SEBI Act, 1992

SECURITIES LAWS
Important Committees for SEBI & Corporate
Governance
• Kumar Mangalam Birla Committee (1999),
• Introduction of Clause 49 of the listing agreement (2000),
• Narayana Murthy Committee (2006) (amendment in Clause 49 of the
Listing Agreement),
• Corporate Governance Voluntary Guidelines (2009),
• Adi Godrej Committee Report on corporate governance (2012)
• Uday Kotak Committee Report (2017).
Key Features of Corporatization

• Separate legal entity: the organization is a legal independent entity

• Managerial autonomy: management has control over all inputs and issues related to
production of services
• Transparency and reporting: the utility is likely to become subject to prevailing
company law and accounting rules
• Assets and Liabilites - the corporatized utility will have transferred to it the resources it
needs to perform its functions and to be viable. It may be that it is inappropriate to
transfer all associated debt to a corporatized entity if the utility is unlikely to be able to
raise revenues to service the debt and fund existing operations
• Corporatization is the act of reorganizing the structure of a government-owned entity
into a legal entity with the corporate structure found in publicly traded companies.
These companies tend to have a board of directors, management and shareholders.
Establishment of SEBI
• The SEBI was established in 1988 by the way of a Government
resolution to promote orderly and healthy growth of the securities market and for
investor's protection.
• Price Rigging - Price rigging is an illegal action that occurs when parties conspire to fix or
inflate prices to achieve higher profits at the expense of the consumer.
• SEBI had to wait for almost four years before the Securities and
Exchange Board of India Ordinance 1992 was promulgated in January of that year
followed by the Securities and Exchange Board of India Act, 1992 conferring statutory
power.
• To give it powers, Union Government of India passed SEBI Act 1992. On 12 April 1992 SEBI
became an autonomous body with statutory powers (Capital Issues (Control) Act 1947).
SEBI – Supervision of Market Manipulations
• Diversion of Funds, 'serious' misstatement of accounts’, - CG Power drops 5%
after SEBI orders forensic audit, bans Gautham Thapar and 3 others from
market.
• Lack of disclosure - Sebi fines IL&FS Rs 10 lakh for disclosure lapses.
• Misstatement in Prospectus.
• Draft scheme of Mergers & Acquisition - Equitas Holdings tanks 13% as Sebi
rejects scheme of arrangement for banking arm
Read more at:
//economictimes.indiatimes.com/articleshow/71159990.cms?utm_source=
contentofinterest&utm_medium=text&utm_campaign=cppst
• Frauds in Securities
Power & Function of SEBI

• Repetition of whatever provided in Preamble.

• SEBI has an onerous duty to perform (J. M Mutual Fund And J.M.
Capital ... vs Securities And Exchange Board Of ... on 22 November, 2004).
• “…by such measures as it thinks fit – See, Clariant International Ltd.”
• Karnavati Fincap Ltd. And Alka ... vs Securities And Exchange Board Of ...
on 6 May, 1996 – …because of “Without prejudice to the generality of
the foregoing provisions” SEBI is empowered to go beyond the powers as
conferred under the Sub – Section 2 of Section 11 (see also, Section 32 of
the Act).
SEBI Act - Preamble
• An Act to provide for the establishment of a Board to protect the
interests of investors in securities and to promote the development
of, and to regulate, the securities market and for matters connected
therewith or incidental thereto.
Power & Function of SEBI
• Regulating the business in stock exchanges.
• Registering and regulating the working of the intermediaries - stock
brokers, sub-brokers, share transfer agents, bankers to an issue,
trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers.
Power & Function of SEBI
•Regulating the business in stock exchanges
•registering and regulating the working of the market intermediaries - market intermediaries are a vital link between the regulators,
issuers and investor in securities supply chain.
•registering and regulating the working of the depositories, depository participants, custodians of securities (safekeeping and ancilliary
services, like updating on the issuer’s actions), foreign institutional investors, credit rating agencies.
•registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;
•promoting and regulating self-regulatory organisations, (see https://www.sebi.gov.in/sebi_data/commondocs/pt3d_h.html )
•prohibiting fraudulent and unfair trade practices relating to securities markets;
•promoting investors‘ education and training of intermediaries of securities markets;
•prohibiting insider trading in securities;
• regulating substantial acquisition of shares and take over of companies;
•calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other
persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;
•calling for information and records from any person
•calling for information from, or furnishing information to, other authorities, whether in India or outside India

•
Role of Custodians
• A custodian is a financial institution that holds customers' securities for
safekeeping in order to minimize the risk of their theft or loss. A
custodian holds securities and other assets in electronic or physical
form. Since they are responsible for the safety of assets and securities
that may be worth hundreds of millions or even billions of dollars,
custodians generally tend to be large and reputable firms. A custodian
is sometimes referred to as a "custodian bank.“
• In addition to holding securities for safekeeping, most custodians also
offer other services, such as account administration, transaction
settlements, the collection of dividends and interest payments, tax
support, and foreign exchange. 
• A self-regulatory organization (SRO) is a non-governmental
organization which has the power to create and enforce stand-alone
industry and professional regulations and standards. In the case of a
financial SROs, such as a stock exchange, the priority is to protect the
investor by establishing rules, regulations, and set standards of
procedures which promote ethics, equality, and professionalism. 
• As mentioned SEBI has a wide power to regulate the securities
market. It has a wide power to regulate or prohibit the issue of
prospectus, any offer document or advertisement to sale the shares
and securities for the protection of investors. If it is suspecting any
wrong, it may prohibit any company from issuing prospectus, any
offer document, or advertisement soliciting money from the public for
the issue of securities.
Authority and Power of SEBI

• The SEBI board has three main powers:

• i. Quasi-Judicial: SEBI has the authority to deliver judgements related to fraud and other
unethical practices in terms of the securities market. This helps to ensure fairness,
transparency, and accountability in the securities market.
• ii. Quasi-Executive: SEBI is empowered to implement the regulations and judgements made
and to take legal action against the violators. It is also authorised to inspect Books of
accounts and other documents if it comes across any violation of the regulations.
• iii. Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the
interests of the investors. Some of its regulations consist of insider trading regulations,
listing obligation, and disclosure requirements. These have been formulated to keep
malpractices at bay.
• Despite the powers, the results of SEBI’s functions still have to go through the Securities
Appellate Tribunal and the Supreme Court of India.
Quasi – judicial functions of SEBI
• Chapter VIA of the SEBI Act deals with the Penalties and Adjudications.
• These provisions were added in the Act, by a 1995 amendment [Securities
Laws (Amendment) Act, 1995].
• Before that, there was only way to deal with the erring parties was to cancel
their registration u/s 12(3) or take action u/s 11 of the Act.
• But the cancellation of registration could not be a viable option to punish the
entities as it was financially detrimental to any party who was dealing with
such entities.
• Hence, to punish appropriately in such cases the amendment Act of 1995
provided for the monetary punishment and also made the provisions for
appropriate adjudications.
Chapter VI A provides the punishment for the following

• To furnish any document, return or report to the Board, to file any return or furnish any
information, to maintain books of account or records (Section 15A).
• Penalty for failure by any person to enter into agreement with clients. (Section 15 B).
• Penalty for failure to redress investors’ grievances. (15C).
• Penalty for certain defaults in case of mutual funds. (15D).
• Penalty for failure to observe rules and regulations by an asset management company. (15E).
• Penalty for default in case of stock brokers. (15F).
• Penalty for insider trading. (15G).
• Penalty for non-disclosure of acquisition of shares and takeovers. (15 H).
• Penalty for fraudulent and unfair trade practices. (15HA).
• Penalty for contravention where no separate penalty has been provided. (15HB).
Landmark Cases
• Clariant International Ltd. and anr. Vs Securities and Exchange Board of India AIR 2004 SC 4236 -
• Issue - The SEBI Act confers a wide jurisdiction upon the Board. Its duties and functions thereunder, run
counter to the doctrine of separation of powers. Integration of power by vesting legislative, executive and
judicial powers in the same body, in future, may raise a several public law concerns as the principle of
control of one body over the other was the central theme underlying the doctrine of separation of powers.
• Throughout the world, specialized adjudicators are performing numerous roles. There are diverse
specialized tribunals in America as also in the Commonwealth countries. In certain States, statutes have
been enacted authorizing appeals to the Administrative Division which jurisdiction used to be exercised by
the High Court alone. The appeals range from questions of law to selected questions of fact, to full
rehearing of all issues (See Stephen Legomsky’s ‘Specialized Justice).
• Had the intention of the Parliament been to limit the jurisdiction of the Tribunal, it could say so
explicitly as it has been done in terms of Section 15Z of the Act whereby the jurisdiction of this Court to
hear the appeal is limited to the question of law. The jurisdiction of the appellate authority under the
Act is not in any way fettered by the statute and, thus, it exercises all the jurisdiction as that of the
Board. It can exercise its discretionary jurisdiction in the same manner as the Board.
• Exemptions from the CIS Regulations
• According to the SEBI Act, the following activities have been exempted from being governed by the CIS
Regulations.
• A scheme/ arrangement made or offered by a cooperative society.
• A scheme/ arrangement which is a contract of insurance.
• A scheme/ arrangement under which the deposits are accepted by Non-Banking Financial Companies.
• A scheme/ arrangement providing for any other scheme such as Pension Scheme or Insurance Scheme
prescribed under the Employees Provident Fund.
• A scheme/ arrangement under which a company accepts the deposits as a Nidhi/ Mutual Benefit Society.
• A scheme/ arrangement under which deposits are accepted under Section 58A of the Companies Act, 1956.
• A scheme/ arrangement falling within the fields of a chit business as per Clause (D) of Section 2 of the Chit
Fund Act, 1982.
• A scheme/ arrangement under which contributions that are made as an investment to a mutual fund.
• Section 11 AA - 58A. DEPOSITS NOT TO BE INVITED WITHOUT ISSUING AN ADVERTISEMENT
(1) The Central Government may, in consultation with the Reserve Bank of India, prescribe
the limits up to which, the manner in which and the conditions subject to which deposits
may be invited or accepted by a company either from the public or from its members.
• Nidhi and Mutual Benefit Society - Nidhi” is a Hindi word, which means finance or
fund. Nidhi means a company which has been incorporated with the object of developing
the habit of thrift (efficient utilization of Money) and reserve funds amongst its members
and also receiving deposits and lending to its members only for their mutual benefit. 
• If the definition of CIS seems rather open ended, it is because the intention of this law is to
sweep into its ambit all kinds of unregulated entities which collect money from investors.
Regulated entities such as mutual funds, insurers, pension funds, registered chit funds, co-
operative societies and nidhis are specifically exempted from the CIS regulations even if
they manage ₹ 100 crore or more.
Nidhi Companies
• Section 406 of Companies Act 2013 and Companies (Nidhi Companies) Rules, 2014 governs The Law and
Procedure for Nidhi Company.
• The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known
under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual
Benefit Company.
• Nidhi’s are more popular in South India and are highly localized single office institutions. They are mutual
benefit societies, because their dealings are restricted only to the members; and membership is limited to
individuals. The principal source of funds is the contribution from the members. The loans are given to the
members at relatively reasonable rates for purposes such as house construction or repairs and are generally
secured. The deposits mobilized by Nidhi’s are not much when compared to the organized banking sector.
• Since Nidhi’s come under one class of NBFCs, RBI is empowered to issue directions to them in matters
relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhi’s deal with
their shareholder-members only, RBI has exempted the notified Nidhi’s from the core provisions of the RBI
Act and other directions applicable to NBFCs. As on date (February 2013) RBI does not have any specified
regulatory framework for Nidhi’s.
Chit fund
• Chit fund is defined as per the Section 2(b) of the Chit Fund Act, 1982.
According to this act; A chit fund is a type of rotating savings and agreement
among different persons i.e. friends, relatives, neighbours and family members
to subscribe a certain sum of money for a specified period of time. Chit funds
are often microfinance organizations. Chit Funds are also known as the Chitty,
Kuree, chit.
• By the end of the month, this fund will be open for bidding. The bidding is done
because there might be multiple people interested in getting the money and
the money would go to only 1 person. Let’s say there are 3 members who need
the money by the end of the month. Member 1 bid for Rs 9.5 lakh, member 2
bid for 9 lakh and member 3 make the lowest bid of 8.5 lakh. The lowest bidder
will be given the amount by subtracting the fee of chit fund organizer.
 SEBI’s Power to Issue Directions
• Under Section 11 B of the SEBI Act, SEBI is empowered to issue direction to the various
intermediaries (like stock broker, sub-broker, share transfer agent, banker to an issue, and
trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio
manager, investment adviser, depository, depository, participant, custodian of securities,
foreign institutional investor, credit rating agency, venture capital funds or collective
investment schemes and such other intermediary who may be associated with securities
market) after making an enquiry if it is satisfied after making an enquiry that it is
necessary to issue direction –
• (i) in the interest of investors, or orderly development of securities market; or
• (ii) to prevent the affairs of any intermediary or other persons referred to in section 12
being conducted in a manner detrimental to the interest of investors or securities market;
or
• (iii) to secure the proper management of any such intermediary or person
Informal Guidance
• Provides clarity on the legal framework of SEBI.
• An informal guidance is an arrangement where an entity can seek advice from Sebi to understand the position of
the law. “While the informal guidance in the form of interpretive letter issued by the relevant departments of Sebi
is helpful to understand their views, the expectation is that the views expressed are consistent based on similar
facts. In view of the recent judgment of SAT, Sebi should consider clarifying that it will not respond to queries
where the statute is clear. Basically, the mechanism of obtaining informal guidance should not be seen as a tool to
reduce the importance of the law," suggests Yogesh Chande, partner, Shardul Amarchand Mangaldas.
https://smartinvestor.business-standard.com/market/ipoNews-457173-Lawyers_uneasy_with_Sebis_informal_guid
ance_scheme.htm

• Compare with the informal guidance given by SEC.

• SEBI cannot act like an advisor.
• Objective to assist the users – requires a critical analysis by the students whether such objective is achieved or
not.
• And although Sebi is not legally bound by such interpretations, legal experts say misinterpretations or ambiguous
replies could undermine the faith of companies on the scheme.
Power to Investigate [Sec. 11(c)]
• (1) Where the Board has reasonable ground to believe that—
(a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market;
or
(b) any intermediary or any person associated with the securities market has violated any of the provisions of this Act or
the rules or the regulations made or directions issued by the Board thereunder, it may, at any time by order in writing,
direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate
the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board.
• Without prejudice to the provisions of sections 235 to 241 of the Companies Act, 1956 (Inspection & Investigation),
directors, officers of the companies or intermediaries are duty bound to produce the information to SEBI.
• SEBI may keep such documents into its custody.
• Such persons may be examined under oath by SEBI.
• Failure to appear with SEBI may cause an imprisonment of one year.
• If essential SEBI (through an authorized officer may approach to the court or police for an order for the seizure of such
books, registers, other documents and record.
North End Foods Marketing (P.) Ltd. V. Securities & Exchange Board of India, Mum.

• If during a preliminary enquiry, it is found prima facie, that the person is indulging in manipulation of the securities market, it would be
obligatory for SEBI to pass an interim order or for that matter an ex parte interim order in order to safeguard the interests of the investors
and to maintain the integrity of the market. Normally, while passing an interim order, the principles of natural justice has to be adhered to,
namely, that an opportunity of hearing is required to be given. Procedural fairness embodying natural justice is to be applied whenever
action is taken affecting the rights of the parties. At times, an opportunity of hearing may not be pre-decisional and may necessarily have
to be post-decisional especially where the act to be prevented is imminent or where action to be taken brooks no delay. Thus, pre-
decisional hearing is not always necessary when ex parte ad interim orders are made pending investigation or enquiry unless provided by
the statute. In such cases, rules of natural justice would be satisfied, if the affected party is given a post-decisional hearing. [Para 13]
• However, it does not mean that in every case, an ex parte interim order should be passed on the pretext that it was imminent to pass such
interim order in order to protect the interest of the investor or the securities market. An interim order, however, temporary it maybe,
restraining an entity/person from pursuing his profession/trade may have substantial and serious consequences which cannot be
compensated in terms of money.
• The respondent is empowered to pass an ex parte interim order only in extreme urgent cases and that such power should be exercised
sparingly. In the instant case, there was no any extreme urgent situation existed which warranted the respondent to pass an ex parte
interim order. Thus, impugned order is not sustainable in the eyes of law as it has been passed in gross violation of the principles of natural
justice as embodied in article 14 of the Constitution of India. Accordingly, the appellants are entitled to the reliefs claimed. [Para 18].
• As held in Liberty Oil Mills v. Union of India AIR 1984 SC 1271, the urgency must be infused by a host of circumstances, viz. large scale
misuse and attempts to monopolise or corner the market. In the said decision, the Supreme Court further held that the regulatory agency
must move quickly in order to curb further mischief and to take action immediately in order to instil and restore confidence in the capital
market. [Para 15].
North End Foods Marketing (P.) Ltd. V.
Securities & Exchange Board of India,
Mum.
• What Is a Commodity Market?
• A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or
primary products. There are currently about 50 major commodity markets worldwide that facilitate
trade in approximately 100 primary commodities.
• Commodities are split into two types: hard and soft commodities. Hard commodities are typically
natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft
commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans,
and pork.
• A futures exchange is a diverse marketplace where commodities futures, index futures, and options
on futures contracts are bought and sold. Those who are allowed access to the exchange are
brokers and commercial traders who are members of the exchange. Members need to be registered
with the National Futures Association (NFA) and the Commodity Futures Trading Commission
(CFTC). Individuals who want to trade futures contracts must do so by having an account with a
registered broker. Futures exchanges also provide clearing and settlement functions.
Futures
• Futures are derivative financial contracts that obligate the parties to
transact an asset at a predetermined future date and price. Here, the
buyer must purchase or the seller must sell the underlying asset at
the set price, regardless of the current market price at the expiration
date.