme, as may be specified by the SEBI. The mutual fund, which intends to list units
of its scheme on the recognised stock exchange(s), shall obtain ‘in-principle’ approval from

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recognised stock exchange(s) in the manner as specified by the recognised stock exchange(s)
from time to time.
- Every mutual fund desirous of listing units of its schemes on a recognised stock exchange
shall execute an agreement with such stock exchange.
- The listing of close-ended schemes is mandatory and these should be listed on a recognised
stock exchange within such time period and subject to such conditions as specified by the
SEBI.
- Units of a close-ended scheme can be opened for sale or redemption at a predetermined fixed
interval if the minimum and maximum amount of sale, redemption and periodicity is disclosed
in the offer document.
- Units of a close-ended scheme can be converted into an open-ended scheme if the offer
document of such scheme discloses the option and the period of such conversion or the
unitholders are provided with an option to redeem their units in full.
- Units of close-ended scheme may be rolled over in the case of those unitholders who express
their consent in writing and the unitholders who do not opt for the roll over or have not given
written consent shall be allowed to redeem their holdings in full at net asset value based
price.
- No scheme other than equity-linked saving scheme can be opened for subscription for more
than 15 days. Further, the minimum subscription and the extent of over subscription that is
intended to be retained should be specified in the offer document. In the case of over-
subscription, all applicants applying up to 5,000 units must be given full allotment subject to
over subscription.
- The AMC is required to refund the application money if minimum subscription is not received,
and also the excess over subscription within five working days of closure of subscription.
- A close-ended scheme shall be wound up on redemption date, unless it is rolled over, or if
75% of the unitholders of a scheme pass a resolution for winding up of the scheme; if the
trustees on the happening of any event require the scheme to be wound up; or if SEBI, so
directs in the interest of investors.

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CODE OF CONDUCT OF MUTUAL FUNDS

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

ADVERTISEMENT OF CONDUCT OF MUTUAL FUNDS

(i) Advertisement shall be accurate, true, fair, clear, complete, unambiguous and concise.
(ii) Advertisement shall not contain statement which are false, misleading, biased or deceptive,
based on assumptions and shall not contain any testimonials or any ranking based on any
criteria.
(iii) No celebrities shall form part of advertisement.
(iv) No advertisement shall directly or indirectly discredit other advertisements or make unfair
comparisons.
(v) Advertisements shall be accompanied by a standard warning in legible fonts which states
“Mutual fund investments are subject to market risks, read all schemes related document
carefully.” No addition or deletion of words shall be made to the standard warning.
(vi) In audio visual media based advertisements, the standard warning in visual and accompanying
voice over reiteration shall be audible in a clear and understandable manner. For example, in

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standard warning both the visual and the voice over reiteration containing 14 words running
for at least 5 seconds may be considered as clear and understandable.
(vii) Advertisement shall not be so designed as likely to be misunderstood or likely to be disguise
the significance of any statement.

MUTUAL FUNDS ARE PERMITTED TO MAKE INVESTMENT IN

(i) ADRs and GDRs;


(ii) Equity of overseas company;
(iii) Initial or follow on public investments;
(iv) Foreign debt securities;
(v) Money market instruments;
(vi) Repos in the form of investment;
(vii) Government securities;
(viii) Derivative;
(ix) Short - term deposits;
(x) Units issued by overseas mutual funds.

PRICING OF UNITS OF MUTUAL FUND

(1) The price at which the units may be subscribed or sold and the price at which such units
may at any time be repurchased by the mutual fund shall be made available to the investors
in the manner specified by the Board.
(2) The mutual fund shall provide the methodology of calculating the sale and repurchase price of
units in the manner specified by the Board.
(3) While determining the prices of the units, the mutual fund shall ensure that the repurchase
price is not lower than 95 per cent of the Net Asset Value and the sale price is not higher
than 107 per cent of the Net Asset Value.

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SYSTEMATIC INVESTMENT PLAN (SIP) IN MUTUAL FUND

An SIP allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically
an equity mutual fund scheme. An SIP helps investor to stagger the investments in equity
mutual fund schemes over a period. Most mutual fund advisors do not recommend investing a
lumpsum in equity mutual funds.

SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

The provisions of SEBI (LODR) Regulations, 2015 applies to the asset management company
managing the mutual fund scheme whose units are listed on the recognised stock exchange(s).

The listed entity shall intimate to the recognised stock exchange(s) of:
(a) movement in unit capital of those schemes whose units are listed on the recognised stock
exchange(s);
(b) rating of the scheme whose units are listed on the recognised stock exchange(s) and any
changes in the rating thereof (wherever applicable);
(c) imposition of penalties and material litigations against the listed entity and Mutual Fund; and
(d) any prohibitory orders restraining the listed entity from transferring units registered in the
name of the unit holders.

NET ASSET VALUE (NAV) – CUT-OFF TIMELINE

Type of Transaction Before/ Cut-off Time Applicable NAV


After
Equity-oriented & Debt funds (except liquid funds)
Purchase & Switch- 3 pm Before Same day NAV
in (value < Rs.2 After Next business day NAV
lakhs)

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Purchase & Switch- 3 pm Before NAV of the business day on


in (value > Rs.2 After which funds are available for
lakhs) utilization
Redemption & 3 pm Before Same day NAV
Switch-out After Next business day NAV
Liquid Funds

Purchase & Switch- 2 pm Before Previous day NAV if funds


in are realized
After NAV of the day previous to
the funds realized
Redemption & 3 pm Before NAV of the day immediately
Switch-out preceding the next business
day
After NAV of the day preceding
the second business day
from submission

Type of Scheme Transaction type Cut-off


timings
Liquid Funds & Subscription (including 1:30 p.m.
Overnight Funds Switch-in from other
schemes)
Redemption (including 3:00 p.m.
Switch-in from other
schemes)
All other schemes Subscription (including 3:00 p.m.
(other than Liquid Funds / Switch-in from other
Overnight Funds) schemes)

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Redemption (including 3:00 p.m.


Switch-in from other
schemes)

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CHAPTER 18 - COLLECTIVE INVESTMENT SCHEMES

INTRODUCTION

A Collective Investment Schemes (CIS) is an extension of Mutual Fund wherein an


investment is done in installments. In Collective Investment Schemes investors do not have
day to day control over the management and operation of the scheme.

A CIS comprises a pool of assets that is managed by a Collective Investment Schemes


manager as is governed by SEBI (Collective Investment Schemes) Regulations, 1999.
Collective Investment Schemes provides a relatively secure means of investing on the SE.

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SEBI (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS, 1999

An Overview :
SEBI (Collective Investment Schemes) Regulations, 1999 defines Collective Investment
Management Company to mean a company incorporated under the Companies Act, 2013 and
registered with SEBI under these regulations, whose object is to organize, operate and
manage a collective investment.

No person other than a Collective Investment Management Company which has obtained a
certificate under the regulations should carry on or sponsor or launch a collective investment
scheme.

“Close ended collective investment scheme” means any collective investment scheme
launched by a collective investment management company in which the maturity period of
the collective investment scheme is specified and these is no provision for repurchase before
the expiry of the collective investment scheme.

“Collective investment scheme property” includes:


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

REGISTRATION OF CIMC
No person other than a Collective Investment Management Company which has obtained a
certificate under these regulations shall carry on or sponsor or launch a collective investment
scheme.

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APPLICATION FOR GRANT OF CERTIFICATE


Any person proposing to carry any activity as a Collective Investment Management Company
shall make an application to the SEBI for the grant of registration as specified.

APPLICATION BY A SCHEME OR ARRANGEMENT DEEMED TO BE A COLLECTIVE


INVESTMENT SCHEME
(1) Any person proposing to carry on or sponsor or launch any scheme or arrangement which
would be deemed to be a collective investment scheme, shall make an application for grant
of registration as a Collective Investment Management Company.
(2) All other provisions of these regulations and the guidelines and circulars issued there under,
shall apply to any scheme or arrangement deemed to be a collective investment scheme.

APPLICATION BY EXISTING COLLECTIVE INVESTMENT SCHEMES


- Any person who immediately prior to the commencement of these regulations was operating
a collective investment scheme, shall subject to the provisions as specified under these
regulations make an application to the SEBI for the grant of a certificate within a period of
two months from such date.
- The application made shall be dealt with in any of the following manner:
(a) by grant of provisional registration by SEBI;
(b) by grant of a certificate of registration by the SEBI;
(c) by rejection of the application for registration.
- An existing collective investment scheme which:
(a) has failed to make an application for registration to the SEBI; or
(b) has not been granted provisional registration by the SEBI; or
(c) having obtained provisional registration fails to comply with the conditions of SEBI;
shall wind up the existing collective investment scheme.

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PROCEDURE WHERE REGISTRATION IS NOT GRANTED


Where an application made for grant of registration does not satisfy the conditions specified,
the SEBI may reject the application after giving the applicant a reasonable opportunity of
being heard and inform the applicant of the same. The decision shall be communicated to
the applicant by the SEBI within 30 days of such decision stating therein the grounds on
which the application has been rejected.

RESTRICTIONS ON BUSINESS ACTIVITIES

Collective Investment Management Company cannot undertake :


Any activity other Act as a trustee of Launch any scheme Invest in any
than managing the any scheme for the purpose of scheme floated by it.
scheme. investing in
securities

OBLIGATIONS OF CIMC
Every Collective Investment Management Company should:
(i) be responsible for managing the funds or properties of the scheme on behalf of the unit
holders.
(ii) exercise due diligence and care in managing assets and funds of the scheme.
(iii) remain liable to the unit holders for its acts of commission or omissions.
(iv) be incompetent to enter into any transaction with or through its associates, or their relatives
relating to the scheme.
(v) appoint registrar and share transfer agents and should also abide by their respective Code of
Conducts.
(vi) give receipts for all monies received and report of the receipts and payments to SEBI, on
monthly basis.
(vii) hold a meeting of Board of Directors to consider the affairs of scheme, at least twice in
every three months and also ensures that its officers or employees do not make improper use
of their position or information.
(viii) obtain adequate insurance against the properties of the schemes.

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(ix) The Collective Investment Management Company and its designated employees shall invest
such amounts in such schemes of the Collective Investment Management Company, as may
be specified by the Board from time to time.

SUBMISSION OF INFORMATION AND DOCUMENTS

1. The Collective Investment Management Company should prepare quarterly reports of its
activities and the status of compliance of SEBI regulations and submit the same to the
trustees within one month of the expiry of each quarter.
2. The Collective Investment Management Company should file with the trustees and the SEBI,
particulars of all its directors along with their interest in other companies within fifteen days
of their appointment.
3. It should furnish a copy of the Balance Sheet, Profit and Loss Account; a copy of the
summary of the yearly appraisal report and such other information as may be required, to the
unit holders, SEBI and trustees within two months from the closure of financial year.

ELIGIBILITY FOR APPOINTMENT AS TRUSTEE

The persons registered with the SEBI as Debenture Trustee under SEBI (Debenture Trustee)
Regulations, 1993 are only eligible to be appointed as trustees.

No person is eligible to be appointed as trustee, if he is directly or indirectly associated with


the persons who have control over the CIMC.

No person should be appointed as trustee of a scheme, if he has been found guilty of an


offence under the securities laws or the SEBI or any authority to which the SEBI has
delegated its power has passed against such person, an order under the Act for violation of
any provision of the Act or of regulations made hereunder.

The trustee and the Collective Investment Management Company should enter into an
agreement for managing the schemes’ property.

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APPOINTMENT OF TRUSTEE NOT FOUND GUILTY


No person should be appointed as trustee of a collective investment scheme, if he has been
found guilty of an offence under the securities laws or the SEBI or any authority to which
the SEBI has delegated its power has passed against such person, an order under the Act for
violation of any provision of the Act or of regulations.

LAUNCH OF SCHEMES BY COLLECTIVE INVESTMENT MANAGEMENT COMPANY


Close ended collective investment scheme and collective investment scheme duration
Collective Investment Management Company shall:
(a) launch only close ended collective investment schemes;
(b) the duration of the collective investment schemes shall not be of less than three calendar
years.

NO GUARANTEED RETURNS
No collective investment scheme shall provide guaranteed or assured returns. However
indicative return may be indicated in the offer document only, if the same is assessed by
the appraising agency and expressed in monetary terms.

ADVERTISEMENT MATERIAL
Advertisements in respect of every collective investment scheme shall be in conformity with
the Advertisement Code as specified in the Seventh Schedule. The advertisement for each
collective investment scheme shall disclose in addition to the investment objectives, the
method and periodicity of valuation of collective investment scheme property.

APPRAISING AGENCY
The appraising agency whose appraisal report forms part of the offer document and has given
a written consent for the inclusion of the appraisal report in the offer document shall be
liable for any statement in the appraisal report which is misleading, incorrect or false.

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MISLEADING STATEMENTS
The offer document and advertisement materials shall not be misleading or contain any
statement or opinion which are incorrect or false. Where an offer document or advertisement
includes any statement or opinions which are incorrect or false or misleading, every person—
(i) who is a director of the Collective Investment Management Company at the time of the
issue of the offer document;
(ii) who has issued the offer document

Shall be punishable under the Act unless he proves either that the statement or opinion was
immaterial or that he had reasonable ground to believe at the time of the issue of the offer
document or advertisement that the statement was true.

OFFER PERIOD
No collective investment scheme shall be open for subscription for more than 15 days.
However, collective investment scheme may be kept open for subscription for a maximum of
another 15 days subject to issuance of public notice by the Collective Investment
Management Company before the expiry of initial 15 days.

KEY ASPECTS FOR LAUNCHING COLLECTIVE INVESTMENT SCHEME


1. The company floating CIS shall have to seek registration with SEBI as Collective Investment
Management Company (CIMC).
2. CIS shall be constituted as a two tiered structure comprising of a trust and a CIMC.
3. At the time of application for Registration as CIMC, these entities should have a minimum
networth of Rs. 3 crores which shall have to be increased to Rs. 5 crores within three years
from the date of grant of registration.
4. Compulsory Filing of Offer Documents: Every collective investment Scheme shall have to
file offer documents with SEBI containing adequate disclosures to enable the investors to
take informed investment decisions.
5. Mandatory Rating Requirement: Each collective investment scheme shall have to obtain a
rating from recognised credit rating agencies such as CRISIL Limited, Fitch Ratings India
Private Limited, ICRA Limited, CARE, SMERA.

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6. The projects being undertaken must also be appraised by an empanelled appraising agency
such as Agricultural Finance Corporation Ltd., North Eastern Development Finance
Corporation Ltd. (NEDFI), Indian Institute of Forest Management, The Forest Research
Institute (FRI).
7. No Assured Return: The collective investment schemes are prohibited from guaranteeing
assured returns. Indicative returns, if any, provided by the collective investment scheme shall
be based on the projections in the appraisal report.
8. Advertisement Code: Advertisements in respect of every collective investment scheme shall
have to conform to the SEBI’s advertisement code.
9. Subscription Period: No collective investment scheme shall be kept open for subscription for
a period of more than 15 days. The collective investment schemes shall be close ended in
nature. The collective investment schemes must indicate the minimum and maximum amount
proposed to be raised over this period.
10. Duration of collective investment Schemes: The duration of the collective investment
schemes shall be for a minimum period of 3 years.
11. Insurance: Compulsory Insurance cover for the assets of the collective investment scheme
and personal indemnity cover for the CIMC shall be obtained.
12. Listing: Units issued under the Collective Investment Schemes are to be compulsorily listed
on recognised stock exchanges.
13. Accounting/Valuation norms: Accounting/valuation norms as stipulated shall have to be
followed by Collective Investment Schemes.

RIGHTS AND OBLIGATIONS OF THE TRUSTEE

The trustee should ensure that the CIMC has;


(i) the necessary office infrastructure;
(ii) appointed all key personnel including managers for the schemes having necessary educational
qualifications and past experience;
(iii) appointed auditors from the list of auditors approved by SEBI;
(iv) appointed a compliance officer to redress investor grievances;
(v) appointed registrars to an issue and share transfer agent.

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(vi) prepared a compliance manual and designed internal control mechanisms including internal
audit systems;
(vii) taken adequate insurance for the assets of the scheme;
(viii) not given any undue or unfair advantage to any associates of the company or dealt with any
of the associates in any manner detrimental to the interest of the unit holders;
(ix) operated the scheme in accordance with the provisions of the trust deed, these regulations
and the offer document;
(x) undertaken the activity of managing schemes only;
(xi) taken adequate steps to ensure that the interest of investors of one scheme are not
compromised with the object of promoting the interest of investors of any other scheme;
(xii) minimum networth on a continuous basis and shall inform the SEBI immediately of any
shortfall
(xiii) A meeting of the trustees to discuss the affairs of the scheme should be held at least twice
in every three months.

TERMINATION OF TRUSTEESHIP

(a) If the trustee ceases to be trustee under SEBI (Debentures Trustees) Regulations, 1993; or
(b) if the trustee is in the course of being wound up; or
(c) if unit holders holding at least three-fourths of the nominal value of the unit capital of the
scheme pass a resolution for removing the trustee and SEBI approves such resolution; or
(d) if in the interest of the unit holders, SEBI, for reasons to be recorded in writing decides to
remove the trustee;
(e) if the trustee serves on the Collective Investment Management Company, a notice of not
less than three months expressing intention of not to continue as trustee.

TERMINATION OF THE AGREEMENT WITH THE COLLECTIVE INVESTMENT MANAGEMENT


COMPANY

The agreement entered into by the trustee with the Collective Investment Management
Company may be terminated -

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(a) if the CIMC is in the course of being wound up as per the provisions of the Companies Act,
2013 or;
(b) if unit holders holding at least three-fourth of the nominal value of the unit capital of the
scheme pass a resolution for terminating the agreement with the CIMC and the prior
approval of SEBI has been obtained, or
(c) if in the interest of the unit holders, SEBI or the trustee after obtaining prior approval of
SEBI, and after giving an opportunity of being heard to the Collective Investment
Management Company, decide to terminate the agreement with the CIMC.

DISCLOSURES IN THE OFFER DOCUMENT

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

ALLOTMENT OF UNITS AND REFUNDS OF MONEY

The CIMC should refund the application money to the applicants, if the scheme fails to
receive the minimum subscription amount. Any amount refundable should be refunded within
5 working days from the date of closure of subscription list, by Registered A.D. and by
cheque or demand draft. In the event of failure to refund the amounts within the period
specified, the CIMC has to pay interest to the applicants at a rate of fifteen percent per
annum on the expiry of 5 working days from the date of closure of the subscription list. A
scheme shall not be open for more than 15 days.

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CLOSURE OF SUBSCRIPTION LIST


Each collective investment scheme shall immediately after the closure of the subscription list
comply with the following conditions, namely,-
(a) minimum subscription amount of rupees twenty crore;
(b) minimum twenty investors; and
(c) no person shall hold more than twenty-five percent of the assets under management of
scheme.

Provided that where the collective investment scheme fails to comply with this, Collective
Investment Management Company shall be liable to refund the application money to the
applicants.

OFFER PERIOD
No collective investment scheme shall be open for subscription for more than fifteen days:
Provided that collective investment scheme may be kept open for subscription for a maximum
of another fifteen days subject to issuance of public notice by the Collective Investment
Management Company before the expiry of initial fifteen days.

UNIT CERTIFICATES
The Collective Investment Management Company should issue to the applicant whose
application has been accepted, the units only in dematerialized form within a period of five
working days from the date of closure of the subscription list.

TRANSFER OF UNITS
A unit certificate issued under the scheme should be freely transferable. The CIMC on
production of instrument of transfer together with relevant unit certificates, register the
transfer and return the unit certificate to the transferee within thirty days from the date of
such production. However, if the units are held in a depository such units shall be
transferable in accordance with the provisions of the SEBI (Depositories and Participants)
Regulations, 2018 and bye-laws of the depository.

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INVESTMENTS AND SEGREGATION OF FUNDS


The Collective Investment Management Company should:
(a) not invest the funds of the scheme for purposes other than the objective of the scheme as
disclosed in the offer document.
(b) segregate the assets of different schemes.
(c) not invest corpus of a scheme in other schemes.
(d) not transfer funds from one scheme to another scheme.
(e) not invest more than 25% of the amount raised by CIMC in projects owned directly or
indirectly by CIMC.

LISTING OF SCHEMES
The units of every scheme shall be listed immediately after the date of allotment of units
and not later than six weeks from the date of closure of the scheme on each of the stock
exchanges as mentioned in the offer document.

WINDING UP OF SCHEME
A scheme may be wound up :
(a) On the happening of any event which, in the opinion of the trustee, requires the scheme to
be wound up and the prior approval of the SEBI is obtained; or
(b) If unit holders of a scheme holding at least three-fourth of the nominal value of the unit
capital of the scheme, pass a resolution that the scheme be wound up and the approval of
SEBI is obtained thereto; or
(c) If in the opinion of SEBI, the continuance of the scheme is prejudicial to the interests of the
unit-holders; or
(d) If in the opinion of the CIMC, the purpose of the scheme cannot be accomplished and it
obtains the approval of the trustees and that of the unit holders of the scheme holding at
least three-fourth of the nominal value of the unit capital of the scheme with a resolution
that the scheme be wound up and the approval of SEBI is obtained thereto.

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WHAT SHALL NOT BE COLLECTIVE INVESTMENT SCHEME


(i) made or offered by a co-operative society registered under the Co- operative Societies Act,
1912 or a society being a society registered or deemed to be registered under any law relating
to co-operative societies for the time being in force in any State;
(ii) under which deposits are accepted by non-banking financial companies as defined in clause
(f) of section 45-I of the Reserve Bank of India Act, 1934;
(iii) being a contract of insurance to which the Insurance Act, 1938, applies;
(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the
Employees Provident Fund and Miscellaneous Provisions Act, 1952;
(v) under which deposits are accepted under section 74 of the Companies Act, 2013;
(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit
society under section 406 of the Companies Act, 2013;
(vii) falling within the meaning of Chit business as defined in clause (d) of section 2 of the Chit
Fund Act, 1982;
(viii) under which contributions made are in the nature of subscription to a mutual fund;
(ix) such other scheme or arrangement which the Central Government may, in consultation with
SEBI, notify, shall not be a collective investment scheme.

SEBI (COLLECTIVE INVESTMENT SCHEMES) (AMENDMENT) REGULATIONS, 2022


The following amendments to the SEBI (Collective Investment Schemes) Regulations, 1999,
have been made:

Definition of “auditor” has been modified as-


“auditor” means a firm, including a limited liability partnership, constituted under the
Limited Liability Partnership Act, 2008, who is eligible and qualified to audit the accounts of
a company under section 141 of the Companies Act, 2013.

The definition of “designated employees” has been inserted:


“designated employees” of the Collective Investment Management Company includes:
(i) chief executive officer, chief investment officer, chief risk officer, chief information security
officer, chief operation officer, fund manager, compliance officer, sales head, investor relation

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officer, heads of other departments and dealer of the Collective Investment Management
Company;
(ii) persons directly reporting to the chief executive officer (excluding personal assistant/
secretary);
(iii) fund management team and research team;
(iv) other employees as identified by Collective Investment Management Companies or trustees.

GENERAL OBLIGATIONS OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

MAINTAIN PROPER BOOKS OF ACCOUNT AND RECORDS, ETC.


(1) Every Collective Investment Management Company shall-
(a) keep and maintain proper books of account, records and documents, for each collective
investment scheme so as to explain its transactions and to disclose any point of time the
financial position of each collective investment scheme and in particular give a true and fair
view of the state of affairs of the collective investment scheme, and
(b) intimate to the SEBI and the trustees the place where such books of account, records and
documents including computer records are maintained.
(2) Every Collective Investment Management Company shall continue to maintain and preserve,
for a period of five years after the close of each collective investment scheme, its books of
account, records, computer data and documents.

DISPATCH OF WARRANTS AND PROCEEDS


The Collective Investment Management Company shall-
(a) Dispatch to the unit holders the warrants within 42 days of the declaration of the interim
returns.
(b) Dispatch the redemption proceeds within 30 days of the closure or the winding up of the
collective investment scheme.

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STATEMENT OF ACCOUNTS AND ANNUAL REPORT


The Collective Investment Management Company shall:
a) The expense incurred in case of Initial Issue Expenses and Annual recurring expenses shall
not exceed 2.00 percent of the funds raised under the collective investment scheme.
However, other direct costs, if any, which are incidental to the operation of the collective
investment scheme may be charged to scheme, as may be approved by trustee;
b) prepare the accounts of the collective investment scheme in accordance with accounting
norms as specified in Part II of the Ninth Schedule;
c) comply with format of balance sheet and profit and loss accounts as specified in Part III of
the Ninth Schedule.

AUDITOR’S REPORT
Every collective investment scheme shall have the annual statement of accounts audited by
an auditor who is empanelled with the SEBI and who is not in any way associated with the
auditor of the Collective Investment Management Company. The auditor shall be appointed
by the trustee. The auditor shall forward his report to the trustee and such report shall form
part of the Annual Report.

PUBLICATION OF ANNUAL REPORT AND SUMMARY THEREOF


The collective investment scheme wise annual report or an abridged form thereof shall be
published in a national daily as soon as possible but not later than two calendar months
from the date of finalisation of accounts. The report if published in abridged form shall carry
a note that full annual report shall be available for inspection at the Head Office and all
branch offices of the Collective Investment Management Company.

QUARTERLY DISCLOSURES
A Collective Investment Management Company, on behalf of the collective investment
scheme shall before the expiry of one month from the close of each quarter publish its
unaudited financial results in one daily newspaper having nationwide circulation and in a
newspaper published in the language of the region where the Head Office of the Collective
Investment Management Company is situated.

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CHAPTER 19 - PRACTICAL PROBLEMS – PAST YEAR EXAMS


2016 – June 1(c)
Machine owns 250 preference shares of Amaze Ltd., which currently sells for Rs.77 per share
and pays annual dividend of Rs. 13 per share –
(i) What is Manish’s expected return?
(ii) If Manish requires 13% return, should he sell or buy more preference shares at the current
price? (5 marks)

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2014 – Dec. [1]


The following information has been collected regarding two shares, Share-A and Share-B,
trading at BSE on 18 th September, 2017.

Share – A
Date Time Price Rs. No of shares
traded

18th September, 2017 14.45.10 385.60 550


18th September, 2017 14.55.35 382.78 1,575
18th September, 2017 15.00.20 380.99 1,514
18th September, 2017 15.01.30 381.79 1,625
18th September, 2017 15.05.40 380.38 1,025
18th September, 2017 15.10.20 381.51 1,390
18th September, 2017 15.20.25 381.42 800
18th September, 2017 15.22.20 384.07 600
18th September, 2017 15.25.55 383.74 1,200

Share - B
Date Time Price Rs. No. of shares
traded

18th September, 2017 14.07.30 50.60 250


18th September, 2017 14.11.40 52.10 585
18th September, 2017 14.16.20 49.85 700
18th September, 2017 14.26.25 51.25 425
18th September, 2017 14.45.10 50.75 450
18th September, 2017 14.55.35 49.95 500

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You are required to determine the closing prices and last traded prices for both the shares for
18th September, 2017. (8 marks)

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2016 – Dec. [1](d)


Following information has been collected regarding Share-X trading at NSE on 2nd September,
2017 :
Date Time Price Rs. No. of shares
traded

2nd September, 2017 14.42.10 265.60 550

2nd September, 2017 14.53.35 262.78 1,575

2nd September, 2017 15.00.20 260.99 1,514

2nd September, 2017 15.03.30 261.79 1,625


2nd September, 2017 15.05.40 260.38 1,025
2nd September, 2017 15.12.20 261.51 1,390
2nd September, 2017 15.21.25 261.42 800
2nd September, 2017 15.22.20 264.07 600
2nd September, 2017 15.26.55 263.74 1,200

You are required to determine the closing price and last traded price for Share-X for 2nd
September, 2017. (8 marks)

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2014 – Dec. [2] (c)


25th January, 2013, XY Bank purchased at 91 – days treasury bill maturing on 16 th March, 2013.
The rate quoted by the seller is Rs. 99.25 per Rs. 100 face value. Computer the yield percentage
of the treasury bill. (4 marks)

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2016 – Dec. [1] (b)


As on 1st April, 2016, Russel Ltd. has surplus cash for six months. It has following two options
under consideration for investing the surplus cash :
(i) To invest in fixed deposit at an interest rate of 8% per annum payable quarterly; or
(ii) To buy treasury bills of the face value of Rs. 100 at Rs. 98.019 maturing after six months.
Presuming that the risk involved in both the options is identical, state with reasons as to
which option should be selected by the company for investing its surplus funds. (5 marks)

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2008 – June [6] (a)


A unit of Evergrow Equity Fund is redeemed at Rs. 15, the exit load being 2.25%. Calculate
the NAV. (4 marks)

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2008 – Dec. [5] (a)


Define ‘NAV’ and ‘offer price’. If Rahul invests Rs. 10,000 in a scheme that charges 2% front
end load at an NAV of Rs. 10 per unit, what shall be the public offer price? (4 marks)

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2010 – June [5] (c)


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

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2015 – June [1] (a)


Super mutual fund has launched a scheme named ‘Super Bonanza’. The net asset value [NAV]
of the scheme is Rs. 12.00 per unit. The redemption price is Rs. 11.66 per unit and offer price
is Rs. 12.50 per unit. You are required to calculate –
(i) Front – end load; and
(ii) Back-end load. (5 marks)

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2015 – June [1] (b)


Calculate value of ‘rights’ from the following information –
Number of rights shares offered 2,500
Number of shares held 1,000
Ex-rights price Rs. 18
Rights offer price Rs. 15
Face value of a share Rs. 10 (5 marks)

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2015 – Dec. [1] (b)


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

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2016 – Dec. [1] (c)


Compute NAV and rate of return for a unit holder who bought a unit at Rs. 17.60 and received
a dividend of Rs. 2 per unit during the period. Face value of the unit is Rs. 10. Other details
are as under :
Particulars Rs. in crore
Market value of funds portfolio 4,200
Size of the scheme 2,000
Accrued income 100
Receivables 100
Accrued expenses 275
Liabilities 150
Number of outstanding units : 200 crore
(5 marks)

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MODULE QUESTION
ABC mutual Fund has the following assets in scheme XYZ at the close business on 31st
March, 2019.

Company No. of Shares Market Price Per Share


N Ltd 25,000 Rs 20
D Ltd 35,000 Rs 300
S Ltd 29,000 Rs 380
C Ltd 40,000 Rs 500

The total number of units of scheme XYZ are 10 Lakh. The Scheme XYZ has accrued expenses
of Rs 2,50,000 and other Liabilities of Rs 2,00,000. Calculate the NAV per unit of the scheme
XYZ

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2017 – Dec. [1]


ABC Ltd. a company whose equity shares are listed at BSE and NSE is seeking delisting of
its equity shares from both the recognized stock exchanges. It provides an exit opportunity to
all public shareholders in accordance with SEBI [Delisting of Equity Shares] Regulations, 2009.
Calculate the minimum number of equity shares to be acquired for the delisting offer to be
successful. Also determine the final offer price from the details given hereunder: (8 marks)
(i) Shareholding
Number of Shares Percentage holding

Promoter 75,00,000 75

Public 25,00,000 25

1,00,00,000 100

(ii) The floor price in terms of SEBI [Substantial Acquisition of Shares and Takeovers] Regulations,
2011 is Rs. 550 per share.
(iii) Assume that all the public shareholders holding shares in the demat mode had participated in
the book building process as follows :
Bid Price Number of Investors Demand [Number of
Rs. Shares]
550 5 2,50,000
565 8 4,00,000
575 10 2,00,000
535 4 4,00,000
595 6 1,20,000
600 5 1,30,000
605 3 2,10,000
610 3 1,40,000
615 3 1,50,000
620 1 5,00,000
48 25,00,000

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2015 – Dec. [1] (a)


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

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2015 – Dec. [1]


Aishwarya Ltd. proposes to issue 10,00,000 share warrants to its promoters. The share warrants
give an option to buy shares at a predetermined price. From the following share price data,
identify the price at which share warrants should be issued and the amount payable by the
promoters at the time of allotment :
(i) Closing price in the market on the relevant date : Rs. 340
(ii) The average of the weekly high and low of the closing prices of the related shares quoted on
the stock exchange during the six months preceding the relevant date; Rs. 354.
(iii) The average of the weekly high and low of the closing prices of the related shares quoted on
a stock exchange during the two weeks preceding the relevant date : Rs. 350. (6 marks)

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2014 – June [1]


Attempt the following and support your answer with necessary reasons:
a) A transaction of dematerialized equity shares took place on Wednesday, the 19 th March, 2018
at BSE. According to the compulsory rolling settlement, compete the following table with
timeline of the settlement cycle :
Activity Day and Date
Rolling settlement trading
Custodial confirmation
Delivery generation
Securities and funds pay in
Securities and funds pay out
Valuation debit
Auction

Auction settlement

(5 marks)
Answer-

Activity Day Day and Date


Rolling Settlement Trading T Wednesday i.e 19th March
Custodial confirmation T+1 Working days Thursday i.e. 20th March
Delivery generation T+1 Working days Thursday i.e. 20th March
Securities and funds pay T+2 Working days Friday i.e. 21st March
in
Securities and funds pay T+2 Working days Friday i.e. 21st March
out
Valuation debit T+2 Working days Friday i.e. 21st March
Auction T+3 Working days Monday i.e. 24th March
Auction Settlement T+5 Working days Wednesday i.e. 26th March

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June 2019
A Mutual Fund having 300 units has shown Net Asset Value (NAV) of Rs 8.75 and Rs 9.45
at the beginning and at the end of the year respectively. The Mutual Fund has given two
options:
(i) Pay Rs 0.75 per unit as dividend and Rs 0.60 per unit as capital appreciation; or
(ii) These distributions are to be reinvested at an average NAV of Rs 8.65 per
unit. What difference it would make in terms of return available and which option is preferable?
(5 marks)

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June 2019:
From the following information, calculate the Enterprise Value of E Ltd. :
Balance Sheet of E Ltd. as on 31st March, 2018

Liabilities Amount Assets Amount


(`Lakh) (`Lakh)

Share Capital (Face Value of Rs 2) 952 Non-Current Assets 2,550


Reserves & Surplus 48 Current Assets :
Minority Interest 115 Cash & Cash Equivalent 102
Short-term Borrowings 2,860 Other Current Assets 1,323

3,975 3,975

Current Market Price Per Share is Rs 96. (4 marks)

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June 2019:
The Board of directors of a listed company desires to delist its equity shares from all the
recognised stock exchanges. The voting details through postal ballot are as under:
— Total nos. of voters : 7,000 (Public : 5,000 & Promoters : 2,000)
— Voting at shareholders meeting :
(a) Public shareholders :
In favour : 3,300 votes
In against : 1,700 votes
(b) All promoters shareholders have voted in favour of resolution.
By referring SEBI delisting regulation, decide upon the resolution passed by the shareholders.
(4 marks)

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

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June 2019:
What are the Option contracts? You are required to compute the profit/loss for
each investors in below option contracts :
(i) Mr. X writes a call option to purchase share at an exercise price of Rs 60 for a premium of Rs
12 per share. The share price rises to Rs 62 by the time the option expires.
(ii) Mr. Y buys a put option at an exercise price of Rs 80 for a premium of Rs 8.50 per share. The
share price falls to Rs 60 by the time the option expires.
(iii) Mr. Z writes a put option at an exercise price of Rs 80 for a premium of
Rs 11 per share. The price of the share rises to Rs 96 by the time the option expires.
(iv) Mr. XY writes a put option with an exercise price of Rs 70 for a premium of Rs 8 per share.
The price falls to Rs 48 by the time the option expires. (5 marks)

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Dec 2019:
A Mutual fund has sown Net Asset Value [NAV] of Rs. 11.60 at the commencement of the
year. At the end of the year NAV increases to Rs. 12.50. Meanwhile, the Fund distributes Rs.
0.75 as dividend and Rs.0.85 as capital gains.
(i) Calculate the fund’s return during the year.
(ii) Had these distributions been re-invested at an average NAV of Rs. 12.20, what is the return
for 400 units? [5 marks]

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

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Dec 2019:
TechNoGrow Ltd. approved buy back proposal of 200000 Equity share capital in its Board
meeting on 25 th April, 2019. The record date was fixed on 25 th June, 2019. The closing market
price on NSE as on 25 th April, 2019 and 25 th June, 2019 was Rs. 2640.40 and Rs. 2514.05
respectively. Determine the number of equity shares which is eligible to be tendered by Small
Shareholder Category [rounded off to lower whole number]. [5 marks]

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Dec 2020
The information relating to one Equity Oriented Mutual Fund is given below:
(`Rs in thousand)
2nd January, 2019 3rd January, 2019

Market Value of Fund’s Portfolio 19,300 19,800


Receivables 200 200
Other Accrued Income 50 50
Accrued Expenses 100 100
Other Payables 100 100
Units of Mutual Fund 5,00,000 5,00,000

Face value per unit is Rs 10.


You are required to calculate:
(i) NAV of the fund on 2nd January, 2019 and 3rd January, 2019.
(ii) Ramesh invested Rs 1,95,000 in this Fund on 2nd January, 2019 at 02:00 PM, through
Internet Banking Payment System. Calculate the number of mutual fund units allotted to
him. Assume that there is no transaction cost.
(5 marks)

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

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Dec 2020
RP Ltd. is planning to issue an IPO in 2019 for which a draft offer document is proposed to
be filed in September, 2019. The following data is available regarding the company:
(`Rs in crore)
2015-16 2016-17 2017-18

Net Tangible Assets 5.00 8.00 7.00


Monetary Assets 1.00 3.00 3.00
Net Worth 3.00 4.00 5.00

(i) Advice the company whether they can proceed with the IPO
(ii) Will your answer be different if value of monetary assets is Rs 4 crore in 2016-17?
(iii) How will you deal with the situation, if company has monetary assets of Rs 5 crore in the
year 2017-18? (5 marks)

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Dec 2020
The Nifty Index was trading at 11025 on 1st February, 2019 on NSE. The put option of 10800
with expiry date of 28th February, 2019 was available at Rs 50 per lot and the call option of
11300 with same expiry date was available at Rs 30 per lot. The size of one lot of Nifty is 75.

Ganesh who is regular trader in stock market purchased 2 lots of put options of 10800 and
one lot of call option of 11300. On 22nd February, 2019, the Nifty Index was trading at 10850.
Ganesh decided to square off all these transactions. At the time of squaring off, the call option
of 10800 could be sold at Rs 80 and put option could be sold at Rs 5.

Calculate the Net gain/loss from this transaction considering the transaction charges including
brokerage is fixed at Rs 100 per lot (buy or sale). (5 marks)

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Dec 2020
Raman Ltd. issued 50 Lakh equity shares at a price of Rs 200 per share. The company provided
Green Shoe Option for stabilizing the post listing price of the shares. The issue was
oversubscribed and it was decided that stabilizing agent would borrow maximum number of
shares permitted by SEBI (ICDR) regulations. Due to rise in price during Green Shoe Option
period, only 5 Lakh shares could be bought back at the price of Rs 180.

You are required to:


(i) Calculate the number of shares that the stabilizing agent needs to borrow in this case at the
time of allotment and explain the same with relevant provisions.
(ii) Explain the responsibility of Issuer Company in the above case with respect to shortfall while
exercising Green Shoe Option.
(iii) Calculate the amount if any, to be transferred to Investor Protection and Education Fund.
(5 marks)

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June 2021
R is holding 2000 units of a equity-oriented scheme of a mutual fund and 1000 units of a debt
scheme of a mutual fund. On 7th June, 2020 he is interested to redeem these units. Prevailing
net asset value (NAV) of these units are as under:

Date Net Asset Value (NAV)


Equity-oriented scheme (in Rs) Debt scheme (in Rs)
6th June 45 35
7th June 46 34
8th June 47 33

He makes an application for redemption of above units on 7th June, 2020 at 2:30 pm. Based
on given information answer the following:
(i) What do you mean by cut-off time? What are the cut-off time for equity-oriented & Debt
funds (except liquid funds)?
(ii) What will be the applicable NAV in his case?
(iii) What will be applicable NAV if application for redemption is made at 3:15 pm?
(3+1+1 marks)

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June 2021
What do you mean by Enterprise value under SEBI Takeover code? From the given information,
calculate the Enterprise value of KRS Ltd:
- Outstanding equity share capital Rs 1,600 lakh (par value per share Rs 2)
- Market price per share on closing date (equity share) : Rs 125
- Reserves & Surplus Rs 195 lakh, Minority interest Rs 275 lakh, Preference share capital
Rs 4,200 lakh, Cash-in-hand Rs 72 lakh, Cash equivalent Rs 63 lakh, Other current
assets Rs 1,965 lakh.
(5 marks)

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

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June 2021
ABC Limited, a public company, has come with public issue of 15,00,000 equity shares through
a book building process. The price band is Rs 500 – Rs 600. The following table shows demand
of securities at various price levels. What should be the cut-off price as per book building
mechanism?
Bid Price (Rs) Number of Investors Demand (Number of Shares)
520 25 8,50,000
530 10 4,00,000
535 15 2,00,000
545 4 4,00,000
560 6 1,00,000
575 5 2,00,000
585 3 1,10,000
590 3 1,40,000
595 3 3,50,000
600 1 7,00,000
Total 75 34,50,000
(5 marks)

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June 2021
Akshay buys 500 shares of PQR Limited @ Rs 210 per share on the stock exchange platform.
In order to hedge the position, he sells 300 futures of PQR Limited @ Rs 195 each. Due to
fall in the share and futures price by 5% and 3% respectively on next day, Akshay closes his
position by counter transactions. Find out his profit or loss.
(2+3 marks)

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Dec 2021
(i) Rakesh has invested Rs. 20,000 in PQR Mutual Fund with entry load 1%. Find out the Net
Asset Value if the number of units purchased was 100.
(ii) Pritam is holding SALORA Mutual Fund units. He sold all the units at a NAV of Rs. 120
with exit load of 1%. He received Rs. 52,000. Find the number of units sold by Pritam.
(5 marks)

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Dec 2021
ABC Company Ltd had issued 2000 equity shares of Rs. 80 each with attachable warrant on
20th June, 2018. The warrant can be exchanged in equity in the proportion of 1 : 1. S, a
shareholder who was allotted 200 equity shares with attachable warrant on 20th June, 2018
wants to know the warrant premium if the market value of warrant is Rs. 18 and exercise price
is Rs. 70.
(i) Calculate the warrant premium for S.
(ii) What are the conditions of eligibility of ABC Company Ltd to issue Warrant?
(iii) When ABC Company can forfeit the warrant?
(5 marks)

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Dec 2021
Suppose B Co Ltd issues bonds with following terms:
Issue price of Bond Rs. 2000.
Coupon rate 2% with maturity period of 2 years.
Convertible into equity shares @ Rs. 100 per share.
Y has subscribed for 5 bonds and made an investment of Rs. 10,000. On maturity date,
investor will have an option to either claim full redemption amount or convert the Bonds in to
equity @ Rs. 100 per share. The quoted share price on maturity date is Rs. 150. If he goes for
conversion how many shares Y will get? Will it be fair enough if he opts for redemption value?
Calculate which option is best suitable to Y?
(5 marks)

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June 2022
Grow India Ltd. has recently launched a Mutual Fund Scheme with the name GI Equity Multi
Cap Scheme with following details:
Size of the Scheme 200 lakh
Face value of the unit RS.20
Number of the outstanding units 20 Lakh
Market value of the fund's investments receivables 360 lakh
Accrued Income 2 lakh
Receivables 2 lakh
Liabilities 1 lakh
Accrued expenses 1 lakh
(1) What do you mean by NAV?
(2) Find out the NAV in the present case.
(3) What does an expense ratio contain in a Mutual Fund Scheme?
(5 marks)

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June 2022
Eknath, a risk averse investor is planning to take advantage of market rumour that in the
upcoming budget, the Government is likely to announce some economic package including
production linked incentive (PLI) scheme for auto industries. As he does not like to take higher
risk; he purchases one call and put option contract (Lot size 1000 shares) of a leading auto
component manufacturing company at a premium of 75 and 4 respectively with strike price of
105. In the budget, no PLI scheme was declared and the price of stock fell to 90.
(i) Ascertain the net loss/profit.
(ii) What would be your answer, if the stock price escalates to 120 as Government slashed GST
rate on vehicles?
(5 marks)

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December 2022
Fortune Mutual Fund launched a special scheme, the details of which are given below:
NAV Rs. 14 per unit
Redemption price Rs. 13.50 per unit
Offer Price Rs. 14.75 per unit

You are required to compute:


(i) Back End Load
(ii) Front End Load (5 marks)

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December 2022
Joshi Ltd is a listed entity entered into a transaction with related party, namely Hosh Ltd for
an amount of Rs. 59 crore and simultaneously made a payment of Rs. 10 crore for brand use.
The turnover of Joshi Ltd is Rs. 480 crore on standalone basis and after considering
consolidation of subsidiary & associate is Rs. 610 crore. You, being a company secretary of
the company, advise on the following:
1. Whether the transaction is a related party transaction or not?
2. Whether the payment made for brand use is a related party transaction or not?
3. When transactions with related party are material in above both the cases?
4. What is omnibus approval of audit committee for all related party transactions?
(8 marks)

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December 2022
Tarun purchases the following European Call options of TCS. He also purchases the following
European put option of ACC. What decision he would take on expiry if TCS closes at Rs. 835
and ACC closes at Rs. 565, spot prices? Ignore premium paid.
i) TCS 830 Call
ii) ACC 510 Put
iii) TCS 840 Call
iv) ACC 520 Put (5 marks)

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June 2023
The financial data of a listed company Sun Rise Ltd. as on 31 st March, 2021 is as follows:

Particulars Amount Rs.

Equity Share Capital [fully paid-up of face value of Rs. 10 each] 5,00,000

10% Preference Share Capital [fully paid-up of Rs. 100 each] 1,00,000
12% Debentures [Rs. 100 each] 2,00,000
Revaluation Reserve 50,000

General Reserve 2,00,000

Profit & Loss Account 2,00,000

The company wanted to place proposal before the Board for buy-back of its equity shares and
also simultaneously redeem the entire preference share capital. You, as a Company Secretary,
advise the Board on the following issues:
i) Maximum limit [in amount] up to which shareholders can approve buy-back of shares.
ii) Maximum number of shares that can be bought back and the maximum price that can be paid
per equity share bought back.
iii) Generally, what should be the ratio of the aggregate of secured and unsecured debts owed to
the company after buy-back? (5 marks)

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June 2023
What is Inflation rate? How to calculate it? M bought his morning coffee for Rs. 12 in 2019,
but now he is paying Rs. 16 in 2023. Calculate the inflation rate. (5 marks)

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June 2023
Daksh is planning to invest in Systematic Investment Plan (SIP) of a mutual fund with a
fixed sum of Rs 20,000 on 2nd of every month for four months. The NAV on these dates are
Rs 30.76, Rs 42.18, Rs 38.15 and Rs 40.25 respectively. The entry load was 1.75% throughout
the period. Find the average buy price including the amount of entry load. (5 marks)

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June 2023
X has made an investment of Rs 50,000 to buy 5000 units of Philip mutual fund on 4th April,
2021. He decided to sell the units on 14th November, 2021 at NAV of Rs 20.60. The exit load
was 2.25%. Find the sale value & gain made in the transaction. (5 marks)

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June 2023
XYZ Limited is having three subsidiaries X Ltd., Y Ltd., and Z Ltd. The consolidated income
of XYZ Limited is ` 300 crore and net worth is ` 600 crore. The income and net worth of X
Ltd., Y Ltd., and Z Ltd. are as follows :
Company Income (`) Net worth (`)
X Ltd. 10 crore 65 crore
Y Ltd. 45 crore 14 crore
Z Ltd. 10 crore 18 crore
Examine if there is any material subsidiary of XYZ Limited. (5 marks)

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June 2023
R purchases the following European Call option of Emkey Tech Ltd. and Europea n Put option
of Giganet Ltd. What decision he would take on expiry, if the share price of Emkey closes at
Rs 1100 and Giganet closes at Rs 590 in the following circumstances? (Ignore any premium
paid).
(a) Emkey : 1050 Call
(b) Giganet : 525 Put
(c) Emkey : 1120 Call
(d) Giganet : 580 Put. (5 marks)

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June 2023
Roshivee wants to invest in the share of blue chip companies. However, due to the expected
outbreak of war between two countries, an investment advisor suggested him to invest through
option contract. He expects that the price of shares will go down in near future.
(a) What option contract (put or call option) he should buy?
(b) If the present futures contract of Maxwell Ltd. are traded at Rs 100 and put option involves,
a cost of 1.5% (one and a half) based on the strike price. During the month, the war was
declared and the price of the share went down to ` 97. What will be the gain or loss on Rs
1,50,000 option contracts ? (5 marks)

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FORMULA TABLE

1. Out of Money [in case of call option] = Strike Price > Market Price.
2. Out of Money [in case of put option] = Market Price > Strike Price.
3. Yield to Maturity [YTM]
= [100 – P] x 365 x 100
PxD
Here P = Price
D = Days to Maturity
4. Net Assets Value [NAV]
Market value of fair value of scheme’s investments
+ Current Assets – Current Liabilities & Provision
No. of outstanding units on the valuation date
5. Public offer price [P.O.P] of an unit of Mutual Fund = NAV
Front End Load
6. Redemption Price of an unit of Mutual Fund = NAV
Back End Load
7. Value of rights [in case of mutual fund]
n
Vr = m
[Pex- P of]
Here,
n = no. of rights shared offered.
m = no. of original shares held;
Pex = Ex-right price
Pof = Rights offer price;
8. Rate of Return = [NAV at Present – NAV at Purchase] + Dividend x 100
NAV at Purchase

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CHAPTER 20 – CASE LAWS

CHAPTER 3 – SECURITIES CONTRACTS (REGULATION) ACT,


1956

21.02.2020
Pacific Finstock Ltd. (Appellant) vs. BSE Ltd. (Respondent)
Securities Appellate Tribunal

For Listing of a security, the Listing norms as on date of Application filed alone is required to
be considered but status of the directors/ promoters of the company are required to be
considered on the date of the passing of the order on the listing application.

1. The appellant, being aggrieved by the order dated August 02, 2019 passed by the BSE Limited
(“BSE”) rejecting the listing application has filed the present appeal.

2. The facts leading to the filing of the present appeal is, that the appellant was a listed company
on the Vadodara Stock Exchange and Ahmedabad Stock Exchange but subsequently it came on
the Dissemination Board of the BSE and remained on the Dissemination Board for the last
several years. Securities and Exchange Board of India (“SEBI” for convenience) issued a Circular
dated October 10, 2016 by which the companies which were on the Dissemination Board were
required to get their company listed on nationwide stock exchange or provide an exit opportunity
to existing shareholders. In terms of this Circular, the appellant submitted a plan of action to
BSE on February 16, 2017 and a revised plan of action was submitted on June 28, 2017.

3. In the meanwhile, the appellant vide notice dated August 07, 2017 was identified as a suspected
shell company. Against this notice, the appellant filed an Appeal No. 264 of 2017 before this
Tribunal which was disposed of by an order dated September 29, 2017 directing the appellant
to make a fresh application for direct listing of its securities which would be considered by
BSE and which would further be subject to any order that may be passed by SEBI.

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4. It transpires that the appellant filed a fresh listing application. During the pendency of the
application, the Whole Time Member (“WTM”) passed an order dated October 26, 2017 directing
BSE to consider the outcome of the forensic audit while considering the listing application.
Accordingly, the appellants’ application was kept in abeyance till the submission of the Forensic
Audit Report. The WTM’s order dated October 26, 2017 was subsequently confirmed by a
confirmatory order dated August 02, 2018 against which the appellant filed an Appeal No. 295
of 2018 which was eventually dismissed as infructuous by an order dated March 07, 2019.

5. In the meanwhile, the promoters/directors of the appellant company were debarred from
accessing the securities market vide SEBI’s order dated September 28, 2019 passed in the
matter of Kavit Industries Ltd. This fact was brought to the notice of the appellant and sought
clarification as to how the company is required to comply with the requirements for direct
listing of its securities. It transpires that the company vide letter dated May 18, 2019 intimated
that two of its directors have resigned with effect from April 15, 2019 and that SEBI vide its
order dated February 13, 2019 has removed the tag of “suspected shell company”. BSE after
considering the aforesaid response, found that one of its promoters Shri Jayesh Raichandbhai
Thakkar, continued to remain as the promoter of the company inspite of being debarred by
SEBI vide order dated September 28, 2018 and, therefore, the direct listing requirements norms
had not been complied with. Accordingly, the listing application was rejected.

6. Before the Tribunal, the only ground urged is that the law which was applicable on the date
when the listing application was filed on July 29, 2017 could alone be considered. There is no
dispute on this proposition namely that the listing norms that was in force on the date when
the application was filed was alone required to be considered. Subsequent norms or amended
norms or regulations are not required to be considered. However, the status of the directors/
promoters of the company are required to be considered on the date of the passing of the
order on the listing application. If on the date when the listing application was being considered
the promoters/ directors of the company committed default and thereby incurred a debarment
from accessing the securities market then it was imperative upon the authority to consider
such debarment while considering the listing application. In the instant case, the debarment
was in direct conflict when the norms stipulated for considering the listing agreement. Such

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order of SEBI of debarment of one of the promoters was brought to the knowledge of the
company. The said listing requirements norms were not rectified and consequently the BSE
had no option but to reject the listing application. The said order does not suffer from any
manifest error of law and requires no interference. The appeal fails and is dismissed.

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03.12.2019
Karvy Stock Broking Limited (Appellant) vs. National Stock Exchange of India
(Respondent)
Securities Appellate Tribunal

1. By the present appeal the appellant is seeking quashment of the impugned order/circular dated
December 2, 2019 issued by respondent National Stock Exchange of India Ltd. (hereinafter
referred to as ‘NSE’).

2. Vide the said circular respondent NSE had suspended the present appellant from its membership
due to the alleged non compliance of the regulatory provisions of the Exchange with effect
from 2nd December, 2019.

3. Upon hearing both sides, the Rules are framed by respondent NSE in exercise of the powers
of the Section 9 of the SCRA. The appellant has equally efficacious remedy to challenge the
impugned order before the relevant authority of the respondent NSE. In that view of the
matter, SAT did not find any reason to entertain the appeal. Learned Senior counsel for the
respondent submits that the appeal, if any, filed by the appellant with the respondent, they
would be heard expeditiously by convening meeting of the relevant authority. There is no need
to bypass the statutory Rules. At this stage, learned counsel for the appellant submits that
the appellant may be provided with liberty to seek documents from the respondent. SAT did
not find any hitch in acceding to the said request. The respondent shall supply the documents
or grant inspection of the same relevant to the dispute.

4. For the reasons stated above, the appeal is disposed of. Appellant would be at liberty to file
an appeal as provided by Rule 13A(d) of the NSE Rules. In case, if such an appeal is filed,
appellant shall be heard as expeditiously as possible and in any event shall be decided by
December 6, 2019. In case the relevant authority would not be able to decide the appeal within
the period, the decision on the temporary stay to the impugned order may be taken by the
relevant authority on or before December 6, 2019. No order as to costs.

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

The disclosures were made by The Orissa Minerals Development Co. Ltd. to stock exchanges
belatedly each after a period of more than 24 hours since the time of their receipt by
OMDC.

Facts of the case:


SEBI conducted investigation into the alleged delayed disclosure of the price sensitive
information (hereinafter referred to as “PSI”) by The Orissa Minerals Development Company
Ltd., (hereinafter referred to as “OMDC/Company”), in the scrip of OMDC, to the Stock
Exchanges ( “BSE” and “NSE”) for alleged violation of provisions of the SEBI Act, 1992 and
SEBI (Prohibition of Insider Trading) Regulations, 1992 during the investigation period July 02,
2012 to August 10, 2012.

The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company
Secretary) has made belated disclosure to the stock exchanges of the important price sensitive
information. Therefore, SEBI hold that the Noticees have violated the provisions of Clause 2.1
of the Code of Corporate Disclosure Practice for Prevention of Insider Trading contained in
Schedule II read with Regulation 12(2) of the PIT Regulations, 1992. Further, OMDC, also
violated Clause 36 of the Listing Agreement read with Section 21 of Securities Contracts
(Regulation) Act, 1956 (“SCRA”).

By not making the disclosures on time, the Noticee has failed to comply with the mandatory
statutory obligation.

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Order:
In view of the foregoing, considering the facts and circumstances of the case, the material on
record, SEBI imposed a total penalty of Rs. 2,00,000/- (Rupees Two Lacs only) under Section
15HB of the SEBI Act, 1992 and Section 23A(a)* of the Securities Contracts (Regulation)
Act, 1956, on the Noticees i.e. The Orissa Minerals Development Co. Ltd., Dr. Satish Chandra
and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate Disclosure Practice for
Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the PIT
Regulations, 1992 and also against The Orissa Minerals Development Co. Ltd for violation of
Clause 36 of Listing Agreement read with Section 21 of SCRA.
* Section 23A(a) deals with Penalty for failure to furnish information, return, etc

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07.09.1998
Vinay Bubna vs. Yogesh Mehta and Ors

Whether by-laws framed by the Bombay Stock Exchange are subordinate legislation?

In the above case Bombay High Court Held

Section 9(4) of the Securities Contract Act requires previous publication of the bye-laws before
they can come into force. Publication is another incidence of subordinate legislation. Therefore,
there is no difficulty in holding that the bye-laws framed under Section 9 are subordinate
legislation. Section 9 of the Securities Contract Act itself confers power on the Board to make
bye-laws pertaining to regulation and control of contracts. Bye-laws have been framed under
the Securities Contracts (Regulation) Act, 1956. For that purpose, the relevant sections of the
Act which need to be referred to are Section 7A of the Securities Contracts (Regulations) Act,
1956 confers a power on a recognised Stock Exchange to make rules restricting voting rights,
etc. Section 8 is the power conferred on the Central Government to direct rules to be made
and/or to make rules itself after consultation with the Governing bodies of the Stock Exchanges
generally or with the governing body of any Stock Exchange in particular for matters specified
in Section 3(2), In case the Governing Body fails to make Rules as directed power is conferred
under sub-section (2) on the Central Government.

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Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals
Development Co. Ltd.

SEBI Adjudication Order:

SEBI, in exercise of the powers conferred under Section 15-I of the SEBI Act read with Rule
5 of the Adjudication Rules,1995 and Section 23-I of the SC(R) Act, 1956 read with Rule 5 of
the Adjudication Rules, 2005, imposed a total penalty of Rs. 2,00,000/- (Rupees Two Lacs
only) under Section 15HB of the SEBI Act, 1992 and Section 23A(a) of the Securities Contracts
(Regulation) Act, 1956, on the Noticees i.e. The Orissa Minerals Development Co. Ltd., Dr.
Satish Chandra and Ms. Sucharita Das for violation of Clause 2.1 of Code of Corporate Disclosure
Practice for Prevention of Insider Trading contained in Schedule II to Regulation 12(2) of the
PIT Regulations, 1992 and also against The Orissa Minerals Development Co. Ltd for violation
of Clause 36 of Listing Agreement read with Section 21 of SCRA.

Extracts from SEBI Order dated 20th August 2020 in the matter of The Orissa Minerals
Development Co. Ltd.

SEBI conducted investigation into the alleged delayed disclosure of the price sensitive
information by The Orissa Minerals Development Company Ltd., (“OMDC/Company”), in the
scrip of OMDC, to the Stock Exchanges (“BSE” and “NSE”) for alleged violation of provisions
of the SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 1992 during the
investigation period July 02, 2012 to August 10, 2012.

The OMDC, Dr. Satish Chandra (Managing Director) and Ms. Sucharita Das (Company
Secretary) has made belated disclosure to the stock exchanges of the important price sensitive
information. Therefore, SEBI hold that they have violated the provisions of Clause 2.1 of the
Code of Corporate Disclosure Practice for Prevention of Insider Trading contained in Schedule
II read with Regulation 12(2) of the PIT Regulations, 1992. Further, OMDC, also violated Clause
36 of the Listing Agreement read with Section 21 of Securities Contracts (Regulation) Act,
1956

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30.08.2022
Atlanta Infrastructure and Finance Ltd.
Adjudicating Officer, SEBI

Facts of the Case :

Atlanta Infrastructure and Finance Ltd. (“Atlanta”) was formerly known as Kadvani Securities
Ltd. and was an authorised Non-Banking Financial Services Company (NBFC). The Company
changed its name to Atlanta Infrastructure and Finance Ltd. w.e.f. August 3, 2013. The main
business activity of the Company is infrastructure and development of land. The company was
incorporated in 1992 and listed on BSE w.e.f June 07, 1995.

SEBI conducted an investigation into trading of the scrip of Atlanta for suspected manipulation
of the scrip price for the period August 2, 2010 to January 6, 2015 and the investigation
revealed that the promoters/promoter group had all disposed-of their shares on February 19,
2014 as per information provided by RTA of the company. The total promoter/promoter group
shareholding of Atlanta for the quarter ended March 2014 should have been zero. Atlanta had
submitted to BSE a wrong shareholding pattern. Atlanta had submitted 2,23,000 shares as
promoter shareholding to BSE for the quarter ended March 2014 and therefore, was alleged to
have violated Section 21 of Securities Contracts (Regulations) Act, 1956 (“SCR Act”).

SEBI Order:

SEBI under Section 23-I of SCR Act read with Rule 5 of SCR(A) Rules, imposed a penalty of
Rs. 1,00,000/- (Rupees One Lakh only) under Section 23H of SCRA, 1956 on Atlanta
Infrastructure and Finance Ltd. for violation of Section 21 of SCRA, 1956.

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19.04.2022
M/s. S.B. Securities Pvt. Ltd.
Adjudicating Officer, SEBI

Facts of the Case :


Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) and BSE Ltd.
(hereinafter referred to as ‘BSE’) conducted a comprehensive joint inspection of M/s. S.B.
Securities Pvt. Ltd. (hereinafter referred to as ‘Stock Broker / Noticee/You/Broker’) from March
26, 2019 to March 27, 2019 and on April 23, 2019. The said inspection was carried out at 379,
Priti Building, S V Road, Vile Parle (west), Mumbai – 400 056 w.r.t. its Stock Broking activities(
(hereinafter referred to as ‘SBs’). The period covered in the inspection was from April 2017 to
September 2018 (hereinafter referred to as ‘Inspection Period’). Noticee is a SEBI-registered
Stock Broker, having SEBI registration number as INZ000001834. Noticee is a Stock Broker of
BSE. Based on the findings of inspection and the reply of Noticee, SEBI initiated adjudication
proceedings against Noticee under: a) Section 23D of Securities Contracts (Regulation) Act,
1956 (hereinafter referred to as “SCRA”), for the alleged violations of Section 23D of SCRA.

SEBI Order:
SEBI under Section 23-I of SCR Act, imposed a penalty of Rs. 3,00,000/- (Rupees Three Lakh
only) on S.B. Securities Pvt. Ltd for violation of Section 23D of SCRA, 1956. The Noticee, a
SEBI registered Intermediary, was under a statutory obligation to abide by the provisions of
the SCRA, SEBI Act, Rules and Regulations and Circulars/directions issued thereunder etc.,
which it failed to do. Such disregard for the provisions of law governing the functioning of
intermediaries calls for an appropriate penalty which should act as a deterrent.

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Extracts from SAT Order dated 25th February 2019 in the matter of Synergy Cosmetics
(Exim) Limited vs. BSE Limited

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

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CHAPTER 4 – SECURITIES AND EXCHANGE BOARD OF INDIA

01.07.2020
India Ratings and Research Private Ltd. (Appellant) vs. SEBI (Respondent)
Securities Appellate Tribunal

SEBI can call for and examine records of any proceedings if it considers the orders passed
by the adjudicating officer erroneous and not in the interests of securities markets. After
making inquiry, SEBI may enhance the quantum of penalty imposed, if the circumstances
of the case so justify.

Facts of the case:


The Adjudicating Officer by the impugned order dated 26th December, 2019 has imposed a
penalty of Rs.25 lakhs upon the Appellant for violating the Code of Conduct to the Securities
and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 while granting credit
rating to IL&FS for the financial year 2018-19.

SEBI issued a second show cause notice dated 28th January, 2020 by exercising powers under
Section 15- I(3) of the SEBI Act directing the Appellant to show cause as to why penalty
should not be enhanced as in their opinion the order of the Adjudicating Officer was not in
the interest of the securities market.

“Under Section 15-I(3), the SEBI can call for and examine records of proceedings if it considers
the orders passed by the adjudicating officer erroneous and not in the interests of securities
markets. After examining the matter, the SEBI can enhance the quantum of penalty imposed.”

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Misc. Application no.159 of 2020 has been filed in Appeal no.103 of 2020 praying that
proceedings initiated by SEBI pursuant to the second show cause notice dated 28th January,
2020 issued under Section 15-I (3) of the SEBI Act, should be stayed.

Order:
SEBI has the power to initiate proceedings under Section 15-I(3) of the SEBI Act. SAT directed
the Appellant to deposit a sum of Rs.25 lakhs pursuant to the impugned order dated 26th
December, 2019 before the Respondent within four weeks which would be subject to the result
of the appeal. SAT further directed that the proceedings in pursuance to the second show
cause notice dated 28th January, 2020 will continue and the Respondent will pass appropriate
orders after giving an opportunity of hearing to the Appellant either through physical hearing
or through video conferencing but any order that is passed by the Respondent shall not be
given effect to during the pendency of this appeal. Misc. Application is accordingly disposed of.

18.03.2021
Mr. Neeleshkumar Radheshyam Lahoti (Noticee) (In the matter of Supreme Tex Mart
Limited) vs. Securities and Exchange Board of India (SEBI)
Adjudicating Officer, SEBI

Every person from whom information is sought should fully co-operate with the
investigating officer and promptly produce all documents, records, information as may be
necessary for the investigations.

Facts of the Case:


SEBI conducted an investigation into the affairs of Supreme Tex Mart Limited (STML/
Company) for the period June 01, 2016 to October 31, 2016. During the course of investigation,
the Investigating Authority (IA) of SEBI issued summons under Section 11C(2) read with
Section 11C(3) of the SEBI Act, 1992 to Mr. Neeleshkumar Radheshyam Lahoti (Noticee)
seeking certain documents/ information. The Noticee replied to the summons and submitted
certain information. However, it was alleged that the Noticee submitted incorrect information.

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In view of the same, SEBI initiated adjudication proceedings under Section 15HB of the SEBI
Act against the Noticee.

SEBI Order:
SEBI imposed a penalty of 8 lakh on the Noticee under the provisions of Section 15HB of the
SEBI Act. It was established that the Noticee provided incorrect information to the
Investigating Authority (IA) of SEBI and hampered the process of investigation thus violating
the provisions of Section 11C(2) read with Section 11C(3) of the SEBI Act, 1992. It was a
deliberate attempt of Noticee to misguide investigation. Section 11C(3) of the SEBI Act
empowers the IA to obtain records, documents, information etc., as considered relevant or
necessary for the purpose of investigation. Section 11C(2) of SEBI Act casts an obligation on
every person associated with the securities market to preserve and to produce to the
Investigating Authority or any person authorised by it in this behalf, such records, documents,
information which are in their custody or power.

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28.02.2019
Adjudicating Officer, SEBI (Appellant) vs. Bhavesh Pabari (Respondent)
Supreme Court of India

The Supreme Court of India ruled in Adjudicating Officer, SEBI v. Bhavesh Pabari granting
back the discretionary power to Adjudicating Officer (AO) under supervision and scrutiny
of the court.

Facts of the Case


The SEBI Act, as the object of its enactment would indicate, was enacted “to provide for the
establishment of SEBI to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith or
incidental thereto.”

Sections 15 A to 15 HA of the SEBI Act, 1992 are the penalty provisions whereas Section 15 I
deals with the power of adjudication and Section 15 J enumerates the “factors to be taken
into account by the Adjudicating Officer” while adjudging the quantum of penalty.

Section 15J has been a part of SEBI since 1992. Section 15J lays down that while adjudging
the amount of penalty, the adjudicating officer shall have due regard to the factors which are
as follows:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made
as a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the
default;
(c) the repetitive nature of the default.

Explanation- For the removal of doubts, it is clarified that the power to adjudge the quantum
of penalty under sections 15A to 15E, clauses (b) and (c) of section 15-F, 15G, 15H and 15HA
shall be and shall always be deemed to have been exercised under the provisions of this
section.”

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The questions referred in the given case can be enumerated and summarized as follows:
(i) Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15J of the
Securities and Exchange Board of India Act, 1992 are exhaustive to govern the discretion
in the Adjudicating Officer to decide on the quantum of penalty or the said conditions
are merely illustrative?
(ii) Whether the power and discretion vested by Section 15J of the SEBI Act to decide on the
quantum of penalty, regardless of the manner in which the first question is answered,
stands eclipsed by the penalty provisions contained in Section 15A to Section 15HA of the
SEBI Act?

The Court held and in the view that-


The provisions of clauses (a), (b) and (c) of Section 15J are illustrative in nature and have
to be taken into account whenever such circumstances exist. But this is not to say that there
can be no other circumstance(s) beyond those enumerated in clauses (a), (b) and (c) of
Section 15J that the Adjudicating Officer is precluded in law from considering while deciding
on the quantum of penalty to be imposed.

Conditions stipulated in clauses (a), (b) and (c) of Section 15J are not exhaustive and in the
given facts of a case, there can be circumstances beyond those enumerated by clauses (a),
(b) and (c) of Section 15J which can be taken note of by the Adjudicating Officer while
determining the quantum of penalty.

Insofar as the second question is concerned, if the penalty provisions are to be understood as
not admitting of any exception or discretion and the penalty as prescribed in Section 15 A to
Section 15-HA of the SEBI Act is to be mandatorily imposed in case of default/failure, Section
15J of the SEBI Act would stand obliterated and eclipsed. Hence, the question referred. Sections
15-A (a) to 15 HA have to be read along with Section 15J in a manner to avoid any
inconsistency or repugnancy.

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11.02.2021
Suman Motels Limited vs. SEBI
Adjudicating Officer, Securities and Exchange Board of India

Failure to obtain SCORES Authentication and to redress investor grievances

Fact of the Case:


Securities and Exchange Board of India (hereinafter referred to as, “SEBI”) vide Circular No.
CIR/OIAE/2/2011 dated June 03, 2011, directed all listed companies to obtain SEBI Complaints
Redressal System (hereinafter referred to as, “SCORES”) authentication and also redress any
pending investor grievances in that platform only. Subsequently, SEBI also vide Circulars No
CIR/OIAE/1/2012 dated August 13, 2012, No. CIR/OIAE/1/2013 dated April 17, 2013 and No
CIR/OIAE/1/2014 dated December 18, 2014, (hereinafter referred to as, “SEBI circulars”) inter
alia directed all companies whose securities were listed on Stock Exchanges to obtain SCORES
authentication within a period of 30 days from the date of issue of this circular and also to
redress the pending investor grievances within the stipulated time period.

It was alleged that Suman Motels Limited (hereinafter referred to as, “Noticee”) had failed
to obtain the SCORES authentication and to redress investor grievances pending therein within
the timelines stipulated by SEBI, therefore not complying with the aforesaid SEBI Circulars.

Order:

After taking into consideration all the facts and circumstances of the case, Adjudicating officer
imposed a penalty of Rs. 1,00,000/- (Rupees One Lakh Only) on the Noticee viz. Suman Motels
Limited in terms of the provisions of section15HB of the SEBI Act, 1992, which will be
commensurate with its non-compliances.

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CASE SNIPPETS

1. JM Financial Ltd’s former vice president Atul Saraogi on July 16, 2020 had settled an alleged
insider trading case with SEBI by paying an amount of Rs 15 lakh towards settlement charges.
During the span of investigation, SEBI observed that Saraogi had entered into two off-market
trades in shares of JMFL and had not obtained preclearance from JMFL for the two off-market
trades. Besides, he had entered the offmarket transaction when the trading window was closed.

2. Shareholders of the Kapashi Commercials Ltd., a BSE Listed company, have settled with SEBI
a case of alleged violation of takeover norms by paying over Rs 34 lakh amount towards
settlement terms. They had filed an application with the SEBI proposing to settle the case for
alleged violation of SAST (Substantial Acquisition of Shares and Takeovers) Regulations in
respect of change in their shareholding in Kapashi Commercials. It was alleged that the four
individuals made delayed disclosures to the company and BSE about the change in their
shareholding in Kapashi Commercials.

3. Northward Financial Planners (NFP) and its partners have settled with SEBI a case related to
alleged violation of Investment Advisers regulations upon payment of Rs. 21.67 lakh towards
settlement charge. NFP and partners were carrying on investment advisory activities since F.Y.
2013-14 and filed application for SEBI registration after a delay of over 4 years and continued
to carry on investment advisory activity without seeking registration.

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CHAPTER 5 – LAWS GOVERNING TO DEPOSITORIES AND DEPOSITORY


PARTICIPANTS

31.03.2020
Jaypee Capital Services Ltd (Noticee) vs. SEBI Whole Time Member, Securities and
Exchange Board of India

Facts of the Case


Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate
of Registration as a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee)
in accordance with provisions of SEBI (Depositories and Participants) Regulations, 1996 (DP
Regulations) initially for a period of five years which was valid from August 11, 2006 to August
10, 2011. The certificate of registration was, thereafter, renewed in 2011 for a further period of
five years and the renewed certificate was valid till August 10, 2016.

SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited
(hereinafter referred to as ‘CDSL’) informing that it has terminated the agreement with the
Noticee w.e.f April 04, 2016 due to noncompliance on the part of JCSL with the bye-laws of
CDSL. CDSL vide the said letter also requested SEBI to cancel the certificate of registration
granted to the Noticee at act as a Depository Participant with immediate effect. Thereafter,
National Securities Depositories Limited (hereinafter referred to as “NSDL”) vide its letter
dated April 22, 2016 informed SEBI that it has also terminated the agreement with JCSL w.e.f
May 23, 2016 due to the non-compliance on part of JCSL with the various bye-laws of NSDL.

Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was
alleged that the Noticee was no longer eligible to be admitted as a participant of depository
and had failed to inform SEBI about the termination of its agreements with CDSL and NSDL.

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Order
The failure on the part of the Noticee to inform SEBI of the termination of the agreement by
the depositories would have to be considered as a violation of Clause 14 of the Code of Conduct
for the DPs as given under third schedule read with Regulation 20AA of the DP Regulations.

SEBI, in exercise of powers conferred under Section 19 of the Securities and Exchange Board
of India Act, 1992 read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008,
cancelled the certificate of registration granted to the Noticee / Jaypee Capital Services Limited
(SEBI Registration No. IN-DP-NSDL-291-2008/IN-DPCDSL-368- 2006) with immediate
effect.

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CHAPTER 6 – SECURITIES MARKET INTERMEDIARIES

05.06.2020
Narendra Singh Tanwar, Proprietor of M/s Capital True Financial Services (Noticee) vs.
SEBI Whole Time Member, Securities Exchange Board of India

The Noticee cease and desist from acting as an Investment Adviser as it refused to refund
the money so taken by it as service fee from complainant.

Facts of the Case:


SEBI had received a complaint against Mr. Narendra Singh Tanwar, Proprietor of M/s Capital
True Financial Services (hereinafter referred to as “Noticee”), a registered Investment Adviser
(hereinafter referred to as “IA”) inter alia alleging that a promise was made on behalf of the
Noticee to the complainant assuring him a huge return of Rs. 28.80 lakh on a meagre
investment of Rs. 20,000/- over a short period of 4 months and 10 days. Pursuant to such an
assurance, an amount of Rs. 1,30,000/- was transferred by the complainant to the Noticee
towards first installment of the service fee, out of total service fee of Rs. 4,47,200/- demanded
by the Noticee in installments. However, after suffering loss on the very first day of availing
the services of the Noticee, the complainant asked the Noticee to return the amount paid to
him. As the Noticee refused to refund the money so taken by it as service fee and also stopped
attending the phone calls of the complainant, a compliant was lodged with SEBI. The said
complaint was forwarded to the Noticee for resolution and to submit an Action Taken Report
(ATR) in the SEBI Complaints Redress System (SCORES).

Order:
In view of the foregoing findings and in the interest of investors and for the protection of
their rights, SEBI issue following directions:
i. The Certificate of Registration as Investment Adviser bearing Registration number
INA000009038 issued in favour of the Noticee is hereby cancelled.
ii. The Noticee shall forthwith cease and desist from acting as an Investment Adviser.

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iii. The Noticee shall not use the term ‘Investment Adviser’ directly or indirectly in any manner
whatsoever on the letter-head, on the website, signage board, or otherwise.
iv. The Noticee is debarred from accessing the securities market and is further prohibited from
buying, selling or otherwise dealing in securities, directly or indirectly, or being associated
with securities market in any manner, for a period of 2 years and during the period of
restraint, the existing holding of securities including the holding of units of mutual funds
of the Noticee(s) shall remain frozen.

31.03.2020
Jaypee Capital Services Ltd (Noticee) vs. SEBI Whole Time Member, Securities and
Exchange Board of India

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate
of Registration as a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee)
in accordance with provisions of SEBI (Depositories and Participants) Regulations, 1996 (DP
Regulations) initially for a period of five years which was valid from August 11, 2006 to August
10, 2011. The certificate of registration was, thereafter, renewed in 2011 for a further period of
five years and the renewed certificate was valid till August 10, 2016.

SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited
(hereinafter referred to as ‘CDSL’) informing that it has terminated the agreement with the
Noticee w.e.f April 04, 2016 due to noncompliance on the part of JCSL with the bye-laws of
CDSL. CDSL vide the said letter also requested SEBI to cancel the certificate of registration
granted to the Noticee at act as a Depository Participant with immediate effect. Thereafter,
National Securities Depositories Limited (hereinafter referred to as “NSDL”) vide its letter
dated April 22, 2016 informed SEBI that it has also terminated the agreement with JCSL w.e.f
May 23, 2016 due to the non-compliance on part of JCSL with the various bye-laws of NSDL.

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Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was
alleged that the Noticee was no longer eligible to be admitted as a participant of depository
and had failed to inform SEBI about the termination of its agreements with CDSL and NSDL.

Order
The failure on the part of the Noticee to inform SEBI of the termination of the agreement by
the depositories would therefore have to be considered as a violation of Clause 14 of the Code
of Conduct for the DPs as given under third schedule read with Regulation 20AA of the DP
Regulations. Whole Time Member, in exercise of powers conferred under Section 19 of the
Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the SEBI
(Intermediaries) Regulations, 2008, hereby cancel the certificate of registration granted to the
Noticee / Jaypee Capital Services Limited (SEBI Registration No. IN-DP-NSDL-29 “self
regulatory organization” means an organization of a class of intermediaries duly recognised by
or registered with the SEBI and includes a stock exchange.

01.07.2020
Mr. Vishal Vijay Shah (Noticee) in the matter of Maharashtra Polybutenes Limited v. SEBI
Securities Appellate Tribunal

Facts of the Case:


In the facts of the instant proceedings, it is observed that the Vishal Vijay Shah (“Noticee”),
a registered Stock Broker had received funds in the client and settlement bank accounts from
third parties in cash and had made payments to third parties on behalf of clients. It is further
observed that the Noticee had also made withdrawal of cash from the client bank accounts.

Under the SEBI Circulars, a responsibility has been cast on the Stock Broker to ensure that
payments are received directly from the respective clients and not from third parties.

Accordingly, the Noticee should have taken expedient steps to ensure that funds received from
third parties are exceptionally dealt with and suitable explanations should have been asked
from the client when such blatant third party monetary amounts were received.

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However, there is nothing on record to suggest that such steps were indeed taken.

Further, the Noticee in its submissions has itself admitted to having carried out such irregular
practices. The aforementioned conduct of the Noticee clearly demonstrates that it failed to
maintain fairness in the conduct of its business, exercise due skill and care and comply with
the statutory requirements. Thus, in addition to the violation of the SEBI Circulars the Noticee
has also violated the provisions of Clauses A(1), (2) & (5) of the Code of Conduct as specified
under Schedule II read with Regulation 9(f) of the Stock Brokers Regulations.

The BSE had earlier conducted inspection of the Noticee and upon a consideration of the BSE
Inspection Reports in light of the Inspection Report, it is observed that the violations committed
by the Noticee in the instant proceedings are repetitive in nature. Further, it is a well settled
position of law that SEBI may initiate multiple proceedings for the same set of violations.

Order:
The Noticee had violated the aforementioned provisions of the Stock Brokers Regulations and
aforementioned SEBI Circulars. Having regard to the facts and circumstances of the instant
proceedings, SEBI accepted the recommendation of the Designated Authority that the
Certificate of Registration of the Noticee be suspended for a period of one year.

29.05.2020
Arihant Capital Markets Ltd. (Noticee) vs. SEBI Adjudicating Officer, Securities Exchange
Board of India

SEBI imposed penalty for the alleged violation of the provisions of SEBI (Stock Broker and
Sub Brokers) Regulations, 1992.

Facts of the case:


SEBI conducted investigation into trading activities of certain entities in the scrip of Moryo
Industries Ltd. for the period of January 15, 2013 to August 31, 2014. Based on the findings
of the investigation, SEBI initiated adjudication proceedings against Arihant Capital Markets

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Ltd. (hereinafter be referred to as, the “Noticee”) under Section 15HB of the Securities and
Exchange Board of India Act, 1992, for the alleged violation of Clause A(2) of the Code of
Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 (as existed at
the relevant time) of the Securities and Exchange Board of India (Stock Broker and Sub
Brokers) Regulations, 1992.

Order:
In view of the above, after considering all the facts and circumstances of the case and
exercising the powers conferred upon SEBI under Section 15-I (2) of the SEBI Act, 1992 read
with Rule 5 of the Adjudication Rules, SEBI hereby impose monetary penalty of Rs.5,00,000/-
(Rupees Five Lakhs only) on the Noticee. The Noticee shall remit / pay the said amount of
penalty within 45 days of receipt of this order or May 31, whichever is later.

28.04.2022
AmrapaliAadya Trading & Investment Pvt. Ltd & Ors (Noticees) vs. SEBI
Adjudicating Officer, Securities and Exchange Board of India

Facts of the Case:


SEBI conducted an investigation in the matter for the investigation period April 01, 2011 to
March 31, 2017. On completion of investigation, it was observed that the Noticees have allegedly
been found indulged in following:
a. Non-submission of information sought through summons.
b. Siphoning of clients’ funds/ securities.
c. Non segregation & Mis-utilisation of client’s securities and funds.
d. Mis-used the client’s securities by pledging/transferring the same.
e. Routing/ Diversion of Clients’ funds.
f. Running fixed return scheme for some of its clients.
g. Selling of client’s securities from the employee’s account.
h. Moving funds and securities to its sister concern and transferring funds from business bank
account of the Noticee to its related/ group entities.
i. Non-disclosure of demat accounts to NSE.
j. Failed to carry out running account settlement.

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In view of same, it was alleged that the Noticees have violated various provisions of the SEBI
Act, Securities Contracts (Regulation) Rules, 1957, SEBI (Stock Brokers) Regulations, 1992 and
circulars issued by SEBI from time to time.

SEBI Order:
SEBI of considered view that the Noticees have violated various provisions of SEBI Act, SCRA,
Rules and Regulation made and various circulars issued thereunder and thus imposed penalties
totaling Rs 29 crore on nine entities, including AmrapaliAadya Trading & Investment Pvt. Ltd.
and Aadya Commodities Pvt. Ltd. It was held that any omission on part of the registered
intermediary is detrimental to the interest of investors in securities market.

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CHAPTER 11 – LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS

04.03.2020
Picturehouse Media Ltd. vs. Bombay Stock Exchange Ltd.
Securities Appellate Tribunal

Penalty imposed for non-compliance of SEBI LODR Regulations on delay appointment of


women director

The provisions of the LODR regulations require that every listed company should have a women
director. The appellant hereby is a public listed company and one women director resigned and
consequently the post became vacant which was require to be filled up by another woman
under the LODR Regulations. Since there was a delay in appointing a woman director of the
company, the penalty was imposed by BSE under LODR Regulations. The appellant has filed
the appeal against the order passed by BSE imposing a penalty of Rs.7,59,920/- for violation
of Regulations 17(1) and 19(1) and 19(2) of SEBI LODR Regulations, 2015. In the light of
default committed by the appellant SAT did not find any error in the impugned order and
dismissed the appeal.

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CHAPTER 12 – ACQUISITION OF SHARES AND TAKEOVERS – CONCEPTS

16.03.2020
G P Shah Investment Private Limited & Ors. (Appellant) vs. SEBI (Respondent)
Securities Appellate Tribunal

Facts of the case:


The present appeal has been filed against the order of the Adjudicating Officer, SEBI dated
March 13, 2019 imposing a penalty of 5 crores to be paid by the appellants jointly and severally,
under Section 15H (ii) of the SEBI Act, 1992 for violation of Regulation 3(2) of the SEBI
(Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“SAST Regulations, 2011”
for convenience). This Tribunal held that the date on which the appellants acquired the shares
triggered the provisions of Regulation 3(2) of the SAST Regulations, 2011 and consequently
incurred an obligation to make a combined public announcement of an open offer for acquiring
the shares of the target company.

Order:
SAT finds that no relief can be granted to the appellants as AO granted several opportunities
but the appellants chose not to appear or file any reply. In the light of the aforesaid, SAT are
of the opinion that sufficient opportunity was given to the appellants to contest the matter
which they failed to do so. Thus, remanding the matter back to the AO in the given
circumstances does not arise. With regard to the quantum of penalty, SAT finds that the order
of the Whole Time Member (WTM) directing the appellants to make a public announcement
was issued as far back as on July 08, 2013 which after 7 years has not as yet been complied
with. Considering the aforesaid and the admitted violations, SAT did not find any error in the
imposition of penalty imposed by the AO though, under Section 15HB a maximum penalty of `
25 crores or three times the amount of profits could have been imposed. In view of the
aforesaid, SAT do not find any merit in the appeal and the same is dismissed with no order
as to costs.

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07.07.2020
M/s Sungold Capital Limited vs. SEBI Whole Time Member, Securities and Exchange Board
of India

One of the principles underlying under SAST Regulations is exit opportunity to the public
shareholders of the Target Company at the best price and accordingly, the provisions of SAST
Regulations deals with offer price, that offer price in an open offer highest of the prices of
shares of the Target Company derived through various methods.

Facts of the case:


The respective acquirers/PAC’s after acquiring shares/voting rights of Sungold Capital Limited
(“Target Company”) beyond the threshold of initial/creeping acquisition have failed to make
an open offer in terms of Regulation 10 and 11(1) of SAST Regulations, 1997, on, April 1, 2007
and September 14, 2007, respectively. As per Regulation 21(19) of SAST Regulations, 1997, the
acquirer and the PAC’s were jointly and severally liable for discharge of obligations under SAST
Regulations, 1997.

SAST Regulations, 1997 has been repealed by Regulation 35(1) of SAST Regulations, 2011 and
has been replaced by SAST Regulations, 2011. Regulation 35(2)(b) of SAST Regulations,
2011, provides that all obligations incurred under the SAST Regulations, 1997, including the
obligation to make an open offer, shall remain unaffected as if the repealed regulations has
never been repealed.

Therefore, the obligations to make open offer, incurred by the acquirers/PAC’s under SAST
Regulations, 1997, are saved and can be enforced against them by virtue of Regulation 35 of
SAST Regulations, 2011.

Order:
SEBI directed acquirers/PAC’s of the target company to make a public announcement of a
combined open offer for acquiring shares of Sungold Capital Ltd., under Regulation 10 and

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

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17.03.2020
Susheel Somani & Ors. (Appellant) vs. SEBI (Respondent)
Securities Appellate Tribunal

Penalty imposed by SEBI on violating SAST Regulations, further reduced by SAT considering it
a technical breach Facts of the case: Aggrieved by the order of the Adjudicating Officer of the
respondent SEBI dated December 27, 2017 imposing a penalty of Rs. 15 lacs for violation of
provisions of public announcement of an open offer under Regulation 3(2) read with Regulation
13(1) of the SEBI (SAST) Regulations, 2011, the present appeal is preferred. The appellants
contended before the AO that there was no violation of Regulation 3(2) read with Regulation
13(1) of the SAST Regulations, 2011 since the transfer was inter se between the promoters,
the same was exempted from making a public announcement as provided by Regulation 10 of
the SAST Regulations. As regard the exemption, the AO found that while Regulation 10 of the
SAST Regulations provides for making disclosures to the stock exchanges and to the company
within a period of two working days. In the present case, the appellants made the disclosures
on 7th day as against the provisions of Regulation 29(3).

[Reg. 29(3) - the disclosures are required to be made within two working days]

Thus, technically the appellants were not exempted from making public announcement and,
thus, are in violation of the relevant regulations. The AO has observed that as the condition of
making disclosures within two working days is not fulfilled, the act was not fit for grant of
exemption. In the circumstances, the penalty was imposed. The appellants made the disclosures
though belatedly after five days as required by Regulation 29 of the SAST Regulations. Thus,
it was a technical breach and, therefore, AO instead of imposing a penalty of Rs. 15 lacs,
imposed a penalty of Rs. 5 lacs which would have been just and sufficient.

The appeal was partly allowed.

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07.09.2017
Mega Resources Ltd. (Appellant) vs. SEBI (Respondent)
Securities Appellate Tribunal

Ignorance of law will not excuse the appellant to escape the liability of violating the law

Facts of the case:


The Appellant, Mega Resources Limited, is aggrieved by the order dated 13.08.2014 passed by
the Adjudicating Officer, SEBI imposing a penalty of Rs. 2,00,000/- under Section 15A(b) of
the SEBI Act and Rs. 50,00,000/- under Section 15 H(ii) of the SEBI Act for failure on the
part of the appellant to comply with the provisions of Regulation 7(1) read with Regulation
7(2) and Regulation 11(1) read with Regulation 14(1) of the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997.

The appellant has admitted that pursuant to the acquisition of 25000 equity shares through
off market transactions the shareholding of the Promoters/Promoter Group of the Company
had increased from 50.46% to 60.46% of the Target Company.

This triggered Regulation 11(1) of the erstwhile SAST Regulations along with the requirement
of submission of certain disclosures under Regulation 7(1) and 7(2) of the erstwhile
Regulations.

It is admitted by the appellant that the non-compliance with the disclosure requirements in
respect of acquisition of shares and failure to make an open offer to the shareholders of the
Company was due to lack of awareness of the erstwhile regulations on the part of the Appellant
and purely unintentional and without any malafide intentions.

However, It is trite law that ignorance of law will not excuse the appellant to escape the
liability of violating the law nor ever absolve the wrongdoer of his crime or misconduct.

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Further, the appellant contended that in the matter of imposition of penalty, the Section 15(H)
(ii) of the SEBI Act, 1992 was amended dated October 29, 2002 and the penalty for
nondisclosure of acquisition of shares and takeovers was enhanced from a maximum of Rs. Five
Lakh to Rs. Twenty Five crore.

It is argued that since the violation in Appeal was committed in February, 2001, the appellant
would be governed by the erstwhile provisions of Section 15H(ii) of the SEBI Act, which existed
on the date of violation in question.

Order:
It is true that the maximum monetary penalty imposable for non-disclosure of acquisition of
shares and takeovers under the erstwhile SEBI Act on the date of violation by the Appellant
was Rs. Five Lakh and by the amendment dated October 29, 2002 it is up to Rs. Twenty Five
Crore or three times of the amount of profits made out of such failure, whichever is higher.

However, the moot point in this connection to be noted is that as on October 29, 2002 the
obligation to make disclosure and public announcement under Regulations 7(1) read with 7(2)
and 11(1) read with 14(1) continued. Therefore, because the violation was continued even after
October 29, 2002, the appellant has been rightly imposed penalty under the amended provisions
of Section 15H (ii) of the SEBI Act.

Since the punishment imposable now for such nondisclosure and public announcement is up to
Rs. Twenty Five Crore, SAT finds that the penalty of Rs. Fifty Lakh is just and reasonable and
not disproportionate. The contention of the appellant in this regard is, therefore, liable to be
turned down.

Therefore, in the peculiarity of the facts and circumstances of the case and, in particular, the
continuity of the obligation to make disclosure and public announcement, the penalty of Rs.
Fifty Lakh is upheld and the appeal is dismissed.

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08.07.2010
M/S Daiichi Sankyo Company vs. Jayaram Chigurupati & Ors.

Supreme Court held that:


What does the deeming provision do? The deeming provision simply says that in case of
specified kinds of relationships, in each category, the person paired with the other would be
deemed to be acting in concert with him/it. What it means is that if one partner in the pair
makes or agrees to make substantial acquisition of shares etc. in a company it would be
presumed that he/it was acting in pursuance of a common objective or purpose shared with
the other partner of the pair. For example, if a company or its holding company makes or
agrees to make a move for substantial acquisition of shares etc. of a certain target company
then it would be presumed that the move is in pursuance of a common objective and purpose
jointly shared by the holding company and the subsidiary company. But the mere fact that
two companies are in the relationship of a holding company and a subsidiary company, without
anything else, is not sufficient to comprise “persons acting in concert”. Something more is
required to comprise “persons acting in concert” than the mere relationship of a holding
company and a subsidiary company.

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CHAPTER 13 – PROHIBITION OF INSIDER TRADING

12.02.2020
Shruti Vora (Appellant) vs. SEBI (Respondent)
Securities Appellate Tribunal

No duty cast upon the Adjudicating Officer to disclose or provide all the documents which
are not relied upon while issuing Show Cause Notice

Appellant (Shruti Vohra) requested to the respondent (SEBI) to be allowed for the full
inspection of other documents obtained during the investigation of the appellant and copies be
supplied thereof. According to appellant, the inspection of the documents was only confined to
the show cause notice and documents relied upon in the show cause notice. The core issue is
whether the appellant is entitled for inspection and for supply of all the documents in
possession of the adjudicating authority including those documents upon which no reliance has
been placed by the Adjudicating Officer (AO) of the SEBI in the show cause notice. SAT
observed that Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry
and Imposing Penalties by 9 Adjudicating Officer) Rules, 1995 does not provide any specific
provision requiring the AO to supply copies of any documents along with the show cause notice
nor requires the AO to furnish any list of documents upon which reliance has been placed by
it. However, the principles of natural justice and doctrine of fair play requires the AO to supply
the documents upon which reliance has been placed at the stage of show cause notice. Hence,
there is no duty cast upon the AO to disclose or provide all the documents in his possession
especially when such documents are not being relied upon.

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16.06.2020
Aditya Omprakash Gaggar (Noticee) vs. SEBI Adjudicating Officer, Securities Exchange
Board of India

Acts such as making UPSI available on a discriminatory basis will compromise the
confidence of investors and has a serious impact on the price of the securities.

Facts of the case:


During November 2017, there were certain articles published in newspapers / print media
referring to the circulation of Unpublished Price Sensitive Information (hereinafter referred to
as “UPSI”) in various private WhatsApp groups about certain companies ahead of their official
announcements to the respective Stock Exchanges. Against this backdrop, SEBI initiated a
preliminary examination in the matter of circulation of UPSI through WhatsApp groups during
which search and seizure operation for 26 entities of Market Chatter WhatsApp Group were
conducted and approximately 190 devices, records etc., were seized. The WhatsApp chats
extracted from the seized devices were examined further and while examining the chats, it was
found that in respect of around 12 companies whose earnings data and other financial
information got leaked in WhatsApp.

Accordingly, SEBI carried out an investigation in the matter of circulation of UPSI through
WhatsApp messages with respect to Bata Ltd., to ascertain any possible violation of the
provisions of the Securities and Exchange Board of India Act, 1992 and SEBI (Prohibition of
Insider Trading) Regulations, 2015 during the period of January 1, 2016 to February 10, 2016.
It was observed that Bata India Ltd. had announced financial results for quarter and nine
months ended on December 31, 2015 on February 10, 2016. The investigation inter alia revealed
that Mr. Aditya Omprakash Gaggar (hereinafter also referred to as “Noticee”) among other
had communicated the UPSI related to Bata India Ltd. viz; Sales, PAT and EBITDA for quarter
ended December 2015 through WhatsApp messages from the WhatsApp chat of Ms. Shruti
Vora.

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Order:
The instant case before SEBI is one such example where the information constituting UPSI
has been circulated through WhatsApp messages, which conveniently wipes out any trace of
the insider leaking the UPSI when the messages are deleted and manages to reach the selected
group of targets. Such acts which are essentially in the form of making UPSI available on a
discriminatory basis, if legitimized in the garb of routine sharing of market gossips/rumors will
compromise the confidence of investors and the activity of such kind has a serious impact on
the price of the securities where the limited set of people having access to UPSI stand to gain
at the expense of the innocent gullible investors. SEBI in the opinion that the peculiar nature
of such communication of UPSI as in the instant case has to be strictly dealt with, in order
to curb and discourage any future attempts at the same.

Thus, SEBI imposed a penalty of ₹15,00,000/- (Rupees Fifteen Lakhs only) on the Noticee
viz., Mr. Aditya Omprakash Gaggar in terms of the provisions of Section 15G of the Securities
and Exchange Board of India Act, 1992 for the violation of Sections 12 A (d) & 12 A (e) of
the Securities and Exchange Board of India Act, 1992 and Regulation 3 (1) of SEBI (Prohibition
of Insider Trading) Regulations, 2015. The Noticee shall remit / pay the said amount of penalty
within 45 days of the receipt of this order.

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16.07.2020
Mr. B Renganathan (‘Noticee’) in the matter of Edelweiss Financial Services Ltd. vs. SEBI
Adjudicating Officer, Securities and Exchange Board of India

Compliance officers are expected to discharge a responsible role in the corporate


functioning. The standards of good compliance aid and build up good corporate governance
to add value and confidence to the market and its investors.

SEBI, upon receipt of examination report from National Stock Exchange (NSE), conducted
investigation in the dealings in the scrip of Edelweiss Financial Services Ltd.
(‘EFSL’/‘Company’) to examine the violation, if any, of the provisions of SEBI (Prohibition of
Insider Trading) Regulations, 2015 (‘PIT Regulations, 2015’) for the period of January 25, 2017
to April 05, 2017 (‘Investigation Period’/‘IP’).

The Company is listed on NSE and Bombay Stock Exchange (BSE). It is observed that Mr. B
Renganathan (‘Noticee’) was the compliance officer and Company Secretary of EFSL during
IP. During the course of investigation, it was observed by SEBI that Ecap Equities Limited
(‘Ecap’), a wholly owned subsidiary of EFSL, had acquired Alternative Investment Market
Advisors Private Limited (‘AIMIN’), a fintech company, on April 05, 2017 by entering into a
share purchase agreement (SPA). The same was disclosed by EFSL to NSE and BSE on the
same day. Further, a Term Sheet in respect of the said transaction was signed between Ecap
and AIMIN on January 25, 2017.

Therefore, it was alleged that the acquisition of AIMIN by Ecap was a price sensitive information
which had come into existence on January 25, 2017 upon signing of Term Sheet. Despite that,
the Noticee, being the compliance officer of the company, failed to close the trading window
during the period of January 25, 2017 to April 05, 2017. By his failure to close the trading
window during this period, it is alleged that the Noticee has violated the provisions of Clause
4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by
Insiders mentioned in Schedule B read with Regulation 9(1) of PIT Regulations, 2015. In view

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of this, adjudication proceedings were initiated against the Noticee under the provisions of
section 15HB of the ‘SEBI Act’.

Order:
Adjudicating Officer, SEBI find non-compliance on the part of the Noticee by failing to close
trading windows when necessary as per law. Therefore, there were repeated instances wherein
the Noticee had failed to close the trading window. In view of the above the argument of the
Noticee that there was no repetition of violation is not acceptable. Adjudicating Officer’s
considered view that a repetitive violation, in disregard to the applicable provisions of law,
cannot be construed to be a technical violation.

After taking into consideration the facts and circumstances of the case, material/facts on
record, the reply submitted by the Noticee, Adjudicating Officer imposed a penalty of Rs.
5,00,000/- (Rupees Five Lakh only) on the Noticee. The Noticee shall remit / pay the said
amount of penalty within 45 days of receipt of this order.

Extracts from SAT Order dated 12th July 2019 in the matter of Mr. G. Bala Reddy vs. SEBI

In this case, a Company had secured work orders but the same were not disclosed to stock
exchange as the contract was not yet issued to the Company and the Company was only found
to be the lowest price bidder. During this period, certain entities had dealt in the shares of
this Company with a contention that being the lowest bidder of a contract is a usual course
of business and hence, does not amount to UPSI. SAT held that considering that the promoter
was aware that the Company was L1 (lowest bidder), this information was UPSI and hence it
was incumbent upon Promoters not to deal in the scrips of the Company directly or indirectly.

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15.02.2021
Mr. Prannoy Roy vs. Securities and Exchange Board of India (SEBI)
Supreme Court of India

The appeals will be heard by the SAT without insisting on deposit of half the amount of
fines as a precondition for hearing appeals.

Background / Facts of the Case:


SEBI conducted an investigation into the suspected insider trading in the scrip of NDTV
(hereinafter referred to as “the Company”) during the period starting from September 01, 2006
to June 30, 2008 (hereinafter referred to as “Investigation Period”).

While the investigation conducted into the matter, inter alia, revealed that Mr. Sanjay Dutt
and his associated entities had indulged in insider trading in the scrip of NDTV (for which
separate proceedings have been initiated) at the same time, the investigation also concurrently
detected that Mr. Prannoy Roy and Mrs. Radhika Roy have carried out insider trading in the
scrip of NDTV during the Investigation Period.

Mr. Prannoy Roy and Mrs. Radhika Roy had together bought 48,35,850 NDTV shares on
December 26, 2007 at the rate of `400 per share. Subsequently, Mr. Prannoy Roy and Mrs.
Radhika Roy had sold 24,10,417 and 25,03,259 shares respectively on April 17, 2008 at 10:26:42
at the rate of `435.10 per share. The trading in the shares of NDTV was done by Mr. Prannoy
Roy and Mrs. Radhika Roy while in possession of UPSI (purchase on December 26, 2007) and
within 24 hours of disclosing the price sensitive information to the stock exchanges (sale on
April 17, 2008), during the period when the trading window for them was closed, thereby
making a wrongful gain of `16,97,38,335/-

The gain made by Mr. Prannoy Roy and Mrs. Radhika Roy on the total number of shares jointly
purchased by them during the UPSI period has been determined as below:

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Name Buy Quantity Gain (`)


Actual sell Actual buy
during UPSI #
price on April price on
period
17, December 26,
pertaining to
2008 (`) 2007 (`)
PSI-6*

Prannoy Roy A B C (B-C)xA

and
4835850 435.1 400 169738335
Radhika Roy

*Price Sensitive Information (PSI) - 6: The Board of the Company decided to evaluate options
for reorganization of the Company, which could include de-merger/ split of the Company into
News related businesses and investments in ‘Beyond News’ businesses which are currently held
through its subsidiary, NDTV Networks Plc.

Therefore, by making the aforesaid sales of Company’s shares held by them, Mr. Prannoy Roy
and Mrs. Radhika Roy have together received a gain of `16.97 crores for themselves.

Alleged violations
Mr. Prannoy Roy and Mrs. Radhika Roy, being the “insiders” with respect to NDTV in terms
of regulation 2(e) of the PIT Regulations, 1992, have traded in NDTV shares during UPSI period
pertaining to PSI-6, while in possession of the UPSI. Regulation 3(i) of the PIT Regulations,
1992, inter alia, prohibits an insider, either on his own behalf or on behalf of any other person,
from dealing in securities of a company listed on any stock exchange when he is in possession
of any UPSI.

Further, in terms of regulation 4 of the PIT Regulations, 1992, any insider who deals in securities
in contravention of regulation 3 is said to be guilty of insider trading. In view of the aforesaid
discussions and factual findings, SEBI found that, in the instant case, Mr. Prannoy Roy and
Mrs. Radhika Roy, by dealing in shares of NDTV on December 26, 2007, while in possession of

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unpublished price sensitive information (PSI- 6), have violated the provisions of section 12A(d),
(e) of the SEBI Act, 1992 read with regulation 3(i) and regulation 4 of the PIT Regulations,
1992.

The PIT Regulations, 1992, have been repealed by the SEBI (Prohibition of Insider Trading)
Regulations, 2015. As per Regulation 12 of the SEBI (Prohibition of Insider Trading) Regulations,
2015, any proceedings initiated for contraventions of provisions of the PIT Regulations, 1992
are saved and, hence, can be proceeded with under the said PIT Regulations, 1992.

SEBI Order:
Mr. Prannoy Roy and Mrs. Radhika Roy had made a wrongful gain of `16,97,38,335 while trading
in the shares of the Company. The gains made by them have been calculated as the difference
between actual sell price (i.e., `435.1) received and actual buy price (i.e., `400) of 4835850
shares of NDTV incurred by them.

In order to protect the interest of investors and the integrity of the securities market, SEBI,
in exercise of its powers conferred under section 19 of the SEBI Act, 1992, read with section
11, 11(4) and 11B of the SEBI Act, 1992, issued the following directions:

(a) Mr. Prannoy Roy and Mrs. Radhika Roy, jointly or severally, disgorge the amount of wrongful
gain of `16,97,38,335/-, along with interest at the rate of 6% per annum from April 17, 2008,
till the date of actual payment of disgorgement amount along with interest, within 45 days
from the date of coming into force of this order.
(b) Mr. Prannoy Roy and Mrs. Radhika Roy shall be restrained from accessing the securities
market and further prohibited them from buying, selling or otherwise dealing in securities,
directly or indirectly, or being associated with the securities market in any manner, whatsoever,
for a period of 2 years.

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Appeal to SAT:
Mr. Prannoy Roy and Mrs. Radhika Roy filed an appeal against the SEBI’s order dated November
27, 2020 whereby SEBI had barred them from the securities market for two years and also
directed them to disgorge illegal gains of ` 16.97 crore for indulging in insider trading more
than 12 years ago.

SAT ORDER:
SAT has directed NDTV’s promoters Prannoy Roy and Radhika Roy to deposit 50 per cent of
the disgorged amount before SEBI within four weeks. If NDTV deposits the amount, the balance
amount will not be recovered during the pendency of the appeal before SAT.

Supreme Court Order:


A bench headed by Chief Justice S A Bobde directed that appeals of the appellants shall be
heard by the Securities Appellate Tribunal (SAT) at Mumbai without insisting on any deposit
of amount.

Further, the Hon’ble Supreme Court vide its order dated February 15, 2021 exempted Prannoy
Roy and Radhika Roy from making deposit before the SAT for hearing their appeals. The Hon’ble
Supreme Court directed that “no amount shall be coercively recovered from the appellants
(Prannoy Roy and Radhika Roy) for hearing the case”.

Extracts from SEBI’s Interpretive Letter dated 19th July, 2018 issued under the SEbI
(Informal guidance) Scheme, 2003 in the matter of Hawkins Cookers Ltd. (HCL) regarding
sale of shares by an Independent Director.

Facts of the case:


a) One of the company’s independent directors wants to sell his equity shares of the company.
b) The sale shall be done as per a trading plan in accordance with regulation 4(iii) of the
SEBI (PIT) Regulations, 2015.

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c) As per para 8 of Schedule B to the PIT Regulations, while applying for preclearance, the
said director will have to submit an undertaking to the company to the effect that he is not
in possession of any Unpublished Price Sensitive Information (UPSI).
d) By virtue of participation in the Board meetings and access to the information that is
shared at such meetings, the said director is deemed to be perpetually in possession of UPSI.
Therefore, the said undertaking is not possible.

Question: a) Whether the said director may submit a trading plan as required for a plan to
trade shares above INR 20 lakh in value and proceed with executing the same without giving
the said undertaking. 358 Prohibition of Insider Trading LESSON 13
b) What procedure should be followed by the company and/ or the said director such that the
said director may lawfully execute the trade?

Guidance from SEBI:


a) Regulation 5 of the PIT Regulations provides exception to the general rule that prohibits
trading by insiders when in possession of UPSI. Further, regulation 5, inter alia, states that
the trading plan shall be approved by the compliance officer and shall not entail trading in
securities for market abuse. In this regard, regulation 5 (3) especially states that the
compliance officer shall review the trading plan to assess whether the plan would have any
potential for violation of PIT Regulations and shall be entitled to seek such express undertakings
as may be necessary to enable such assessment and to approve and monitor the implementation
of the plan.

b) In the absence of an approved trading plan, designated persons are subject to the
requirements of code of conduct formulated by the company in terms of regulation 9 read with
schedule B to the PIT Regulations.

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April 19, 2022


Balram Garg and Ms. Shivani Gupta & Ors. (Appellants) vs. Securities and Exchange Board
of India (Respondent) Supreme Court of India

Insider Trading cannot be presumed due to proximity between the parties.

Brief Facts of the Case:


P. Chand Jeweller Pvt. Ltd. was incorporated on April 13, 2005 under the Companies Act, 1956
as a Private Limited Company. However, pursuant to a resolution passed by the shareholders
on July 5, 2011, the company was converted into a Public Limited Company, following which
the name of the company was changed to “PC Jeweller Ltd.” (“PCJ”).

SEBI vide its impounding order dated 17.12.2019 and a show-cause notice dated 24.04.2020
alleged that the Padam Chand Gupta (P.C. Gupta) was the Chairman of PCJ during the
relevant period and was a “connected person” in terms of Regulation 2(1)(d)(i) and an
“insider” under Regulation 2(1)(g) of the SEBI (Prevention of Insider Trading Regulations),
2015 ( “PIT Regulations”).

Balram Garg, who is the brother of P.C. Gupta and the Managing Director of PCJ is also a
“connected person” in terms of Regulation 2(1)(d)(i) and an “insider” under Regulation
2(1)(g) of the PIT Regulations.

Sachin Gupta and Smt. Shivani Gupta (son and daughter-in-law of Balram Garg’s deceased
brother late P.C. Gupta) and Amit Garg (son of Amar Garg, who was also the brother of
Balram Garg) traded on the basis of Unpublished Price Sensitive Information (“UPSI”) received
by them on account of their alleged proximity to P.C. Gupta and Balram Garg between the
period from 01.04.2018 to 31.07.2018.

It was also alleged that all the appellants shared the same residence.

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Aggrieved by the order of SEBI, the Appellants filed appeals before the Securities Appellate
Tribunal (“SAT”) and the Tribunal, vide its order dated 21.10.2021, dismissed the Appeals
preferred by the Appellants

Supreme Court Judgment:


Supreme Court allowed the appeals and set aside the final orders of Whole Time Member and
SAT. It was held that in the absence of any material available on record to show frequent
communication between the parties, there could not have been a presumption of communication
of UPSI by the appellant Balram Garg. The trading pattern of the appellants cannot be the
circumstantial evidence to prove the communication of UPSI by the appellant Balram Garg to
the other appellants. Regulation 3 of the PIT Regulations, which deals with communication of
UPSI, does not create a deeming fiction in law. Hence, it is only through producing cogent
materials (letters, emails, witnesses etc.) that the said communication of UPSI could be proved
and not by deeming the communication to have happened owing to the alleged proximity
between the parties.

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CHAPTER 14 – PROHIBITION OF FRAUDULENT AND UNFAIR TRADE


PRACTICES RELATING TO SECURITIES MARKET

05.01.2021
SEBI (Appellant) vs. Bharti Goyal etc. (Respondent)
The Supreme Court of India

The direction for substituting the penalty which has been imposed under Section 15HA of
SEBI Act, 1992 with a warning is contrary to the statutory provisions.

Background/ Facts of the Case:

The SEBI conducted an investigation in the matter of Mapro Industries Limited (Mapro/MIL)
during July 1, 2014 to November 30, 2014 (investigation period) and the possible violation of
Regulations 3(a), (b), (c) & (d), 4(1), 4(2) (a) and (e) of SEBI (Prohibition of Fraudulent
and Unfair Trade Practices ) Regulations, 2003 by the Noticees (total 16 entities).

SEBI had initiated investigation against sixteen entities, including the appellant, for
manipulating the price of the scrip of Mapro Industries Limited (Mapro), a listed company, by
trading above the last traded price (LTP) and violating various provisions of the SEBI (PFUTP)
Regulations, 2003. While six of the entities which had engaged in market manipulation were
suspected to be related entities, the appellants were part of the other ten entities which were
not shown to be connected to these related entities.

Alleged violations
It was alleged that during this period the price of the scrip was raised from Rs.79.15 on July
1, 2014 to a high of Rs.493.40 on November 10, 2014 and thereafter closing at Rs.430 on
November 28, 2014. Though only six entities were found to be suspected group entities the
scope of the investigation was expanded to another ten entities who were found to be part of

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the top traders during the investigation period. What is held in the impugned order is that
though there is no connection/relationship of these ten entities to the six suspected entities
by the very manipulative nature of their trades such as placing buy orders mostly at the
beginning of trading hours and substantively above the Last Traded Price (LTP) they have
manipulated the trading system and disturbed the market equilibrium in the scrip of Mapro.

Together these ten entities raised the price of the scrip by Rs.241.95 by trading a total quantity
of 1174 shares in 43 trades. It was also held in the impugned order that the contribution of
these ten entities was about 69% of the total net LTP which was achieved in 29 trades with
a total quantity of just 234 shares.

SEBI Findings
The SEBI observed that they had executed 120 trades as buyers and out of which their 22
trades contributed to positive LTP of Rs. 139.95 which was 18.07% of market positive LTP. On
further analysis of said 22 trades, it was observed that buy orders were placed first in 14
trades and LTP contribution of such trades were Rs. 88.95 which was 11.48% of the total
positive market LTP.

SEBI, from the trading pattern of the entities, noted that the entities manipulated the share
price of the company by contributing positively to the LTP (last traded price) which
consequently led to the rise in the price of the scrip.

SEBI found that the trades done by the Noticees are in violation thus liable for monetary
penalty under Section 15HA of SEBI Act for violation of Regulations3(a), (b), (c) & (d), 4(1),
4(2) (a) and (e) of SEBI PFUTP Regulations, 2003. Without delving into the aspect of
connection between the appellants and the connected/ suspected entities, SEBI held that by
the very nature of their trades, the appellants manipulated the scrip price and disturbed the
market equilibrium.

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SEBI Order
SEBI imposed a penalty of Rs. 5,00,000 each on 10 individuals and six entities under Section
15 HA of the SEBI Act, 1992 for violating the Regulations 3(a), (b), (c) & (d), 4(1), 4(2)
(a) and (e) of SEBI PFUTP Regulations, 2003.

Appeal before Securities Appellate Tribunal (SAT)


Bharti Goyal, one of the individual one which fine was imposed, has filed an appeal before SAT.
Ms. Bharti Goyal, appeared in person during hearing and contended that she invested in the
shares of Mapro in the normal course of business as she is a small-time trader though not
frequent and there is no connection or relationship with any connected/suspected entity and
finally lost money in this investment.

The learned counsel for the Respondent in Appeal contended that placing buy orders well above
the LTP is completely irrational as no rational investor would like to buy shares at a price
substantially higher than the LTP.

While the trading pattern of Appellant; placing the buy orders for generally very small number
of shares and the timing of the orders; all point towards possible violation of the provisions of
PFUTP Regulations it is also possible that an investor through a thorough observation of the
movement of the scrip could be placing orders in the system without any intention to
manipulate the market. Since the dividing line is very thin and blurred distinguishing both
these categories is a difficult, if not impossible, task.

SAT Order dated August 25, 2020


The SAT modified the penalty order imposed by SEBI for the manipulation in the scrip price
of a listed entity into a warning, on account of non-establishment of a connection between
the appellants and the connected/ suspected entities that are alleged to have manipulated the
price.

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SEBI Appeal before Supreme Court of India


SEBI filed appeal before Supreme Court of India. Mr. K K Venugopal, learned Attorney General
for India, (from Appellant side) submitted that Section 15HA of the Securities and Exchange
Board of India Act 1992, as amended on 8 September 2014, provides for a minimum penalty
of Rs. 5,00,000 which can go up to Rs. 25 crores. Hence, the imposition of a warning which is
not a penalty contemplated by section 15 HA is beyond jurisdiction. It has been submitted
that similar orders have been passed by SAT in many other cases, leading to several appeals
being filed before this Court by SEBI.

Supreme Court of India Order dated 05.01.2021


Prima facie, the direction for substituting the penalty which has been imposed under Section
15HA with a warning is contrary to the statutory provisions. The SAT is not exercising the
jurisdiction under Article 226 of the Constitution and is a creature of the statute. Even the
jurisdiction under Article 226 has to be exercised in a manner consistent with law. Hence,
there shall be a stay of the operation of the impugned judgment and order of the SAT dated
25 August 2020.

01.01.2021
Order In the matter of Reliance Petroleum Limited (now known as Reliance Industries
Limited) Adjudication Officer, SEBI

The positions taken by clients on behalf of principal which is not known to the trading
members or the market at large, will be treated as fraudulent and manipulative in nature.

Background
SEBI conducted an investigation into the trading in the scrip of Reliance Petroleum Limited
(now known as Reliance Industries Limited) for the period November 1, 2007 to November 29,
2007 ( ‘Investigation Period’/‘IP’). The SEBI observed that RIL had entered into a well-planned
operation with its Agents to corner the open interest in the RPL Futures and to earn undue
profits from the sale of RPL shares in both cash & futures segments and to dump large

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number of RPL shares in the cash segment during the last ten minutes of trading on the
settlement day resulting in a fall in the settlement price.

Facts of the Case


A resolution was passed by the Board of Directors of ‘Noticee-1’ (‘RIL’) on March 29, 2007
which inter-alia approved the operating plan for the year 2007-08 and resource requirements
for the next two years, i.e., approximately Rs. 87,000 crore. Thereafter, RIL decided to sell
approximately 5% of its shareholding in RPL (i.e., upto 22.5 crore RPL shares) in November
2007.

RIL admittedly appointed 12 agents, between 30th October, 2007 to 3rd November, 2007, to
undertake transactions in the November 2007 RPL Futures (settlement period 1st November -
29th November 2007) on its behalf.

The said Agents appointed by RIL took short positions in the F&O Segment on behalf of RIL,
while RIL undertook transactions in RPL shares in the cash segment. During the period of 1st
November 2007 to 29th November 2007, various transactions were undertaken by RIL in the
Cash Segment and by RIL through the Agents in the F&O Segment. From 15th November 2007
onwards, RIL’s short position in the F&O Segment constantly exceeded the proposed sale of
shares in the Cash Segment. On 29th November 2007, RIL sold a total of 2.25 crore shares
in the Cash Segment during the last 10 minutes of trading resulting in fall in the prices of
RPL shares, which also lowered the settlement price of RPL November Futures in the F&O
Segment. RIL’s entire outstanding position of 7.97 crores in the F&O Segment was cash settled
at this depressed settlement price resulting in profits on the said short positions. The said
profits were transferred by the agents to RIL as per a prior agreement.

As per SEBI’s order, RIL executed a well-planned scheme of manipulative trades in the Cash
Segment and the F&O Segment in Reliance Petroleum Limited shares. As a result of their
involvement in this scheme, these entities have violated the provisions of Regulations 3(a),
(b), (c), (d) and Regulations 4(1), 4(2) (d), (e) of SEBI (Prohibition of Fraudulent and

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Unfair Trade Practices relating to Securities Market) Regulations, 2003 and SEBI Circular no.
SMDRP/DC/CIR10/01 dated November 02, 2001.

Alleged Violations
During investigation, it was alleged that RIL manipulated the settlement price by placing huge
sell orders in the cash segment during the last ten minutes of trading on November 29, 2007
(the day of expiry of RPL November Futures contracts) which depressed the closing share
price of RPL, while simultaneously having large short position in RPL November futures through
its agents.
It was also alleged that Shri Mukesh D. Ambani (hereinafter referred to as ‘Noticee-2’), being
the Chairman & Managing Director of RIL, was responsible for its day-to-day affairs and
thereby, liable for the manipulative trading done by RIL.

SEBI Findings
Mr. Sandeep Agarwal was commonly authorized by the 12 Agents to place orders in the F&O
Segment, who was an employee of a wholly owned subsidiary of RIL. SEBI noted that the
orders were placed by the same person for all the entities and the entities were connected
directly or indirectly with RIL.

During the month of November 2007, the front entities of RIL had held a position which was
substantial compared to the maximum permissible limit, in accordance with NSE data.
These arrangements were entered with the intention to corner the F&O segment and were
therefore fraudulent and manipulative in nature. Agents of RIL had assumed individual positions
in the November 2007 futures of RPL, without disclosing their relationship with the principal,
i.e., RIL. The fact that the clients have been authorized by RIL to take separate and
independent position limits was not known to the trading members or the market at large.

SEBI Order
SEBI imposed a penalty of Rs. 40 crores on Reliance Industries Ltd (RIL) and its Chairman
& Managing Director, Mukesh Ambani and Rs.20 crores and Rs.10 crores on other two entities

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i.e. Navi Mumbai SEZ Pvt Ltd. and Mumbai SEZ Ltd respectively for alleged manipulation in
the trading of Reliance Petroleum Limited’s (now known as RIL) securities.

26.08.2021
Nishant Inbuild Limited (Noticee) In the matter of PMC Fincorp Ltd.
Adjudication Officer, SEBI

Creation of misleading appearance of trading and manipulation the price of the scrip by
contributing to the price rise to be treated as Unfair Trade Practice as per Securities and
Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003

Facts of the Case


SEBI carried out an investigation in the matter of PMC Fincorp Ltd. wherein it was observed
that lots of buyers and sellers were trading in the scrip of PMC during the investigation period
of March 29, 2012 to March 31, 2015. The shares of company were listed on UP Stock Exchange
Ltd (UPSE) and subsequently got listed on Bombay Stock Exchange Ltd (BSE) on March 12,
2012. The investigation was carried out to ascertain the artificial demand in the scrip of PMC
during the IP by continuously buying shares at increasing prices and then holding on to the
shares purchased by Noticee and other entities, thereby also reducing the shares held by the
public and that their trades were manipulative in nature. The Investigation Period was divided
into five patches to identify the volume traded and fluctuation in prices.

Noticee along with connected entities as mentioned in the SEBI order contributed to high
trading volumes in Patch 3 and 4 which lead to fluctuate the price of the scrip of PMC Fincorp
Ltd. Further, Noticee and other entities namely Embassy, Economy, Seabird Retails, Seabird
Distributors and Seabird Vincon had fund transfers with PMC. On analysis of bank statements
of aforesaid entities, it was observed that PMC had transferred funds to aforesaid entities who
in turn transferred the aforesaid funds to their respective brokers for settlement of their
trading in the scrip of PMC.

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Alleged Violations
1. It was alleged that a group of 92 entities were found to be connected to one another on
the basis of fund transfers, off market transactions, common directors, same address etc. and
in common connection with Noticee by one or other way.
2. From the trading analysis of the Investigation Period, SEBI had observed that some of the
entities had traded among themselves and contributed to market +ve contribution.
3. Few of the entities were alleged to have aided 11other connected entities (buyers) by selling
shares to increase the price of the scrip.
4. It was alleged that the Noticee, along with the 33 connected entities created misleading
appearance of trading and manipulated the price of the scrip by contributing to the price rise
and have violated Section 12 A(a),(b),(c) of SEBI Act read with Regulation 3(a),(b),(c),(d)
and Regulation 4(1), 4(2) (a), (e) of PFUTP Regulations.

SEBI Findings
Noticee was involved in negative and positive LTP contribution both. From the volume traded
during the Investigation Period of Patch 3 (20/03/2013 to 12/03/2014) and Patch 4
(13/03/2014 to 21/10/2014), SEBI noted that the Noticee was a significant buyer in the PMC
scrip during Patches 3 and 4, and contributed to high trading volumes in Patch 3 and 4.
Amongst the connected entities it was the 9th largest trading entity, providing significant
liquidity in the scrip during Patches 3 and 4. The trading pattern of the Noticee thus establishes
that it contributed to trading volumes and provided liquidity.

Noticee was connected with other Entities


The Noticee, through its trades provided the necessary counterparties and liquidity required to
maintain volumes of trading in the scrip and enable the entities Economy, Embassy, Seabird
Distributors, Seabird Vincon, Seabird Retails, Famous, Rolex and Shivdarshan to continuously
buy in the scrip at increasing prices. Noticee also facilitated in fund transfers from PMC and
its promoter through loans directly or via Seabird Distributors which were uses to pay to the
brokers for some of its purchases.

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The SEBI found that Noticee had a close connection with the Embassy, Seabird Distributors,
Seabird Vincon, Economy, Seabird Retails, which have been found to have manipulated the price
of the scrip. Further, Noticee also had close connection with PMC and its promoters namely
Prabhat Management and RRP Management Services which have been found to be played a
part in funding or routing of funds to Economy, Embassy, Seabird Distributors, Seabird Vincon,
Seabird Retails.

Hence, Noticee contributed to significant trading volume in the scrip during patch 3 and 4 and
provided liquidity and was a counterparty to trades by aforesaid entities.

SEBI Order
SEBI imposed a penalty of Rs. 5 Lakh on Nishant Inbuild Limited.

02.09.2021
M/s Achal Investments Ltd. In the matter of Mis-utilization of funds raised through
preferential issue
Whole Time Member,SEBI

Mis-utilisation and diversion of the proceeds is considered as violation of high standards


of ethics and corporate governance and attract penalty under the provisions of SEBI
(PFUTP) Regulations, 2003.

Background
The SEBI conducted an investigation in dealing in securities by raising of funds through
preferential issue of equity shares and utilization thereof by the M/s Achal Investments Ltd.
(Company) to ascertain whether there was any violation of the provisions of SEBI Act, 1992,
Listing Agreement read with provisions of SEBI (LODR) Regulations, 2015 and SEBI (PFUTP)
Regulations, 2003

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Facts of the Case


The company had issued equity shares on preferential basis to 47 entities. The objects of the
preferential issue of equity shares issued to the shareholders are as under:
1. To strengthen the equity base of the company,
2. To arrange the funds required for meeting the enhanced working capital requirements of the
company,
3. To meet certain capital expenditure, and
4. To meet expenditure for general corporate purposes.
The company, in response to a Bombay Stock Exchange Notice admitted that it has deviated
from the stated objectives in utilization of the issue proceeds. Further, the company informed
SEBI that it has obtained ratification for the deviation from its shareholders in the AGM.
The ratified details of utilization of proceeds of preferential issue are mentioned below: l Loans
& Advances – Rs. 1,55,00,000 l Advance for purchase of shares – Rs. 27,69,600 l Repayment
of Loan – Rs. 8,50,000

Alleged Violations
A Show Cause Notice (SCN) issued to the Company inter alia, states the following allegations:

1. The Company has mis-utilized and diverted the proceeds received through the preferential
issue of equity shares.
2. The Company, while seeking ratification from its shareholders after a delay of 5 years, has
not made full and complete disclosure of facts and information pertaining to the alleged mis-
utilization and diversion of proceeds.
3. The Company by mis-utilizing and diverting the proceeds received through the preferential
issue of equity shares has committed fraud on its shareholders.
4. The Company failed to make the quarterly disclosure regarding utilization of preferential
issue proceeds as required under Clause 43 of Listing Agreement.
It was also alleged that following provisions have been violated by the company:
 Section 12A of SEBI Act, 1992 (SEBI Act) deals with Prohibition of manipulative and
deceptive devices, insider trading and substantial acquisition of securities or control
 Regulation 2(1)(c) of PFUTP Regulations

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 Regulation 3. Prohibition of certain dealings in securities


 Regulation 4. Prohibition of manipulative, fraudulent and unfair trade practices
 Conditions for Listing as per SCRA.

SEBI Findings:
One of the reasons for deviation of funds was advance for purchase of shares to the SEBI
registered Sub-brokers. However, it was found that the MoUs which were executed by the
Company do not stipulate even the basic details of the names of the scrips that need to be
purchased, quantity of shares, price, whether the shares have to be purchased in the primary
market or in the secondary market through Stock Exchanges or in off market, etc. Hence, it
was observed that the transfer of funds by the Company to the Sub-brokers could not have
been for the purpose of purchasing shares. To the contrary, it was alleged that the funds were
transferred for the Sub-brokers’ own use since no KYC formalities were completed and no
orders were made.

SEBI concluded that the company has mis-utilized the proceeds received from the preferential
issue of equity shares. This action is not only detrimental to the interest of the company but
also to the interest of its shareholders.

Another allegation was in relation to a loan given to an individual which was also ratified by
the shareholders. SEBI noticed that the said loan amount cannot be considered as a normal
business transaction of the Company as deployment of funds out of the working capital. No
legally binding agreement had been entered into by the Company, no interest was charged
from the borrower and no collateral was taken from the borrower. It was deduced that the
company had no intention to secure the return of funds.

In light of the aforesaid discussion, which brings out the alleged mis-utilization and diversion
of proceeds of preferential issue of equity shares by the Company, it was alleged that the
company has committed fraud as defined under Regulations 2(1)(c)(2) and 2(1)(c)(4) of
the PFUTP Regulations.

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SEBI observed that the company has employed, in connection with the preferential issue of
securities, a manipulative device to defraud the existing and prospective shareholders and has
engaged in a practice which has acted as a fraud on them. These acts of the Company in
making such a suggestion are a fraudulent or an unfair trade practice as it knew the same to
be not true and the Company was aware that such misleading information would influence
the decision of investors and induce them in dealing in securities.

The company contended that it sought shareholders’ approval for ratification of deviation of
proceeds of preferential issue. However, SEBI noted that the company had merely informed
the shareholders that it had deviated from the purpose for which the proceeds were raised
and had not made full and complete disclosure of facts and information pertaining to the
alleged mis-utilization and diversion of proceeds of preferential issue of equity shares.

SEBI concluded that the Company in order to ratify the alleged mis-utilization and diversion
of proceeds of preferential issue of equity shares from its shareholders, has in the said process,
misled and influenced its shareholders. Further, the act of the Company not to make true and
complete disclosure and diversion of proceeds of preferential issue of equity shares is not only
a device to manipulate its shareholders to ratify the mis-utilization and diversion of proceeds
of preferential issue of equity shares but it is also meant to deprive the shareholders of giving
informed consent regarding the ratification process. SEBI held that the said act of the
Company has led to the violation of provisions of Regulations 3 (a), (b), (c) and (d), 4(1),
4(2)(f), 4(2)(k) and 4(2)(r) of the PFUTP Regulations read with Sections 12A (a), (b)
and (c) of SEBI Act.

SEBI Order
SEBI issued the following directions to the company:
That it is restrained from accessing the securities market and from buying, selling or dealing
in securities, either directly or indirectly, in any manner whatsoever, for a period of five (05)
years from the date of Order.

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That it shall bring back the amount of Rs.1,38,29,600/- due to it, which has been extended
either directly or indirectly, to the entities mentioned in this Order, along with due interest,
expeditiously and take all necessary action, including legal actions, towards bringing back the
said sum. It shall file a quarterly report stating the compliance of this direction to SEBI.

Imposed penalty of Rs. 20,00,000/- (Rs. 10 lakh each under Section 15HA of the SEBI Act,
1992 and under Section 23E of the SCRA).

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CHAPTER 15 – DELISTING OF EQUITY SHARES

16.06.2022
Autoriders Finance Ltd. - Appellant v. National Stock Exchange of India Ltd. -Respondent
Securities Appellate Tribunal

Facts of the Case:


The National Stock Exchange of India Limited (‘NSE’) issued a show cause notice dated
August 26, 2020 to the appellant Company to show cause as to why the appellant Company
should not be compulsorily delisted under Regulation 22(1) of the Delisting Regulations on the
ground of continuous non-compliance with respect to the requirements under the Listing
Regulations. Thereafter, the respondent sent an e-mail to the appellant Company on September
4, 2020 stating therein that reply has not been received by the respondent.

It transpires that the Delisting Committee considered the matter on September 24, 2020 and
thereafter passed the impugned order on November 27, 2020 directing compulsorily delisting
of the appellant Company under Regulation 22(1) of the Delisting Regulations. The appellant
is aggrieved by the order dated November 27, 2020.

The appellant contends that no opportunity of hearing was provided by the Delisting Committee
before passing the impugned order and therefore the said order is violative of the principles of
natural justice as embodied under Article 14 of the Constitution of India.

The proviso to Regulation 22(1) of the Delisting Regulations clearly indicates that no order
directing delisting of the shares of the Company shall be made unless the Company is given
a reasonable opportunity of being heard.

SAT Order:
SAT opined that the impugned order is violative of principles of natural justice since no notice
of hearing or opportunity of hearing was provided to the appellant Company. The proviso clearly

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stated that no order shall be passed under Regulation 22(1) unless the Company has been
given a reasonable opportunity of being heard. It means that the Delisting Committee is
required to give a notice for hearing which admittedly no such notice was issued. For the
reasons stated aforesaid, the impugned order cannot be sustained and is quashed.

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CHAPTER 17 – MUTUAL FUNDS

23.05.2006
SEBI Vs. Shriram Mutual Fund
Hon’ble Supreme Court

Facts
The respondent was a mutual fund and the asset management company. During the period
from June, 1998 to September, 1999, the respondent had conducted business through associated
brokers, in excess of the limits prescribed under regulation 25(7)(a) of the 1996 Regulations
on 12 occasions covering 6 quarters. The respondent had failed to comply with the terms and
conditions attached to the certificate of registration granted to it, inasmuch as it did not
exercise diligence to ensure that the transactions by its own asset management company were
confined to the permissible limits. The Adjudicating Officer imposed a sum of Rs. 5 lakhs as
penalty on the respondent No. 2 under section 15E for failure to comply with regulation 25(7)
(a) and Rs. 2 lakhs on the respondent No. 1 for failure to comply with the terms and conditions
attached to the certificate of registration.

The respondents filed appeals before the Securities Appellate Tribunal, inter alia, contending
that the transactions with the associate brokers were related to thinly traded securities, for
which there were no ready markets available through the normal stock exchange, or were
relating to securities which did not have any large volume or trade in the market.

The Tribunal set aside the order passed by the Adjudicating Officer on the ground that the
penalty to be imposed for failure to perform a statutory obligation is a matter of discretion
which has to be exercised judicially and on a consideration of all the relevant facts and
circumstances. The Tribunal also held that the Adjudicating Officer had to be satisfied with
the material placed before him that the violation deserved punishment. The appeal was filed
to Supreme Court.

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HON’BLE SUPREME COURT JUDGEMENT


The Hon’ble Supreme Court set aside the decision of Securities Appellate Tribunal in Shriram
Mutual Fund v. Chairman.

It was held by Supreme Court that the penalty is warranted by the quantum which has to be
decided by taking into consideration the factors stated in section 15J of SEBI Act. In its
opinion, mens rea is not an essential ingredient for contravention of the provisions of a civil
act. The penalty is attracted as soon as contravention of the statutory obligations as
contemplated by the Act is established and, therefore, the intention of the parties committing
such violation becomes immaterial. In other words, the breach of a civil obligation which
attracts penalty under the provisions of an Act would immediately attract the levy of penalty
irrespective of the fact whether the contravention was made by the defaulter with any guilty
intention or not.

The SEBI was set up to promote orderly and healthy growth of the securities market and for
investors protection SEBI has been monitoring and regulating the activities of Stock Exchanges,
Mutual Funds and Merchant Bankers, etc. to achieve these goals. The capital market has
witnessed tremendous growth in recent times, characterized particularly by the increasing
participation of the Public. Investors’ confidence in the capital market can be sustained largely
by ensuring investors protection. That it became imperative to impose monetary penalties also
in addition to other penalties in cases of default.
The Court held that mens rea is not an essential element for imposing penalty for breach of
civil obligations.

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23.10.2017
SAHARA ASSET MANAGEMENT COMPANY P. LTD & ORS. Appellant(s) VERSUS
SECURITIES AND EXCHANGE BOARD OF INDIA & ORS. Respondent(s)
Hon’ble Supreme Court

Facts of the case:


SEBI passed an order dated June 23, 2011 against two Sahara group entities namely Sahara
India Real Estate Corporation Ltd. (SIRECL), Sahara Housing Investment Corporation Ltd.
(SHICL) and some of their Directors to refund the money collected through the issue of
Optionally Fully Convertible Debentures (OFCDs) and restrained those Directors from
associating themselves with any listed public company and any public company which intends
to raise money from the public till such time the money is refunded to the investors to the
satisfaction of SEBI.

Following these orders against the two Sahara group companies and their Directors SEBI
initiated proceedings by appointing a Designated Authority under the Intermediaries Regulations
on June 9, 2014. This Designated Authority was to enquire into whether there was any violation
of the provisions of the Mutual Fund Regulations, 1996 as well as related SEBI Circulars by
the Sahara Mutual Fund, Sahara Sponsor, Sahara AMC and its Trustees. The Designated
Authority submitted the report on October 14, 2014 holding that these entities are no longer
fit and proper persons to carry on the business of mutual fund and recommended cancellation
of certificate of registration of Sahara MF.

The impugned order has been issued consequent to the findings by SEBI that Sahara Sponsor
is not a ‘fit and proper person’ because its Promoter-Director is not a fit and proper person
and hence the Sahara MF and Sahara AMC are no longer fit and proper to carry on the business
of mutual fund

Thus, SEBI vide order dated July 28, 2015 had ordered cancellation of Certificate of Registration
of Sahara Mutual Fund with effect from expiry of 6 months from the date of the order.

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Subsequently, Sahara MF, Sahara AMC and others had preferred an appeal against the SEBI
order dated July 28, 2015 before the Hon’ble Securities Appellate Tribunal (SAT). The Hon’ble
SAT vide order dated July 28, 2017 disposed of the said appeal, granting a period of 6 weeks
to the appellants to approach the Hon’ble Supreme Court of India.

Sahara MF and others subsequently filed an appeal in the Hon’ble Supreme Court, challenging
the aforesaid order of the Hon’ble SAT.

Hon’ble Supreme Court Order


The said appeal was dismissed by the Hon’ble Supreme Court vide order dated October 23,
2017.

WINDING UP OF SIX YIELD-ORIENTED FIXED INCOME SCHEMES OF FRANKLIN TEMPLETON


INDIA AMID COVID-19- A CASE STUDY

INTRODUCTION
COVID-19 started showing its impact on the mutual fund industry during pandemic. Though
we could attribute most of that outflow to corporates redeeming funds to meet their quarter
end obligations, high volatility and uncertainty as consequences of the pandemic could have
also played a major hand in the redemption pressure for debt schemes. Foreign Institutional
Investors (FIIs) have been redeeming investments heavily in equity and debt segment ever
since WHO declared COVID-19 a pandemic. In March 2020, FIIs pulled out Rs. 60,375 crore
from the debt market.

High redemption and lack of buying interest has made debt mutual fund schemes vulnerable,
especially those with higher exposure to low rated instruments. This instability has claimed
its first casualty in debt mutual funds.

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ABOUT FRANKLIN TEMPLETON (INDIA)


Franklin Templeton’s association with India dates back to over 2 decades as an investor. As
part of the group’s major thrust on investing in markets around the world, the India office
was set up in 1996 as Templeton Asset Management India Pvt. Limited. It flagged off the
mutual fund business with the launch of Templeton India Growth Fund in September 1996,
and since then the business has grown at a steady pace.

Franklin Templeton (India) is one of the largest foreign fund houses in the country. It manages
one of the most comprehensive ranges of mutual funds catering to varied investor requirements
and offering different investment styles to choose from.

WINDING-UP OF SPECIFIC SCHEMES


The Trustees of Franklin Templeton Mutual Fund (FTMF) in India announced that they have,
after careful analysis and review of the recommendations submitted by Franklin Templeton
AMC, and in close consultation with the investment team, voluntarily decided to wind up their
suite of six yield oriented, managed credit funds effective from April 23, 2020.

In light of the severe market dislocation and illiquidity caused by the COVID-19 pandemic, this
decision has been taken in order to protect value for investors via a managed sale of the
portfolio. This action is limited to the below-mentioned funds, which have material direct
exposure to the higher yielding, lower rated credit securities in India that have been most
impacted by the ongoing liquidity crisis in the market.

Details of schemes being wound up

S. Name of the Scheme Scheme Characteristic (based Macaulay


No. on Macaulay duration or credit duration* in
rating) as stated in the years as on 22
scheme information April
document 2020

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1. Franklin India Ultra Short Bond Investing in Instruments with 0.38


Fund Macaulay duration between 3-6
months

2. Franklin India Short term Investing in Instruments with 2.41


Income Fund Macaulay duration between 1-3
years

3. Franklin India credit Risk Fund A bond fund focusing on AA and 2.37
below rated corporate bonds
(excluding AA+ rated corporate
bonds)

4. Franklin India Low Duration Investing in Instruments with 1.17


Fund Macaulay duration between 6-12
months

5. Franklin India Dynamic Accrual Investing across duration 1.95


Fund

6. Franklin India Income Investing in Instruments with 3.94


Opportunity Fund Macaulay duration between 3-4
years

*Macaulay duration is the weighted average of the time to receive the cash flows from a
bond. It is measured in units of years. Macaulay duration tells the weighted average time
that a bond needs to be held so that the total present value of the cash flows received
is equal to the current market price paid for the bond.

CAUSES FOR WINDING UP THESE SCHEMES


According to a statement to investors from FTMF, Franklin Templeton (India) winding up
these schemes in order to preserve value and secure an orderly and equitable exit for investors
in these yield-oriented schemes. The credit climate was extremely challenging over the last
quarter or so, and Covid-19 severely heightened the pressure resulting in a spike in yields and
sharply reduced liquidity. The ongoing global pandemic has impacted business activity across a

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wide range of sectors and diminished portfolio companies’ ability to access funds and service
existing debt. Mutual funds are facing unprecedented liquidity challenges during the lockdown
which was necessary to address the Covid-19 pandemic.

Factors like rising redemption pressures, mark to market losses, following spike in yields and
rising illiquidity in portfolios, following lower trading volumes have together caused severe and
worsening liquidity crunch for open-end mutual fund schemes. This impact will be long-lasting,
and bond market conditions are unlikely to return to normalcy in the immediate future.
The schemes had to resort to continuous borrowing to fund redemptions during this time, and
were unable to repay the borrowings through sale of portfolio securities due to the prevailing
market environment. The Investment manager did not believe it was prudent to continue
funding redemptions through potentially increasing levels of borrowings.

FTMF follows a high-risk high-return strategy for the above mentioned funds - Meaning a
major part of its portfolio is exposed to lower rated securities (rating below AAA). The market
disruption due to the virus outbreak has impacted these securities the most. Under conditions
of high redemption pressure, mutual funds sell their liquid assets to meet the demand, leaving
the portfolio highly exposed to illiquid assets. Thus, investors who choose to stay invested are
at a disadvantage here.

Anticipating continued liquidity stress to the funds, the fund house thought winding up
the scheme is the only viable option for the unit holders to minimize erosion of value.

KEY IMPLICATIONS FOR INVESTORS ON SUCH WINDING UP


Suspension of Purchase and Redemption:
The six wound up schemes were no longer available for subscription or redemption, post cut-
off time on 23 April 2020. All Systematic Investment Plans (SIP), Systematic Transfer Plans
(STP) and Systematic Withdrawal Plans (SWP) into and from the abovementioned schemes
stand cancelled post cut-off time on 23 April 2020.

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Distribution of monies from Scheme Assets:


Following the decision to wind-up the schemes, Franklin Templeton (India) will proceed to
assist the Trustees with orderly realization and liquidation of the underlying assets with the
objective of preserving value for unit holders, and with distribution of the proceeds thereof to
the unit holders after discharging the liabilities of the schemes.

Tax Implications:
The amount received by investors are in the form of redemption of units and would, where
such amount or part thereof represents a gain for the investor, be taxed as capital gain in the
hands of investors depending on inter alia the period of their investment in the scheme.
Investors can take advice from a tax expert as impact could vary depending on their status
and income.

SEBI/SAT/SUPREME COURT’S DIRECTION TO FRANKLIN TEMPLETON MUTUAL FUND –


KEY bULLETS
l SEBI vide its press release dated May 7, 2020 has advised Franklin Templeton mutual fund
(FT) to focus on returning money to investors, in the context of their winding up six of their
debt schemes.
 However, a small number of investors sought the intervention of various courts and winding
up of the schemes were stayed.
 In October 2020, the High Court of Karnataka issued its judgment, in which it upheld the
decision to wind up the Funds and held that there was “nothing wrong with the decision
making process,” but determined that consent of the unitholders u/r 18(15)(c) was required
to implement the decision.
 On December 3, 2020, the SC issued an interim order allowing the Trustee to seek
unitholder approval for winding up the six Funds, without prejudice to the right of the
parties to argue on the interpretation of the regulation and other aspects of the appeal.
 The Trustee then proceeded to conduct votes for each of the six Funds, which concluded
on December 29, 2020, and a substantial majority (above 96%) of the voting unitholders
of each of the Funds voted in favor of the winding-up decision. Thereafter, the SC allowed
the Trustee to distribute the cash available in the schemes to the respective unitholders

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proportionately and appointed SBI Funds Management Private Limited, a public sector
entity, to undertake the distribution.
 Further vide order dated February 12, 2021, the SC upheld the validity of the e-voting
exercise and confirmed the winding-up status of the schemes. With the consent of all the
parties, the SC appointed SBI Mutual Fund Pvt. Ltd as the liquidator to monetize the
assets of the scheme and distribute the proceeds to the unitholders.
 Since the date of the winding up till July 9, 2021, the six schemes have received INR
25,859 crore from maturities, coupons, sale, and prepayments. The total amount distributed
in the winding up schemes stands at INR 26,783.22 crores amounting to 106% of the
AUM as on April 23, 2020.

SEBI initiated a forensic audit/inspection, with respect to the affairs of the six fixed income
schemes and fund of funds schemes that invested in these six schemes. SEBI had
communicated the observations/findings of the said forensic audit/inspection to the Trustee
and the AMC and sought their comments together with relevant supporting documents/ records.
The Trustee and the AMC had submitted their response to SEBI. Subsequently, SEBI has issued
Show Cause Notices (‘SCNs’), on 24 November 2020 to the AMC and on 27 November 2020
to the Trustee and 8 employees of the AMC (including an ex-employee), upon consideration
of observations in forensic audit / inspection and responses thereon submitted by the AMC
and the Trustee. The Trustee and the AMC and 8 employees (including an ex employee) had
submitted their response to the SEBI on these SCNs.

On June 7, 2021, SEBI issued an order against the AMC and on June 14, 2021 a separate joint
order against the Trustee and certain AMC officers and employees, finding violations of certain
regulatory provisions, including – at a high level – with respect to similarity in investment
strategies among the Funds, calculation of duration and valuation of portfolio securities,
documentation of investment diligence and investment terms, and portfolio risk management.
SEBI’s orders include, as applicable, monetary penalties, disgorgement of investment
management and advisory fees, and a prohibition from launching new fixed income funds in
India for a two-year period.

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The AMC filed an appeal and an application for stay before the Hon’ble Securities Appellate
Tribunal (SAT). After hearing the parties, the Hon’ble SAT has stayed the operation of the
order passed by the WTM.

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CHAPTER 18 – COLLECTIVE INVESTMENT SCHEMES

05.06.2020
Dairyland Plantations (India) Limited – Noticee No. 1
Mrs. Roshan D. Nariman – Noticee No. 2
Ms. Taz N. Nariman – Noticee No. 3
Ms. Jeroo Nariman – Noticee No. 4
Mrs. Silloo R. Nariman – Noticee No. 5
Mr. Urvaksh Naval Hoyvoy – Noticee No. 6
Mrs. Shernaz Kershasp patel – Noticee No. 7
Mrs. Meher Khushru Patel – Noticee No. 8
Mrs. Rukhshana Meher Anklesaria – Noticee No. 9
Whole Time Member
Securities and Exchange Board of India

Facts of the Case:


Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted an
examination into the business activities being carried out by Dairyland Plantations (India)
Limited (hereafter referred to as “Company/DPL/Noticee no.1”). The examination of the
business activities of the Company revealed that the Company had launched a scheme named
as Green Gold Bonds scheme (hereinafter referred to as “Scheme”) which apparently possessed
the requisite ingredients of a collective investment scheme (hereinafter referred to as “CIS”).

It was noticed that the said Scheme entailed a one-time payment of Rs. 5 000 in lieu of a
unit of 5 Teakwood trees with a holding period of 20 years and on maturity, the contributor/
investor had the option to get the teak trees or the realised sale proceeds thereof. The
examination of the details of the scheme further revealed that the Company had mobilised
approx. Rs. 1,00,82,000/- (Rs One Crore and Eighty-Two Thousand) from 1660
contributors/investors. It was observed that the Scheme was launched by the Company during
the period from 1992 to 1996 and during the said period as well as subsequently thereafter
during the operation of the Scheme, the Noticees no. 2 to 9 were its Directors and were

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responsible for the affairs of the management of the business of the Company. It was also
noticed that the said Scheme was being carried on without obtaining registration from SEBI,
in violation of provisions of Securities and Exchange Board of India Act, 1992 (hereinafter
referred to as “SEBI Act”) and SEBI (Collective Investment Schemes) Regulations, 1999
(hereafter referred to as “CIS Regulations”).

It is noted that Section 12 (1B) of SEBI Act, which came into effect on January 25, 1995
prohibited a person from carrying out any CIS, unless he obtains registration from SEBI.

However, the section permitted existing entity who were carrying out CIS activities prior to the
commencement of the aforesaid provision to continue with the existing scheme till Regulations
governing CIS are promulgated. Subsequently a separate CIS Regulations of SEBI was enacted
which came into force on October 15, 1999 in terms of which, all the existing CIS (prior to the
commencement of CIS Regulations) were required to apply for registration or else, were required
to wind up the existing CIS after making repayment to the contributors/investors and also were
further required to file a Winding Up and Repayment report (hereinafter referred to as “WRR”)
with SEBI in terms of the said CIS Regulations.

Accordingly, various companies including the Noticee Company, which were running CIS schemes
at the time of promulgation of the afore-stated CIS Regulations, were asked vide several letters
and public notices, to abide by the provisions of the CIS Regulations and submit their
compliance reports as mandated under the said Regulations. However, the Noticee Company
neither obtained provisional registration, nor applied for registration of its CIS Scheme by the
prescribed date of March 31, 2000, and did not even take necessary steps for winding up of
the Scheme. Therefore, a Show Cause Notice dated May 12, 2000 (hereinafter referred to as
“SCN”) was issued to the Company calling upon it to show cause as to why suitable directions
shall not be issued against it for continuing with its CIS activities, in violations of the provisions
of SEBI Act r/w the CIS Regulations.

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Order:
SEBI issue following directions:-
a) The Noticee Company shall, within a month from the date of issue of this order, cause to
effect a newspaper publication in one national daily in English and in Hindi each, and in
a local daily with wide circulation in each of the States wherein the investors reside,
mentioning in bold letters the name of the Scheme i.e ‘Green Gold Bonds Scheme’ in the
said News Papers and inviting complaints/claims from any investor in respect of the said
Green Gold Scheme from contributors/investors that are still outstanding. The newspaper
publications shall also contain an advisory, informing the investors to forward a copy of
their complaints/claims, with the superscription “Complaints/Claims in the Matter of
Dairyland Plantations (India) Ltd.”, to SEBI.

b) A period of one month from the date of the advertisement shall be provided to
contributors/investors for submitting any claim/complaint as stated aforesaid.

c) The Company shall furnish to SEBI the details of the investors viz; name of the investors,
amount invested, year of investment, address and other material information etc., within
a period of 15 days from the date of this order.

d) An interest bearing escrow account shall be opened by the Noticee Company in a


nationalised public sector bank and the entire outstanding amount payable to the investors
under the above stated Scheme shall be transferred/deposited to this escrow account within
one month from the date of this order.

e) The Company shall wind up its existing CIS and refund the money collected by the
Company under the Scheme to the contributors/investors which are due to them strictly
as per the terms of offer of the scheme. Those investors who want to opt for repayment
in the form of 5 Teak-wood trees and not in cash, the Noticees shall refund them in the
form of Teak-wood Trees on a best efforts basis but in the event the repayments cannot
be made in the form of Teak-wood trees for want of permission/authorisation to cut the
trees or any other genuine hardships, those investors shall also be repaid their dues in cash

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as per the terms of the scheme. All the monetary refunds to the contributors/investors
shall be made through ‘Bank Demand Draft’ or ‘Pay Order’ (both of which shall be crossed
as “Non Transferable”) or through any other appropriate banking channels such as NEFT
or RTGS with appropriate audit trail.

f) The present incumbent Directors (Noticees no. 4 to 6) shall ensure that the aforesaid
directions are complied with.

g) Noticee Company and present incumbent Directors shall submit to SEBI a final Winding
Up and Repayment Report ( WRR) in the prescribed format for the purpose along with
information on the claims so received, contributors/ investors so refunded and other details
of escrow account duly supported by list of all contributors/investors, their contact details,
details of investments and corresponding refunds made to the investors, bank account
statements of the Company indicating refunds so made to the investors and receipts taken
from the investors acknowledging such refunds along with a consolidated statement of
such repayments having been made, duly certified by two Independent Chartered
Accountants, within a period of six (06) months from the date of this Order.

h) Any amount remaining balance in the aforesaid escrow account after making repayment to
contributors/ investors, shall be transferred to Investor Protection and Education Fund
established under the SEBI (Investor Protection and Education Fund) Regulations, 2009
after a lapse of 1 year from the date of this order.

i) All the Noticee Directors along with the Company (Noticee No.1) except for the Noticee
no. 2 and 3 (against whom the proceedings stand abated on account of death), are
restrained from accessing the Securities Market including by issuing prospectus, offer
document or advertisement soliciting money from the public and are further prohibited
from buying, selling or otherwise dealing in securities, directly or indirectly in any manner,
for a period of one (01) year with effect from the date of filing of WRR to SEBI. It is
clarified that during the period of restraint, the existing holding of securities of the Noticees
including units of mutual funds, shall remain frozen.

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j) In the event the Noticee Company and the present Directors fail to carry out the directions
issued at sub-paragraph (a) to (h) above or any complaint is received hereinafter
suggesting that the Company has failed to pay all the dues to the investors, the Noticee
Company and its Directors (Noticees no. 4, 6, 7, 8 and 9) shall be jointly and severally
liable to refund to the contributors/ investors such amounts in the manner provided under
the direction in subpara (e) above within a period of 03 months from the end of the six
(06) months as directed under sub-para (g) above.

k) The Noticee Company and its present Directors shall not divert any funds raised from
public at large and shall not alienate or dispose of or sell any of the assets of the Company
except for the purpose of making refund to its investors as directed above.

l) The Noticee Company and Director Noticees no. 4, 6, 7, 8 and 9 shall provide inventory of
details of all their assets (movable and immovable) within a period of one (01) month
from the date of this order.

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25.02.2019
Nicer Green Housing Infrastructure Developers Ltd. & Ors. (Appellant) vs. SEBI
(Respondent)
Securities Appellate Tribunal

In the absence of any evidence that the appellants had refunded and that they are ready
and willing to pay the balance amount to investors in a time bound manner, SAT is of the
opinion that there is no infirmity in the order passed by SEBI disposing of their
representations.

Facts of the case:


The Nicer Green Housing Infrastructure Developers Ltd., Appellant No. 1 is a company
incorporated under the Companies Act, 1956 as a public limited company and is engaged in the
business of acquiring agricultural land and developing the same for the purpose of re-sale.

SEBI found that the activity of fund mobilization by the appellant no. 1 under its scheme fell
within the ambit of “Collective Investment Scheme” as defined under Section 11AA of Securities
and Exchange Board of India Act, 1992 (hereinafter referred to as, ‘SEBI Act’). SEBI issued
an order dated November 9, 2015 under Section 19 read with Sections 11(1), 11B and 11(4) of
the SEBI Act read with Regulation 65 of Securities and Exchange Board of India (Collective
Investment Schemes) Regulations, 1999 issuing a slew of directions restraining the appellant
and its directors from collecting any money from the investors or to launch or to carry out any
investments schemes.

SEBI further directed to refund the money collected under its scheme to the investors and
thereafter wind up the company. The appellants being aggrieved by the said order filed an
Appeal before the Securities Appellate Tribunal wherein the appellants contended that they are
ready and willing to comply with the order passed by SEBI contending that out of an amount
of Rs. 31.71 crore collected the appellants have already refunded Rs. 27.48 crore and that the
appellants are ready and willing to refund the balance amount in a time bound manner.

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Order:
SAT finds that no proof has been filed either before SEBI or even before this Tribunal to show
that the appellants had refunded a sum of Rs. 27.48 crore and that they are ready and willing
to pay the balance amount in a time bound manner. In the absence of any evidence being
filed, SAT is of the opinion that there is no infirmity in the order passed by SEBI disposing of
their representations. The appeal lack merit and is dismissed summarily.

SEBI IN ITS ORDER DATED FEBRUARY 25, 2020 IN CASE OF VAYAA BUILDER AND
DEVELOPERS (P.) LTD. (VBDP) HELD

Where VBDP and its directors had mobilized funds from investors through different land/plot
allotment scheme which satisfied four requirements of a collective investment scheme as
defined in section 11AA and since these schemes were being carried out without obtaining
registration from SEBI in violation of section 12(1B), VBDP and its directors were to be directed
to refund illegally mobilised funds to investors and were also to be restrained from accessing
securities market.

SECURITIES APPELLATE TRIBUNAL, MUMBAI BENCH IN CASE OF SHREE SAI SPACE


CREATIONS LTD. (SSCL) (APPELLANT COMPANY) HELD –

Where appellant company was involved in mobilizing funds by launching (CIS) without obtaining
SEBI registration and it failed to comply with directions issued by SEBI to refund entire amount
to investor, penalty of Rs. 25 lakhs imposed on appellant was reasonable and Adjudicating
Officer’s direction to pay penalty of Rs. 25lakhs by appellant could not be faulted.

SEBI concluded that appellant company set up in year 2010 was engaged in fund mobilizing
activity from public by launching Collective Investment Scheme (CIS) without obtaining SEBI
registration and accordingly directed appellant to file a proposal for refund of entire amount.
However, appellants had not completed process of repayment to investors despite lapse of three
years from date of order.

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CS Vikas Vohra
Founder - YES Academy

Vikas is a Commerce and Law Graduate and a


Company Secretary by profession. He has to his
credit, few other Certifications and
specialisations in Corporate and Securities Laws.
On the teaching side, he has taught more than
20,000 students.

He is also a speaker at various Management


Institutes and ICSI on various Corporate matters
and Entrepreneurship. In his previous
assignments, he worked as an Associate Vice
President with LexValueAdd Consulting Private
Limited, an Investment Banking firm based out
of Mumbai.

He has significant hands on experience in


Mergers and Acquisitions, Public Offerings and
consequent listing of the Shares and GDR’s on
the Bourses, fund raising and Deal Structuring.
Before that he also worked with Kirloskar
Brothers Investments Limited & Bajaj Auto
Limited wherein, he was deeply involved in
various M&A activities.

Vikas is presently the Founder of YES Academy


for CS, Pune He is also a Co-Founder of
PapaZapata (Mexican food chain) &
GujjuKhakhra (Indian Breads). He enjoys writing
poetry and doing meditation in his free time.

07969 21 5500
CS | LAW

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