CHAPTER FIVE
ROLE OF SEBI
IN
CAPITAL MARKET
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CHAPTER FIVE
ROLE OF SEBI IN CAPITAL MARKET
This chapter deals with role of SEBI in primary market and
secondary market. Mutual Funds and Fils have emerged as important
players in the capital market during this decade so steps taken
by SEBI regarding MFs and Fils is also included in this chapter.
Background behind establishment of SEBI, its objectives and
overall organisation is also discussed in the early part of this
Chapter.
5.1 INTRODUCTION :
It was the crash of 1929 which drove millions of American
investors to an unexpected encounter with total collapse. The US
government was literally benumbed with shock, the new US
President Mr. Fraklin Roosevelt set up Securities Exchange
Commission (SEC) to regulate the stock markets. Mr.Joseph Kennedy
Sr, John F. Kennedy's father was the first President of SEC as he
made lot of money on stock exchange. SEC has since grown from the
trim and humble organisation of its founding fathers into a
powerful and large regulatory machine, which holds global
investors and even government in thrall.SEBI was established on
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the lines of SEC.
Securities markets in India have grown exponentially since
1980, as judged by the number of issues, amounts raised, market
capitalisation, trading volumes as well as price indices. The
1. Indian Securities Market - Agenda for Development and
Reforms - a Discussion paper published by SEBI,1994
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n.mber of investors, intermediaries, and stock exchanges have
also seen significant increase. As the economy grows, securities
markets are being increasingly relied upon by the private
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corporate sector, by public sector units and by banks for raising
funds, (/bile the investor profile continues to be dominated by
middle class individuals, trends towards institutionalisation in
the securities markets is becoming evident. With the opening of
the Mutual Fund industry to the private sector, and the advent
of foreign portfolio investment, Indian securities markets are
set to continue their rapid growth.
The healthy development of securities markets with the
appropriate degree and manner of regulation will be of immense
importance in the developing economy like India on account of
their role in meeting the need for greater investment especially
in infrastructure sectors^such as power, telecommunication and
transportation, that is expected to arise with the progress of
economic reform.
The need for reforms in the capital market has been evident
for some time. The functioning of the stock exchanges shows many
shortcoming with long delays, lack of transparency ' and
vulnerability to price rigging and insider trading. To counter
these deficiencies it had been announced in Budget speech of
1987-88 that the Government would establish a Securities and
Exchange Board of India(SEBI) to regulate the capital markets.
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1
The SEBI was set up as a non statutory body in 1988.
The Securities and Exchange Board of India was set up as an
administrative body in April 1988 with the objective of
monitoring and regulating the capital market and protecting the
investors. Due to the lack of statutory status and power gains of
bureaucrats in investment division of the finance ministry
including the Office of the Controller of Capital Issues, SEBI
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could not perform effectively.
The securities markets in India was being regulated and
controlled by the stock exchanges division of the Ministry of
Finance and the Department of Company Affairs but activities were
not properly regulated by these divisions.
The promulgation of the Securities and Exchange Board of
India Ordinance on January 30,1992, SEBI was established as a
staututory body on Feb.21,1992. Subsequently, the Ordinance was
replaced by the Securities and Exchange Board of India Act on
April 4,1992 and further strengthening of its powers through the
Securities Laws (Amendment) Act, 1995, mark the process of
installation of a regulatory edifice for the Indian securities
markets."
1. Dr.Mathur B L, Indian Capital Market - Challenges and
responses, RBSA Publishers, Jaipur, 1995, P-2
2 Shaha N.V. & Anil Rao Paila, Role of SEBI in Capital Market,
Readings in Indian Financial Services, 1993, P-15
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5.2 OBJECTIVES. MANAGEMENT ANDFUNCTIONS OF SEBI :
The objectives and functions of the Securities and Exchange
Board of India are specified as under -
5.2.1 OBJECTIVES :
The Preamble of the SEBI Act, 1992 enshrines the objectives
as follows -
".... to protect the interest of the investors in securities
and to promote development of, and to regulate the securities
market and for matters connected therewith or incidental
thereto".
5.2.2 MANAGEMENT OF SEBI :
Section 4 of the Act lays down the constitution of the
management of SEBI. The board of members of SEBI shall consist of
a Chairman, two members from amongst the official of the
ministries of Central Government dealings with Finance and Law,
one member from amongst the official of Reserve Bank of India
constituted under Section 3 of the Reserve Bank of India Act,
193b, two other members to be appointed by Central Government who
shall be professionals and interalia have experience or special
knowledge relating to securities market.
While the superintendence, direction and management of the
affairs of SEBI, vests in the Board of Members, the Chairman also
has these powers and is empowered to exercise them and to do all
acts and things which may be exercised or done by the Board.
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5.2.3 FUNCTIONS AND POWERS OF SEBI :
Section 11(1) of Act cast upon SEBI the duty to protect the
interest of investors In securities and to promote the
development of and to regulate the securities market, through
appropriate measures.
The SEBI Act interalia provides SEBI with power to
a) Regulate the business transactions in Stock Exchanges.
b) Register and regulate the working of collective investment
schemes including Mutual funds.
c) Register and regulate the working of stock brokers, sub
brokers, bankers to the issue, registrar to the issue,
merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who.,
may be associated with the securities market in any manner.
d) Promote and regulate SRO's (Self-Regulatory Organisations)
e) Prohibit unfair and fraudulent trade practices relating to
securities markets.
f) Promote investors education and training of financial
intermediaries of Securities Market.
g) Prohibit insider trading in securities.
h) Regulate substantial requisition of shares & takeover of
companies.
i) Call from information from, undertake inspection, conduct
inquiries and audits of SE's and intermediaries and SRO's
in the Securities Market.
j) Carry out research work.
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At its founding, SEBI was charged with the twin
responsibilities of regulation and development of Indian
securities markets. The twin mission of SEBI being investor
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protection and market development,the fundamental logic driving
SEBI's regulatory approach has been that sustained growth of
securities markets could be assured when the markets are able to
attract issuers and investors.
SEBI has formed rules and regulations covering several areas
of the securities markets and various market intermediaries for
the first time. It has taken measures to help the development of
the market and has been taking action under its powers to enforce
its rules and regulations.
Every Rule and every Regulation made under the SEBI Act must
be laid, as soon as may be after it is made, before each House of
Parliament. In accompalishing these objectives, SEBI would be
responsible to the needs of the three groups which basically
constitute the market.
1) Investors 2) Issuer of Securities 3) Market Intermediaries
SEBI has emerged into an effective regulatory body for the
securities markets so as to fulfil its mandate of investor
protection and market development, enshrined in the SEBI Act.
5.3 AMENDMENTS TO THE SEBI ACT AND ADDITIONAL POWERS TO SEBI :
After March 1995, the following additional powers have been
granted to SEBI, through an amendment to the SEBI Act.
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1. Registration and regulation of the working of depositories,
custodians. Foreign Institutional Investors, Credit rating
agencies. Venture capital funds.
2. Power to frame regulations relating to the issue of capital
and other incidental matters.
While conducting inquiries, investigations and audits, SEBI
has been vested with powers of the Civil Court under Code
of Civil Procedure in respect of discovery and production of
books, documents, records, and accounts, summoning and
enforcing the attendance of persons and examining them on oath.
Section 15 of the SEBI Act empowers SEBI to levy monetary
fines for violations specified in Section 15A to 15H. These
violations relate to failure to submit information to SEBI,
failure to enter into agreements with clients,
failure to redress investor grievances, violations by mutual
funds, violations by stock brokers, violations of insider trading
regulations and violations of takeover regulations.
SEBI AND PRIMARY MARKET : •
With the progress of economic reform, the primary markets
have become an important source of mobilising funds for Indian
corporates. With the removal of restrictions on pricing .and
frequency of issues, which were a part of the erstwhile regime
imposed by the Capital Issues (Control)Act, and the primary
markets have shown indifferent picture since 1992-93.
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The steps taken by SEBI in the primary market can be broadly
divided in to four parts -
a) Registration of intermediaries
b) Issue of Securities
c) Improving disclosure standards
d) Other Investor Protection measures
5.4 REGISTRATION OF INTERMEDIARIES :
Intermediaries in the primary market such as merchant
bankers, underwriters, registrar's to the issue, bankers to the
issue are required to be register with SEBI and for the first
time regulations have been issued by SEBI to govern these
intermedaries. A code of conduct for each intermediary has also
been prescribed in the regulations. Capital'adequacy and other
norms have been specified for intermediaries, and a system of
monitoring and inspecting their operations has been instituted to
enforce compliance.
5.4.1 MERCHANT BANKERS :
The regulations governing merchant bankers which were
notified in Dec.92, prescribe the conditions for the granting or
renewals of registration certificates, capital adequacy
requirements, the right of SEBI to inspect the accounts etc. SEBI
(Merchant Bankers) Rules and Regulations were introduced on 22nd
Dec.92 and same were amended on 7th Sept. 95 and 6th June 1996.
Apart from issuers, SEBI also laid down a code of conduct
for the merchant bankers, to ensure that they carried out their
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activities with the highest standards of integrity and fairness.
Lead Managers were also issued guidelines "for interse allocation
of responsibilities" in respect of pre and post issue activities.
This was done to ensure their responsibility an accountability
for their role in the issue of capital. They were instructed to
exercise '\iue diligence’ in independently verifying the contents
of the offer^docvments.
To encourage merchant bankers to participate in certain
types of issue manangement activities and allow more lead
managers in issues, SEBI classified merchant bankers into three
categories and laid minimum net worth threshold levels for each.
And to enable professionals to take part in certian issue
management activities, SEBI has introduced a fourth category of
merchant bankers who would not require any minimum net worth
levels.
SEBI has also tried to infuse an element of competition
among merchant bankers to make them more attuned to the realities
of the market place. SEBI has freed merchant bankers from any
ceiling on fees. This is a very significant step towards
professinalising merchant banking.
As a stick aganist errant merchant bankers, SEBI has
introduced a system of punitive action, whereby they would be
awarded penalty points for any defaults committed in respect of
issues managed by them. A merchant banker is liable for
suspension or de-authorisation after a maximum of eight such points.
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In the year 1997-98 Amendments to SEBI (Merchant Bankers)
Regulations 1992 were made. Only body corporates were allowed to
function as merchant bankers. Multiple category of merchant
bankers viz Category II, III and IV were abolished and henceforth
there will be only one category of merchant bankers. The merchant
bankers would now be required to seek separate registration if
they wish to act as underwriter or portfolio manager.
Merchant bankers were prohibited from carrying on fund based
activities other than those related exclusively to the capital
market. In effect, the activities undertaken by NBFCs such as
accepting deposits, leasing, bill discounting etc. would not be
allowed to be undertaken by a merchant banker.
In order to monitor the movement of employees of merchant
bankers category I, the SEBI directed all category I merchant
bankers to submit specified information on their employees
engaged in merchant banking activity. Thus, a database of persons
engaged in merchant banking industry has been created by the SEBI.
5.4.2 REGISTARS TO THE ISSUE AND SHARE TRANSFER AGENTS
The Registrar to the issue(RTI) and Share Transfer
Agent(STA) play a significant role in the securities market.
These two intermediaries are regulated by the SEBI (Registrars
to an Issue and Share Transfer Agents) Rules and Regulations
notified in 1993.
These intermediaries have been classified into 2 categories,
Category I who can carry on the activities both as Registars and
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Transfer Agents and Category II who can carry any one of these
activities.
The SEBI (Registar to an Issue and Share Transfer Agents)
Regulations 1993 were amended to provide for an arms length
relationship between the issuer and the Registrars to the Issue.
It fcas Jbeen stipulated that no registrar can act as registrar to
any issue of securities made by any body corporate, if the
Registrar to the Issue and the Issuer are the associates.
Registrars to an issue and share transfer agents are
required to submit quarterly reports in prescribed formats to
SEBI, containing details of their activities. On the basis of
quarterly reports as well as the inspection reports, the SEBI
takes up issues such as delays on part of the registrars to an
issue and share transfer agents.
5.4.3 PORTFOLIO MANAGERS :
The Portfolio Managers are now regulated by the Securities
and Exchange of India (Portfolio Managers) Rules and Regulations,
1993 notified on January 7, 1993.No person can act as a
Portfolio Manager without registration with SEBI. The Rules and
Regulations also prescribe the capital adequacy, the contents of
contracts between Portfolio Managers and clients, the general
responsibilities, the management and investment of client's
money, reporting requirements etc.
The Regulations also lay down a Code of Conduct for the
Portfolio Managers to ensure that the Portfolio Managers conducts
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the business observing high standard of integrity and fairness in
their dealings with clients and other Portfolio Managers.
5.4.4 BANKERS TO AN ISSUE :
Bankers to an Issue are registered and regulated by the SEBI
(Bankers to an Issue) Rules and Regulations 1994. Under these
regulations, registration commenced in 1994-95. The various
actions were taken against bankers to issue as on March 31,1988
are as follows -
- 72 Bankers to an Issue were registered with the SEBI
~ 5 warning letters were issued for delay in submission of
final certificate to registrar.
- 2 show-cause notices were sent for non compliance of the
SEBI directives.
- 10 bankers who had not entered into agreements with the
issue/client companies as per Regulation were referred to
adjudication in Feb.1998
5.4.5 UNDERWRITERS :
The number of underwriters registered with the SEBI in terms
of SEBI (Underwriters) Rules and Regulations, 1993 was 43 at the
end of 1997-98 and was 38 for 1996-97. 6 underwriters were
granted registration/renewal during the year 1997-98 and one was
cancelled.
No person is allowed to act as an underwriter unless he or
she holds a certificate granted by SEBI. The registration is
valid for three years and has to be renewed thereafter, The
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underwriters status may be a public or private limited company,
an association of persons, a body of individuals, a partnership,
a proprietory or others.
Every registered stockbroker or registered category I, II
and III merchant banker is entitled to act as an underwriter.
After stipulating a minimum net worth of Rs.20 lac for issue
underwriters, SEBI warned them that any one found indulging in
"manipulation or price rigging or cornering activities" would
face suspension and possibly even cancellation of their
registration. It has also instructed all the stock exchanges not
to clear any fresh underwriting commitments of any underwriter
who failed to fulfill his commitments in the past.
5.4.6 DEBENTURES TRUSTEES :
Debenture Trustees are registered and regulated by the SEBI
(Debenture Trustees) Rules and Regulations, 1993. Under these
regulations, registration commenced in 1993-94. As on March 31,
1998, 32 Debenture Trustees were registered with SEBI.
5.5 ISSUE OF SECURITIES :
In response to market needs and to curb various undersirable
practices which came to SEBI's notice, SEBI issued several
directives and guidelines regarding the issue of securities,
which were aimed at improving disclosure and streamlining the
issue process, and which provided increased flexibility to
issuers. The details are as follows-
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5.5.1 VETTING OF PUBLIC ISSUE DOCUMENTS :
SEBI dispensed with the requirement of vetting of public
issues of listed companies offering pure debt instruments having
atleast an adequately safe credit rating in 1995-96.
SEBI also dispensed with the requirement of vetting of right
issues (not accompanied by public issue three months prior or
subsequent to the right issue). Merchant bankers are required to
ensure compliance with SEBI rules, regulations, guidelines and
requirements of other laws in this respect.
From 1996-97, the requirement of vetting of offer documents
by SEBI prior to a public offer discontinued and replaced by
filing of draft prospectus with SEBI prior to the public issue.
SEBI to convey its observations, if any, within the specified
period of 21 days.
SEBI stopped waiting of offer documents for types of issue's
since 1996. It has increased the responsibility of the Merchant
Bankers. It is the duty of the Merchant Bankers to ensure the
full disclosures in the offer document. ':
5.5.2 ELIGIBILITY NORMS ;
The eligibility norms for companies accessing the primary
market have been strengthened to improve the quality of issues.
The elibility norms are different for Initial Public Offering and
the existing company's public issue.
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ELIGIBILITY NORMS FOR INITIAL PUBLIC OFFERING are -
a) the company has a track record of dividend payment for
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the immediate preceding three years.
b) a public financial institution or scheduled commercial
bank has appraised the project to be financed through
the proposed offer to the public, and■ the appraising
agency participates in financing the project by way of
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loan or equity to the extent of at least 10 % of the
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project cost.
ELIGIBILITY FOR PUBLIC ISSUE :
An issue of equity share or convertible securities to the
public by a listed company seeking to raise fresh capital faces
typically fewer restriction than an IPO. Only if a listed company
which intends to issue new securities to the public such that its
post-issue net worth would grow to move than five times its pre
issue net worth, does the company have to satisfy the eligibility
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criteria for an IPO before it makes the proposed issue.
1. The guideline was modified to " the immediately preceding three
years" from "atleast three years out of the immediately
preceding five years".( SEBI Press Release Ref.PR 91/97,
August 12, 1997.
2 Part A of SEBI clarification Nos.XV and Part A of SEBI Clarifi
cation Nos. XVI of SEBI Guidelines.
3. The guideline was modified to"will have a post-issue net worth
of more five times its pre-issue net worth"from"has been listed
for less than 3 years or does not have a three year track
record of dividend payment out of the preceding five years"
SEBI Press Release Ref.No.PR 91/97 dated August 12, 1997
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5.5.3 PRICING OF THE ISSUE :
A listed company making a public offer may freely price its
equity shares or convertible securities, provided that the
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company has a three year track record of consistent
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profitability and makes a disclosure of the relevant information
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on the offer document. Earlier, there used to be detailed
pricing norms imposed on an IPO, depending on whether the issue
was priced at par, at a premium or otherwise, such price norms
not longer exist.
5.5.4 PROMOTER’S MINIMUM CONTRIBUTION :
SEBI has prescribed separate norms for IPO and the public
issue of existing companies.
PROMOTERS MINIMUM CONTRIBUTION IN IPO
The promoter group of an issuing company, including its
promoters, directors, friends, relatives, associates etc., is
reguired to make at least a certain amount of contribution,
known as "Promoter's Contribution", to company’s IPO. [1] The
promoter and/or his or her followers are required to invest their
money as a kind of commitment. The requirements of the
promoter's contribution is given on the next page.
1. 2 years in the case of public sector banks (Part B of SEBI
clarification No.XVI dated July 17, 1996
2. Section B (I) of SEBI Guidelines, dated June 11, 1992
3. SEBI Press Release i2ef.No. PR 91/97 dated August 12, 1997
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Promoter's Minimum Contribution in IPO
Class of companies Promoter's Minimum Contribution
An unlisted company with a 20% of the post issue
capital three-year track record
of consistent profitability
An unlisted company which 50% of the post-issue
capital does not have a
three-year track record of if the issue size is Rs.l
consistent profitability but has billion or less
set up by existing company(ies)
with a five-year track record of Slab rates are given in
of consistent profitability table( )
if the issue size exceeds
Rs.l billion
An unlisted company of which The promoters' shareholding
shares are offered for sale after offer for sale shall
not be issue less than 20% of the post
capital
Source : SEBI Clarifications and Guidelines
1. Section L of SEBI Clarification No.l dated June 17, 1992
Slab rates for PMC in case issue exceeds Rs.l billion
Size of Capital Issue Percentage of Contribution
On first Rs.l billion 50
Next Rs.2 billion 40
Next Rs.3 billion 30
Balance of issue amount 15
Source :Section 2.3 , SEBI Clarification No.VII
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PROMOTERS' MINIMUM CONTRIBUTION - LISTED COMPANY
In a public issue by a listed company, the promoters are
either required to contribute at least 20 % of the proposed
issue, or to ensure that their shareholding be kept at 20% or
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more of the company's expanded capital. However, there are
exemptions to this rule.
55.5 LOCK-IN PERIOD :
Minimum Promoters contribution and lock in period in IPOs.
In an IPO, the promoters' minimum contribution will be locked
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in for a period of three years from the date of allotment in the
issue or the date of commencement of commercial production,
whichever is later. During this period, all members of the
promoter group are prohibited from disposing of shares acquired
as a result of the promoters' contribution.
In addition, if the promoters’ contribution in .an IPO
exceeds the promoters' minimum contribution, the excess will also
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be locked in for a period of three years.
1. Section L (a) of SEBI Clarification No.II dated July 16, 1992
2. Part B of SEBI Clarification No.XIX, RMB (DIP Series) Circular
No.5 (96-97)
3. SEBI Press Release dated October 26, 1994
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Minimum Promoters’ contribution & lock in period in public
issues by listed company is given below -
Class of Companies Minimum Lock-in period
Promoters'
Contribution
A company which has been Not required Not applicable
listed on a stock exchange
for at least 3 years and
has a track record of
dividend payment for at
least 3 immediate
preceding years
A listed company which The contribution to 3 years
does not satisfy the be at least 20% of the
condition in (1) above proposed issue or the
shareholding to be at
least 20% of the
expanded capital
Source : SEBI Guidelines & Clarification
5.5.6 PREFERENTIAL ALLOTMENT :
An issue of securities to selected persons, at a price which
may or may not be related to the prevailing market price of the
securities, is conventionlly called preferential allotment. The
selected persons need not be existing shareholders of the
company. A preferential allotment is not linked to a public issue
and should not be mixed up with reservation on preferential
basis in a public issue.
A preferential allotment earlier had some undersirable
features. Firstly allotments tended to be made to the promoters
or existing management. Secondly, the issue prices of securities
tended to be unrelated to the prevailing market price. The
minority shareholder's interest were thus likely to be
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compromised. SEBI introduced pricing rules and a lock-in period
in August 1994.
The SEBI guidelines for Preferential Allotment issues on
August 4, 1994 address the concern regarding the lack of
transparency and market unrelated pricing which accompanied
several preferential issues which were made in the past. In
addition to imposing a requirement for pricing of these
allotments at market related levels, the guidelines also imposed
a condition of lock-in period . The interest of shareholders
could be adequately protected by the requirement of pricing
preferential allotments in line with market prices, besides
approval at a General Meeting of shareholders was required for
making preferential issues. Pricing of shares to be issued upon
the exercise of warrants or conversion of convertible bonds that
are issued by a preferential allotment is also regulated so that
the allottees may not be unreasonably favoured at the expense of
minority shareholders.
Securities issued to the promoters or his or her group by
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way of preferential allotment have a lock-in period of 3 years
and are not transferable for that period. The lock-in period for
securities issued to other categories of investors by way of a
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preferential allotment was removed in March 1996.
1. Additional guidelines - Preferential Allotments of Shares,
SEBI Press Release, dated August 4, 1994, amended by SEBI
Press Release dated August 8, 1994 SEBI RMB (DIP Series)
Circular No.3 (95-95) dated August 5,1994 and "Meeting of the
Advisory Committee on Primary Market held on Thursday,
February 6,1997",SEBI Press Release Ref .No.33/97, Mar.6, 1997.
2 Part B SEBI Clarification No.XIV, dated March 1, 1996.
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5.5.7 ALLOTMENT :
Securities issued and alloted in public issue are divided
into three groups according mode of allotment
a) net offer to the public b) firm allotments
c) reservation
a) Net offer to the public :
Net offer to the public is the portion of a public issue that
is offered to the public for subscription at the offer price.
This has to be at least 25% of the total number of securities
offered in the issue to qualify for listing.
An important objective of a public issue is the widening of
the shareholders base, therefore a minimum of 50% of net offer to
the public out of the public issue amount has to be reserved for
individual investors applying for securities not exceeding 1,000
securities in each case.
b) Firm allotment :
Firm allotments are the portion of a public issue that is
reserved for, and placed with selected investors. A firm
allotment to permanent/regular employees of the issuer is subject
to a ceiling of 10% of the issue amount.
Previously, there were individual ceilings to firm
allotmentss that could be made to (i) Indian and multilateral
development financial institutions, (ii) Indian mutual funds,
(Hi) Fils, including Non-Resident Indians and Overseas Corporate
Bodies. These ceilings have been removed. As a result, the first
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two categories of investors may be freely alloted securities up
to 75% of the issue amount. However, an allotment to the
category of Fils and NRIs/OCBs is still constrained by 24% or 30%
ceilings for the aggregate foreign ownership by Fils and
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NRIs/OCBs under the RBI regulation.
The provision of making reservations or firm allotments as
part of the public issue was also extended to scheduled
banks in addition to financial institutions in 1997-98.
c) Reservations :
Reservations are the portion of a public issue that is
reserved for & alloted to investors of selected categories at the
issue price on competitive basis, e.g. reservation for employees
The limit of 200 shares per employee to be allotted on firm
basis to a permanent/regular employee of the issuer in a public
issue has been removed. However, as earlier, reservation to
employees in a public issue may not exceed 10% of the size of the issi
Listed companies are permitted to issue securities to
employees under Employee Stock Option Scheme (ESOPS) subject to
two main conditions.
a) issue of securities to employees under ESOPS should not exceed
5% of the paid up capital of the company in any one year
b) pricing of securities should be in accordance with formula
contained in SEBI preferential offer guidelines dated
August 4, 1994. The companies were free to devise further
details of the ESOPS including the terms of payment.
1.Section 3 of SEBI Clarification No.XII, Dated Sept. 29, 1995
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5.5.8 APPLICATION MONEY :
To prevent fraudulent encashment of refund orders, it was
decided that application forms for subscription to the public
issue must necessarily indicate savings bank/current account
number and name of the bank with which such account is held.
The minimum application size reduced to Rs.2000 from Rs.5000
to encourage small investors.
Permanent Account Number (PAN) or General Index Register
(GIR) should be necessarily be given in the application for
public or rights issues only when the monetary value of the
proposed investment exceeds to Rs.50000 . The previous limit was
Rs.20000.
5.5.9 ALLOTMENT OF SHARES :
The proprotionate basis of allotment was brought in to
overcome the problem of multiple applications in smaller lots
which increased costs and processing delays. The minimum
application size was raised ( minimum 500 shares) and number of
mandatory collection centres decreased to reduce the cost of
raising funds.
5.5.10 PUBLIC REPRESENTATIVE AT THE TIME OF ALLOTMENT :
To ensure that no malpractices take place during the
allotment process in oversubscribed public issues, SEBI has
stipulated that its representatives would oversee the allotment
process of such issues.
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In 1994-95 keeping in view the new requirement of minimum
application money being Rs.5000 and allotment to be made on
proporationate basis, it was decided that a SEBI nominated public
representative was required to be associated in public issues
only in cases where a par issue is oversubscribed by more than
five times and premium issue by more the two times.
5.5.11 BOOKJJUILDING :
For the first time, guidelines to introduce the book
building procedure have been issued, which can be adopted for
issues of over Rs.100 crore. Book building, which is widely used
in other markets, has been found to be a fair transparent and
market driven way of pricing and allocation of issues.
In 1996-97, to further encourage book building, the book
building option available for the portion of the issue sold as
firm allotment and allowed for public issues of over Rs.100 crore
relaxed & debt issues not accompanied by an equity component &
equity issues of less than Rs.100 crore, subject to the
compliance with the Securities Contracts (Regulation) Rules allowed.
The existing SEBI Guidelines restricted the facility of book
building to 75% of the issue size. However, this constrained the
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benefits arising out of demand and price discovery. The facility
of making an issue through book building has now been extended to
entire issue size and shall be available to issuer companies
which propose to make an issue of capital of and above Rs.100
crore from 1997-98.
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5.6 IMPROVING DISCLOSURE STANDARDS :
One of the first steps taken by SEBI was to issue guidelines
for disclousure and investor protection with regard to capital
issues. Disclousure norms for things like the company's track
e
record, details of previous issues, promises vs performance,
justification for pricing etc. were prescribed and prospectus and
other offer documents had to go through a vetting process. A new
format of prospectus for capital issues, disclosing among other
things, risk factors in the perception of the management was
introduced at SEBI's instance.
During 1994-95, SEBI continued to take measures for
improving investor protection in the primary markets through
better disclosure of relevant information about the issuer and
the nature of the securities to be issued.
In addition to ensuring investor protection, SEBI has also
been making efforts to streamline the process of issuing
securities so as to reduce the cost of raising funds from Indian
securities markets.
5.6.1 OFFER DOCUMENT :
Issuing companies were allowed to indicate the issue price
in consultation with the lead manager within a price band of 20%
of the floor price at the time of submission of the offer
document to SEBI. The actual time could be determined only at the
time of filing the offer documents with the Registrar of
Companies or with the concerned stock exchange. This has allowed
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a greater flexibility to issuers in pricing of the issue by
taking market conditions into account.
Due diligence certificate given by the lead manager to SEBI
was made a part of the offer document, in order to make merchant
bankers more accountable.
In order to enhance the transparency in public issues, the
offer document is now a public document even at draft stage, as
soon as it is filed with or submitted to SEBI so that prospective
investors and market participants have sufficient time to bring
any adverse feature to the notice of SEBI before the issue opens
for subscription. Lead managers and stock exchanges have
instructed to make copies of the draft prospectus available to
the public . Such copies can also be obtained from SEBI.
The validity period of letters issued by SEBI giving
observations on offer documents filed with SEBI was decided to be
extended to 365 days from the date of observation letter.
5.6.2 PROSPECTUS :
The front .page of the prospectus modified to bring it in
line with international practice. The colour of the front page
required to be white and no patterns or pictures allowed to be
used. Risk factors and'other necessary information about the
issue such as the registered offices of the issuer and the lead
manager are to be published on front page.
5.63 RECOMMENDATION OF MALEGAM COMMITTEE :
With the rapid expansion in the primary market, there were
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concerns raised about the quality of the some issuers who were
able to raise funds from the market in the period after the
repeal of the Capital Issues (Control)Act 1947. In response to
these concerns, SEBI had strengthened norms for public issues,
raised the standards of disclosure in public issues to enhance
the level of investor protection without seeking to control the
freedom of eligible issuers to enter the market and freely price
their issues. This was done in 1995-96, through the
implementation of the recommendations of the expert committee
appointed in 1994-95 under the chairmanship of Shri Y.H.Malegam,
to examine the issues related to disclosure and eligibility norms
for issuers in the primary market.
The committee submitted its report during the year 1995-96
and in keeping with its established practice. SEBI published the
report and widely circulated it among market participantss, to
encourage debate on the report and elicit views of the market
participants. SEBI accepted almost all of the recommendations
made by the Committee and implemented them during the year. The
main recommendations implemented by SEBI are given below -
1) Unlisted companies which have been in commercial operation
for more than 2 years and whose post issue paid up capital is
Es.3 crore or more, but less than Rs.5 crore, are eligible
for listing only on those stock exchanges where trading of
securities is screen jbasedTj Besides, such issuers are
required to put in place market making arrangements to
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ensure liquidity to investors.
Greater disclosure in the offer document regarding
expenditure incurred on the project before filing the offer
document with SEBI for vetting and proposed to be incurred at
later stages is required to be madeJ^The means and sources of
financing such expenditure are required to be stated.
Zlt^Issuers are required to disclose details of "bridge loans"
which were to be repaid from the proceeds of the issue.
4) A more detail break up of the activities of the issuer is
expected. Issuers are required to specify further details of
'turnover' reported in their profit and loss statements, to
clearly bring the contribution to the stated turnover figures
from the products manufactured by the issuer, products traded
in by the issuer and from products not normally dealt in by
the issuer.
5) In the asset and liability statement, issuers are required to
deduct "revaluation reserves" from 'fixed assets' and from
'reserves' and net worth is required to be arrived at after
such deduction.
6) Issuers are required to give details of the shareholding in
the issuer company of promoters, and directors of the
promoter, where the promoter is a body corporate, as well as
details of the transactions by promoters and directors of the
promoters in the six months preceeding the date of filling of
the offer document with SEBI . Issuers are required to
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provide details of the prices at which the transactions
took place and the relevant dates.
7) Issuers are required to give details, inter alia, of technical
or financial collaborators, buy back arrangements,largest
shareholders, group companies, the basis for issue price,
financial information, accounting ratios and other income.
8) Additional disclosures are required to be made in abridged
prospectus as is required in full prospectus to improve
disclosure standards in the abridged prospectus.
9) Only prospectus for issues made by new companies and existing
companies setting up new projects, or undertaking a major
expansion programme, could incorporate future projections,
provided the projections were based on the appraisal done by
a financial institution or a scheduled commercial bank which
is either financing the project or is committed to finance
the project.
10) The advertisement code for issues has been strengthened to
prevent issuers and intermediaries from misleading investors.
No corporate advertisement can now be issued between the date
of issue of acknowledgement card by SEBI and closure of the
issue and the annoucement of the closure of issue can only be
made after getting a certificate from the registrar to the
issue that atleast 90% of the issue has been subscribed to.
11) The lead manager to the isssue is required to furnish due
diligence certificates at five different stages of the issue
process.
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12) Issuers are required to furnish a list of the persons
consisting the promoters or promoters group to SEBI.
13) The track record of the profitability of a division of a
company, spinning off into a separate company, can now be
considered for the purpose of a public issue at premium by
such a separate company.
14) Issuers are also required to give information regarding
unusual or infrequent events or transactions, significant
economic changes that materially affected or are likely to
affect the income from continuing operations, the
distribution of turnover among each segment in which the
issuer operates, the status of any publicly announced product
or venture, the seasonal variations in the issuers business,
the concentration of business with a small number of supplies
or customers and issuers perception of competitive
conditions, cost and technological conditions in their
segment of industry.
15) Management perception and analysis• of the financial
conditions and results of operations as reflected in the
financial statements .is now required to be given.
16) Whenever, statements of assets and liabilities, profits and
loss or any other financial information is qualified by the
notes of an auditor, all necessary adjustments, wherever
qualification is possible shall be made in the statement
itself.
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5.7 OTHER MEASURES RELATED TO PRIMARY MARKET :
5.7.1 NEW INSTRUMENT "5T0CKINVEST" :
In March 1992, the SEBI In consultation with RBI has
designed this instrument to be issued by banks like the pay order
or DD but with a difference that the money kept is now on lien
with the Bank until the allotment or non allotment but 'earning
interest for the investor during this period. A new instrument,
"Stockinvest" was introduced to ensure that investors did not
suffer due to delays in the allotment process. It is valid upto
six months from the date of its issue and the same can be renewed
on expiry.
On SEBI's initiative that the instrument of Stockinvest was
floated to reduce the headache of investors ( in receiving refund
orders etc.) as well as eliminate the medium of "float money",
whereby promoters enjoyed interest free funds for two or three
months, prior to allotment. The scheme did not work out as
smoothly as envisaged.
The number of shares which could be bought back from the
original allottees upon listing as a 'safety net* has been
increased from 500 shares to 1000 shares.
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5.7.2 USE OF FUNDS BY DFIs :
Development Financial Institutions (DFIs) have been allowed
to utilise the moneys raised by them through public offerings,
espcially of debt instruments even before allotment of the
instruments and/or listing of the instruments, enabling more
effective use of funds, provided the following conditions are met:
a) The DFI would pay interest to the investors from the date not
later than the date from which such permission to utilise the
funds has been granted.
b) The DFI would undertake to refund the entire amount in case
its listing application is rejected by any of the stock
exchanges where listing of its instruments has been sought, and
c) The DFI had complied with the provisions of the Companies
Act, 1956 wherever applicable.
5.7.3 ADVERTISEMENT
-
- - ■—
AT THE TIME OF PUBLIC ISSUE :
■ - - - - - ■
Restrictions on display of corporate advertisements also
removed and corporates allowed to issue corporate advertisements
after 21 days from the date of filing the offer document with
SEBI till the issue closure date provided all risk factors are
mentioned in the advertisement.
5.7.4 RATING FOR AGRO BONDS AND PLANTATION BONDS :
In November 1997, the Central Government decided that
entities which issue instruments such as agro bonds, plantation
bonds etc. and the schemes throgh which such instruments are
issued would be treated as collective investment schemes coming
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under the provisions of the SEBI Act 1992 and would be regulated
by the SEBI. The provisions of the SEBI Act prohibited any new
scheme to be sponsored or further fund to be raised. Meanwhile
the SEBI also stipulated that all existing schemes could mobilise
funds only through the existing schemes after obtaining a rating
from any of the recognised credit rating agencies.
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SECONDARY MARKET
In 1994-95, several changes were made by the government and
SEPT in regulations relating to the functioning of the secondary
markets.These involved in the membership rules of the stock
exchanges, amendments to the Listing Agreement and the Securities
Contracts (Regulation ) Act 1956 and amendments to the SEBI Act
1992. Some importnat decisions regarding the secondary market are
given below.
To further empower SEBI in its role as the primary regulator
of the securities markets, the government issued a notification
in September 1994, enabling SEBI to exercise several powers
concurrently with the government.
These powers allow SEBI to -
a) Grant recognition to stock exchanges and to renew or withdraw
such recognition
b) Issue notifications regarding the applicability of section 13
to any state, area or otherwise
c) Consider the appeals against refusal of stock exchanges to
list securities
d) Issue notifications regarding the non-applicability of the
Securities Contracts (Regulation) Act 1956 to any class of
contracts or contract.
AMENDMENT TO THE SECURITIES CONTRACT (REGULATION) ACT 1956
In order to allow for the trading of new instruments in the
secondary markets, and facilitate the enforcement of continuing
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disclosure and investor protection norms, changes were made to
the Securities Contracts (Regulation) Act. The changes are given
below -
a) The Securities Contracts (Regulation) Act 1956 has been
suitably amended to allow the issuance and trading of
options in securities.
b) The Act has also been amended to allow existing stock
exchanges to establish additional trading floors outside
their area of operation
c) Violation of listing agreement have been made an offence
under the Act
The role of SEBI related to secondary market is discussed
under four categories.
a) Administration of stock exchanges
b) Safety and integrity of secondary market
c) Efficiency & Transparency in secondary market
d) Checking unfair trade practices
e) Investor protection
f) Other measures
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5.8 ADMINISTRATION OF STOCK EXCHANGES :
5.8.1 REGULATION OF BROKERS AND SUB-BROKERS :
Prior to these regulations, the stock brokers were required
to be registered only with stock exchanges of which they were
members & the sub-brokers were not regulated by any authority.
The SEBI Regulation introduced the concept of dual registration
of stock brokers with SEBI and the stock exchanges & brought the
broker and sub-broker within the regulatory fold for the first time.
All stock brokers are registered with the SEBI in terms of
SEBI (Stock Brokers and Sub-Brokers)Regulation,1992. The total
number of registered brokers and sub-brokers as on March 31,1998,
stood at 9005 and 3760 respectively.
5.8.2 GOVERNING BOARDS OF EXCHANGES AND VARIOUS COMMITTEES
In past, the Governing Boards of the Stock Exchanges were
constituted by the members of the Stock Exchanges. Although there
were a few Public Represenativess and Nominees appointed' by the
Government, the Boards were dominated by the brokers.
The Governing Boards of exchanges have been reorganised' and
broad based, so that they represent different interests, '& not
just the interests of their members. The Governing Boards now
consist of 50 per cent representatives of the members & 50 per
cent non member representatives.The various committees of stock
exchanges have been restructured, for example, 'their
disciplinary, default and arbitration committees now have a
• 7
majority of non-brokers.
The exchanges are now required to appoint a non-member
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professorial in the capacity of an executive director or principal
officer, who is empowered and made responsible for the day-to-day
management of the exchange.
Through a notification issued under the Securities Contract
(Regulation) Act 1956 the power to regulate stock exchanges, was
delegated to SEBI. This includes recognition, rules, articles,
voting rights, delivery contracts, stock exchange, listing and
nomination of public representative.
5.8.3 CORPORATE MEMBERSHIP :
SEBI has been encouraging corporate membership of stock
exchanges, so that stock broking intermediaries would be able to
incorporate as limited liability companies, which would allow
them to attract capital. Direct investment by foreign stock
broking firms through joint ventures has also been allowed by the
Government. The rules under the Securities Contracts (Regulation)
Rules 1957 enabling the entry of corporate members were further
relaxed.
Eligibility criteria for the corporate membership of
governing bodies of the stock exchange have been prescribed by
SEBI, to enable corporate members to be elected to the governing
bodies of the stock exchanges.
5.8.4 ARBITRATION MECHANISM :
In order to expedite the settlement of disputes, all stock
exchanges have been advised to review the position of the pending
arbitration cases in every meeting of the governing body and to
ensure that cases are disposed of within the stipulated period of
4 months.
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5.9 SAFETY AND INTEGRITY OF SECONDARY MARKET :
5.9.1 CAPITAL ADEQUACY NORMS FOR BROKERS :
For ensuring safety of the , trades in the market and
protection of investors, it is essential that the member firms
are adequately capitalised in relation to their outstanding
positions.
SEBI has also been insisting on the imposition of capital
adequacy norms for all members of stock exchanges, whether
i
corporate or not. As part of the mover towards better capital
adequacy, the stock exchanges are to double their existing base
minimum capital requirement for their individual members.
In addition to capital adequacy , insurance of stock brokers
has a useful role to play in reducing risks for investors.
Accordingly, the stock exchanges are in the process of taking out
suitable policies for their members.
To ensure adequacy of the capital base of the stock brokers,
SEBI required all stock exchanges to double the amounts
prescribed for the minimum capital for brokers from January 1996.
This amount now stands at Rs.10 lakh for members of the Mumbai
and Calcutta stock exchanges. Rs.7 lakh for brokers who are
members of the Delhi and Ahmedabad stock exchanges and Rs.A lakh
for brokers on the remaining exchanges in the country.
5.9.2 MARKET MARGIN SYSTEM :
To ensure integrity and safety of the markets, SEBI advised
all the exchanges to introduce daily mark to market margin system
U9
and to collect scrip wise. 100% of marked to market notional loss
of a broker on a daily basis. This margin is in addition to any
other margin that the exchange may be levying and is collected in
cash/bank guarantee without netting gain or loss across scrips.
The effectiveness of the measure was . tested out during the
periods of volatility witnessed by the securities markets in
early 1997.
5.9.3 PRICE BAND :
To curb undesirable volatility, all exchanges were required
to fix uniformly daily price band at 10% and a weekly overall
limit of 25%. However, in case of scrips up to the value of
Rs.20, the price bands could be decided by, the stock exchanges.
The price band would be calculated on the basis of the closing
price of the scrip on the previous day, ~ which will be the
weighted average price of the last half'hour of trading in the
scrip on that exchange.
5.9.4 SETTING UP OF TRADE/SETTLEMENT GUARANTEE FUND BY STOCK
EXCHANGES
One of the shortcomings of the clearing and settlement
process of the Indian stock markets was the absence of a system
to reduce counter-party risk. Managing this risk is an essential
need of a safe and efficient market, which can be achieved
through setting up of a Trade or Settlement Guarantee Fund. The
principal objective of this Fund is to provide the necessary
funds and ensure timely completion of settlements in cases of
150 :-
failure of member brokers to fulfill their settlement
obligations. Thus establishment of such funds would give greater
confidence to investors in the settlement of clearing procedure
of the stock exchanges. Keeping this objective in view, the SEBI
had advised all stock exchanges to set up a Trade or Settlement
Guarantee Fund.
5.9.5 UNIQUE ORDER CODE NUMBER :
All stock exchanges have been required to ensure that a
system is put in place whereby each transaction is assigned a
unique order code number which is intimated by the broker to his
client. Once the order is executed, this number is to be printed
on the contract note.
5.9.6 INTRA DAY TRADING AND EXPOSURE LIMITS :
During 1997-98, with a view to enhancing market safety, the
SEBI decided that the upper limit for gross exposure of the
member brokers of the stock exchanges would be fixed at 20 times
Ohe base minimum capital and additional capital of the member
brokers. Gross exposure is the sum total of overall open position
of a broker. This is in addition to the existing intra-day
trading limits of 33 1/3 times the base minimum capital and the
additional capital of the broker, which were implemented by all
the stock exchanges in the previous year.
5.9.7 TIME STAMPING OF CONTRACTS :
Stock brokers have been required to maintain a record of
time when the client has placed the order and reflect the same in
151
the contract note along with the time of the execution of the
order. This will ensure that the broker gives due preference in
execution of client’s order and charges the correct price to his
client without taking advantage of any intra-day price
fluctuation for himself.
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5.10 EFFICIENCY & TRANSPARENCY IN SECONDARY MARKET
5.10.1 IMPLEMENTATION OF NORMS RELATING TO
CLIENT-BROKER RELATIONSHIP
In order to bring about greater transparency in the
functioning of brokers, and to provide increased confidence to
investors in their dealings with brokers, SEBI had prescribed
norms for the regulation of transactions between brokers and
their clients in November 1993 and had advised the stock
exchanges to incorporate these norms in their bye-laws and to
implement them. While most stock exchanges to incorporate these
norms in their bye-laws and to implement them.
While most stock exchanges implemented these norms on
their own accord, in the case of the Mumbai, Cochin and Madras
Stock Exchanges, SEBI had to amend these bye-laws itself in
exercise of its powers under Section 10 of the Securities
Contracts (Regulation)Act 1956 . SEBI is following up with the
stock exchanges to ensure enforcement of client broker norms.
5.10.2 AUTOMATION OF TRADING AND POST TRADE PROCESSING :
Computerised or screen based trading is essential in order
to achieve transparency, more efficient price formation, and
reduction in transaction costs. With screen" based trading,
participation in a market is no longer dependent on physical
access to a trading floor, and is thus no longer constrained by
the capacity of physical trading infrastructure or by manual and
paper based trade reporting and matching systems.
153
With screen based trading, it becomes possible to establish
audit trails and to monitor abnormal price variations. The NSE
and OTCEI had already introduced computerised on-line trading
facilities prior to 1995-96.The remaining stock exchanges were
advised by SEBI to work out a definite programme to introduce
screen based trading and as a result majority stock exchanges
have introduced on-line trading system.
5.10.3 REDUCTION OF SETTLEMENT CYCLES :
It was decided that The Stock Exchange, Mumbai which has a
trading period of 14 days for 'B' group shares would reduce the
same to 7 days. The other stock exchanges are already having a
similar trading period. This would help investors in speedier
realisation of the proceeds of the trade.
5.10.4 ROLLING SETTLEMENT : ...... .
The trading and settlement cycles have"been'shortened from
14 to 7 days. Rolling settlement is a logical' extension to
further shortening of the trading and settlement cycles. So far,
OTCEI has been the only exchange with a rolling settlement
system.
With the introduction of dematerialised trading, it has now
become feasible to comtemplate the introduction of rolling
settlement. Accordingly, the SEBI introduced T + 5 rolling
settlement cycles from Jan.15, 1998 in respect of those
securities for which dematerialised trading was made compulsory
for institutional investors namely, banks, financial
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institutions, domestic mutual funds and foreign institutional
investors.
5.10.5 NEGOTIATED DEALS TO RESULT IN DELIVERY :
To prevent certain irregularities and to improve the
percentage of deliveries to the total turnover, stock exchanges
were required to introduce a system of compulsory delivery of the
transactions covered under negotiated deals with effect from
June 1, 1997.
5.10.6 UNIFORM NORMS FOR GOOD AND BAD DELIVERY :
SEBI prescribed uniform norms for good and bad deliveries
which are now followed by all market participants. This has
significantly reduced the number of disputes and ensured smooth
and speedy resolution of bad deliveries.
5.10.7 ESTABLISHMENT OF A BAD DELIVERY CELL :
, * * * >
The process of rectification of bad deliveries from broker
to broker was lengthy and gave rise to problem especially in
cases of trades involving brokers from different exchanges. Also,
there was no time limit in which the investor was assured of
rectification/replacement of his shares as the stock exchanges
were not handling the bad deliveries.
SEBI has required all stock exchanges to establish BDCs and
has prescribed the operational procedure for the functioning of
BDCs. This procedure has made possible the rectification
/replacement of shares within 21 days of receipt of bad
deliveries by the introducing member. In case the rectified
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shares come under objection for the second time, the transaction
is closed out. A training program for the officers of the stock
exchanges was also conducted by SEBI to train them for the smooth
functioning of the BDCs.
5.10.8 WEEKLY SETTLEMENT CYCLE AND AUCTION :
The stock exchanges were required to necessarily complete
their settlements within seven days and to conduct the auction
immediately i.e. not later than eight days, after the completion
of the relevant trading period, in those cases where members have
failed to give the delivery. Most of the stock exchanges have
implemented this immediately.
The stock exchanges have required to uniformly amend their
bye-laws relating to close out procedures for short deliveries
pertaining to the settlement. The revised close sought procedure
ensures that the auctions would now completed on the eighth day
from the last day of the trading period. In case of shares are
not available through the auction conducted at the exchange, the
transaction will be closed out.
KNOW YOUR CLIENT :
It was decided " in-principle" that stock exchanges would be
required to ask their member-brokers to maintain a database of
their clients. SEBI has designed a suitable client introduction
form for this purpose. The implementation of the priciple of
"know your client" is a prudential business practice, to further
enhance the safety of the market.
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5.11 CHECKING UNFAIR TRADE PRACTICES :
SEBI has been vested with the powers to take action against
unfair Trade Practices relating to Securities Markets. The
regulation bring for the first time, enforcement against market
manipulation, misleading statement to induce sale or purchase of
securities and unfair trade practices under SEBI's regulatory
purview.
SEBI has been now made empowered to levy fines for violations
related to the failure to submit information to SEBI, failure to
enter into an agreements with client, failure to redress investor
grievances, violation by stock broker etc.
Redressal of complaints of investors is to be encouraged
sharing it with recognised investor associations. This will
facilitate filling of class action suits in consumer courts
against erring companies.
5.11.1 Indefinite suspension of scrips :
With a view to bring some uniform structure regarding
suspensions of scrips, it was decided that suspension should be
followed with immediate investigations at the level of the
exchange. During 1996-97, in respect of 28 scrips (BSE 20, ASE 4,
CSE 1, DSE 1, NSE 1, BGSE 1), SEBI has approved requests for
indefinite suspensions. In some cases suspensions have been
revoked after completion of investigations.
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5.11.2 Simplification of procedure for transfer of shares :
The stock exchanges have been asked to amend their listing
agreements to require issuers to the adopt the following
procedure in cases where proper documents are lodged for transfer
and there are no material defects in the documents except minor
difference in signature of the transferor.
The issuer will promptly send to the transferor an
intimation of the defect in the documents and inform the
transferor that the objection, if any , of the transferor
supported by valid proof, is not lodged with issuer within 15
days of the receipt of the issuer's letter,then securities will
be transferred.
If the objection from the transferor with supporting
documents is not received within the stipulated period, the
issuer shall transfer the securities provided the issuer does not
suspect fraud or forgery in the matter and
When the signature of the transferor is attested by a person
authorised by the Department of Company Affairs, under Section
108 (1A) of the Companies Act 1956, it shall not refuse to
transfer the securities on the ground of signature difference
unless it has reasons to believe that forgery or fraud is
involved.
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5.12 INVESTOR PROTECTION :
The stock exchanges mechanism for dealing with investor
complaints against their members has been strengthened. SEBI has
also put in place a process through which investor grievances
against brokers may find redressal through a complaint to SEBI.
SEBI has advised the exchanges to take measures to improve
investor protection and service.
5.12.1 Investor Protection Fund and Investor Services Fund
All the stock exchanges are required to set up a fund called
"Investor Protection Fund". The purpose of the fund is to provide
compensation, arising out of disputes or defaults of the member
brokers of the exchange to small investors. The amount of
compension available against a single claim of an investor
arising out of default by a member broker of a stock exchange is
Rs.l lakh in case of major stock exchanges, Rs.50000 in case of
medium stock exchanges and Rs.25000 in case of smaller stock
exchanges. Another Fund being maintained by the exchanges is the
Investor Services Fund, whose purpose is, as the name indicates,
to provide investor related services. SEBI advised the stock
exchanges to provide various services including a desk for
attending investor complaints and dummy terminal for showing the
trades of the exchange. The number of Investor Service Centre
will be set up by the stock exchanges at various places is also
being increased.
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5.12.2 Continuing disclosure through the listing agreement :
The Listing Agreement entered into by the issuing firm with
stoch exchange, is an important instrument of ensuring continuing
disclosure to investors. SEBI has been emphasising the need to
strengthen the provisions of the Listing Agreement, as well its
strict enforcement by the exchanges. In 1994-95, stock exchanges
were advised to amend the Listing Agreement.
a) to make companies furnish to the stock exchanges a yearly
statement on the actual utilisation of funds and actual
profitability, as against projected utilisation of funds and
projected profitability respectively.
b) to require similar disclosures to be made in newspapers
together with audited/unaudited results.
c) to require companies to give complete balance sheets and
directors reports to shareholders.
In 1995-96, SEBI advised the stock exchanges to amend the
Listing Agreement, requiring issuers to provide shareholders with
cash flow statements in a prescribed format, along with the
complete balance sheet and profit and loss statement. The stock
exchanges have accordingly amended their listing agreement.
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5.13 OTHER MEASURES TAKEN BY SEBI :
SEBI has taken the initiative to revive the institution of
remisier, to start the facility of warehousing of shares and to
introduce stock lending scheme.
5.13.1 Monitoring and Surveillance :
Market manipulation on the stock exchanges through
fraudulent practices leads to loss of investor confidence. With
the automation of trading and post trade system on the major
stock exchanges, it has become more difficult to manipulate
prices, and to cancel audit trails of such manipulation. SEBI has
instructed the exchanges to set up independent and focused market
surveillance departments.
SEBI strengthened its investigation and enforcement
machinery in terms of staff and resources for effective
monitoring, surveillance and enforcement. The trading terminals
of the screen based trading systems of the Mumbai Stock Exchange
and NSE have been installed in SEBI.
SEBI organised two workshops to impart training to the staff
of the exchanges involved in surveillance. Besides, SEBI
interacted with overseas regulatory authorities and stock
exchanges to gain insight into their systems and experience in
market surveillance.
i
In addition to the above, the exchanges have been asked to
take the following steps to achieve better co-ordinatino and
greater effectiveness in curbing price manipulation of securities.
161
In the case of newly listed securities, four trading days
were earlier allowed for price formation and price stabilisation.
During this period, circuit breakers were not applied and the
securities were not subject to price monitoring by the exchanges.
It was decided that monitoring of the newly listed securities
would now be done by the exchanges from the first day of trading.
Circuit breakers and other monitoring mechanisms will apply form
the second day of trading.
In case of newly listed/permitted securities, where there is
an abnormal price variation, the exchanges are to impose a
specialmargin of 25% or more on purchases in addition to the
regular margin. Further, the seller is also required to pay a
penal margin equivalent to the special margin (applicable to
buyers) on the undelivered quantity. Such penal margin is to be
retained by the exchages for a period of three months or one
month after the delivery, whichever is earlier. In case of non
delivery, the usual auction procedure would continue to apply.
The special/penal margin will apply not only to newly listed
or permitted securities but also to other traded scrips where
price manipulation comes to the attention of the stock exchanges.
The suspension of trading of a security by a stock exchange
on account of market manipulation or price rigging is now to be
immediately informed by the concerned stock exchange to other
stock exchanges. The other stock exchanges are to also suspend
trading in that scrip in cases where the said suspension is for
the more than a day.
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SEBI's approval would, however, have to be sought by the
stock exchanges whenever a scrip is suspended for more than 3 days
The cases of suspension of more than 3 days must be followed
by an investigation. If more than one stock exchange is involved
in such an investigation, it will be done in co-ordination
by the concerned exchanges.If necessary, SEBI could also take up
such investigation.
A market surveillance division was set up in SEBI in July
1995, with a view to effectively monitor abnormal market
activities and detect market manipulation. Since then several
steps have been taken at the level of SEBI and the stock
exchanges to Improve the surveillance capabilities. Some of the
steps were :
the setting up of independent surveillance departments
. .1
functioning directly under the executive directors of the
stock exchanges.
submission to SEBI of daily, settlement and pre-issue
monitoring reports from all the stock exchanges in formats
prescribed by SEBI
the system of circuit breakers/filters mechanisms was
implemented at all stock exchanges
the system of levying special and penal margins was
implemented
procedure for co-ordination among the stock exchanges on
market related suspensions were put in place.
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5.14 SEBI AND MUTUAL FUNDS :
Prior to the SEBI ACT 1992, the Mutual Funds, were governed
by a set of Guidelines Issued by the Reserve Bank of India and
the office of the erstwhile Controller of Capital Issues. The
SEBI (Mutual Funds) Regulations, which were notified in 1993,
provided a formal regulatory framework for all mutual funds in
the country for the first time, except UTI. The latter being set
up under a separate statue due to historical reasons, have not
come under the purview of SEBI.
S.U.l STRUCTURAL CHANGES :
SEBI (Mutual Fund) Regulation brought about several
structural changes in the domestic mutual fund industry. Mutual
Funds are required to have a Board of Trustees or Trustee Company
separate from the Asset Management Company, and the securities
belonging to the various schemes are required to be kept with an
independent custodian. The Regulations have brought about an arm-
length relationship between the constituents of the mutual fund
viz. the asset management company, the trustee and the custodian.
As a part of reforms mutual funds are required to set up
asset management companies with fifty percent independent
directors, separate boards of trustees or trustee companies,
consisting of a minimum fifty percent of independent trustees and
to appoint independent custodians.
Independent trustees who are not associated with the sponsor
shall now constitute two third of the Board of Trustees instead
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of the earlier provision of 50 per cent.
5.14.2 CALCULATION AND DECLARATION OF NAV :
The transparent and well understood declaration of Net Asset
Values (NAVs) of mutual fund schemes is an important issue in
providing investors with information as to the performance of the
fund. Norms for calculation and publication of NAVs were
formulated by an expert committee appointed by SEBI. The Expert
Committee set up by SEBI to recommend uniform practice as regards
valuation and computation of Net .Asset Value (NAV) submitted its
recommendations during 1995-96.
5.14.3 OFFER DOCUMENT :
The offer documents of schemes launched by mutual funds and
the schemes particulars are required to be vetted by SEBI. The
SEBI prepared a standard offer document which prescribes the
minimum disclosure requirements to be contained in the offer
document of any mutual fund scheme. In addition, an abridged
offer document i.e.the memorandum containing key information,
which must accompany all scheme application forms in terms of sub
regulation(4) of regulation 29 of the Regulations, has also been
*
standarised. Both these documents have strengthened the
disclosure standards in the offer dcouments of mutual fund
schemes, thereby enabling the investors to take informed
investment decisions.
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5.14.4 Mutual Fund 2000 :
During 1995-96, SEBI had prepared and widely circulated a
paper titled " Mutual Funds 2000" which identified ways to
improve the working and regulation of the mutual fund industry,
so that mutual funds could provide a better performance and
service to all categories of invesors and offer a range of
innovative products in a competitive mannner to match investors
needs and preferences across various investor segments. Based on
the comments received on the recommendations made in the paper by
market participants and investors and on discussions held with
the Association of Mutual Funds of India (AMI), the SEBI (Mutual
Funds) Regulations, 1993 were revised and the new regulations
notified in Dec.1996.
5.14.5 The SEBI (Mutual Funds) Regulations, 1996 :
The revised regulations embodied far reaching changes in the
regulation and functioning of mutual funds. The revised
regulation provide for
enhanced level of investor protection
empowerment of investors
stringent disclosure norms in the offer documents, so that
investors are better informed, better advised, better aware
of risks and rewards
standardisation of norms for valuation of assets, computation
of NAVs of schemes of mutual funds and accounting
standards and policies
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complete freedom to asset management companies to structure
schemes in accordance with Investor preferences
removal of quantitative restrictions on investment by mutual
funds and replacement by prudential supervision
replacement of vetting of offer documents by filing
guaranteed return schemes by mutual funds permitted provided
returns including capital were guaranteed
indication of expected returns based on hypothetical
portfolio permitted
better governance of mutual funds through higher
responsibilities and empowerment of trustees as from-line
regulators of mutual funds
close scrutiny through off site and on site inspections
code of ethics for asset management companies
The impact of the new regulations was immediately felt. Asset
management companies framed several schemes which made use of the
freedom provided to them by the new regulations and greater
variety in the schemes were offered.
The new regulations have brought into greater focus the
responsibilities of trustees of mutual funds who are uniquely
positioned to promote the interests of the uniholders and to
ensure that mutual funds are managed responsibly and ethically.
In this process, trustees act as the first level regulators and
are critical in helping to ensure the profitability and progress
of the mutual funds.
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5.14.6 Money Market Mutual Funds :
Guidelines for Money Market Mutual Funds were issued by RBI.
These guidelines were subsequently incorporated into the revised
SEBI regulations and paved the way for the introduction of money
market schemes by mutual funds for the first time. Similarly,
pension schemes were also launched by mutual funds for the first
time under section 88(xiii-c) of the Income Tax Act, 1961.
5.14.7 Structuring of the scheme :
SEBI has been seeking to give greater degree of freedom to
fund managers to structure their schemes according to investor
preferences. The provision of structuring of the scheme is given
below.
Aggregate investment by a mutual fund in listed and/or to be
listed securities of group companies of the sponsor shall not
exceed 25 per cent of the net asset of all schemes of the fund.
Asset Management Companies (AMCs) will not be required to
disclose in the scheme offer document, the maximum investments
proposed to be made by the scheme in the securities of the group
companies. The AMCs must submit quarterly reports to the trustees
on transactions in the securities of group companies during the
quarter, and trustees will have to specifically comment on such
transactions recorded in the half yearly reports which they would
submit to SEBI. Mutual Funds have been prohibited from making
investments in unlisted/privately placed securities of
associate/group companies of the sponsor.
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5.14.8 OTHER MEASURES FOR DEVELOPMENT OF MUTUAL FUNDS :
Mutual Funds have also been allowed to underwrite issues as
a part of their investment activity. Mutual funds with a track
record of five years have been allowed to launch income schemes
assuring returns for one year at a time through payment of post
dated warrants, subject to suitable disclosures to the investors.
Mutual funds were allowed to keep the minimum subscription
between Rs.1000 and Rs.5000.
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5.15 SEBI AND FOREIGN INSTITUTIONAL INVESTMENT :
Foreign Institutional Investors (FII) such as Mutual Funds,
Pension Funds, Investment Trusts, Asset Management Companies,
Institutional Portfolio Managers, Nominee Companies have been
allowed to invest in the tradeable securities in the primary and
secondary markets, under the Guidelines for Fils were Issued by
the Government on September 14, 1992.
Registration of Fils is very often common requirement in
other emerging markets also. The Guidelines for Fils to be
registered with SEBI and obtain general permission under the
Foreign Exchange Regulation Act 1973 from Reserve Bank of India
which would enable Fils to open and operate bank accounts in
India.
SEBI(Foreign Institutiona Investors) Regulation 1995
As a part of the amendment to the SEBI Act carried out
through the Securities Laws (Amendment) Act, 1995, Fils are now
required to be registered with SEBI under regulations made under
the Act. Accordingly SEBI notified the SEBI (Foreign
Institutional Investors) Regulation 1995 on November 14, 1995.
The provisions of the Government Guidelines of September 1992
under which SEBI was hitherto registering Fils and the changes
that have been made from time to time in those guidelines have
been incorporated in the regulations.
In 1996-97, several changes have been made to the SEBI
(Foreign Institutional Investors) Regulations, 1995 to diversify
170
the foreign institutional investor base and to further facilitate
inflow of foreign portfolio investment. The changes have also
aimed at facilitating investment in debt securities through the
FII route. The changes are as follows -
The eligible categories of Fils have expanded to include
university funds, endownments, foundations, charitable trusts and
chatitable societies which have a tract record of 5 years and
which are registered with a statutory authority in their country
of incorporation or establishment.
Each FII or sub-account of an FII has been permitted to
invest upon 10% of the equity of any one company, subject to
overall limit of 24% on investments by all Fils, NRIs and OCBs.
The 24% limit may be raised to 30% in the case of individual
companies who have obtained shareholder approval for the same.
Fils have been permitted to invest in unlisted securities
Fils have been allowed to invest in their proprietary funds
Fils who obtain specific approval from SEBI have been
permitted to invest 100% of their portfolios in debt securities.
Such investment may be in listed or to be listed corporate debt
securities or in dated government securities, and is treated to
be part of the overall limit on external commercial borrowing.
In 1997-98, measures were taken to further debt investments
by Fils. Fils Investing through the 100 per cent debt route were
also permitted by the Reserve Bank of India to hedge their
exchange exposure by taking forward cover..
171
The SEBI (Foreign Institutional Investors)Regulations, 1995
were amended on February 12,1997 allowing Fils to invest
proprietory funds and to make investments in dated government
securities and further two amendments were made in the same
Regulation for smooth working of Fils in India.
5.16 THE SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS.1996
SEBI had circulated a consultative paper on the framework of
the draft regulations for depositories and participants in
October 1995. Extensive discussion were then held with the stock
exchanges, market participants and investors on this issue. The
SEBI (Depositories and Participants) Regulations, 1996 were
notified in May 1996.
These regulations provide for registration of depositories
and participants under the SEBI Act, the eligibility criteria for
admission of securities to a depository, the specific rights and
obligations of depositories, participants and issuers in addition
to those specified in the Depositories Act, periodic reports to
be submitted to SEBI, penal action and procedure in case of
default.
In February 1997, the SEBI (Depositories and Participants)
Regulations, 1997 were amended to restrict foreign ownership of a
depository, whether as sponsors or participants to 20 % of its
equity.