CHAPTER 2: REGULATORY FRAMEWORK - GENERAL VIEW

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

Financial Market Regulators and their role SEBI, RBI, IRDAI, PFRDA
Regulatory Bodies ROC, EOW, FIU-India
Securities Appellate Tribunal (SAT)
Legislative framework governing the financial markets
Bye-laws of stock exchanges
Taxes on securities

2.1 Regulatory System

Regulation of the securities market is motivated by the need to safeguard the interests of investors.
What is paramount is to ensure that investors make informed decisions on the basis of complete
transparency and fairness in both primary and secondary market transactions. The basic objective
of SEBI is to:

a. To protect the interest of investors in securities markets

b. To promote the development of securities markets
c. To regulate the securities markets

There are many other issues which warrant regulation. For example, deliberately engineered
speculative activities in the stock market or insider trading are undesirable as they can hurt investors
at large; companies and mutual funds issuing securities and units ought to furnish adequate
disclosures on all relevant facts; stockbrokers ought to execute transactions most efficiently and
also refrain from charging excessive brokerage. There can be instances of unethical activities which
can be detrimental to investors in general such as insider trading, misusing the power of attorney
given by investors to brokers, price manipulation, front running, etc.

There are various regulatory institutions that regulate different sectors of the financial system
explained in section 2.2.

The ruling given by a regulator may be challenged by petitioning the prescribed authority. In the
case of SEBI, for example, the appellate authority is the Securities Appellate Tribunal (SAT). Rulings
of the SAT can be challenged in the Supreme Court of India. Importantly, no civil court shall entertain
any suit or proceeding relating to a matter which an adjudicating officer appointed under the SEBI
Act, or under a duly constituted SAT, is empowered under the said Act to decide upon. Further, no

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injunction can be granted by any court or any other authority with regard to any action taken or to
be taken pursuant to any power conferred by the SEBI Act.

2.2 Financial Market Regulators

As already discussed in the above section, the role of a market regulator is to regulate markets, to
ensure integrity and protect the interests of investors. The different regulators who regulate the
activities of the different sectors in the financial market are as given below:
Ministry of Finance (MOF)
Ministry of Corporate Affairs (MCA)
Securities and Exchange Board of India (SEBI) regulates the (Capital) Securities, Commodities
and Futures markets.
Reserve Bank of India (RBI) is the authority to regulate and monitor the Banking sector.
Insurance Regulatory and Development Authority of India (IRDAI) regulates the Insurance
sector.
Pension Fund Regulatory and Development Authority (PFRDA) regulates the pension fund
sector.
International Financial Services Centres Authority (IFSCA) is a unified authority for the
development and regulation of financial products, financial services and financial
institutions in the International Financial Services Centre (IFSC) in India.

Additionally, intermediaries representing some segment of the securities market may form a Self-
Regulatory Organization (SRO). In order to obtain recognition as an SRO from SEBI, certain
conditions have to be met as prescribed under the SEBI (Self-Regulatory Organizations) Regulations,
y laying out and maintaining high
ethical and professional standards of conduct and encouraging best practices among its members.

We will discuss in brief the role of each regulator in the subsequent sections.

2.2.1 Role of Securities and Exchange Board of India (SEBI)

SEBI was established as a non-statutory body on April 12, 1988. It was established as a statutory
body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992
(15 of 1992) came into effect on January 30, 1992. The preamble of SEBI describes the basic
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

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As per Section 11(2) of SEBI Act, SEBI is empowered under the various regulations of the SEBI Act
to;
a) Regulate the business in stock exchanges and any other securities markets;
b) Register and regulate the working of stockbrokers, share transfer agents, bankers to an
issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters,
portfolio managers, investment advisers and others associated with the securities market.
registering and regulating the working of depositories and
depository participants, custodians of securities, foreign institutional investors, credit rating
agencies, and others as may be specified by SEBI;
c) Register and regulate the working of venture capital funds and collective investment
schemes including mutual funds;
d) Promote and regulate self-regulatory organisations;
e) Prohibit fraudulent and unfair trade practices relating to the securities market;
f) iaries in the securities market;
g) Prohibit insider trading in securities;
h) Regulate substantial acquisition of shares and takeover of companies;
i) Require disclosure of information, to undertake inspection, conduct inquiries and audits of
stock exchanges, mutual funds, other persons associated with the securities market,
intermediaries and SROs in the securities market. The requirement of disclosure of
information can apply to any bank or any other authority or board or corporation established
or constituted by or under any Central or State Act which, in the opinion of the Board, shall
be relevant to any investigation or inquiry by the Board in respect of any transaction in
securities;
j) Call for information from or furnish information to other authorities within India or abroad
having functions similar to SEBI in matters relating to prevention or detection of violations
in respect of securities laws;
k) Perform such functions and to exercise such powers under the Securities Contracts
(Regulation) Act, 1956 as may be delegated to it by the Central Government;
l) Levy fees or other charges pursuant to the implementation of this regulation;
m) Conduct research for the above purposes;
n) Call from or furnish to such agencies specified by the Board, information as may be
considered necessary for the discharge of its functions;
o) Performing such other functions as may be prescribed.

Some of the powers of SEBI as provided in the SEBI Act include:

Section 11(2A): The power to inspect any book, or register or other document or record of any listed
public company or a public company which intends to get its securities listed at a recognized stock

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exchange if SEBI has reasonable grounds to assume that the concerned company has been indulging
in insider trading or fraudulent and unfair trade practices relating to securities market.

Section 11(3): SEBI shall have the same powers as are vested in a civil court under the Code of Civil
Procedure 1908, in respect of certain matters, such as the inspection of books and registers and
summoning and enforcing the attendance of persons and examining them on oath.

Section 11(4) empowers SEBI to take the following actions if it is in the interest of investors or the
Securities Market:
suspend the trading of any security in a recognized stock exchange
restrain persons from accessing the securities markets, and prohibiting any persons
associated with securities market from buying, selling or dealing in securities
suspend any office-bearer of any stock exchange or SRO from holding such position
impound and retain the proceeds or securities relating to any transaction which is under
investigation
attach bank accounts or other property of any intermediary or any person associated with
the securities market in any manner involved in violation of any of the provisions of the SEBI
Act or the rules or regulations made thereunder, for up to 90 days.
direct any intermediary or person associated with the securities market in any manner not
to dispose off or alienate an asset constituting a part of any transaction which is under
investigation

Section 11(5): The amount disgorged pursuant to direction issued under section 11B of the SEBI Act
or section 12A of the Securities Contracts (Regulation) Act, 1956 or section 19 of +Depositories Act,
1996 or under a settlement made under section 15JB or section 23JA of the Securities Contracts
(Regulation) Act, 1956 or section 19-IA of the Depositories Act, 1996, as the case may be, shall be
credited to the Investor Protection and Education Fund established by SEBI and such amount shall
be utilised by SEBI in accordance with the regulations of SEBI Act 1992.

Section 11A: SEBI is vested with the power to regulate or prohibit the issue of prospectus, offer
document or advertisement which solicits money for the issue of securities.

Section 11A (1) empowers SEBI to specify regulations with respect to matters relating to the issue
of capital, transfer of securities and other incidental matters as well as the manner in which such
matters are required to be disclosed by the Companies. Apart from this, SEBI is empowered to issue
general or special orders prohibiting any company from issuing the prospectus, any offer document,
or advertisement soliciting money from the public for the issue of securities and specify the
conditions subject to which the prospectus or offer document or advertisement, if not prohibited,
may be issued.

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Section 11A (2) empowers SEBI to specify the requirements for listing and transfer of securities and
matters incidental thereto.

Section 11B: SEBI has been vested with the powers to issue direction to any intermediary if after

obstructing the orderly development of the securities market. If need be, SEBI can also in the
interest of the market/investors secure the proper management of any such intermediary or person
against whom enquiry has been made. This power includes the power to direct any person who
made a profit or averted loss by indulging in any transaction or activity in contravention of the
provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the
wrongful gain made or loss averted by such contravention. Apart from the above, SEBI also has the
power to levy penalties after recording its reasons in writing.

Section 11C: In cases where SEBI has reasonable ground to believe that the transaction in securities
are being dealt with in a manner detrimental to the investors or the securities market or that any
intermediary or any person associated with the securities market has violated any of the provisions
of the SEBI Act or the rules or the regulations made or directions issued by SEBI , at any time by
order in writing may direct any person to investigate the affairs of such intermediary or person
associated with the securities market and also report to SEBI such investigation.

We would be discussing the SEBI Act in greater detail in Unit 4 of this workbook.

2.2.2 Role of Reserve Bank of India (RBI)

Reserve Bank of India (RBI) is the central bank of the country vested with the responsibility of
administering the monetary policy. Therefore, its key concern is to ensure the adequate growth of
money supply in the economy so that economic growth and financial transactions are facilitated,
but not so rapidly which may precipitate inflationary trends. This is borne out in its Preamble, in
which the basic functions of the Bank are thus defined:
the keeping of reserves with a view to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage; to have a modern monetary policy
framework to meet the challenge of an increasingly complex economy, to maintain price stability
while keeping in mind the objective of growth

supervision.

The main functions of RBI are:

1. As the monetary authority: to formulate, implement and monitor the monetary policy in a
manner as to maintain price stability while ensuring an adequate flow of credit to productive
sectors of the economy.

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2. As the regulator and supervisor of the financial system: To prescribe broad parameters of
banking operations within which Indian banking and financial system functions. The
objective here is to maintain public confidence in the system, protect the interest of the
people who have deposited money with the bank and facilitate cost-effective banking
services to the public.
3. As the manager of Foreign Exchange: To administer the Foreign Exchange Management Act
1999, in a manner as to facilitate external trade and payment and promote orderly
development and maintenance of the foreign exchange market in India.
4. As the issuer of currency: To issue currency and coins and to exchange or destroy the same
when not fit for circulation. The objective that guides RBI here is to ensure the circulation of
an adequate quantity of currency notes and coins of good quality.
5. Developmental role: To perform a wide range of promotional functions to support national
objectives.
6. Regulator and Supervisor of Payment and Settlement Systems: It introduces and upgrades
safe and efficient mode of payment systems in the country to meet the requirements of the
public at large. The objective is to maintain public confidence in the payment and settlement
system.
7. Banking functions:
a) It acts as a banker to the Government and manages issuances of Central and State
Government Securities.
b) It acts as a banker to the banks by maintaining the banking accounts of all scheduled
banks.
entrusted to a Central Board of
Directors which is appointed by the Government of India. Further, each of the four regions in
the country is served by a Local Board which advises the Central Board on local issues and
represents territorial and economic interests of local co-operative and indigenous banks. The
Local Boards also perform other functions as delegated by the Central Board.

RBI performs the important function of financial supervision under the guidance of the Board
for Financial Supervision (BFS) which was constituted in 1994 as a committee of the Central
Board of Directors. The primary objective of the BFS is to carry out consolidated supervision of
the financial sector consisting of commercial banks, financial institutions and non-banking
finance companies. The BFS oversees the functioning of the Department of Banking
Supervision, the Department of Non-Banking Supervision and Financial Institutions Division and
issues directions on regulatory and supervisory issues. Some of the initiatives undertaken by
the BFS are:

Fine-tuning the supervisory processes adopted by the Bank for regulated entities;
Introduction of off-site surveillance system to complement the on-site supervision of
regulated entities;
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 Strengthening the statutory audit processes of banks and enlarging the role of auditors in
the supervisory process;
Strengthening the internal defences within supervised institutions such as corporate
governance, internal control and audit functions, management information and risk control
systems, review of housekeeping in banks;
Introduction of supervisory rating system for banks and financial institutions;
Supervision of overseas operations of Indian banks, consolidated supervision of banks;
Technical assistance programme for cooperative banks;
Introduction of the scheme of Prompt Corrective Action Framework for weak banks;
Guidance regarding fraud risk management framework in banks;
Introduction of risk-based supervision of banks;
Introduction of an enforcement framework in respect of banks;
Establishment of a credit registry in respect of large borrowers of supervised institutions;
and
Setting up a subsidiary of RBI to take care of the IT requirements, including the cyber security
needs of the Reserve Bank and its regulated entities, etc.

ector is
governed by the Banking Regulation Act 1949.

2.2.3 Role of Insurance Regulatory and Development Authority of India (IRDAI)

The mission of the Insurance Regulatory and Development Authority of India (IRDA) is to regulate,
promote and ensure orderly growth of the insurance sector, including the re-insurance business
while ensuring the protection of the interests of insurance policyholders. IRDAI was constituted by
an act of parliament and according to Section 4 of the IRDA Act 1999, the Authority comprises ten
members who are all government appointees.
The powers and functions of the authority include the following:
1. Issuing a certificate of registration or renewing, modifying, withdrawing, suspending or
cancelling such registration.
2. Protecting the interests of policyholders in matters relating to assignment of the policy,
nomination by policyholders, insurable interest, settlement of insurance claim, surrender value
of the policy and other clauses of insurance contracts.
3. Specifying the required qualifications, code of conduct and practical training for intermediaries
including insurance intermediaries and agents.
4. Promoting efficiency in the conduct of insurance business
5. Promoting and regulating professional organisational connected with insurance and re-
insurance business
6. Specifying the code of conduct for surveyors and loss assessors.

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7. Seeking information, undertaking inspection, conducting inquiries and investigations including
audit of the insurer, intermediaries and others.
8. To control and regulate the rates and terms and conditions that may be offered by insurers with
regard to general insurance, which are not covered by the Tariff Advisory Committee.
9. Regulating the investment of funds by insurance companies.
10. Regulating maintenance of margin of solvency
11. Adjudication of disputes between insurers and intermediaries or insurance intermediaries
12. Supervising the functioning of the Tariff Advisory Committee
13. Specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organisations
14. Specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
15. Exercising such other powers as may be prescribed.

2.2.4 Role of Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA was established on 18 September 2013 in accordance with the provisions of the Pension
Fund Regulatory and Development Authority Act, 2013 with the following responsibilities: (a) To
promote old age income security by establishing, developing and regulating pension funds, (b) To
protect the interests of subscribers to schemes of pension funds and related matters. The PFRDA
Act is applicable to (i) the National Pension System (NPS) and (ii) any other pension scheme not
regulated by any other enactment.

The Preamble of the Pension Fund Regulatory & Development Authority Act, 2013 describes the
basic functions of the PFRDA as
lating pension funds,
to protect the interests of subscribers to schemes of pension funds and for matters connected

PFRDA regulates National Pension System (NPS), subscribed by employees of Govt. of India, State
Governments and by employees of private institutions/organizations & unorganized sectors.

The PFRDA is empowered under the various regulations of the PFRDA Act to:
regulate, promote and ensure orderly growth of the National Pension System and pension
schemes to which this Act applies
protect the interests of subscribers of such Systems and schemes
call for information from, undertaking inspection of, conducting inquiries and investigations
including audit of, intermediaries and other entities or organisations connected with
pension funds.

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 The National Pension System (NPS) is a defined contribution retirement savings scheme regulated
by PFRDA. It offers a menu of investment choices and Fund Managers to its subscribers. NPS is
mandatory for the new recruits to the Central Government, except the armed forces. NPS is also
available for all the citizens of India on a voluntary basis. However, mandatory programmes under
the Employees Provident Fund Organization (EPFO) and other special provident funds continue to
operate according to the existing system, under the Employees Provident Fund (EPF) and
Miscellaneous Provisions Act 1952 and other special acts governing these funds.

2.2.5 Role of International Financial Services Centres Authority (IFSCA)

IFSCA has been established on April 27, 2020 under the International Financial Services Centres
Authority Act, 2019. It is headquartered at Gift City, Gandhinagar in Gujarat.

Before the establishment of IFSCA, the domestic financial regulators, namely RBI, SEBI, PFRDA and
IRDA regulated business in IFSC. As the dynamic nature of business in the IFSCs requires a high
degree of inter-regulatory coordination within the financial sector, the IFSCA has been established
as a unified regulator with a holistic vision to promote ease of doing business in IFSC and provide a
world-class regulatory environment.

The main objective of the IFSCA is to develop a strong global connection and focus on the needs of
the Indian economy as well as serve as an international financial platform for the entire region and
the global economy as a whole.

2.3 Other Agencies in the Financial Market

There are several government departments / agencies / organisations that also help in the
regulation of the financial market such as the Ministry of Finance (MoF).

Ministry of Finance (MoF) governs the entire fiscal system of the Government of India. It centralizes
around all the issues in India pertaining to the economy and finance. It also undertakes the task of
mobilization of resources for execution of developmental programmes. Department of Economic
Affairs (DEA), Department of Expenditure, Department of Revenue, Department of Financial
Services etc. are the various departments that are headed by the MoF.

Department of Economic Affairs (DEA) is the nodal agency of the Central Government for
formulating and monitoring
international aspects of economic management. The main function of the DEA is formulation and
monitoring of macroeconomic policies relating to fiscal policy and public finance etc. as well as the
functioning of the capital market including stock exchanges. Other responsibilities include the

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mobilization of external resources, foreign investments and monitoring foreign exchange resources
including balance of payments, production of bank notes and coins of various denominations etc.

Department of Financial Services administers government policies relating to:

Public sector banks
Life insurance and general insurance
Pension reforms
Development Financial Institutions (DFIs) like National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), India
Infrastructure Finance Company Ltd. (IIFCL), National Housing Bank (NHB), Export-Import
Bank of India (EXIM Bank), Industrial Finance Corporation of India (IFCI).

Department of Investment and Public Asset Management oversees, among other things, all
matters relating to the disinvestment of equity shares of Central Government from Central Public
Sector undertakings. The department is also concerned with the financial policy relating to the
utilization of proceeds of disinvestment.

The Ministry of Corporate Affairs is mainly concerned with the administration of the Companies
Act, 1956/2013 and other allied acts, rules and regulations pertaining to the corporate sector. The
Ministry is also responsible for administering the Competition Act 2002 which has replaced the
Monopolies and Restrictive Trade Practices Act, 1969 (MRTP). The Ministry also supervises three
professional bodies, viz., the Institute of Chartered Accountants of India (ICAI), the Institute of
Company Secretaries of India (ICSI) and the Institute of Cost Accountants of India. The Ministry of
Corporate Affairs is also vested with the responsibility of administering the Partnership Act, 1932,
the Companies (Donations to National Funds) Act, 1951 and Societies Registration Act, 1980.

2.3.1 Registrar of Companies (ROC)

Pursuant to Section 396(1) of the Companies Act, 2013, the Central Government has appointed
Registrars at different places to discharge the function of registration of companies as provided in
Section 7. Registrar of Companies (ROC) covers the various States and Union Territories and are
vested with the primary duty of registering companies created in the respective states and the
Union Territories and ensuring that such companies comply with statutory requirements under the
Act. These offices function as a registry of records, relating to the companies registered with them,
which are available for inspection by members of the public on payment of the prescribed fee. The
Central Government exercises administrative control over these offices through the respective
Regional Directors.

Functions of ROC
1) To take care of registration of a company in the country
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 2) To maintain a register of Companies/LLP by entering names of newly incorporated
companies and removing the names of those which are stuck off.
3) To complete regulation and reporting of companies and their shareholders and directors.
4) To administer government reporting of several matters which includes the annual filing of
numerous documents.
5) To foster and facilitate a business culture
6) To ask for supplementary information from any company when necessary. The registrar of
companies can search for any company and demand to look into the accounts of the
company with prior approval from the court.
7) To file a petition for winding up of a company with the discretion of the government

The ROC also undertakes other important duties, some of which are given below:
Under Section 81, the Registrar has to maintain a register containing particulars of all charges in
respect of each company.

Under Section 83, the Registrar on being given evidence to his satisfaction with respect to any
registered charge:
a) The debt for which the charge was created has been paid or satisfied wholly or partly, or
b) The part of the property or undertaking charged has been released from the charge or has
king;

The Registrar may enter in the Register of Charges a memorandum of satisfaction in whole or in
part or about the fact that a part of the property or undertaking has been released from the charge
r undertaking as the case may be, even if no
intimation is received by him from the company.
Section 206 confers power on the Registrar to call for information or explanation. On perusing any
document which a company is required to submit to him under the Act, if the Registrar determines
that any information or explanation pertinent to the document is necessary, the Registrar may by
written order call for information in writing from the company. If no information or explanation is
forthcoming within the time specified, or if the information or explanation is inadequate, then the
Registrar may demand that the company produce for inspection such books and papers as he deems
necessary.

Section 209 spells out the power of the Registrar to seize documents and therefore, goes a step
beyond Section 206, by which the Registrar may only demand the production of documents. If the
Registrar has reasonable grounds to believe that books and papers of, or relating to, any company
or body corporate or managing director or manager of such an entity may be destroyed, mutilated,

36
altered, falsified or secreted, then the Registrar may make an application to a Magistrate having
appropriate jurisdiction to obtain authority to search and seize the books and papers as he deems
necessary.

Section 248 of Companies Act, 2013 confers powers on the Registrar to strike a defunct company
off the register, after completing the formalities prescribed in the section.

2.3.2 National Company Law Tribunal (NCLT)

The Central Government has constituted National Company Law Tribunal (NCLT) under section 408
of the Companies Act, 2013 w.e.f. 01st June 2016.

In the first phase the Ministry of Corporate Affairs have set up eleven Benches, one Principal Bench
at New Delhi and ten Benches at New Delhi, Ahmadabad, Allahabad, Bengaluru, Chandigarh,
Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. These Benches are headed by the President
and 16 Judicial Members and 09 Technical Members at different locations. Subsequently, more
members have joined and Benches at Cuttack, Jaipur, Kochi, Amravati, and Indore have been set
up.

It is a quasi-judicial authority dealing with corporate disputes that are of civil nature arising under
the Companies Act and Insolvency and Bankruptcy Code. The NCLT is a single judicial forum dealing
with all disputes concerning the affairs of Indian companies.

2.3.3 Serious Fraud Investigation Office (SFIO)

The Government of India had set up a Committee on Corporate Governance under the
Chairmanship of Shri Naresh Chandra, former Cabinet Secretary. The Naresh Chandra Committee,
inter-alia, recommended setting up of Corporate Serious Fraud Office. Consequent to the
recommendation of the Naresh Chandra Committee and in the backdrop of stock market scams as
also the failure of non-banking companies resulting in huge financial loss to the public, the Cabinet
in its meeting held on 9th January, 2003 decided to set up a Serious Fraud Investigation Office (SFIO).

As per the decisions of the Cabinet, the Central Government issued a resolution on 2nd July, 2003
constituting this organisation. In continuation of the aforesaid Resolution, charter of Serious Fraud
Investigation Office was issued by the Government on 21st of August, 2003 which, inter alia, stated
that the responsibilities and functions of the SFIO will include, but not be limited to the following: -
a) The SFIO is expected to be a multi-disciplinary organisation consisting of experts in the field of
accountancy, forensic auditing, law, information technology, investigation, company law, capital
market and taxation for detecting and prosecuting or recommending for prosecution white-
collar crimes/frauds.

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b) The SFIO will normally take up for investigation only such cases, which are characterized by
i) complexity and having inter-departmental and multi-disciplinary ramifications;
ii) substantial involvement of public interest to be judged by size, either in terms of monetary
iii) the possibility of investigation leading to or contributing towards a clear improvement in
systems, laws or procedures.

c) The SFIO shall investigate serious cases of fraud received from the Department of Company
Affairs. SFIO may also take up cases on its own, subject to para (d) below. The SFIO would make
investigations under the provisions of the Companies Act, 2013 and would also forward the
investigated reports on violations of the provisions of other acts to the concerned agencies for
prosecution/appropriate action.
d) Whether or not an investigation should be taken up by the SFIO would be decided by the
Director, SFIO who will be expected to record the reasons in writing. These decisions will be
further subject to review by a coordination committee.
With a view to review the functioning of the SFIO and to make it more effective, the Central
Government constituted an Expert Committee under the Chairmanship of Shri Vepa Kamesam
formerly Deputy Governor, Reserve Bank of India. The committee deliberated upon various issues
relating to the investigation of corporate fraud, based on the experience of SFIO and the recent
developments in India and the global arena. In its report dated 29th April, 2009 the committee gave
various recommendations to suggest statutory, administrative and organizational changes for
improving the effectiveness and to ensure efficient discharge of duties by SFIO. The committee had
carefully considered the views and opinions of different regulatory and investigative agencies and
gave its recommendations to the Ministry in developing its proposals for legislative changes and
institutional development towards dealing with corporate fraud effectively and also making SFIO an
effective investigative and law enforcement agency.

Serious Fraud Investigation Office (SFIO) has been established through the Government of India vide
Notification NO. S.O.2005(E) dated 21.07.2015. It is a multi-disciplinary organisation under the
Ministry of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing,
banking, law, information technology, investigation, company law, capital market and taxation etc.
for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.

SFIO is headed by a Director as Head of Department in the rank of Joint Secretary to the Government
of India. The Director is assisted by Additional Directors, Joint Directors, Deputy Directors, Senior
Assistant Directors, Assistant Directors Prosecutors and other secretarial staff. The headquarters of
SFIO is in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad &
Kolkata.

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Investigation Procedure

(i) As per Section 212 (1) of the Companies Act, 2013, the Central Govt. may assign the investigation
into the affairs of a company to the Serious Fraud Investigation Office
(a) on receipt of report of the Registrar or Inspector under section 208;
(b) on intimation of a special resolution passed by a company requesting an investigation into
its affairs;
(c) in public interest;
(d) on the request of any Department of Central Government or State Government

On receipt of such order from the Government, Director, SFIO may designate such number of
Inspectors as he may consider necessary for the purpose of such investigation.

(ii) As per sub-section (3) of section 212 of Companies Act, 2013, the investigation into the affairs
of a company shall be conducted in the manner and by following the procedure specified in Chapter
XIV of Companies Act, 2013. The SFIO shall submit its report to the Central Government within the
period specified in the order.

(iii) As per sub-section (4) of section 212 of Companies Act, 2013, the Director, SFIO shall cause the
affairs of the company to be investigated by an investigating officer, who shall have the powers of
the Inspector under section 217 of the Companies Act, 2013.

(iv) As per sub-section (5) of section 212 of Companies Act, 2013, it shall be the responsibility of the
company, its officers and employees, who are or have been in the employment of the company to
provide all information, explanation, documents and assistance to the investigating officer as he
may require for conduct of business.

(v) As per sub-section (11) of section 212 of Companies Act, 2013, the Serious Fraud Investigation
shall submit an interim report, if so directed by the Central Government.
(vi) As per sub-section (12) of section 212 of Companies Act, 2013, on completion of an
investigation, the SFIO shall submit the Investigation Report to the Central Government.

The Computer Forensic and Data Mining Laboratory (CFDML) was set up in 2013 to provide support
and service to the officers of SFIO in their investigations. The laboratory is equipped with state-of-
the- art tools for Computer (Media) Forensics and has adopted a quality system based on
internationally accepted standards in accordance with ISO/IEC 17025.

Mission statement - The CFDML is committed to provide

i) quality service of international standards to its customers by adopting procedures that are valid,
reliable and sufficient for the intended purpose.

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ii) technically valid results which fulfil statutory and regulatory requirements.
iii) impartial and objective analysis in a time-bound manner and maintain a high level of integrity.

The CFDML has been notified as Examiner of Electronic Evidence u/s 79A of Information Technology
Act, 2000 by the Ministry of Electronics and Information Technology (MeitY).

2.3.4 Economic Offences Wing (EOW)

The Economic Offences Wing (EOW) in the Central Bureau of Investigation was created in 1964 to
deal with offences under various sections of the Indian Penal Code and notified under Special Acts
mainly relating to serious frauds in banks, stock exchanges, financial institutions, joint-stock
companies, public limited companies, misappropriation of public funds, criminal breach of trust,
violation of Customs Act, counterfeiting of currency, narcotics, drug trafficking, arms peddling and
offences relating to adulteration, black-marketing and others.

Following the securities and stock market scam of 1992, it was deemed desirable to strengthen and
expand the EOW and accordingly, a full-fledged Economic Offences Division (EOD) was formed in
1994. The EOD has four zones of which one focuses exclusively on large and complicated security
and bank frauds.

The areas currently covered by the EOD are:

1. Frauds relating to foreign trade
2. Banking frauds
3. Insurance frauds
4. Foreign exchange frauds
5. Frauds involving manipulation of share prices, insider trading and others
6. Smuggling of narcotics and psychotropic substances
7. Forgery of travel documents, identity papers and overseas job rackets
8. Counterfeit currency and fake Government stamps and paper
9. Smuggling of antiques, arts and treasures
10. Cybercrimes
11. Violation of Intellectual Property Rights, audio and video piracy and software piracy
12. Wildlife and environmental offences

State governments have also set up their EOWs to deal with commercial crimes, thefts of idols,
bogus lottery tickets and other offences.

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2.3.5 Financial Intelligence Unit - India (FIU-I)

Financial Intelligence Unit India (FIU-IND) was set up by the Government of India vide O.M. dated
18th November 2004 as the central national agency responsible for receiving, processing, analysing
and disseminating information relating to suspect financial transactions. FIU-IND is also responsible
for coordinating and strengthening efforts of national and international intelligence, investigation
and enforcement agencies in pursuing the global efforts against money laundering and financing of
terrorism. FIU-IND is an independent body reporting directly to the Economic Intelligence Council
(EIC) headed by the finance minister.

The main function of FIU-IND is to receive cash/suspicious transaction reports, analyse them and,
as appropriate, disseminate valuable financial information to intelligence/enforcement agencies
and regulatory authorities. The functions of FIU-IND are:

Collection of Information: Act as the central point for receiving Cash Transaction reports (CTRs),
Non-Profit Organisation Transaction Report (NTRs), Cross Border Wire Transfer Reports
(CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction
Reports (STRs) from various reporting entities.

Analysis of Information: Analyse received information in order to uncover patterns of

transactions suggesting suspicion of money laundering and related crimes.

Sharing of Information: Share information with national intelligence/law enforcement

agencies, national regulatory authorities and foreign Financial Intelligence Units.

Act as Central Repository: Establish and maintain a national database on the basis of reports
received from reporting entities.

Coordination: Coordinate and strengthen the collection and sharing of financial intelligence
through an effective national, regional and global network to combat money laundering and
related crimes.

Research and Analysis: Monitor and identify strategic key areas on money laundering trends,
types and developments.

The value of information exchange at an international level in support of law enforcement efforts
has proven itself to be highly significant. FIUs have the ability to exchange financial information that
is helpful for following the financial trail in law enforcement investigations, including those related
to terrorism, and uncovering criminal assets.

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The Financial Action Task Force (FATF) is an inter-governmental body which sets standards and
develops and promotes policies to combat money laundering and terrorist financing. The revised
Forty Recommendations of FATF provide a complete set of counter-measures against money
laundering covering the criminal justice system and law enforcement, the financial system and its
regulation, and international co-operation. These Recommendations have been recognised,
endorsed, or adopted by many international bodies as the international standards for combating
money laundering.

Certain exclusive and concurrent powers under the Prevention of Money Laundering Act (PMLA)
are conferred on the Director, FIU-IND. For instance, under Section 13(2) of the PMLA, the Director
may impose a fine on any banking company, financial institution or intermediary for failing to
comply with the obligations of maintenance of records or to furnish information or to verify the
identities of clients. For the purposes of Section 13, the Director shall have the same powers as are
vested in a civil court under the Court of Civil Procedure 1908, while trying a suit, such as discovery
and inspection, compelling the production of records and so on. Under Section 66 of the PMLA, the
Director or a specified authority may furnish or cause to be furnished, any information received or
obtained, to any officer, authority or body, if it is deemed to be in the public interest.

2.3.6 Police Authorities

The police authorities are responsible for maintaining law and order and for enabling the
enforcement of The Indian Penal Code (IPC) which contains laws on crimes of various kinds. The IPC
has 511 sections, some of which contain detailed descriptions of certain crimes. In the context of
the securities market, sections that have particular relevance are the ones relating to specific
offences, such as:

a. Giving false evidence and offences against public justice (sections 191 to 229)
b. Offences against property (sections 378 to 462)
c. Offences relating to documents and property marks (sections 463 to 489E)
d. Attempts to commit offences (section 511)

To illustrate the relevance, some of the sections from the ones listed above are discussed as follows:

Section 192 relates to the fabrication of false evidence. For example: making a false entry in any
book or record or electronic record; or, making a document or electronic recording containing a
false statement intending that such circumstances, false entry or false statement may appear in
evidence in a judicial proceeding or in a proceeding taken by law which may cause an erroneous
opinion to be formed.

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Section 403 relates to the dishonest misappropriation of property. The offence is committed when
a person dishonestly misappropriates or converts to his own use any movable property.

Section 405 is about a criminal breach of trust. The offence is committed when a person who has
been entrusted with property or dominion over property, dishonestly misappropriates it or converts
it to his own use or disposes off that property in violation of any direction of law or legal contract
or wilfully makes another person do so.

Offences relating to property, marks and documents include forgery (sections 463 and 465) and
making a false document (section 464); further, if a clerk, officer or servant wilfully and with intent
to defraud makes a false entry in, omits or alters or abets the omission or alteration of any material
particular from or in any such book, electronic record, paper, writing, valuable security or account
belonging to or in the possession of his employer, then it is an act of falsification of accounts, which
is an offence under section 477A.

2.4 Appellate Authority

2.4.1 Role of Appellate Authority -Securities Appellate Tribunal (SAT)
The Securities Appellate Tribunal has been set up under the SEBI Act, which hears and disposes of
the appeals of any person who has been aggrieved by any order of SEBI or of any adjudicating officer
under the Act. This section elaborates on the different sections under the SEBI Act which discusses
the establishment and the role of SAT. Section 15K (1) of the SEBI Act, 1992, empowers the Central
Government to establish Securities Appellate Tribunal (SAT) to exercise jurisdiction, powers and
authority under the said Act or any other law in force. SAT shall consist of a presiding officer and
such other members, as may be determined by the Central Government. The qualification for
appointment is that the person should be a sitting or retired- judge of the Supreme Court or Chief
Justice of a High Court or a Judge of High Court for at least 7 years in the case of the Presiding Officer
and is or has been a Judge of High Court for at least five years in case of a Judicial Member. There
are specific requirements prescribed for a Technical Member.

SAT hears and disposes of appeals against orders passed by the Pension Fund Regulatory and
Development Authority (PFRDA) under the PFRDA Act, 2013 and against orders passed by the
Insurance Regulatory Development Authority of India (IRDAI) under the Insurance Act, 1938, the
General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and
Development Authority Act, 1999 and the Rules and Regulations framed thereunder.

Any person aggrieved by the following may appeal to the SAT, provided the aggrieved person had
not granted his consent to the order against which the appeal is being made. The appeal must be
filed within a period of 45 days from the date on which a copy of the order is received:

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a. An order of SEBI made on or after the commencement of the Securities Laws (Second
Amendment) Act, 1999, under the SEBI Act 1992, or related rules and regulations.
OR
b. By an order made by an Adjudicating Officer under the Act.
OR
c. By an order of the Insurance Regulatory and Development Authority or the Pension Fund
Regulatory and Development Authority.

As per Section 15U (1), the SAT shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908, but shall be guided by the principles of natural justice. Further, subject to other
provisions of the SEBI Act, 1992, and rules, the SAT shall have powers to regulate its own procedure.

As per Section 15U (2), the SAT shall have, for discharging its functions, the same powers as are
vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the
following matters:

a) Summoning and enforcing the attendance of any person and examining him on oath
b) Requiring the discovery and production of documents
c) Receiving evidence on affidavits
d) Issuing commissions for the examination of witnesses or documents
e) Reviewing its decisions
f) Dismissing an application for default or deciding it ex-parte
g) Setting aside any order of dismissal of any application for default or any order passed by it ex-
parte
h) Any other matter which may be prescribed

According to Section 15U (3), every proceeding before the SAT shall be deemed to be a judicial
proceeding and SAT shall be deemed to be a civil court.

Section U states, where Benches are constituted, the Presiding Officer of the SAT may, from
time to time, make provisions as to the distribution of the business of the SAT amongst the Benches
and also provide for the matters which may be dealt with, by each Bench.

According to section 15U (5), on the application of any of the parties and after notice to the parties,
and after hearing such of them as he may desire to be heard, or on his own motion without such
notice, the Presiding Officer of the SAT may transfer any case pending before one Bench, for
disposal, to any other Bench.

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Section 15U (6) states that if a Bench of the SAT consisting of two members differ in opinion on any
point, they shall state the point or points on which they differ, and make a reference to the Presiding
Officer of the SAT who shall either hear the point or points himself or refer the case for hearing only
on such point or points by one or more of the other members of the SAT and such point or points
shall be decided according to the opinion of the majority of the members of the SAT who have heard
the case, including those who first heard it.

Section 15V states that the appellant may either appear in person or authorize one or more
chartered accountants or company secretaries or cost accountants or legal practitioners or any of
its officers to present his or its case before the SAT.

Section 15W states that the provisions of the Limitation Act, 1963 shall apply to an appeal made to
a SAT.
Section 15Y specifies that no civil court shall have jurisdiction to entertain any suit or proceeding in
respect of any matter which SAT constituted under the SEBI Act is empowered to decide upon.
Further, no injunction shall be granted by any court or authority in respect of any action taken or to
be taken in pursuance of any power conferred by or under the SEBI Act.

Section 15Z states that any person aggrieved by any decision or order of the SAT may file an appeal
to the Supreme Court within 60 days from the date of communication of the decision or order of
the SAT to him, on any question of law arising out of the order.

2.5 Legislative Framework Governing the Financial Market

Understanding the financial market, intermediaries and the regulators are involved in efficient
regulation of the system, in this section, we however try to take a look at the main rules and
regulations pertaining to the securities market. The subsequent chapters in this workbook will delve
deeper into each of the regulations as discussed hereunder.

2.5.1 SEBI Act, 1992

The SEBI Act, 1992 is an act to provide for the establishment of a Board to protect the interests of
investors in securities and to promote the development of, and to regulate, the securities market
-brokers,
share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and other intermediaries
associated with the securities market. Further, SEBI is the authority to regulate depositories,
participants, custodians, foreign institutional investors, credit rating agencies, mutual funds and
venture capital funds. SEBI is also vested with the responsibility of prohibiting fraudulent and unfair
trade practices relating to the securities market, including insider trading.

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2.5.2 Securities Contracts (Regulation) Act, 1956

The Securities Contracts (Regulation) Act, 1956 is a legislation designed to prevent undesirable
transactions in securities by regulating the business of securities dealing and trading. In pursuance
of its objects, the Act covers a variety of aspects, some of which are listed below:

1. Granting recognition to stock exchanges

2. Corporatization and demutualization of stock exchanges
3. The power of the Central Government to call for periodical returns from stock exchanges
4. The power of SEBI to make or amend bye-laws of recognized stock exchanges
5. The power of the Central Government (exercisable by SEBI also) to supersede the governing
body of a recognized stock exchange
6. The power to suspend the business of recognized stock exchanges
7. The power to prohibit undesirable speculation

2.5.3 Securities Contracts (Regulation) Rules, 1957

Section 30 of the Securities Contracts (Regulation) Act, 1956 empowers the Central Government to
make rules for the purpose of implementing the objects of the said Act. Pursuant to the same, the
Securities Contracts (Regulation) Rules 1957 have been made. These rules contain specific
information and directions on the following:

Formalities to be completed including submission of application for recognition of a stock

exchange
Qualification norms for membership of a recognized stock exchange
Mode of entering into contracts between members of a recognized stock exchange
Obligation of the governing body to take disciplinary action against a member, if so, directed
by the SEBI
Audit of accounts of members
Maintaining and preserving books of accounts and other documents by every recognized
stock exchange and by every member
Submission of the annual report and periodical returns by every recognized stock exchange
Requirements with respect to the listing of securities on a recognized stock exchange
Requirements with respect to the listing of units or any other instrument of a Collective
Investment Scheme on a recognized stock exchange

2.5.4 SEBI (Prohibition of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 has come into force w.e.f. May 2015.
Any trading done by an insider based on information that is not available in the public domain gives

46
an undue advantage to insiders and affects market integrity. This is not in line with the principle of
fair and equitable disclosure. In order to protect the integrity of the market, the SEBI (Prohibition
of Insider Trading) Regulations have been put in place. The Regulations mainly provide for who are
insiders, what is prohibited for them and the systemic provisions which need to be laid down and
followed by listed companies as well as intermediaries to prevent insider trading.

The regulations define an a company or who is in

possession of or as having access to unpublished price sensitive information in respect of securities
of a company.

The regulations also define generally available information which means an information that is
accessible to the public on a non-discriminatory basis and does not include unverified event or
information reported in print or electronic media. It is intended to define what constitutes generally
available information so that it is easier to crystallize and appreciate what constitutes unpublished
price sensitive information. Information published on the website of a stock exchange would
ordinarily be considered generally available.

on of or

regardless of how one came in possession of or had access to such information. Various
circumstances are provided for such a person to demonstrate that he has not indulged in insider
trading.

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 is deemed to be a connected person if such person is:

(a) an immediate relative of connected persons specified in clause (i); or
(b) a holding company or associate company or a subsidiary company; or
(c) an intermediary as specified in section 12 of the SEBI Act or an employee or director thereof; or

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

director thereof; or
(e) an official of a stock exchange or clearing house or corporation; or

47
(f) a member of the 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 the 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;
It is intended that a connected person is one who has a connection with the company that is
expected to put him in possession of unpublished price sensitive information. Immediate relatives
and other categories of persons specified above are also presumed to be connected persons but
such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to
bring into its ambit persons who may not seemingly occupy any position in a company but are in
regul
operations. It is intended to bring within its ambit those who would have access to or could access
unpublished price sensitive information about any company or class of companies by virtue of any
connection that would put them in possession of unpublished price sensitive information.

This Regulation is also applicable to Immediate Relative. Immediate relative is defined to include
the spouse of a person, parents, sibling, child of such person or the spouse, any of whom is either
dependent financially on such person, or consults such person in taking decisions relating to trading
in securities. It is intended that the immediate relative of the also becomes a
connected person for purpose of these regulations.

2.5.5 SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 prohibit fraudulent, unfair and manipulative trade practices in securities. These
regulations have been made in exercise of the powers conferred by section 30 of the SEBI Act, 1992.

Regulation 2(1) (c) defines fraud as inclusive of any act, expression, omission or concealment
committed whether in a deceitful manner or not by a person or by any 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 include

48
a) A knowing misrepresentation of the truth or concealment of material fact in order that another
person may act, to his detriment
b) A suggestion as to a fact which is not true, by one who does not believe it to be true
c) An active concealment of a fact by a person having knowledge or belief of the fact
d) A promise made without any intention of performing it
e) A representation, whether true or false, made in a reckless and careless manner
f) Any such act or omission as any other law specifically declares to be fraudulent
g) deceptive behaviour by a person depriving another of informed consent or full participation
h) false statement made without reasonable ground for believing it to be true
i) 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

In this context, the term dealing in securities needs to be understood. It is defined as under:

(i) 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 the Act, either by
themselves or through mule accounts6;

(ii) such acts which may be knowingly designed to influence the decision of investors in securities;
and

(iii) any act of providing assistance to carry out the aforementioned acts.

Chapter II of the regulations prohibits certain dealings in securities covering buying, selling or
issuance of securities. Further, it specifies instances of manipulative, fraudulent or unfair trade
practice which includes the following:

a. Knowingly indulging in an act that creates a false or misleading appearance of trading in the
securities market
b. Dealing in a security that is not intended to affect a transfer of beneficial ownership but to serve
only as a device to inflate or depress or cause fluctuations in the price of such security for
wrongful gain or avoidance of loss

account linked with such trading account in the name(s) of a person, where the account is effectively controlled by
another person, whether or not the consideration for transactions in the account are paid by such other person.

49
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 which is tantamount to a manipulation of the price of security including,
influencing or manipulating the reference price or benchmark price of any securities
f. A person dealing in securities, knowingly publishing or causing to publish or reporting or causing
to report any untrue information or information relating to securities, including financial results,
financial statements, mergers and acquisitions, regulatory approvals 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 the intention of performing it or without the
intention of change of ownership of such security
h. Selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities whether in the
physical or dematerialized form:
i. However, if:
a. the person selling, dealing in or pledging stolen, counterfeit or fraudulently issued securities
was a holder in due course; or
b. the stolen, counterfeit or fraudulently issued securities were previously traded on the market
through a bonafide transaction,
c. such selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities shall
not be considered as a manipulative, fraudulent, or unfair trade practice
j. 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;
k. A market participant entering into transactions on behalf of client without the knowledge of or
instructions from client or mis-utilizing or diverting the funds or securities of the client held in a
fiduciary capacity;
l. Circular transactions in respect of 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;
m. Fraudulent inducement of any person by a market participant to deal in securities with the
objective of enhancing his brokerage or commission or income;
n. An intermediary predating or otherwise falsifying records including contract notes, client
instructions, the balance of securities statement, client account statements
o. Any order in securities placed by a person, while directly or indirectly in possession of
information that is not publicly available, regarding a substantial impending transaction in those
securities, its underlying securities or its derivative;

50
p. Knowingly planting false or misleading news which may induce the sale or purchase of securities.
q. 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 i)
knowingly making a false or misleading statement or ii) knowingly concealing or omitting
material facts or iii) knowingly concealing the associated risk or iv) not taking reasonable care
to ensure the suitability of the securities or service to the buyer.
r. 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

Chapter III relates to the investigation of transactions of the nature described above. In particular,
under regulation 8(1), it shall be the duty of every person who is under investigation:

a. To produce books, accounts, records and documents that may be required by the
Investigating Authority and also to furnish statements and information that is sought.
b. To appear before the Investigating Authority personally when required to do so and to
answer questions posed by the authority.

2.5.6 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, are spread over six
chapters dealing with issues such as disclosures of shareholding and control, substantial acquisition
of shares or voting rights, the procedure for an open offer, obligations of the acquirer, merchant
banker and the target company and investigation and action by SEBI.

a
. Some of the regulations are discussed below, to illustrate the nature
and scope of the regulations.

Regulation 3(1) Public Announcement of an open offer

According to regulation 3(1), any acquirer who acquires shares or voting rights, which (taken
together with shares or voting rights, if any held by him) would entitle him to exercise twenty-five
per cent or more voting rights in a company, in any manner whatsoever, is required to make a public
announcement of an open offer for acquiring shares of the target company.
Regulation 3(2) Acquisition of additional shares or voting rights
Regulation 3(2) states that no acquirer who together with persons acting in concert with him, has
acquired and holds in accordance with these regulations shares or voting rights in a target company
entitling them to exercise twenty-five per cent or more of the voting rights in the target company
but less than the maximum permissible non-public shareholding, shall acquire within any financial
year additional shares or voting rights in such target company entitling them to exercise more than

51
five per cent of the voting rights unless the acquirer makes a public announcement of an open offer
for acquiring shares of such target company in accordance with these regulations.

In the case of a listed entity which has listed its specified securities on Innovators Growth Platform,
the percentage would be 49% instead of 25%.

Regulation 4 No control unless public announcement of an open offer is made

Regulation 4 states 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

Regulation 5(1) Grounds for the indirect acquisition of share/voting rights/control

Regulation 5 (1) for the purposes of regulation 3 and regulation 4, acquisition of shares or voting
rights in, or control over, any company or other entity, that would enable any person and
persons acting in concert with him to exercise or direct the exercise of such percentage of voting
rights in, or control over, a target company, the acquisition of which would otherwise attract
the obligation to make a public announcement of an open offer for acquiring shares under
these regulations, shall be considered as an indirect acquisition of shares or voting rights in,
or control over the target company

Regulation 5(2) Grounds for indirect acquisition considered as direct acquisition

Regulation 5(2) Notwithstanding anything contained in these regulations, in the case of an indirect
acquisition attracting the provisions of sub-regulation (1) where,

(a)the proportionate net asset value of the target company as a percentage of the consolidated net
asset value of the entity or business being acquired

(b) the proportionate sales turnover of the target company as a percentage of the consolidated
sales turnover of the entity or business being acquired; or

(c) the proportionate market capitalisation of the target company as a percentage of the enterprise
value for the entity or business being acquired; is in excess of eighty per cent, based on the most
recent audited annual financial statements, such indirect acquisition shall be regarded as a direct
acquisition of the target company for all purposes of these regulations including without limitation,
the obligations relating to timing, pricing and other compliance requirements for the open offer .7

7Explanation For the purposes of computing the percentage referred to in clause (c) of this sub-regulation, the market capitalisation

of the target company shall be taken into account on the basis of the volume-weighted average market price of such shares on the
stock exchange for a period of sixty trading days preceding the earlier of, the date on which the primary acquisition is contracted,

52
The Regulation 29(1) describes disclosure requirements when 5% or more of shares/voting rights
are acquired and the Regulation 29(2) concentrates on disclosure requirements pertaining to the
transactions resulting in more than 2% change in shareholding/voting rights. Further, Regulation
29(3) states the time limit and intimation to for disclosures required under sub-regulation (1) and
sub-regulation (2). These regulations have been covered in detail in Section 13.3.2 of Chapter 13
covering SEBI SAST Regulations, 2011.

The other Regulations contain directions on various aspects of the public offer such as the
appointment of a merchant banker, timing and content of the public announcement of the offer,
submission of a letter of offer to SEBI and the offer price. Subsequent regulations deal with matters
such as general obligations of the acquirer, merchant banker, BoD of the target company, provision
of escrow to enable the acquirer to perform his obligations and substantial acquisition of shares in
a financially weak company.

2.5.7 Companies Act, 2013

The Companies Act, 2013 is legislation to consolidate and amend the law relating to companies and
certain other associations.

The new Companies Act, 2013 is divided into 29 Chapters and 470 sections. All the sections have
been notified as on date except Sections 129A, 393A and 418A.

The relevant Chapters are described briefly below:

Chapter III - Prospectus and Allotment of Securities

Part I: Public Offer
Part II: Private Placement
Matters covered include the contents of a prospectus, its registration, shelf prospectus, red herring
prospectus, civil and criminal liabilities for misstatements in the prospectus, allotment of securities
by the company, Global depository receipt and offer or invitation for subscription of securities on
private placement.

Section 24 of the Act which is part of this Chapter, states that the provisions contained in this
Chapter, Chapter IV and section 127 shall be administered by SEBI if the company is listed or is
proposing to get its securities listed on any recognised stock exchange.

and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, as traded on
the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period.

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Chapter IV Share Capital and Debentures: This Chapter describes the kinds of share capital,
numbering and certificate of shares, voting rights, calls, dividend, issue of sweat equity shares, issue
and redemption of preference shares, debentures, buy-back of securities and alteration of capital.

Chapter VII Management and Administration: Matters dealt with herein include the registered
office and name, the Register of Members and debenture holders, Annual Returns, meetings and
proceedings.

Chapter VIII Declaration and Payment of Dividend: Matters dealt with are declaration of dividend,
unpaid dividend account, Investor Education and Protection Fund and punishment for failure to
distribute dividend.

Chapter XI Appointment and Qualifications of Directors: This Chapter deals with the Board of
Directors, selection of independent d
resignation and removal of directors etc.

Chapter XII Meetings of Board and its Powers: This Chapter describes in detail the requirements
relating to meetings of the Board, quorum, passing of resolution by circulation, audit committee,
powers of the Board and the restrictions thereto as well as loans and investments by company,
related party transactions and the prohibition on insider trading of securities.

Chapter XIII Appointment and Remuneration of managerial personnel: Appointment of Managing

Director, whole-time director or manager, overall maximum managerial remuneration, calculation
of profits, recovery of remuneration in certain cases, central government or company to fix a limit
with regard to remuneration, compensation for loss of office of managing or whole-time director
or manager.

Chapter XIV Inspection, Inquiry and Investigation: Powers and procedure for inspection and
investigation of companies by the inspector and Serious Fraud Investigation Office are described in
this Chapter.

Chapter XV Compromises, Arrangements and Amalgamations: Power to enter into a compromise

or make arrangements with creditors and members, Power of Tribunal to enforce compromise or
arrangement, merger and amalgamation of certain companies, Power to acquire shares of
shareholders dissenting from scheme or contract approved by the majority, Power of Central
Government to provide for amalgamation of companies in the public interest.

Chapter XVI Prevention of Oppression and Mismanagement: Application to the tribunal for relief in
case of oppression, powers of the tribunal, consequences of termination or modification of certain
agreements, class action.

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Chapter XXVII National Company Law Tribunal and Appellate Tribunal: This Chapter deals with the
constitution of National Company Law Tribunal and the Appellate Tribunal, qualification of
President and members of the tribunal, selection of members of the appellate tribunal, term of
office, salary allowances and other terms and conditions of service of members, resignation of
members, removal of members benches of tribunals, orders of tribunal, appeal from orders of
tribunal, appeal to the supreme court, procedures before the appellate tribunal, power to punish
for contempt, the civil court not to have jurisdiction.

Chapter XXVIII Special Courts: This Chapter deals with the Establishment of Special Courts, offences
triable by Special courts, offences to be non-cognizable, compounding of certain offences,
mediation and conciliation panel and procedures related thereto.

Chapter XXIX Miscellaneous: The punishment and penalty sections alike punishment for fraud, false
statement, false evidence, in case of repeated default, for wrongful withholding of property,
adjudication of penalties, delegation by Central Government and its power and functions, Power to
exempt class or classes of companies from provisions of Act.

There are seven Schedules in the Companies Act, 2013.

2.5.8 Indian Contract Act, 1872

The Indian Contract Act came into force on 1 September 1872. It lays down general principles with
regard to contracts and applies to the whole of India, except the state of Jammu & Kashmir.

The law of contracts represents the most important branch of mercantile law and rests at the
foundation of trade and commerce. It is pervasive as it affects us in our daily lives, often without
our realizing it. The main purpose of the law is to impart credibility about the fulfilment of
obligations in mercantile transactions. The contracts become enforceable through the courts of law.

A contract primarily must satisfy two conditions;

1. There shall be an agreement; and

2. Such an agreement should be enforceable by law which creates legal obligations.
Hence, agreements that are enforceable by law are contracts. An agreement is enforceable by law
when it fulfils certain conditions as laid down in section 10 of The Indian Contract Act, 1872. As per
All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a lawful object and
are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force

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in India and not hereby expressly repealed by which any contract is required to be made in writing
or the presence of witnesses, or any law relating to the registration of documents.
The sections of the Act relate to matters such as:
1. Essentials of a valid contract
2. Classification of contracts
3. Offer, acceptance and communication of offer, acceptance and revocation of either
4. Capacity of the parties to a contract
5. Free consent
6. Consideration
7. Legality of object and consideration
8. Performance of a contract
9. Remedies for breach of contract
10. Indemnity and guarantee
11. Bailment and pledge
12. Law of agency

A more detailed explanation on the essential elements of a contract is provided below.

There must be at least two parties to a contract, with an offer by one and acceptance by
the other. Such offer and acceptance must be legal.
The parties to the agreement must intend to create legal relations between them. Mere
social or domestic agreements do not constitute contracts.
The agreement to be enforceable by law must be supported by valuable consideration. An
agreement to perform for nothing in return is usually not enforceable. The consideration
could be an act of abstinence or a promise to do or not to do something.
The parties must be capable of entering into a valid contract, that is, they should have
attained the age of majority, should be of sound mind and not be disqualified from
contracting by any law.
The consent of the parties must be free, that is, it should not have been caused by coercion,
undue influence, fraud, misrepresentation or mistake.
The object of the agreement must be lawful, which implies that it must not be illegal,
immoral or against public policy. Any agreement with an unlawful object is void.
The terms of the agreement must be definite and certain. A court will not enforce a
contract that contains vague or illusory terms.
The agreement must be capable of performance. An agreement to perform an impossible
act is void.
The agreement must not have been expressly declared to be void. Examples of such
agreements are:
1. An agreement in restraint of trade
2. An agreement in restraint of legal proceedings

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 3. An agreement having uncertain meaning
The agreement may be oral or written. However, those agreements which are required to
be written or even attested and registered must be in the prescribed form. Examples are
mortgages of immovable property and negotiable instruments.

From the perspective of the securities market, the law of agency is especially important and it
governs the relationship between an investor (principal) and a broker (agent). The function of a
broker is to establish the privity of a contract between two parties to a transaction for which he
earns a commission, i.e., brokerage. Accordingly, section 226 makes it clear that contracts entered
into through an agent and the resulting obligations may be enforced in the same manner and will
have the same legal consequences as if the contracts had been entered into and the acts performed
by the principal in person.

Section 211 states that an agent is bound to conduct the business of his principal according to the
directions given by the principal.

Section 212 makes it clear that an agent is bound to conduct the business of the agency skilfully
(unless the principal is aware of his deficiencies) and with reasonable diligence.

Section 213 requires that an agent render proper accounts to his principal on demand.

Similarly, some regulations lay down the duties of the principal, as for instance, section 222 lays
down that the principal is bound to indemnify the agent against the consequences of all lawful acts
done by such agent in exercise of the authority conferred on him.

2.5.10 Prevention of Money-Laundering Act, 2002

Money laundering involves disguising financial assets so that they can be used without detection of
the illegal activity that produced them. Through money laundering, the launderer transforms the
monetary proceeds derived from criminal activity into funds with an apparently legal source.

The Prevention of Money-Laundering Act, 2002 (PMLA), is an act to prevent money-laundering and
to provide for confiscation of property derived from, or involved in, money laundering and for
related matters. Chapter II, section 3 describes the offence of money-laundering thus: Whoever
directly or indirectly attempts to indulge, or knowingly assists or knowingly is a party or is involved,
in any process or activity connected with the proceeds of crime and projecting it as untainted
property shall be guilty of the offence of money-laundering.

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The offences are classified under Part A, Part B and Part C of the Schedule. Under Part A, offences
include counterfeiting currency notes under the Indian Penal Code to punishment for unlawful
activities under the Unlawful Activities (Prevention) Act, 1967. Under Part B, offences are
considered money laundering if the total value of such offences is Rs 30 lakh or more. Such offences
include dishonestly receiving stolen property under the Indian Penal Code to breaching
confidentiality and privacy under the Information Technology Act, 2000. Part C includes all offences
under Part A and Part B (without the threshold) that has cross-border implications.

We will be discussing this Act in detail in Unit 9 of this workbook.

2.5.11 Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act (FEMA), 1999, is an act to consolidate and amend the law
relating to foreign exchange, external trade and payments for promoting the orderly development
and maintenance of the foreign exchange market in India. As a consequence of this enactment, its
predecessor, The Foreign Exchange Regulation Act (FERA), 1973 was repealed. FEMA extends to the
whole of India and shall apply to all branches, offices and agencies outside India, owned or
controlled by a person resident in India and also to any violation committed outside India by any
person covered by FEMA. For illustrative purposes, some provisions of the Act are discussed below.

Section 3 states that except as provided in FEMA and allied rules and regulations or under
permission of RBI, no person shall:

a) Deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person
b) Make any payment to or for the credit of any person resident outside India in any manner
c) Receive otherwise through an authorized person, any payment by order or on behalf of any
person resident outside India in any manner
d) Enter into any financial transaction in India, as consideration for or in association with the
acquisition or creation or transfer of a right to acquire any asset outside India by any person

Section 4 lays down that except as otherwise provided in FEMA, no person resident in India shall
acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable
property situated outside India. Section 5 relates to Current Account transactions, while Section 6
pertains to Capital Account transactions.

Section 10 empowers RBI to authorize any person, on any application made to it, to deal in foreign
exchange or foreign securities as an authorized dealer, money changer or offshore banking unit or
any other manner as it considers fit. Further, sub-section (5) stipulates that an authorized person
shall, before undertaking any transaction in foreign exchange on behalf of any person, require that

58
person to make such declaration and to give such information as will reasonably satisfy him that
the transaction will not involve and is not meant to contravene or evade any provisions of the FEMA
or any rule, regulation, notification, direction or order made under the legislation. If the person
refuses to comply with any requirement or performs unsatisfactory compliance, the authorized
person shall furnish written refusal to undertake the transaction and shall report the matter to RBI,
if he has the reason to suspect that any violation or evasion is being contemplated by the person.

FEMA empowers the Central Government to appoint Adjudicating Authorities, Special Directors
(Appeals) and an Appellate Tribunal. The latter two shall have for the purposes of discharging their
functions under the Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 while trying a suit. Examples of some powers are:

a) Summoning and enforcing the attendance of any person and examining him on oath
b) Requiring the discovery and production of documents
c) Receiving evidence on affidavits
d) Subject to the provisions of regulations 123 and 124 of the Indian Evidence Act, 1872,
requisitioning any public record or document or copy of such record or document from any
office
e) Issuing commissions for the examination of witnesses or documents

Section 34 stipulates that no civil court shall have jurisdiction to entertain any suit or proceeding in
respect of any matter which an Adjudicating Authority or the Appellate Tribunal or the Special
Director (Appeals) is empowered under the FEMA to determine. Further, no injunction shall be
granted by any court or other authority in respect of any action taken or to be taken in pursuance
of any powers conferred by the Act. Section 35 pertains to appeal against any decision or order of
the Appellate Tribunal, to the High Court.

2.5.12 Bye-Laws of Stock Exchanges8

Indian stock exchanges such as BSE, NSE, MCX, NCDEX, MSEI etc. frame their own Bye-Laws which
are binding on all the trading members / brokers registered with the particular exchange. The bye-
laws framed by the stock exchanges need to be approved by the SEBI and shall be in conformity
with the provisions of the SC(R)A, 1956, SC(R)R, 1957 and the SEBI Act, 1992. The bye-laws lay down
rules regarding the admission of trading members, listing requirements, fees, suspension of
admission to the stock exchange, transaction and settlement, rights and liabilities of members,
arbitration etc. It is the responsibility of the trading member or the compliance officer or any such

8Candidates may like to read the different provisions as given under the different bye-laws of the exchanges posted on the Exchange

website.

59
person appointed by the trading member to ensure that all the different regulations of the bye-laws
are adhered to.

[Link] Stamp duty9

Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and
Depositories) Rules, 2019 has been issued by the Central Government to regulate the liability of
instruments of transaction in stock exchanges and depositories to stamp duty. The responsibility
for collection of stamp duty on transactions by the transferor of securities or issuance by the issuer
in the depository system is the responsibility of the depository.

2.5.13 Taxes on Securities

[Link] Income-Tax Act, 1961

The Income-Tax Act, 1961, (as amended by the Finance Act, 2008) is an Act to consolidate and
amend the law relating to income-tax and super-tax, and it extends to the whole of India. It came
into force in April 1962. It consists of twenty-three chapters, but the ones that are of common
interest are as follows:

Chapter I: Preliminary
Chapter II: Basis of charge
Chapter III: Incomes that do not form part of Total Income
Chapter IV: Computation of Total Income
Chapter V: Income of other persons included in assesses total income
Chapter VI: Aggregation of income and set off or carry forward of loss
Chapter VIA: Deductions to be made in computing total income
Chapter VIB: Restrictions on certain deductions in case of companies
Chapter VII: Incomes forming part of total income on which no income tax is payable
Chapter VIII: Rebates and Reliefs

Income Tax on Securities

Tax Deducted at Source (TDS) on Dividend

Financial securities (mostly shares, but also listed debentures and mutual funds) provide regular
income in the form of dividend on shares and units of mutual funds, and interest on debt securities.
Vide the Finance Act, 2020, dividend, in excess of Rs. 5000 in a financial year, is taxable in the hands
of investors, effective from April 1, 2020. The applicable TDS on dividend is 10% for resident

9 The regulation would come into force w.e.f April 1, 2020.

60
investors. However, if PAN is not available or is not submitted by the investor, the applicable TDS
rate should be 20%. For non-resident Indians (NRIs), TDS should be at 20% of the dividend amount.
The Finance Act, 2020 also provides for deduction of interest expense incurred to earn that dividend
income. The deduction should not exceed 20% of the dividend income.

Capital Gains Tax

When securities, such as listed shares, listed debentures, mutual funds etc. are sold, it could result
in gains or losses, depending on the cost of purchase (acquisition, including brokerage etc.). Such
securities, if held for more than 12 months before the sale (called a transfer) could result in a Long-
Term Capital Gain or Long-Term Capital Loss. If the holding period, however, is 12 months or less,
the resultant Gain or Loss is called a Short-Term Capital Gain or Short-Term Capital Loss.

Tax on Short-Term and Long-Term Capital Gains10

Tax Type Condition Tax applicable

Long-term capital Except on sale of equity shares/ 12.5%

gains tax units of equity-oriented fund

Long-term capital On sale of Equity shares/ units of 12.5% on long-term capital gains in
gains tax equity-oriented fund excess of Rs. 1.25 lakh, provided
such transfer if subject to
Securities Transaction Tax (STT).

Short-term When securities transaction tax is The short-term capital gain is

capital gains tax not applicable
taxed according to his applicable
income tax slab.

Short-term When securities transaction tax is 20%.

capital gains tax applicable

Long Term Capital Losses can be set off only against Long Term Capital Gains, if there is any such
income to be taxed. However, Short Term Capital Gains can be set off either against Short Term
Capital Losses or Long-Term Capital Gains, if any. Losses (both Long and Short Term), if not set off
in a year due to lack of offsetting income, can be carried forward for 8 assessment years.

10
Tax rates are subject to changes. Candidates are advised to refer to latest rates as mentioned in the Finance Act.

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The above provisions apply in respect of securities held as capital assets, not by persons regularly
engaged in the business of buying and selling securities. For persons holding financial securities as
a business asset (inventory or stock) for sale and filing Income Tax returns specifically under

[Link] Securities Transaction Tax (STT)

The Securities Transaction Tax (STT) was introduced by Chapter VII of The Finance (No. 2) Act, 2004.
It is a tax applicable on the purchase or sale of equity shares, derivatives, equity-oriented funds and
equity-oriented mutual funds. Examples of transactions done in a recognized stock exchange on
which STT applies are as follows:

Purchase or sale of equity shares and sale of units of equity-oriented mutual funds (delivery-based).
Sale of equity shares and units of equity-oriented mutual funds (non-delivery-based).

Sale of derivatives

The rate of STT differs based on the type of security traded and whether the transaction is a
purchase or a sale. Taxable securities include equity, derivatives, unit of equity-oriented mutual
funds etc. It also includes unlisted shares sold under an offer for sale to the public included in IPO
and where such shares are subsequently listed in stock exchanges. STT is required to be collected
by a recognised stock exchange or by the prescribed person in the case of every Mutual Fund or the
lead merchant banker in the case of an initial public offer, and subsequently payable to the
Government. Off-market transactions are out of the purview of STT.

[Link] Goods and Services Tax

Goods and Services Tax (GST) is an indirect tax that came into effect from July 2017. It replaced all
other types of indirect taxes, once prevalent in India. GST is a comprehensive indirect tax that is
levied on the supply of goods and services at every value addition stage.

Provisions of place of supply of service in case of stockbroking services are contained in section 12
(12) of IGST Act which states that the place of supply of banking and other financial services,
including stock-broking services to any person shall be the location of the recipient of services on
the records of the supplier of service. Provided that if the location of the recipient of service is not
on the records of the supplier, the place of supply shall be the location of the supplier of services.

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