CHAPTER FIVE

ROLE OF SEBI
IN
CAPITAL MARKET
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CHAPTER FIVE

ROLE OF SEBI IN CAPITAL MARKET

This chapter deals with role of SEBI in primary market and

secondary market. Mutual Funds and Fils have emerged as important

players in the capital market during this decade so steps taken

by SEBI regarding MFs and Fils is also included in this chapter.

Background behind establishment of SEBI, its objectives and

overall organisation is also discussed in the early part of this

Chapter.

5.1 INTRODUCTION :

It was the crash of 1929 which drove millions of American

investors to an unexpected encounter with total collapse. The US

government was literally benumbed with shock, the new US

President Mr. Fraklin Roosevelt set up Securities Exchange

Commission (SEC) to regulate the stock markets. Mr.Joseph Kennedy

Sr, John F. Kennedy's father was the first President of SEC as he

made lot of money on stock exchange. SEC has since grown from the

trim and humble organisation of its founding fathers into a

powerful and large regulatory machine, which holds global

investors and even government in thrall.SEBI was established on

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the lines of SEC.

Securities markets in India have grown exponentially since

1980, as judged by the number of issues, amounts raised, market

capitalisation, trading volumes as well as price indices. The

1. Indian Securities Market - Agenda for Development and

Reforms - a Discussion paper published by SEBI,1994

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n.mber of investors, intermediaries, and stock exchanges have

also seen significant increase. As the economy grows, securities

markets are being increasingly relied upon by the private

•
corporate sector, by public sector units and by banks for raising

funds, (/bile the investor profile continues to be dominated by

middle class individuals, trends towards institutionalisation in

the securities markets is becoming evident. With the opening of

the Mutual Fund industry to the private sector, and the advent
of foreign portfolio investment, Indian securities markets are

set to continue their rapid growth.

The healthy development of securities markets with the

appropriate degree and manner of regulation will be of immense

importance in the developing economy like India on account of

their role in meeting the need for greater investment especially

in infrastructure sectors^such as power, telecommunication and

transportation, that is expected to arise with the progress of

economic reform.

The need for reforms in the capital market has been evident

for some time. The functioning of the stock exchanges shows many

shortcoming with long delays, lack of transparency ' and

vulnerability to price rigging and insider trading. To counter

these deficiencies it had been announced in Budget speech of

1987-88 that the Government would establish a Securities and

Exchange Board of India(SEBI) to regulate the capital markets.

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1
The SEBI was set up as a non statutory body in 1988.

The Securities and Exchange Board of India was set up as an

administrative body in April 1988 with the objective of

monitoring and regulating the capital market and protecting the

investors. Due to the lack of statutory status and power gains of

bureaucrats in investment division of the finance ministry

including the Office of the Controller of Capital Issues, SEBI

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could not perform effectively.

The securities markets in India was being regulated and

controlled by the stock exchanges division of the Ministry of

Finance and the Department of Company Affairs but activities were

not properly regulated by these divisions.

The promulgation of the Securities and Exchange Board of

India Ordinance on January 30,1992, SEBI was established as a

staututory body on Feb.21,1992. Subsequently, the Ordinance was

replaced by the Securities and Exchange Board of India Act on

April 4,1992 and further strengthening of its powers through the

Securities Laws (Amendment) Act, 1995, mark the process of

installation of a regulatory edifice for the Indian securities

markets."

1. Dr.Mathur B L, Indian Capital Market - Challenges and

responses, RBSA Publishers, Jaipur, 1995, P-2

2 Shaha N.V. & Anil Rao Paila, Role of SEBI in Capital Market,
Readings in Indian Financial Services, 1993, P-15
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5.2 OBJECTIVES. MANAGEMENT ANDFUNCTIONS OF SEBI :

The objectives and functions of the Securities and Exchange

Board of India are specified as under -

5.2.1 OBJECTIVES :

The Preamble of the SEBI Act, 1992 enshrines the objectives

as follows -

".... to protect the interest of the investors in securities

and to promote development of, and to regulate the securities

market and for matters connected therewith or incidental

thereto".

5.2.2 MANAGEMENT OF SEBI :

Section 4 of the Act lays down the constitution of the

management of SEBI. The board of members of SEBI shall consist of

a Chairman, two members from amongst the official of the

ministries of Central Government dealings with Finance and Law,

one member from amongst the official of Reserve Bank of India

constituted under Section 3 of the Reserve Bank of India Act,

193b, two other members to be appointed by Central Government who

shall be professionals and interalia have experience or special

knowledge relating to securities market.

While the superintendence, direction and management of the

affairs of SEBI, vests in the Board of Members, the Chairman also

has these powers and is empowered to exercise them and to do all

acts and things which may be exercised or done by the Board.

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5.2.3 FUNCTIONS AND POWERS OF SEBI :

Section 11(1) of Act cast upon SEBI the duty to protect the

interest of investors In securities and to promote the

development of and to regulate the securities market, through

appropriate measures.

The SEBI Act interalia provides SEBI with power to

a) Regulate the business transactions in Stock Exchanges.

b) Register and regulate the working of collective investment

schemes including Mutual funds.

c) Register and regulate the working of stock brokers, sub­

brokers, bankers to the issue, registrar to the issue,

merchant bankers, underwriters, portfolio managers,

investment advisers and such other intermediaries who.,

may be associated with the securities market in any manner.

d) Promote and regulate SRO's (Self-Regulatory Organisations)

e) Prohibit unfair and fraudulent trade practices relating to

securities markets.

f) Promote investors education and training of financial

intermediaries of Securities Market.

g) Prohibit insider trading in securities.

h) Regulate substantial requisition of shares & takeover of

companies.

i) Call from information from, undertake inspection, conduct

inquiries and audits of SE's and intermediaries and SRO's

in the Securities Market.

j) Carry out research work.

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At its founding, SEBI was charged with the twin

responsibilities of regulation and development of Indian

securities markets. The twin mission of SEBI being investor

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protection and market development,the fundamental logic driving

SEBI's regulatory approach has been that sustained growth of

securities markets could be assured when the markets are able to

attract issuers and investors.

SEBI has formed rules and regulations covering several areas

of the securities markets and various market intermediaries for

the first time. It has taken measures to help the development of

the market and has been taking action under its powers to enforce

its rules and regulations.

Every Rule and every Regulation made under the SEBI Act must

be laid, as soon as may be after it is made, before each House of

Parliament. In accompalishing these objectives, SEBI would be

responsible to the needs of the three groups which basically

constitute the market.

1) Investors 2) Issuer of Securities 3) Market Intermediaries

SEBI has emerged into an effective regulatory body for the

securities markets so as to fulfil its mandate of investor

protection and market development, enshrined in the SEBI Act.

5.3 AMENDMENTS TO THE SEBI ACT AND ADDITIONAL POWERS TO SEBI :

After March 1995, the following additional powers have been

granted to SEBI, through an amendment to the SEBI Act.

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1. Registration and regulation of the working of depositories,

custodians. Foreign Institutional Investors, Credit rating

agencies. Venture capital funds.

2. Power to frame regulations relating to the issue of capital

and other incidental matters.

While conducting inquiries, investigations and audits, SEBI

has been vested with powers of the Civil Court under Code

of Civil Procedure in respect of discovery and production of

books, documents, records, and accounts, summoning and

enforcing the attendance of persons and examining them on oath.

Section 15 of the SEBI Act empowers SEBI to levy monetary

fines for violations specified in Section 15A to 15H. These

violations relate to failure to submit information to SEBI,

failure to enter into agreements with clients,

failure to redress investor grievances, violations by mutual

funds, violations by stock brokers, violations of insider trading

regulations and violations of takeover regulations.

SEBI AND PRIMARY MARKET : •

With the progress of economic reform, the primary markets

have become an important source of mobilising funds for Indian

corporates. With the removal of restrictions on pricing .and

frequency of issues, which were a part of the erstwhile regime

imposed by the Capital Issues (Control)Act, and the primary

markets have shown indifferent picture since 1992-93.

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The steps taken by SEBI in the primary market can be broadly

divided in to four parts -

a) Registration of intermediaries

b) Issue of Securities

c) Improving disclosure standards

d) Other Investor Protection measures

5.4 REGISTRATION OF INTERMEDIARIES :

Intermediaries in the primary market such as merchant

bankers, underwriters, registrar's to the issue, bankers to the

issue are required to be register with SEBI and for the first

time regulations have been issued by SEBI to govern these

intermedaries. A code of conduct for each intermediary has also

been prescribed in the regulations. Capital'adequacy and other

norms have been specified for intermediaries, and a system of

monitoring and inspecting their operations has been instituted to

enforce compliance.

5.4.1 MERCHANT BANKERS :

The regulations governing merchant bankers which were

notified in Dec.92, prescribe the conditions for the granting or

renewals of registration certificates, capital adequacy

requirements, the right of SEBI to inspect the accounts etc. SEBI

(Merchant Bankers) Rules and Regulations were introduced on 22nd

Dec.92 and same were amended on 7th Sept. 95 and 6th June 1996.

Apart from issuers, SEBI also laid down a code of conduct

for the merchant bankers, to ensure that they carried out their

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activities with the highest standards of integrity and fairness.

Lead Managers were also issued guidelines "for interse allocation

of responsibilities" in respect of pre and post issue activities.

This was done to ensure their responsibility an accountability

for their role in the issue of capital. They were instructed to

exercise '\iue diligence’ in independently verifying the contents

of the offer^docvments.

To encourage merchant bankers to participate in certain

types of issue manangement activities and allow more lead

managers in issues, SEBI classified merchant bankers into three

categories and laid minimum net worth threshold levels for each.

And to enable professionals to take part in certian issue

management activities, SEBI has introduced a fourth category of

merchant bankers who would not require any minimum net worth

levels.

SEBI has also tried to infuse an element of competition

among merchant bankers to make them more attuned to the realities

of the market place. SEBI has freed merchant bankers from any

ceiling on fees. This is a very significant step towards

professinalising merchant banking.

As a stick aganist errant merchant bankers, SEBI has

introduced a system of punitive action, whereby they would be

awarded penalty points for any defaults committed in respect of

issues managed by them. A merchant banker is liable for

suspension or de-authorisation after a maximum of eight such points.

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In the year 1997-98 Amendments to SEBI (Merchant Bankers)

Regulations 1992 were made. Only body corporates were allowed to

function as merchant bankers. Multiple category of merchant

bankers viz Category II, III and IV were abolished and henceforth

there will be only one category of merchant bankers. The merchant

bankers would now be required to seek separate registration if

they wish to act as underwriter or portfolio manager.

Merchant bankers were prohibited from carrying on fund based

activities other than those related exclusively to the capital

market. In effect, the activities undertaken by NBFCs such as

accepting deposits, leasing, bill discounting etc. would not be

allowed to be undertaken by a merchant banker.

In order to monitor the movement of employees of merchant

bankers category I, the SEBI directed all category I merchant

bankers to submit specified information on their employees

engaged in merchant banking activity. Thus, a database of persons

engaged in merchant banking industry has been created by the SEBI.

5.4.2 REGISTARS TO THE ISSUE AND SHARE TRANSFER AGENTS

The Registrar to the issue(RTI) and Share Transfer

Agent(STA) play a significant role in the securities market.

These two intermediaries are regulated by the SEBI (Registrars

to an Issue and Share Transfer Agents) Rules and Regulations

notified in 1993.

These intermediaries have been classified into 2 categories,

Category I who can carry on the activities both as Registars and

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Transfer Agents and Category II who can carry any one of these

activities.

The SEBI (Registar to an Issue and Share Transfer Agents)

Regulations 1993 were amended to provide for an arms length

relationship between the issuer and the Registrars to the Issue.

It fcas Jbeen stipulated that no registrar can act as registrar to

any issue of securities made by any body corporate, if the

Registrar to the Issue and the Issuer are the associates.

Registrars to an issue and share transfer agents are

required to submit quarterly reports in prescribed formats to

SEBI, containing details of their activities. On the basis of

quarterly reports as well as the inspection reports, the SEBI

takes up issues such as delays on part of the registrars to an

issue and share transfer agents.

5.4.3 PORTFOLIO MANAGERS :

The Portfolio Managers are now regulated by the Securities

and Exchange of India (Portfolio Managers) Rules and Regulations,

1993 notified on January 7, 1993.No person can act as a

Portfolio Manager without registration with SEBI. The Rules and

Regulations also prescribe the capital adequacy, the contents of

contracts between Portfolio Managers and clients, the general

responsibilities, the management and investment of client's

money, reporting requirements etc.

The Regulations also lay down a Code of Conduct for the

Portfolio Managers to ensure that the Portfolio Managers conducts

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the business observing high standard of integrity and fairness in

their dealings with clients and other Portfolio Managers.

5.4.4 BANKERS TO AN ISSUE :

Bankers to an Issue are registered and regulated by the SEBI

(Bankers to an Issue) Rules and Regulations 1994. Under these

regulations, registration commenced in 1994-95. The various

actions were taken against bankers to issue as on March 31,1988

are as follows -

- 72 Bankers to an Issue were registered with the SEBI

~ 5 warning letters were issued for delay in submission of

final certificate to registrar.

- 2 show-cause notices were sent for non compliance of the

SEBI directives.

- 10 bankers who had not entered into agreements with the

issue/client companies as per Regulation were referred to

adjudication in Feb.1998

5.4.5 UNDERWRITERS :

The number of underwriters registered with the SEBI in terms

of SEBI (Underwriters) Rules and Regulations, 1993 was 43 at the

end of 1997-98 and was 38 for 1996-97. 6 underwriters were

granted registration/renewal during the year 1997-98 and one was

cancelled.

No person is allowed to act as an underwriter unless he or

she holds a certificate granted by SEBI. The registration is

valid for three years and has to be renewed thereafter, The

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underwriters status may be a public or private limited company,

an association of persons, a body of individuals, a partnership,

a proprietory or others.

Every registered stockbroker or registered category I, II

and III merchant banker is entitled to act as an underwriter.

After stipulating a minimum net worth of Rs.20 lac for issue

underwriters, SEBI warned them that any one found indulging in

"manipulation or price rigging or cornering activities" would

face suspension and possibly even cancellation of their

registration. It has also instructed all the stock exchanges not

to clear any fresh underwriting commitments of any underwriter

who failed to fulfill his commitments in the past.

5.4.6 DEBENTURES TRUSTEES :

Debenture Trustees are registered and regulated by the SEBI

(Debenture Trustees) Rules and Regulations, 1993. Under these

regulations, registration commenced in 1993-94. As on March 31,

1998, 32 Debenture Trustees were registered with SEBI.

5.5 ISSUE OF SECURITIES :

In response to market needs and to curb various undersirable

practices which came to SEBI's notice, SEBI issued several

directives and guidelines regarding the issue of securities,

which were aimed at improving disclosure and streamlining the

issue process, and which provided increased flexibility to

issuers. The details are as follows-

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5.5.1 VETTING OF PUBLIC ISSUE DOCUMENTS :

SEBI dispensed with the requirement of vetting of public

issues of listed companies offering pure debt instruments having

atleast an adequately safe credit rating in 1995-96.

SEBI also dispensed with the requirement of vetting of right

issues (not accompanied by public issue three months prior or

subsequent to the right issue). Merchant bankers are required to

ensure compliance with SEBI rules, regulations, guidelines and

requirements of other laws in this respect.

From 1996-97, the requirement of vetting of offer documents

by SEBI prior to a public offer discontinued and replaced by

filing of draft prospectus with SEBI prior to the public issue.

SEBI to convey its observations, if any, within the specified

period of 21 days.

SEBI stopped waiting of offer documents for types of issue's

since 1996. It has increased the responsibility of the Merchant

Bankers. It is the duty of the Merchant Bankers to ensure the

full disclosures in the offer document. ':

5.5.2 ELIGIBILITY NORMS ;

The eligibility norms for companies accessing the primary

market have been strengthened to improve the quality of issues.

The elibility norms are different for Initial Public Offering and

the existing company's public issue.

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ELIGIBILITY NORMS FOR INITIAL PUBLIC OFFERING are -

a) the company has a track record of dividend payment for

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the immediate preceding three years.

b) a public financial institution or scheduled commercial

bank has appraised the project to be financed through

the proposed offer to the public, and■ the appraising

agency participates in financing the project by way of

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loan or equity to the extent of at least 10 % of the

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project cost.

ELIGIBILITY FOR PUBLIC ISSUE :

An issue of equity share or convertible securities to the

public by a listed company seeking to raise fresh capital faces

typically fewer restriction than an IPO. Only if a listed company

which intends to issue new securities to the public such that its

post-issue net worth would grow to move than five times its pre­

issue net worth, does the company have to satisfy the eligibility
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criteria for an IPO before it makes the proposed issue.

1. The guideline was modified to " the immediately preceding three

years" from "atleast three years out of the immediately
preceding five years".( SEBI Press Release Ref.PR 91/97,
August 12, 1997.

2 Part A of SEBI clarification Nos.XV and Part A of SEBI Clarifi­

cation Nos. XVI of SEBI Guidelines.

3. The guideline was modified to"will have a post-issue net worth

of more five times its pre-issue net worth"from"has been listed
for less than 3 years or does not have a three year track
record of dividend payment out of the preceding five years"
SEBI Press Release Ref.No.PR 91/97 dated August 12, 1997
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5.5.3 PRICING OF THE ISSUE :

A listed company making a public offer may freely price its

equity shares or convertible securities, provided that the

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company has a three year track record of consistent
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profitability and makes a disclosure of the relevant information
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on the offer document. Earlier, there used to be detailed

pricing norms imposed on an IPO, depending on whether the issue

was priced at par, at a premium or otherwise, such price norms

not longer exist.

5.5.4 PROMOTER’S MINIMUM CONTRIBUTION :

SEBI has prescribed separate norms for IPO and the public

issue of existing companies.

PROMOTERS MINIMUM CONTRIBUTION IN IPO

The promoter group of an issuing company, including its

promoters, directors, friends, relatives, associates etc., is

reguired to make at least a certain amount of contribution,

known as "Promoter's Contribution", to company’s IPO. [1] The

promoter and/or his or her followers are required to invest their

money as a kind of commitment. The requirements of the

promoter's contribution is given on the next page.

1. 2 years in the case of public sector banks (Part B of SEBI

clarification No.XVI dated July 17, 1996
2. Section B (I) of SEBI Guidelines, dated June 11, 1992

3. SEBI Press Release i2ef.No. PR 91/97 dated August 12, 1997

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Promoter's Minimum Contribution in IPO

Class of companies Promoter's Minimum Contribution

An unlisted company with a 20% of the post issue

capital three-year track record
of consistent profitability

An unlisted company which 50% of the post-issue

capital does not have a
three-year track record of if the issue size is Rs.l
consistent profitability but has billion or less
set up by existing company(ies)
with a five-year track record of Slab rates are given in
of consistent profitability table( )

if the issue size exceeds

Rs.l billion

An unlisted company of which The promoters' shareholding

shares are offered for sale after offer for sale shall
not be issue less than 20% of the post
capital

Source : SEBI Clarifications and Guidelines

1. Section L of SEBI Clarification No.l dated June 17, 1992

Slab rates for PMC in case issue exceeds Rs.l billion

Size of Capital Issue Percentage of Contribution

On first Rs.l billion 50

Next Rs.2 billion 40
Next Rs.3 billion 30
Balance of issue amount 15

Source :Section 2.3 , SEBI Clarification No.VII

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PROMOTERS' MINIMUM CONTRIBUTION - LISTED COMPANY

In a public issue by a listed company, the promoters are

either required to contribute at least 20 % of the proposed

issue, or to ensure that their shareholding be kept at 20% or

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more of the company's expanded capital. However, there are

exemptions to this rule.

55.5 LOCK-IN PERIOD :

Minimum Promoters contribution and lock in period in IPOs.

In an IPO, the promoters' minimum contribution will be locked

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in for a period of three years from the date of allotment in the

issue or the date of commencement of commercial production,

whichever is later. During this period, all members of the

promoter group are prohibited from disposing of shares acquired

as a result of the promoters' contribution.

In addition, if the promoters’ contribution in .an IPO

exceeds the promoters' minimum contribution, the excess will also

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be locked in for a period of three years.

1. Section L (a) of SEBI Clarification No.II dated July 16, 1992

2. Part B of SEBI Clarification No.XIX, RMB (DIP Series) Circular

No.5 (96-97)

3. SEBI Press Release dated October 26, 1994

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Minimum Promoters’ contribution & lock in period in public

issues by listed company is given below -

Class of Companies Minimum Lock-in period

Promoters'
Contribution

A company which has been Not required Not applicable

listed on a stock exchange
for at least 3 years and
has a track record of
dividend payment for at
least 3 immediate
preceding years

A listed company which The contribution to 3 years

does not satisfy the be at least 20% of the
condition in (1) above proposed issue or the
shareholding to be at
least 20% of the
expanded capital

Source : SEBI Guidelines & Clarification

5.5.6 PREFERENTIAL ALLOTMENT :

An issue of securities to selected persons, at a price which

may or may not be related to the prevailing market price of the

securities, is conventionlly called preferential allotment. The

selected persons need not be existing shareholders of the

company. A preferential allotment is not linked to a public issue

and should not be mixed up with reservation on preferential

basis in a public issue.

A preferential allotment earlier had some undersirable

features. Firstly allotments tended to be made to the promoters

or existing management. Secondly, the issue prices of securities

tended to be unrelated to the prevailing market price. The

minority shareholder's interest were thus likely to be

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compromised. SEBI introduced pricing rules and a lock-in period

in August 1994.

The SEBI guidelines for Preferential Allotment issues on

August 4, 1994 address the concern regarding the lack of

transparency and market unrelated pricing which accompanied

several preferential issues which were made in the past. In

addition to imposing a requirement for pricing of these

allotments at market related levels, the guidelines also imposed

a condition of lock-in period . The interest of shareholders

could be adequately protected by the requirement of pricing

preferential allotments in line with market prices, besides

approval at a General Meeting of shareholders was required for

making preferential issues. Pricing of shares to be issued upon

the exercise of warrants or conversion of convertible bonds that

are issued by a preferential allotment is also regulated so that

the allottees may not be unreasonably favoured at the expense of

minority shareholders.

Securities issued to the promoters or his or her group by

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way of preferential allotment have a lock-in period of 3 years

and are not transferable for that period. The lock-in period for

securities issued to other categories of investors by way of a

2
preferential allotment was removed in March 1996.

1. Additional guidelines - Preferential Allotments of Shares,

SEBI Press Release, dated August 4, 1994, amended by SEBI
Press Release dated August 8, 1994 SEBI RMB (DIP Series)
Circular No.3 (95-95) dated August 5,1994 and "Meeting of the
Advisory Committee on Primary Market held on Thursday,
February 6,1997",SEBI Press Release Ref .No.33/97, Mar.6, 1997.
2 Part B SEBI Clarification No.XIV, dated March 1, 1996.
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5.5.7 ALLOTMENT :

Securities issued and alloted in public issue are divided

into three groups according mode of allotment

a) net offer to the public b) firm allotments

c) reservation

a) Net offer to the public :

Net offer to the public is the portion of a public issue that

is offered to the public for subscription at the offer price.

This has to be at least 25% of the total number of securities

offered in the issue to qualify for listing.

An important objective of a public issue is the widening of

the shareholders base, therefore a minimum of 50% of net offer to

the public out of the public issue amount has to be reserved for

individual investors applying for securities not exceeding 1,000

securities in each case.

b) Firm allotment :

Firm allotments are the portion of a public issue that is

reserved for, and placed with selected investors. A firm

allotment to permanent/regular employees of the issuer is subject

to a ceiling of 10% of the issue amount.

Previously, there were individual ceilings to firm

allotmentss that could be made to (i) Indian and multilateral

development financial institutions, (ii) Indian mutual funds,

(Hi) Fils, including Non-Resident Indians and Overseas Corporate

Bodies. These ceilings have been removed. As a result, the first

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two categories of investors may be freely alloted securities up

to 75% of the issue amount. However, an allotment to the

category of Fils and NRIs/OCBs is still constrained by 24% or 30%

ceilings for the aggregate foreign ownership by Fils and
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NRIs/OCBs under the RBI regulation.

The provision of making reservations or firm allotments as

part of the public issue was also extended to scheduled

banks in addition to financial institutions in 1997-98.

c) Reservations :

Reservations are the portion of a public issue that is

reserved for & alloted to investors of selected categories at the

issue price on competitive basis, e.g. reservation for employees

The limit of 200 shares per employee to be allotted on firm

basis to a permanent/regular employee of the issuer in a public

issue has been removed. However, as earlier, reservation to

employees in a public issue may not exceed 10% of the size of the issi

Listed companies are permitted to issue securities to

employees under Employee Stock Option Scheme (ESOPS) subject to

two main conditions.

a) issue of securities to employees under ESOPS should not exceed

5% of the paid up capital of the company in any one year

b) pricing of securities should be in accordance with formula

contained in SEBI preferential offer guidelines dated

August 4, 1994. The companies were free to devise further

details of the ESOPS including the terms of payment.

1.Section 3 of SEBI Clarification No.XII, Dated Sept. 29, 1995

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5.5.8 APPLICATION MONEY :

To prevent fraudulent encashment of refund orders, it was

decided that application forms for subscription to the public

issue must necessarily indicate savings bank/current account

number and name of the bank with which such account is held.

The minimum application size reduced to Rs.2000 from Rs.5000

to encourage small investors.

Permanent Account Number (PAN) or General Index Register

(GIR) should be necessarily be given in the application for

public or rights issues only when the monetary value of the

proposed investment exceeds to Rs.50000 . The previous limit was

Rs.20000.

5.5.9 ALLOTMENT OF SHARES :

The proprotionate basis of allotment was brought in to

overcome the problem of multiple applications in smaller lots

which increased costs and processing delays. The minimum

application size was raised ( minimum 500 shares) and number of

mandatory collection centres decreased to reduce the cost of

raising funds.

5.5.10 PUBLIC REPRESENTATIVE AT THE TIME OF ALLOTMENT :

To ensure that no malpractices take place during the

allotment process in oversubscribed public issues, SEBI has

stipulated that its representatives would oversee the allotment

process of such issues.

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In 1994-95 keeping in view the new requirement of minimum

application money being Rs.5000 and allotment to be made on

proporationate basis, it was decided that a SEBI nominated public

representative was required to be associated in public issues

only in cases where a par issue is oversubscribed by more than

five times and premium issue by more the two times.

5.5.11 BOOKJJUILDING :

For the first time, guidelines to introduce the book

building procedure have been issued, which can be adopted for

issues of over Rs.100 crore. Book building, which is widely used

in other markets, has been found to be a fair transparent and

market driven way of pricing and allocation of issues.

In 1996-97, to further encourage book building, the book

building option available for the portion of the issue sold as

firm allotment and allowed for public issues of over Rs.100 crore

relaxed & debt issues not accompanied by an equity component &

equity issues of less than Rs.100 crore, subject to the

compliance with the Securities Contracts (Regulation) Rules allowed.

The existing SEBI Guidelines restricted the facility of book­

building to 75% of the issue size. However, this constrained the

l
benefits arising out of demand and price discovery. The facility

of making an issue through book building has now been extended to

entire issue size and shall be available to issuer companies

which propose to make an issue of capital of and above Rs.100

crore from 1997-98.

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5.6 IMPROVING DISCLOSURE STANDARDS :

One of the first steps taken by SEBI was to issue guidelines

for disclousure and investor protection with regard to capital

issues. Disclousure norms for things like the company's track

e

record, details of previous issues, promises vs performance,

justification for pricing etc. were prescribed and prospectus and

other offer documents had to go through a vetting process. A new

format of prospectus for capital issues, disclosing among other

things, risk factors in the perception of the management was

introduced at SEBI's instance.

During 1994-95, SEBI continued to take measures for

improving investor protection in the primary markets through

better disclosure of relevant information about the issuer and

the nature of the securities to be issued.

In addition to ensuring investor protection, SEBI has also

been making efforts to streamline the process of issuing

securities so as to reduce the cost of raising funds from Indian

securities markets.

5.6.1 OFFER DOCUMENT :

Issuing companies were allowed to indicate the issue price

in consultation with the lead manager within a price band of 20%

of the floor price at the time of submission of the offer

document to SEBI. The actual time could be determined only at the

time of filing the offer documents with the Registrar of

Companies or with the concerned stock exchange. This has allowed

 136

a greater flexibility to issuers in pricing of the issue by

taking market conditions into account.

Due diligence certificate given by the lead manager to SEBI

was made a part of the offer document, in order to make merchant

bankers more accountable.

In order to enhance the transparency in public issues, the

offer document is now a public document even at draft stage, as

soon as it is filed with or submitted to SEBI so that prospective

investors and market participants have sufficient time to bring

any adverse feature to the notice of SEBI before the issue opens

for subscription. Lead managers and stock exchanges have

instructed to make copies of the draft prospectus available to

the public . Such copies can also be obtained from SEBI.

The validity period of letters issued by SEBI giving

observations on offer documents filed with SEBI was decided to be

extended to 365 days from the date of observation letter.

5.6.2 PROSPECTUS :

The front .page of the prospectus modified to bring it in

line with international practice. The colour of the front page

required to be white and no patterns or pictures allowed to be

used. Risk factors and'other necessary information about the

issue such as the registered offices of the issuer and the lead

manager are to be published on front page.

5.63 RECOMMENDATION OF MALEGAM COMMITTEE :

With the rapid expansion in the primary market, there were

 137

concerns raised about the quality of the some issuers who were

able to raise funds from the market in the period after the

repeal of the Capital Issues (Control)Act 1947. In response to

these concerns, SEBI had strengthened norms for public issues,

raised the standards of disclosure in public issues to enhance

the level of investor protection without seeking to control the

freedom of eligible issuers to enter the market and freely price

their issues. This was done in 1995-96, through the

implementation of the recommendations of the expert committee

appointed in 1994-95 under the chairmanship of Shri Y.H.Malegam,

to examine the issues related to disclosure and eligibility norms

for issuers in the primary market.

The committee submitted its report during the year 1995-96

and in keeping with its established practice. SEBI published the

report and widely circulated it among market participantss, to

encourage debate on the report and elicit views of the market

participants. SEBI accepted almost all of the recommendations

made by the Committee and implemented them during the year. The

main recommendations implemented by SEBI are given below -

1) Unlisted companies which have been in commercial operation

for more than 2 years and whose post issue paid up capital is

Es.3 crore or more, but less than Rs.5 crore, are eligible

for listing only on those stock exchanges where trading of

securities is screen jbasedTj Besides, such issuers are

required to put in place market making arrangements to

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ensure liquidity to investors.

Greater disclosure in the offer document regarding

expenditure incurred on the project before filing the offer

document with SEBI for vetting and proposed to be incurred at

later stages is required to be madeJ^The means and sources of

financing such expenditure are required to be stated.

Zlt^Issuers are required to disclose details of "bridge loans"

which were to be repaid from the proceeds of the issue.

4) A more detail break up of the activities of the issuer is

expected. Issuers are required to specify further details of

'turnover' reported in their profit and loss statements, to

clearly bring the contribution to the stated turnover figures

from the products manufactured by the issuer, products traded

in by the issuer and from products not normally dealt in by

the issuer.

5) In the asset and liability statement, issuers are required to

deduct "revaluation reserves" from 'fixed assets' and from

'reserves' and net worth is required to be arrived at after

such deduction.

6) Issuers are required to give details of the shareholding in

the issuer company of promoters, and directors of the

promoter, where the promoter is a body corporate, as well as

details of the transactions by promoters and directors of the

promoters in the six months preceeding the date of filling of

the offer document with SEBI . Issuers are required to

 139

provide details of the prices at which the transactions

took place and the relevant dates.

7) Issuers are required to give details, inter alia, of technical

or financial collaborators, buy back arrangements,largest

shareholders, group companies, the basis for issue price,

financial information, accounting ratios and other income.

8) Additional disclosures are required to be made in abridged

prospectus as is required in full prospectus to improve

disclosure standards in the abridged prospectus.

9) Only prospectus for issues made by new companies and existing

companies setting up new projects, or undertaking a major

expansion programme, could incorporate future projections,

provided the projections were based on the appraisal done by

a financial institution or a scheduled commercial bank which

is either financing the project or is committed to finance

the project.

10) The advertisement code for issues has been strengthened to

prevent issuers and intermediaries from misleading investors.

No corporate advertisement can now be issued between the date

of issue of acknowledgement card by SEBI and closure of the

issue and the annoucement of the closure of issue can only be

made after getting a certificate from the registrar to the

issue that atleast 90% of the issue has been subscribed to.

11) The lead manager to the isssue is required to furnish due

diligence certificates at five different stages of the issue

process.
 140

12) Issuers are required to furnish a list of the persons

consisting the promoters or promoters group to SEBI.

13) The track record of the profitability of a division of a

company, spinning off into a separate company, can now be

considered for the purpose of a public issue at premium by

such a separate company.

14) Issuers are also required to give information regarding

unusual or infrequent events or transactions, significant

economic changes that materially affected or are likely to

affect the income from continuing operations, the

distribution of turnover among each segment in which the

issuer operates, the status of any publicly announced product

or venture, the seasonal variations in the issuers business,

the concentration of business with a small number of supplies

or customers and issuers perception of competitive

conditions, cost and technological conditions in their

segment of industry.

15) Management perception and analysis• of the financial

conditions and results of operations as reflected in the

financial statements .is now required to be given.

16) Whenever, statements of assets and liabilities, profits and

loss or any other financial information is qualified by the

notes of an auditor, all necessary adjustments, wherever

qualification is possible shall be made in the statement

itself.
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5.7 OTHER MEASURES RELATED TO PRIMARY MARKET :

5.7.1 NEW INSTRUMENT "5T0CKINVEST" :

In March 1992, the SEBI In consultation with RBI has

designed this instrument to be issued by banks like the pay order

or DD but with a difference that the money kept is now on lien

with the Bank until the allotment or non allotment but 'earning

interest for the investor during this period. A new instrument,

"Stockinvest" was introduced to ensure that investors did not

suffer due to delays in the allotment process. It is valid upto

six months from the date of its issue and the same can be renewed

on expiry.

On SEBI's initiative that the instrument of Stockinvest was

floated to reduce the headache of investors ( in receiving refund

orders etc.) as well as eliminate the medium of "float money",

whereby promoters enjoyed interest free funds for two or three

months, prior to allotment. The scheme did not work out as

smoothly as envisaged.

The number of shares which could be bought back from the

original allottees upon listing as a 'safety net* has been

increased from 500 shares to 1000 shares.

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5.7.2 USE OF FUNDS BY DFIs :

Development Financial Institutions (DFIs) have been allowed

to utilise the moneys raised by them through public offerings,

espcially of debt instruments even before allotment of the

instruments and/or listing of the instruments, enabling more

effective use of funds, provided the following conditions are met:

a) The DFI would pay interest to the investors from the date not

later than the date from which such permission to utilise the

funds has been granted.

b) The DFI would undertake to refund the entire amount in case

its listing application is rejected by any of the stock

exchanges where listing of its instruments has been sought, and

c) The DFI had complied with the provisions of the Companies

Act, 1956 wherever applicable.

5.7.3 ADVERTISEMENT
-
- - ■—
AT THE TIME OF PUBLIC ISSUE :
■ - - - - - ■

Restrictions on display of corporate advertisements also

removed and corporates allowed to issue corporate advertisements

after 21 days from the date of filing the offer document with

SEBI till the issue closure date provided all risk factors are

mentioned in the advertisement.

5.7.4 RATING FOR AGRO BONDS AND PLANTATION BONDS :

In November 1997, the Central Government decided that

entities which issue instruments such as agro bonds, plantation

bonds etc. and the schemes throgh which such instruments are

issued would be treated as collective investment schemes coming

 143

under the provisions of the SEBI Act 1992 and would be regulated

by the SEBI. The provisions of the SEBI Act prohibited any new

scheme to be sponsored or further fund to be raised. Meanwhile

the SEBI also stipulated that all existing schemes could mobilise

funds only through the existing schemes after obtaining a rating

from any of the recognised credit rating agencies.

 144

SECONDARY MARKET

In 1994-95, several changes were made by the government and

SEPT in regulations relating to the functioning of the secondary

markets.These involved in the membership rules of the stock

exchanges, amendments to the Listing Agreement and the Securities

Contracts (Regulation ) Act 1956 and amendments to the SEBI Act

1992. Some importnat decisions regarding the secondary market are

given below.

To further empower SEBI in its role as the primary regulator

of the securities markets, the government issued a notification

in September 1994, enabling SEBI to exercise several powers

concurrently with the government.

These powers allow SEBI to -

a) Grant recognition to stock exchanges and to renew or withdraw

such recognition

b) Issue notifications regarding the applicability of section 13

to any state, area or otherwise

c) Consider the appeals against refusal of stock exchanges to

list securities

d) Issue notifications regarding the non-applicability of the

Securities Contracts (Regulation) Act 1956 to any class of

contracts or contract.

AMENDMENT TO THE SECURITIES CONTRACT (REGULATION) ACT 1956

In order to allow for the trading of new instruments in the

secondary markets, and facilitate the enforcement of continuing

 145

disclosure and investor protection norms, changes were made to

the Securities Contracts (Regulation) Act. The changes are given

below -

a) The Securities Contracts (Regulation) Act 1956 has been

suitably amended to allow the issuance and trading of

options in securities.

b) The Act has also been amended to allow existing stock

exchanges to establish additional trading floors outside

their area of operation

c) Violation of listing agreement have been made an offence

under the Act

The role of SEBI related to secondary market is discussed

under four categories.

a) Administration of stock exchanges

b) Safety and integrity of secondary market

c) Efficiency & Transparency in secondary market

d) Checking unfair trade practices

e) Investor protection

f) Other measures
 146

5.8 ADMINISTRATION OF STOCK EXCHANGES :

5.8.1 REGULATION OF BROKERS AND SUB-BROKERS :

Prior to these regulations, the stock brokers were required

to be registered only with stock exchanges of which they were

members & the sub-brokers were not regulated by any authority.

The SEBI Regulation introduced the concept of dual registration

of stock brokers with SEBI and the stock exchanges & brought the

broker and sub-broker within the regulatory fold for the first time.

All stock brokers are registered with the SEBI in terms of

SEBI (Stock Brokers and Sub-Brokers)Regulation,1992. The total

number of registered brokers and sub-brokers as on March 31,1998,

stood at 9005 and 3760 respectively.

5.8.2 GOVERNING BOARDS OF EXCHANGES AND VARIOUS COMMITTEES

In past, the Governing Boards of the Stock Exchanges were

constituted by the members of the Stock Exchanges. Although there

were a few Public Represenativess and Nominees appointed' by the

Government, the Boards were dominated by the brokers.

The Governing Boards of exchanges have been reorganised' and

broad based, so that they represent different interests, '& not

just the interests of their members. The Governing Boards now

consist of 50 per cent representatives of the members & 50 per

cent non member representatives.The various committees of stock

exchanges have been restructured, for example, 'their

disciplinary, default and arbitration committees now have a

• 7
majority of non-brokers.

The exchanges are now required to appoint a non-member

 147

professorial in the capacity of an executive director or principal

officer, who is empowered and made responsible for the day-to-day

management of the exchange.

Through a notification issued under the Securities Contract

(Regulation) Act 1956 the power to regulate stock exchanges, was

delegated to SEBI. This includes recognition, rules, articles,

voting rights, delivery contracts, stock exchange, listing and

nomination of public representative.

5.8.3 CORPORATE MEMBERSHIP :

SEBI has been encouraging corporate membership of stock

exchanges, so that stock broking intermediaries would be able to

incorporate as limited liability companies, which would allow

them to attract capital. Direct investment by foreign stock

broking firms through joint ventures has also been allowed by the

Government. The rules under the Securities Contracts (Regulation)

Rules 1957 enabling the entry of corporate members were further

relaxed.

Eligibility criteria for the corporate membership of

governing bodies of the stock exchange have been prescribed by

SEBI, to enable corporate members to be elected to the governing

bodies of the stock exchanges.

5.8.4 ARBITRATION MECHANISM :

In order to expedite the settlement of disputes, all stock

exchanges have been advised to review the position of the pending

arbitration cases in every meeting of the governing body and to

ensure that cases are disposed of within the stipulated period of

4 months.
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5.9 SAFETY AND INTEGRITY OF SECONDARY MARKET :

5.9.1 CAPITAL ADEQUACY NORMS FOR BROKERS :

For ensuring safety of the , trades in the market and

protection of investors, it is essential that the member firms

are adequately capitalised in relation to their outstanding

positions.

SEBI has also been insisting on the imposition of capital

adequacy norms for all members of stock exchanges, whether

i

corporate or not. As part of the mover towards better capital

adequacy, the stock exchanges are to double their existing base

minimum capital requirement for their individual members.

In addition to capital adequacy , insurance of stock brokers

has a useful role to play in reducing risks for investors.

Accordingly, the stock exchanges are in the process of taking out

suitable policies for their members.

To ensure adequacy of the capital base of the stock brokers,

SEBI required all stock exchanges to double the amounts

prescribed for the minimum capital for brokers from January 1996.

This amount now stands at Rs.10 lakh for members of the Mumbai

and Calcutta stock exchanges. Rs.7 lakh for brokers who are

members of the Delhi and Ahmedabad stock exchanges and Rs.A lakh

for brokers on the remaining exchanges in the country.

5.9.2 MARKET MARGIN SYSTEM :

To ensure integrity and safety of the markets, SEBI advised

all the exchanges to introduce daily mark to market margin system

 U9

and to collect scrip wise. 100% of marked to market notional loss

of a broker on a daily basis. This margin is in addition to any

other margin that the exchange may be levying and is collected in

cash/bank guarantee without netting gain or loss across scrips.

The effectiveness of the measure was . tested out during the

periods of volatility witnessed by the securities markets in

early 1997.

5.9.3 PRICE BAND :

To curb undesirable volatility, all exchanges were required

to fix uniformly daily price band at 10% and a weekly overall

limit of 25%. However, in case of scrips up to the value of

Rs.20, the price bands could be decided by, the stock exchanges.

The price band would be calculated on the basis of the closing

price of the scrip on the previous day, ~ which will be the

weighted average price of the last half'hour of trading in the

scrip on that exchange.

5.9.4 SETTING UP OF TRADE/SETTLEMENT GUARANTEE FUND BY STOCK

EXCHANGES

One of the shortcomings of the clearing and settlement

process of the Indian stock markets was the absence of a system

to reduce counter-party risk. Managing this risk is an essential

need of a safe and efficient market, which can be achieved

through setting up of a Trade or Settlement Guarantee Fund. The

principal objective of this Fund is to provide the necessary

funds and ensure timely completion of settlements in cases of

 150 :-

failure of member brokers to fulfill their settlement

obligations. Thus establishment of such funds would give greater

confidence to investors in the settlement of clearing procedure

of the stock exchanges. Keeping this objective in view, the SEBI

had advised all stock exchanges to set up a Trade or Settlement

Guarantee Fund.

5.9.5 UNIQUE ORDER CODE NUMBER :

All stock exchanges have been required to ensure that a

system is put in place whereby each transaction is assigned a

unique order code number which is intimated by the broker to his

client. Once the order is executed, this number is to be printed

on the contract note.

5.9.6 INTRA DAY TRADING AND EXPOSURE LIMITS :

During 1997-98, with a view to enhancing market safety, the

SEBI decided that the upper limit for gross exposure of the

member brokers of the stock exchanges would be fixed at 20 times

Ohe base minimum capital and additional capital of the member

brokers. Gross exposure is the sum total of overall open position

of a broker. This is in addition to the existing intra-day

trading limits of 33 1/3 times the base minimum capital and the

additional capital of the broker, which were implemented by all

the stock exchanges in the previous year.

5.9.7 TIME STAMPING OF CONTRACTS :

Stock brokers have been required to maintain a record of

time when the client has placed the order and reflect the same in
 151

the contract note along with the time of the execution of the

order. This will ensure that the broker gives due preference in

execution of client’s order and charges the correct price to his

client without taking advantage of any intra-day price

fluctuation for himself.

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5.10 EFFICIENCY & TRANSPARENCY IN SECONDARY MARKET

5.10.1 IMPLEMENTATION OF NORMS RELATING TO

CLIENT-BROKER RELATIONSHIP

In order to bring about greater transparency in the

functioning of brokers, and to provide increased confidence to

investors in their dealings with brokers, SEBI had prescribed

norms for the regulation of transactions between brokers and

their clients in November 1993 and had advised the stock

exchanges to incorporate these norms in their bye-laws and to

implement them. While most stock exchanges to incorporate these

norms in their bye-laws and to implement them.

While most stock exchanges implemented these norms on

their own accord, in the case of the Mumbai, Cochin and Madras

Stock Exchanges, SEBI had to amend these bye-laws itself in

exercise of its powers under Section 10 of the Securities

Contracts (Regulation)Act 1956 . SEBI is following up with the

stock exchanges to ensure enforcement of client broker norms.

5.10.2 AUTOMATION OF TRADING AND POST TRADE PROCESSING :

Computerised or screen based trading is essential in order

to achieve transparency, more efficient price formation, and

reduction in transaction costs. With screen" based trading,

participation in a market is no longer dependent on physical

access to a trading floor, and is thus no longer constrained by

the capacity of physical trading infrastructure or by manual and

paper based trade reporting and matching systems.

 153

With screen based trading, it becomes possible to establish

audit trails and to monitor abnormal price variations. The NSE

and OTCEI had already introduced computerised on-line trading

facilities prior to 1995-96.The remaining stock exchanges were

advised by SEBI to work out a definite programme to introduce

screen based trading and as a result majority stock exchanges

have introduced on-line trading system.

5.10.3 REDUCTION OF SETTLEMENT CYCLES :

It was decided that The Stock Exchange, Mumbai which has a

trading period of 14 days for 'B' group shares would reduce the

same to 7 days. The other stock exchanges are already having a

similar trading period. This would help investors in speedier

realisation of the proceeds of the trade.

5.10.4 ROLLING SETTLEMENT : ...... .

The trading and settlement cycles have"been'shortened from

14 to 7 days. Rolling settlement is a logical' extension to

further shortening of the trading and settlement cycles. So far,

OTCEI has been the only exchange with a rolling settlement

system.

With the introduction of dematerialised trading, it has now

become feasible to comtemplate the introduction of rolling

settlement. Accordingly, the SEBI introduced T + 5 rolling

settlement cycles from Jan.15, 1998 in respect of those

securities for which dematerialised trading was made compulsory

for institutional investors namely, banks, financial

 154

institutions, domestic mutual funds and foreign institutional

investors.
5.10.5 NEGOTIATED DEALS TO RESULT IN DELIVERY :

To prevent certain irregularities and to improve the

percentage of deliveries to the total turnover, stock exchanges
were required to introduce a system of compulsory delivery of the
transactions covered under negotiated deals with effect from
June 1, 1997.

5.10.6 UNIFORM NORMS FOR GOOD AND BAD DELIVERY :

SEBI prescribed uniform norms for good and bad deliveries

which are now followed by all market participants. This has
significantly reduced the number of disputes and ensured smooth
and speedy resolution of bad deliveries.
5.10.7 ESTABLISHMENT OF A BAD DELIVERY CELL :

, * * * >

The process of rectification of bad deliveries from broker

to broker was lengthy and gave rise to problem especially in
cases of trades involving brokers from different exchanges. Also,
there was no time limit in which the investor was assured of
rectification/replacement of his shares as the stock exchanges
were not handling the bad deliveries.
SEBI has required all stock exchanges to establish BDCs and
has prescribed the operational procedure for the functioning of
BDCs. This procedure has made possible the rectification
/replacement of shares within 21 days of receipt of bad
deliveries by the introducing member. In case the rectified
 155

shares come under objection for the second time, the transaction

is closed out. A training program for the officers of the stock

exchanges was also conducted by SEBI to train them for the smooth

functioning of the BDCs.

5.10.8 WEEKLY SETTLEMENT CYCLE AND AUCTION :

The stock exchanges were required to necessarily complete

their settlements within seven days and to conduct the auction

immediately i.e. not later than eight days, after the completion

of the relevant trading period, in those cases where members have

failed to give the delivery. Most of the stock exchanges have

implemented this immediately.

The stock exchanges have required to uniformly amend their

bye-laws relating to close out procedures for short deliveries

pertaining to the settlement. The revised close sought procedure

ensures that the auctions would now completed on the eighth day

from the last day of the trading period. In case of shares are

not available through the auction conducted at the exchange, the

transaction will be closed out.

KNOW YOUR CLIENT :

It was decided " in-principle" that stock exchanges would be

required to ask their member-brokers to maintain a database of

their clients. SEBI has designed a suitable client introduction

form for this purpose. The implementation of the priciple of

"know your client" is a prudential business practice, to further

enhance the safety of the market.

 156

5.11 CHECKING UNFAIR TRADE PRACTICES :

SEBI has been vested with the powers to take action against

unfair Trade Practices relating to Securities Markets. The

regulation bring for the first time, enforcement against market

manipulation, misleading statement to induce sale or purchase of

securities and unfair trade practices under SEBI's regulatory

purview.

SEBI has been now made empowered to levy fines for violations

related to the failure to submit information to SEBI, failure to

enter into an agreements with client, failure to redress investor

grievances, violation by stock broker etc.

Redressal of complaints of investors is to be encouraged

sharing it with recognised investor associations. This will

facilitate filling of class action suits in consumer courts

against erring companies.

5.11.1 Indefinite suspension of scrips :

With a view to bring some uniform structure regarding

suspensions of scrips, it was decided that suspension should be

followed with immediate investigations at the level of the

exchange. During 1996-97, in respect of 28 scrips (BSE 20, ASE 4,

CSE 1, DSE 1, NSE 1, BGSE 1), SEBI has approved requests for

indefinite suspensions. In some cases suspensions have been

revoked after completion of investigations.

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5.11.2 Simplification of procedure for transfer of shares :

The stock exchanges have been asked to amend their listing

agreements to require issuers to the adopt the following

procedure in cases where proper documents are lodged for transfer

and there are no material defects in the documents except minor

difference in signature of the transferor.

The issuer will promptly send to the transferor an

intimation of the defect in the documents and inform the

transferor that the objection, if any , of the transferor

supported by valid proof, is not lodged with issuer within 15

days of the receipt of the issuer's letter,then securities will

be transferred.

If the objection from the transferor with supporting

documents is not received within the stipulated period, the

issuer shall transfer the securities provided the issuer does not

suspect fraud or forgery in the matter and

When the signature of the transferor is attested by a person

authorised by the Department of Company Affairs, under Section

108 (1A) of the Companies Act 1956, it shall not refuse to

transfer the securities on the ground of signature difference

unless it has reasons to believe that forgery or fraud is

involved.
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5.12 INVESTOR PROTECTION :

The stock exchanges mechanism for dealing with investor

complaints against their members has been strengthened. SEBI has

also put in place a process through which investor grievances

against brokers may find redressal through a complaint to SEBI.

SEBI has advised the exchanges to take measures to improve

investor protection and service.

5.12.1 Investor Protection Fund and Investor Services Fund

All the stock exchanges are required to set up a fund called

"Investor Protection Fund". The purpose of the fund is to provide

compensation, arising out of disputes or defaults of the member

brokers of the exchange to small investors. The amount of

compension available against a single claim of an investor

arising out of default by a member broker of a stock exchange is

Rs.l lakh in case of major stock exchanges, Rs.50000 in case of

medium stock exchanges and Rs.25000 in case of smaller stock

exchanges. Another Fund being maintained by the exchanges is the

Investor Services Fund, whose purpose is, as the name indicates,

to provide investor related services. SEBI advised the stock

exchanges to provide various services including a desk for

attending investor complaints and dummy terminal for showing the

trades of the exchange. The number of Investor Service Centre

will be set up by the stock exchanges at various places is also

being increased.
 159 :-

5.12.2 Continuing disclosure through the listing agreement :

The Listing Agreement entered into by the issuing firm with

stoch exchange, is an important instrument of ensuring continuing

disclosure to investors. SEBI has been emphasising the need to

strengthen the provisions of the Listing Agreement, as well its

strict enforcement by the exchanges. In 1994-95, stock exchanges

were advised to amend the Listing Agreement.

a) to make companies furnish to the stock exchanges a yearly

statement on the actual utilisation of funds and actual

profitability, as against projected utilisation of funds and

projected profitability respectively.

b) to require similar disclosures to be made in newspapers

together with audited/unaudited results.

c) to require companies to give complete balance sheets and

directors reports to shareholders.

In 1995-96, SEBI advised the stock exchanges to amend the

Listing Agreement, requiring issuers to provide shareholders with

cash flow statements in a prescribed format, along with the

complete balance sheet and profit and loss statement. The stock

exchanges have accordingly amended their listing agreement.

 160

5.13 OTHER MEASURES TAKEN BY SEBI :

SEBI has taken the initiative to revive the institution of

remisier, to start the facility of warehousing of shares and to

introduce stock lending scheme.

5.13.1 Monitoring and Surveillance :

Market manipulation on the stock exchanges through

fraudulent practices leads to loss of investor confidence. With

the automation of trading and post trade system on the major

stock exchanges, it has become more difficult to manipulate

prices, and to cancel audit trails of such manipulation. SEBI has

instructed the exchanges to set up independent and focused market

surveillance departments.

SEBI strengthened its investigation and enforcement

machinery in terms of staff and resources for effective

monitoring, surveillance and enforcement. The trading terminals

of the screen based trading systems of the Mumbai Stock Exchange

and NSE have been installed in SEBI.

SEBI organised two workshops to impart training to the staff

of the exchanges involved in surveillance. Besides, SEBI

interacted with overseas regulatory authorities and stock

exchanges to gain insight into their systems and experience in

market surveillance.
i

In addition to the above, the exchanges have been asked to

take the following steps to achieve better co-ordinatino and

greater effectiveness in curbing price manipulation of securities.

 161

In the case of newly listed securities, four trading days

were earlier allowed for price formation and price stabilisation.

During this period, circuit breakers were not applied and the

securities were not subject to price monitoring by the exchanges.

It was decided that monitoring of the newly listed securities

would now be done by the exchanges from the first day of trading.

Circuit breakers and other monitoring mechanisms will apply form

the second day of trading.

In case of newly listed/permitted securities, where there is

an abnormal price variation, the exchanges are to impose a

specialmargin of 25% or more on purchases in addition to the

regular margin. Further, the seller is also required to pay a

penal margin equivalent to the special margin (applicable to

buyers) on the undelivered quantity. Such penal margin is to be

retained by the exchages for a period of three months or one

month after the delivery, whichever is earlier. In case of non­

delivery, the usual auction procedure would continue to apply.

The special/penal margin will apply not only to newly listed

or permitted securities but also to other traded scrips where

price manipulation comes to the attention of the stock exchanges.

The suspension of trading of a security by a stock exchange

on account of market manipulation or price rigging is now to be

immediately informed by the concerned stock exchange to other

stock exchanges. The other stock exchanges are to also suspend

trading in that scrip in cases where the said suspension is for

the more than a day.
 162 :-

SEBI's approval would, however, have to be sought by the

stock exchanges whenever a scrip is suspended for more than 3 days

The cases of suspension of more than 3 days must be followed

by an investigation. If more than one stock exchange is involved

in such an investigation, it will be done in co-ordination

by the concerned exchanges.If necessary, SEBI could also take up

such investigation.

A market surveillance division was set up in SEBI in July

1995, with a view to effectively monitor abnormal market

activities and detect market manipulation. Since then several

steps have been taken at the level of SEBI and the stock

exchanges to Improve the surveillance capabilities. Some of the

steps were :

the setting up of independent surveillance departments

. .1

functioning directly under the executive directors of the

stock exchanges.

submission to SEBI of daily, settlement and pre-issue

monitoring reports from all the stock exchanges in formats

prescribed by SEBI

the system of circuit breakers/filters mechanisms was

implemented at all stock exchanges

the system of levying special and penal margins was

implemented

procedure for co-ordination among the stock exchanges on

market related suspensions were put in place.

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5.14 SEBI AND MUTUAL FUNDS :

Prior to the SEBI ACT 1992, the Mutual Funds, were governed

by a set of Guidelines Issued by the Reserve Bank of India and

the office of the erstwhile Controller of Capital Issues. The

SEBI (Mutual Funds) Regulations, which were notified in 1993,

provided a formal regulatory framework for all mutual funds in

the country for the first time, except UTI. The latter being set

up under a separate statue due to historical reasons, have not

come under the purview of SEBI.

S.U.l STRUCTURAL CHANGES :

SEBI (Mutual Fund) Regulation brought about several

structural changes in the domestic mutual fund industry. Mutual

Funds are required to have a Board of Trustees or Trustee Company

separate from the Asset Management Company, and the securities

belonging to the various schemes are required to be kept with an

independent custodian. The Regulations have brought about an arm-

length relationship between the constituents of the mutual fund

viz. the asset management company, the trustee and the custodian.

As a part of reforms mutual funds are required to set up

asset management companies with fifty percent independent

directors, separate boards of trustees or trustee companies,

consisting of a minimum fifty percent of independent trustees and

to appoint independent custodians.

Independent trustees who are not associated with the sponsor

shall now constitute two third of the Board of Trustees instead

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of the earlier provision of 50 per cent.

5.14.2 CALCULATION AND DECLARATION OF NAV :

The transparent and well understood declaration of Net Asset

Values (NAVs) of mutual fund schemes is an important issue in

providing investors with information as to the performance of the

fund. Norms for calculation and publication of NAVs were

formulated by an expert committee appointed by SEBI. The Expert

Committee set up by SEBI to recommend uniform practice as regards

valuation and computation of Net .Asset Value (NAV) submitted its

recommendations during 1995-96.

5.14.3 OFFER DOCUMENT :

The offer documents of schemes launched by mutual funds and

the schemes particulars are required to be vetted by SEBI. The

SEBI prepared a standard offer document which prescribes the

minimum disclosure requirements to be contained in the offer

document of any mutual fund scheme. In addition, an abridged

offer document i.e.the memorandum containing key information,

which must accompany all scheme application forms in terms of sub

regulation(4) of regulation 29 of the Regulations, has also been

*

standarised. Both these documents have strengthened the

disclosure standards in the offer dcouments of mutual fund

schemes, thereby enabling the investors to take informed

investment decisions.
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5.14.4 Mutual Fund 2000 :

During 1995-96, SEBI had prepared and widely circulated a

paper titled " Mutual Funds 2000" which identified ways to

improve the working and regulation of the mutual fund industry,

so that mutual funds could provide a better performance and

service to all categories of invesors and offer a range of

innovative products in a competitive mannner to match investors

needs and preferences across various investor segments. Based on

the comments received on the recommendations made in the paper by

market participants and investors and on discussions held with

the Association of Mutual Funds of India (AMI), the SEBI (Mutual

Funds) Regulations, 1993 were revised and the new regulations

notified in Dec.1996.

5.14.5 The SEBI (Mutual Funds) Regulations, 1996 :

The revised regulations embodied far reaching changes in the

regulation and functioning of mutual funds. The revised

regulation provide for

enhanced level of investor protection

empowerment of investors

stringent disclosure norms in the offer documents, so that

investors are better informed, better advised, better aware

of risks and rewards

standardisation of norms for valuation of assets, computation

of NAVs of schemes of mutual funds and accounting

standards and policies

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complete freedom to asset management companies to structure

schemes in accordance with Investor preferences

removal of quantitative restrictions on investment by mutual

funds and replacement by prudential supervision

replacement of vetting of offer documents by filing

guaranteed return schemes by mutual funds permitted provided

returns including capital were guaranteed

indication of expected returns based on hypothetical

portfolio permitted

better governance of mutual funds through higher

responsibilities and empowerment of trustees as from-line

regulators of mutual funds

close scrutiny through off site and on site inspections

code of ethics for asset management companies

The impact of the new regulations was immediately felt. Asset

management companies framed several schemes which made use of the

freedom provided to them by the new regulations and greater

variety in the schemes were offered.

The new regulations have brought into greater focus the

responsibilities of trustees of mutual funds who are uniquely

positioned to promote the interests of the uniholders and to

ensure that mutual funds are managed responsibly and ethically.

In this process, trustees act as the first level regulators and

are critical in helping to ensure the profitability and progress

of the mutual funds.

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5.14.6 Money Market Mutual Funds :

Guidelines for Money Market Mutual Funds were issued by RBI.

These guidelines were subsequently incorporated into the revised

SEBI regulations and paved the way for the introduction of money

market schemes by mutual funds for the first time. Similarly,

pension schemes were also launched by mutual funds for the first

time under section 88(xiii-c) of the Income Tax Act, 1961.

5.14.7 Structuring of the scheme :

SEBI has been seeking to give greater degree of freedom to

fund managers to structure their schemes according to investor

preferences. The provision of structuring of the scheme is given

below.

Aggregate investment by a mutual fund in listed and/or to be

listed securities of group companies of the sponsor shall not

exceed 25 per cent of the net asset of all schemes of the fund.

Asset Management Companies (AMCs) will not be required to

disclose in the scheme offer document, the maximum investments

proposed to be made by the scheme in the securities of the group

companies. The AMCs must submit quarterly reports to the trustees

on transactions in the securities of group companies during the

quarter, and trustees will have to specifically comment on such

transactions recorded in the half yearly reports which they would

submit to SEBI. Mutual Funds have been prohibited from making

investments in unlisted/privately placed securities of

associate/group companies of the sponsor.

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5.14.8 OTHER MEASURES FOR DEVELOPMENT OF MUTUAL FUNDS :

Mutual Funds have also been allowed to underwrite issues as

a part of their investment activity. Mutual funds with a track

record of five years have been allowed to launch income schemes

assuring returns for one year at a time through payment of post

dated warrants, subject to suitable disclosures to the investors.

Mutual funds were allowed to keep the minimum subscription

between Rs.1000 and Rs.5000.

 169 :-

5.15 SEBI AND FOREIGN INSTITUTIONAL INVESTMENT :

Foreign Institutional Investors (FII) such as Mutual Funds,

Pension Funds, Investment Trusts, Asset Management Companies,

Institutional Portfolio Managers, Nominee Companies have been

allowed to invest in the tradeable securities in the primary and

secondary markets, under the Guidelines for Fils were Issued by

the Government on September 14, 1992.

Registration of Fils is very often common requirement in

other emerging markets also. The Guidelines for Fils to be

registered with SEBI and obtain general permission under the

Foreign Exchange Regulation Act 1973 from Reserve Bank of India

which would enable Fils to open and operate bank accounts in

India.

SEBI(Foreign Institutiona Investors) Regulation 1995

As a part of the amendment to the SEBI Act carried out

through the Securities Laws (Amendment) Act, 1995, Fils are now

required to be registered with SEBI under regulations made under

the Act. Accordingly SEBI notified the SEBI (Foreign

Institutional Investors) Regulation 1995 on November 14, 1995.

The provisions of the Government Guidelines of September 1992

under which SEBI was hitherto registering Fils and the changes

that have been made from time to time in those guidelines have

been incorporated in the regulations.

In 1996-97, several changes have been made to the SEBI

(Foreign Institutional Investors) Regulations, 1995 to diversify

 170

the foreign institutional investor base and to further facilitate

inflow of foreign portfolio investment. The changes have also

aimed at facilitating investment in debt securities through the

FII route. The changes are as follows -

The eligible categories of Fils have expanded to include

university funds, endownments, foundations, charitable trusts and

chatitable societies which have a tract record of 5 years and

which are registered with a statutory authority in their country

of incorporation or establishment.

Each FII or sub-account of an FII has been permitted to

invest upon 10% of the equity of any one company, subject to

overall limit of 24% on investments by all Fils, NRIs and OCBs.

The 24% limit may be raised to 30% in the case of individual

companies who have obtained shareholder approval for the same.

Fils have been permitted to invest in unlisted securities

Fils have been allowed to invest in their proprietary funds

Fils who obtain specific approval from SEBI have been

permitted to invest 100% of their portfolios in debt securities.

Such investment may be in listed or to be listed corporate debt

securities or in dated government securities, and is treated to

be part of the overall limit on external commercial borrowing.

In 1997-98, measures were taken to further debt investments

by Fils. Fils Investing through the 100 per cent debt route were

also permitted by the Reserve Bank of India to hedge their

exchange exposure by taking forward cover..

 171

The SEBI (Foreign Institutional Investors)Regulations, 1995

were amended on February 12,1997 allowing Fils to invest

proprietory funds and to make investments in dated government

securities and further two amendments were made in the same

Regulation for smooth working of Fils in India.

5.16 THE SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS.1996

SEBI had circulated a consultative paper on the framework of

the draft regulations for depositories and participants in

October 1995. Extensive discussion were then held with the stock

exchanges, market participants and investors on this issue. The

SEBI (Depositories and Participants) Regulations, 1996 were

notified in May 1996.

These regulations provide for registration of depositories

and participants under the SEBI Act, the eligibility criteria for

admission of securities to a depository, the specific rights and

obligations of depositories, participants and issuers in addition

to those specified in the Depositories Act, periodic reports to

be submitted to SEBI, penal action and procedure in case of

default.

In February 1997, the SEBI (Depositories and Participants)

Regulations, 1997 were amended to restrict foreign ownership of a

depository, whether as sponsors or participants to 20 % of its

equity.