SECURITIES LAWS AND COMPLIANCES
REGULATORY FRAME WORK
Before going into details of regulatory frame work, economy of the country
• India needs to grow at 8 or 9 percent
• a year in order to eliminate pervasive poverty
• within a generation. It cannot do this without
• better capital markets.
• Increase the quality of investment in India
Efficient and transparent capital markets attracts foreign investment
Before 1991, investment in the most important areas of the economy was a public sector monopoly, private investment was carefully directed,and foreign investment discouraged
Capital markets were constrained
by five particular government policies:
a) The government owned and controlled almost
b) all of the banking system and prevented
foreign and domestic institutions from entering it.
c) The insurance and pension fund industry
was government owned and had to invest
most of its assets in low-yielding government
securities.
d) Nearly all interest rates were set by the government,
and financial institutions were
directed on how they should allocate some of their investments
e) Banks had to meet high reserve requirements,
and the funds were used to finance
the government’s fiscal deficit—in effect
preempting private investment.
f) Private capital markets were small and
needed government approval (including
government determination of price and terms) on new capital issues
• Prior to existence of SEBI, the issue of new stocks was controlled by a government agency, Controller of Capital issues
• With a mission to ensure the quality of new IPOs, the CCI reviewed the financial situation and prospects of the issuing company,and approved the price at which the new issue could be offered
• Since 1991, there has been a substantial and steady liberalization started by then Prime Minster Mr.P.V.Naraishma Rao
• Foreign investment has been permitted both debt and equity markets
• Companies to approach CCI for each and every issue
• Whereas , SEBI has prescribed guidelines for various issues such as Preferential issue, bonus issue, unlisted company issue
• Based on the guidelines, companies can issue the shares as per procedure regulated by SEBI
• Abolition of the Comptroller of Capital Issues in 1991 (with residual responsibility for oversight of new issues given to the Securities and Exchange Board) led to large numbers of initial public offerings in 1992-1994
• The Securities and Exchange Board of India.
• Established in 1992,
• SEBI has a dual mandate of regulating capital markets and promoting their development
Capital market where government and corporate can raise long term funds
Indian Economy ranks among the top five largest economies of the world. Its booming financial and capital markets have been impressing and enticing investors and companies from every major and developed countries every year (in addition to thousands of Indian investors) by virtue of extensive investment prospects, rapid growth potential, and bumper profitability. Capital market
The Capital Market deals in the long-term (for time-periods more than one year) capital Securities (Equity or Debt) offered by the private business companies and also governmental undertakings of India. All New Stocks or Bonds presented by growth-oriented business companies of diverse sectors are sold to the investors in the Primary Capital Market through Underwriting. The further trading of these capital market securities and bonds takes place in the Secondary Capital Market, commonly with the help of Stock Exchanges. The Securities and Exchange Board of India (SEBI) governs and regulates the Indian capital market. The capital market of India is among the top ten biggest capital markets of the world, and provides a variety of capital market instruments. There are 25 well-organized Stock Markets in India among which the Bombay Stock Exchange (BSE) and the National Stock Exchange hold the dominant positions
Four main act
The Companies Act, 1956
SEBI Act
Securities Contracts ( Regulations)
Depositories Act 1996
SEBI Act 1992
Establishment
Central Government empowered to set up SEBI by issuing a notification in the official gazette
Main objective
Investor protection
Systematic growth of securities market
Regulating the securities market
Provide better platform to raise the funds in fair manner with low cost
Monitoring the activities of stock exchanges, mutual funds and merchant bankers
Composition of the Board
Section 4 (1) provides for composition
A Chairman
Two members from amongst the officials of the Ministry of Central government dealing with finance and administration of the companies act 1956
One member from amongst the officials of the RBI
Five other members of whom at least three shall be whole time members
Securities contract ( Regulation) Act, 1956
• By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60
• In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
• At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Objects of the Act
Regulation of stock exchanges
Regulation of transaction in securities
Prevention of speculative activities
Regulate the buying and selling of securities outside the limits of stock exchange
Provide ancillary matters
Non Applicability act
The Government
RBI
Any local authority
Any corporation set by a special law
Any class of contracts exempted by Central government by issuing a notification in Official gazette
• The Bombay Stock Exchange, the oldest stock exchange in the country, was founded in 1875.
• It is the leading exchange in the country, and until recently accounted for about 80 percent
• of all stock transactions
The National Stock Exchange. NSE was established in 1994 as a competitor to the Bombay Stock Exchange (BSE
Depositories Act
A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities
• The benefits are enumerated below:-
• • A safe and convenient way to hold securities;
• • Immediate transfer of securities;
• • No stamp duty on transfer of securities;
• • Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
• • Reduction in paperwork involved in transfer of securities;
• • Reduction in transaction cost;
• • No odd lot problem, even one share can be traded;
• • Nomination facility;
• • Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;
• • Transmission of securities is done by DP eliminating correspondence with companies;
• • Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc.
• Benefit to the Country
The depository system helps the capital market to be more liquid, attracting more foreign investors and is in compliance with international standards, as it creates efficient and risk-free trading environment.
It minimises the settlement risks and frauds in carrying out transactions in capital markets and thus can restore faith of investors in capital markets.
It helps to reduce delay in trading practices creating investor friendly atmosphere in the capital markets.
• Benefit to the Company
The depository system helps in reducing the cost of new issues due to less printing and distribution cost.
It increases the efficiency of the registrars and transfer agents and the Secretarial Department of the company.
It provides better facilities for communication and timely services with shareholders, investor etc.
• Benefit to the Investor
The depository system reduces risks involved in holding physical certificated, e.g., loss, theft, mutilation, forgery, etc.
It ensures transfer settlements and reduces delay in registration of shares.
It ensures faster communication to investors.
It helps avoid bad delivery problem due to signature differences, etc.
It ensures faster payment on sale of shares.
No stamp duty is paid on transfer of shares.
It provides more acceptability and liquidity of securities.
• Benefit to Brokers
The depository system reduces risk of delayed settlement.
It ensures greater profit due to increase in volume of trading.
It eliminates chances of forgery – bad delivery.
It increases overall of trading and profitability.
It increases confidence in investors.
• Agency in Depositories
India has chosen the concept of multi-depositories.[5] Presently, there are two depositories registered with SEBI;
National Securities Depository Limited (NSDL)
Central Depository Service (India) Limited (CDSL
• National Securities Depository Limited (NSDL)
Both agencies are linked with each other. NSDL is a public limited company incorporated under the Companies Act, 1956. Four renowned institutions participate in it. Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), National Stock Exchange of India (NSE), State Bank of India (SBI).UTI is the largest mutual fund of India and IDBI is the largest development bank, NSE is the largest stock exchange of India and SBI is the largest commercial bank of India having clearing facility. HDFC and Citibank also share in this system.[6] NSDL is managed by Board of directors headed by a managing director. It is governed by its bye-laws and its business operations are regulated by business rules. NSDL interfaces with the investors through players or business partners. Constituents of depository compromise of clearing corporation, brokers, clearing member, registrar and transfer agents, company or issuer, stock exchange, bank depository participant and investors. All are electronically linked to the main depository for the settlement of trades and to perform a daily reconciliation of all accounts held with NSDL.
• Central Depository Service (India) Limited (CDSL)
Second agency is CDSL - Central Depository Service (India) Limited. Main functions of this agency are centralized database and accounting. Major participant in CDSL[7] are LIC, GIC and BSE. This agency is set up with the object to keep in mind to accelerate growth of scripless trading, with major thrust of individual participation and creating competitive environment, responsible to the users interests and demands to enhance liquidity. CDSL aims to retain the entire data of the investors in the central database of CDSL. It has opted for it with the following objectives:
Depository Participant
Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is the representative (agent) in the depository system providing the link between the Company and the investor through the Depository. Depository Participant maintains investor’s securities account balances and intimates him the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the depository. A DP is one with whom you need to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of bank with whom one can have an account.
Process of Demating Shares
The process of opening an account with a Depository Participant is similar to the opening of a bank account.
One has to open an account with a Depository Participant (DP) by filling up an Account Opening Form and signing a “Participant-Client Agreement”. Then a unique client ID number will be given, which must be quoted in all correspondence with the DP.
Thereafter, one has to fill up and submit a Dematerialization Request Form (DRF) provided by the DP duly signed by all the holders and surrender the physical shares intended to be dematted to the DP.
The DP upon receipt of the shares and the DRF will issue an acknowledgement and will send an electronic request to the Company/ Registrars and Transfer Agents of the Company through the Depository for confirmation of demat. The DP will simultaneously surrender the DRF and the shares to the Company / Registrars and Transfer Agents of the Company with a covering letter requesting the Company to confirm demat.
The Registrars and Transfer Agents of the Company, after necessary verification of the documents received from the DP, will cancel the physical shares and confirm demat to the Depository. This confirmation will be passed on by the Depository to the DP which holds investor’s account. After receiving this confirmation from the Depository, the DP will credit investor account with the number of shares dematerialized. The DP will hold the shares in the dematerialized form thereafter on behalf of the investor. And hence one becomes the beneficial owner of these dematerialized shares.
When the beneficial owner submits the shares for dematerialization, his DP will deface the share certificates with the stamp “SURRENDERED FOR DEMATERIALISATION”. This ensures that shares are not lost in transit or misused till credit is received in demat account.
REGULATORY FRAME WORK
Before going into details of regulatory frame work, economy of the country
• India needs to grow at 8 or 9 percent
• a year in order to eliminate pervasive poverty
• within a generation. It cannot do this without
• better capital markets.
• Increase the quality of investment in India
Efficient and transparent capital markets attracts foreign investment
Before 1991, investment in the most important areas of the economy was a public sector monopoly, private investment was carefully directed,and foreign investment discouraged
Capital markets were constrained
by five particular government policies:
a) The government owned and controlled almost
b) all of the banking system and prevented
foreign and domestic institutions from entering it.
c) The insurance and pension fund industry
was government owned and had to invest
most of its assets in low-yielding government
securities.
d) Nearly all interest rates were set by the government,
and financial institutions were
directed on how they should allocate some of their investments
e) Banks had to meet high reserve requirements,
and the funds were used to finance
the government’s fiscal deficit—in effect
preempting private investment.
f) Private capital markets were small and
needed government approval (including
government determination of price and terms) on new capital issues
• Prior to existence of SEBI, the issue of new stocks was controlled by a government agency, Controller of Capital issues
• With a mission to ensure the quality of new IPOs, the CCI reviewed the financial situation and prospects of the issuing company,and approved the price at which the new issue could be offered
• Since 1991, there has been a substantial and steady liberalization started by then Prime Minster Mr.P.V.Naraishma Rao
• Foreign investment has been permitted both debt and equity markets
• Companies to approach CCI for each and every issue
• Whereas , SEBI has prescribed guidelines for various issues such as Preferential issue, bonus issue, unlisted company issue
• Based on the guidelines, companies can issue the shares as per procedure regulated by SEBI
• Abolition of the Comptroller of Capital Issues in 1991 (with residual responsibility for oversight of new issues given to the Securities and Exchange Board) led to large numbers of initial public offerings in 1992-1994
• The Securities and Exchange Board of India.
• Established in 1992,
• SEBI has a dual mandate of regulating capital markets and promoting their development
Capital market where government and corporate can raise long term funds
Indian Economy ranks among the top five largest economies of the world. Its booming financial and capital markets have been impressing and enticing investors and companies from every major and developed countries every year (in addition to thousands of Indian investors) by virtue of extensive investment prospects, rapid growth potential, and bumper profitability. Capital market
The Capital Market deals in the long-term (for time-periods more than one year) capital Securities (Equity or Debt) offered by the private business companies and also governmental undertakings of India. All New Stocks or Bonds presented by growth-oriented business companies of diverse sectors are sold to the investors in the Primary Capital Market through Underwriting. The further trading of these capital market securities and bonds takes place in the Secondary Capital Market, commonly with the help of Stock Exchanges. The Securities and Exchange Board of India (SEBI) governs and regulates the Indian capital market. The capital market of India is among the top ten biggest capital markets of the world, and provides a variety of capital market instruments. There are 25 well-organized Stock Markets in India among which the Bombay Stock Exchange (BSE) and the National Stock Exchange hold the dominant positions
Four main act
The Companies Act, 1956
SEBI Act
Securities Contracts ( Regulations)
Depositories Act 1996
SEBI Act 1992
Establishment
Central Government empowered to set up SEBI by issuing a notification in the official gazette
Main objective
Investor protection
Systematic growth of securities market
Regulating the securities market
Provide better platform to raise the funds in fair manner with low cost
Monitoring the activities of stock exchanges, mutual funds and merchant bankers
Composition of the Board
Section 4 (1) provides for composition
A Chairman
Two members from amongst the officials of the Ministry of Central government dealing with finance and administration of the companies act 1956
One member from amongst the officials of the RBI
Five other members of whom at least three shall be whole time members
Securities contract ( Regulation) Act, 1956
• By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60
• In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
• At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Objects of the Act
Regulation of stock exchanges
Regulation of transaction in securities
Prevention of speculative activities
Regulate the buying and selling of securities outside the limits of stock exchange
Provide ancillary matters
Non Applicability act
The Government
RBI
Any local authority
Any corporation set by a special law
Any class of contracts exempted by Central government by issuing a notification in Official gazette
• The Bombay Stock Exchange, the oldest stock exchange in the country, was founded in 1875.
• It is the leading exchange in the country, and until recently accounted for about 80 percent
• of all stock transactions
The National Stock Exchange. NSE was established in 1994 as a competitor to the Bombay Stock Exchange (BSE
Depositories Act
A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities
• The benefits are enumerated below:-
• • A safe and convenient way to hold securities;
• • Immediate transfer of securities;
• • No stamp duty on transfer of securities;
• • Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
• • Reduction in paperwork involved in transfer of securities;
• • Reduction in transaction cost;
• • No odd lot problem, even one share can be traded;
• • Nomination facility;
• • Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;
• • Transmission of securities is done by DP eliminating correspondence with companies;
• • Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc.
• Benefit to the Country
The depository system helps the capital market to be more liquid, attracting more foreign investors and is in compliance with international standards, as it creates efficient and risk-free trading environment.
It minimises the settlement risks and frauds in carrying out transactions in capital markets and thus can restore faith of investors in capital markets.
It helps to reduce delay in trading practices creating investor friendly atmosphere in the capital markets.
• Benefit to the Company
The depository system helps in reducing the cost of new issues due to less printing and distribution cost.
It increases the efficiency of the registrars and transfer agents and the Secretarial Department of the company.
It provides better facilities for communication and timely services with shareholders, investor etc.
• Benefit to the Investor
The depository system reduces risks involved in holding physical certificated, e.g., loss, theft, mutilation, forgery, etc.
It ensures transfer settlements and reduces delay in registration of shares.
It ensures faster communication to investors.
It helps avoid bad delivery problem due to signature differences, etc.
It ensures faster payment on sale of shares.
No stamp duty is paid on transfer of shares.
It provides more acceptability and liquidity of securities.
• Benefit to Brokers
The depository system reduces risk of delayed settlement.
It ensures greater profit due to increase in volume of trading.
It eliminates chances of forgery – bad delivery.
It increases overall of trading and profitability.
It increases confidence in investors.
• Agency in Depositories
India has chosen the concept of multi-depositories.[5] Presently, there are two depositories registered with SEBI;
National Securities Depository Limited (NSDL)
Central Depository Service (India) Limited (CDSL
• National Securities Depository Limited (NSDL)
Both agencies are linked with each other. NSDL is a public limited company incorporated under the Companies Act, 1956. Four renowned institutions participate in it. Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), National Stock Exchange of India (NSE), State Bank of India (SBI).UTI is the largest mutual fund of India and IDBI is the largest development bank, NSE is the largest stock exchange of India and SBI is the largest commercial bank of India having clearing facility. HDFC and Citibank also share in this system.[6] NSDL is managed by Board of directors headed by a managing director. It is governed by its bye-laws and its business operations are regulated by business rules. NSDL interfaces with the investors through players or business partners. Constituents of depository compromise of clearing corporation, brokers, clearing member, registrar and transfer agents, company or issuer, stock exchange, bank depository participant and investors. All are electronically linked to the main depository for the settlement of trades and to perform a daily reconciliation of all accounts held with NSDL.
• Central Depository Service (India) Limited (CDSL)
Second agency is CDSL - Central Depository Service (India) Limited. Main functions of this agency are centralized database and accounting. Major participant in CDSL[7] are LIC, GIC and BSE. This agency is set up with the object to keep in mind to accelerate growth of scripless trading, with major thrust of individual participation and creating competitive environment, responsible to the users interests and demands to enhance liquidity. CDSL aims to retain the entire data of the investors in the central database of CDSL. It has opted for it with the following objectives:
Depository Participant
Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is the representative (agent) in the depository system providing the link between the Company and the investor through the Depository. Depository Participant maintains investor’s securities account balances and intimates him the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the depository. A DP is one with whom you need to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of bank with whom one can have an account.
Process of Demating Shares
The process of opening an account with a Depository Participant is similar to the opening of a bank account.
One has to open an account with a Depository Participant (DP) by filling up an Account Opening Form and signing a “Participant-Client Agreement”. Then a unique client ID number will be given, which must be quoted in all correspondence with the DP.
Thereafter, one has to fill up and submit a Dematerialization Request Form (DRF) provided by the DP duly signed by all the holders and surrender the physical shares intended to be dematted to the DP.
The DP upon receipt of the shares and the DRF will issue an acknowledgement and will send an electronic request to the Company/ Registrars and Transfer Agents of the Company through the Depository for confirmation of demat. The DP will simultaneously surrender the DRF and the shares to the Company / Registrars and Transfer Agents of the Company with a covering letter requesting the Company to confirm demat.
The Registrars and Transfer Agents of the Company, after necessary verification of the documents received from the DP, will cancel the physical shares and confirm demat to the Depository. This confirmation will be passed on by the Depository to the DP which holds investor’s account. After receiving this confirmation from the Depository, the DP will credit investor account with the number of shares dematerialized. The DP will hold the shares in the dematerialized form thereafter on behalf of the investor. And hence one becomes the beneficial owner of these dematerialized shares.
When the beneficial owner submits the shares for dematerialization, his DP will deface the share certificates with the stamp “SURRENDERED FOR DEMATERIALISATION”. This ensures that shares are not lost in transit or misused till credit is received in demat account.
