1

DEPATMENT OF ONLINE AND DISTANCE EDUCATION

Prof. (Dr.) S. Surya Prakash Hon’ble Vice Chancellor

Prof. (Dr.) Bir Pal Singh Director

Prof. (Dr.) Atul Kumar Pandey Additional Director

Dr. Manish Yadav Deputy Director

Mr. Mahendra Soni Assistant Director

MODULE PREPARATION COMMITTEE

CONTENT WRITER CONTENT REVIEWER

Prof. (Dr.) Kondaiyah Prof. (Dr.) Himanshu

Jonnalgadda Pandey
Professor, MNLU, Aurangabad Professor, MNLU, Nagpur

PROGRAMME COORDINATOR
DR. PADMA SINGH
ASSISTANT PROFESSOR

All Rights Reserved. No part of this work will be reproduced in any form, without permission
in writing from the copyright holder.

Conducted By

Department of Online and Distance Education

National Law Institute University
Kerwa Dam Road, Bhopal – 462 044 (M.P.), India

© 2024 National Law Institute University, Bhopal

[For Academic Purpose and Limited Circulation Only]

2
 Module III
SEBI and Regulation of Securities Market

3
Module III

SEBI and Regulation of Securities Market

LEARNING OUTCOMES:

UNIT I: SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 -

Acquisition of Shares and Takeovers

1. Understand the key provisions and objectives of the SEBI (Substantial Acquisition of
Shares and Takeover) Regulations, 2011.
2. Analyze the process and legal requirements for the acquisition of shares and takeovers in
India.
3. Evaluate the roles and responsibilities of acquirers, target companies, and other
stakeholders in the takeover process.
4. Identify the mandatory disclosure requirements and timelines associated with substantial
acquisition of shares.
5. Assess the implications of takeover regulations on corporate governance and shareholder
rights.

UNIT II: SEBI (Prohibition of Insider Trading) Regulations, 2015

1. Understand the concept and significance of insider trading regulations in the securities
market.
2. Analyze the definitions of key terms such as insider, unpublished price-sensitive
information (UPSI), and trading.
3. Evaluate the legal framework and key provisions of the SEBI (Prohibition of Insider
Trading) Regulations, 2015.
4. Identify the obligations of insiders and the preventive measures against insider trading.
5. Assess the penalties and enforcement actions for violations of insider trading regulations.

4
UNIT III: Alternative Investment Fund Regulation, Mutual Funds Regulations in India,
Collective Investment Scheme Regulation

1. Understand the regulatory framework governing Alternative Investment Funds (AIFs) in

India.
2. Analyze the categories, registration process, and investment conditions for AIFs.
3. Evaluate the key provisions and compliance requirements under the SEBI (Mutual Funds)
Regulations, 1996.
4. Identify the roles and responsibilities of mutual fund entities such as trustees, asset
management companies, and custodians.
5. Assess the regulatory framework for Collective Investment Schemes (CIS) and the
obligations of Collective Investment Management Companies (CIMCs).

UNIT IV: Listing of Securities and Law, Delisting of Securities and Law

1. Understand the legal framework and procedures for the listing of securities on stock
exchanges in India.
2. Analyze the eligibility criteria and disclosure requirements for companies seeking to list
their securities.
3. Evaluate the process and legal implications of delisting securities from stock exchanges.
4. Identify the roles and responsibilities of issuers, stock exchanges, and regulatory authorities
in the listing and delisting process.
5. Assess the impact of listing and delisting on investors and market dynamics.

5
CONTENTS:

UNIT I
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, -
Acquisition of Shares and Takeovers
UNIT II
SEBI (Prohibition of Insider Trading) Regulations, 2015
UNIT III
Alternative Investment Fund Regulation,
Mutual Funds Regulations in India.
Collective Investment Scheme Regulation
UNIT IV
Listing of Securities and Law
Delisting of Securities and Law

6
Module III

UNIT I

SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, -

Acquisition of Shares and Takeovers

Contents:
1.1. Introduction
1.2. Objectives
1.3. Meaning of Takeover and Acquisition
1.3.1. Meaning of Takeover
1.3.2. Types of Acquisition
1.3.3. Types of Indirect Acquisition
1.4. Some Important Definition
1.4.1. Persons Acting in Concert
1.4.2. Tendering Period
1.4.3. Volume Weighted average Price
1.4.4. Weighted average number of shares
1.4.5. Volume weighted average price.
1.5. Open offer and Trigger Point by an Acquirer
1.5.1 Open offer
1.5.2. Mandatory open offer
1.5.3. Voluntary open offer.
1.6. Public Announcement
1.6.1. Abridged Public Announcement
1.6.2. Detailed Public Announcement
1.6.3. Offer Price
1.7. Provisions of ESCROW
1.8. Withdrawal of Open offer
1.9. Disclosure of Acquisition and Disposal

7
1.10. Continual Disclosures
1.11. Summary
1.12. Terminal Questions

8
 Unit-I

SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

1.1. Introduction:
Securities Exchange Board of India (SEBI) established by SEBI Act,1992 to protect
the interest of investors in securities, and to promote the development of and to
regulate, the securities market. After 1992, due to globalization and industrialization
the presence of listed companies has increased significantly. SEBI has vested the
power to regulate the substantial acquisition of shares and take overs. However, in the
interest of securities market and investors, SEBI has issued regulations to regulate
substantial acquisition of shares and takeovers in 1997. These regulations are replaced
with 2011 SEBI Substantial acquisition of share and Take overs 2011(SAST,2011).

In this unit, the reader would be studying the legal implications of SAST
2011.Takeover laws have been enacted by most of the countries, prescribing a
systematic framework for acquisition of stake in listed companies, thereby ensuring
that the interests of the shareholders of listed companies are not compromised in case
of an acquisition or takeover. Protection of the interests of minority shareholders is a
fundamental corporate governance principle that gains further significance in case of
listed companies. Highest standards of corporate governance and transparency ought
to be ensured in the management and operation of companies that have public
participation as the public shareholders rely on the management and the promoters
while investing in the company. The takeover regulations ensure that public
shareholders of a listed company are treated fairly and equitably in relation to a
substantial acquisition in, or takeover of, a listed company thereby maintaining
stability in the securities.

Takeover code prescribes a systematic framework for acquisition of stake in listed

companies. By these laws the regulatory system ensures that the interests of the
shareholders of listed companies are not compromised in case of an acquisition or

9
takeover. It also protects the interests of minority shareholders, which is also a
fundamental attribute of corporate governance principle.

The takeover code ensures that public shareholders of a listed company are treated
fairly and equitably in relation to a substantial acquisition in, or takeover of, a listed
company thereby maintaining stability in the securities market. The objective of the
takeover regulations is to ensure that the public shareholders of a company are
mandatorily offered an exit opportunity from the company at the best possible terms
in case of a substantial acquisition in, or change in control of, a listed company.

The earliest attempts at regulating takeovers in India can be traced back to the 1990s
with the incorporation of Clause 40 in the Listing Agreement. While, the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1994 which were
notified in November 1994 made way for regulation of hostile takeovers and
competitive offers for the first time; the subsequent regulatory experience from such
offers brought out certain inadequacies existing in those Regulations. As a result, the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were
introduced and notified on February 20, 1997, pursuant to repeal of the 1994
Regulations.

Owing to several factors such as the growth of Mergers & Acquisitions activity in
India as the preferred mode of restructuring, the increasing sophistication of takeover
market, the decade long regulatory experience and various judicial pronouncements, it
was felt necessary to review the Takeover Regulations 1997. Accordingly, SEBI
formed a Takeover Regulations Advisory Committee (TRAC) in September 2009
under the Chairmanship of (Late) Shri. C. Achuthan, Former Presiding Officer,
Securities Appellate Tribunal (SAT) for this purpose. After extensive public
consultation on the report submitted by TRAC, SEBI came out with the SAST
Regulations 2011 which were notified on September 23, 2011. The Takeover
Regulations, 1997 stand repealed from October 22, 2011, i.e. the date on which SAST
Regulations, 2011 come into force.

The Takeover Code comprises of Six chapters and one schedules encompassing the
various regulations related to Substantial Acquisition of Shares and Takeovers.

10
 Chapter One (Regulation 1 – 2) deals mainly with the definitions used in regulation.
Chapter two (Regulation 3-11) provides for substantial acquisition of shares, Voting
Rights or Control, threshold limit for open offer. It also contains the exemption
available to the Company. Chapter Three (regulation 12-23) narrates the open offer
process and deals with concept related to open offer. Chapter Four (regulation 24-27)
deals with the other obligations of Acquirer, Merchant Banker etc., Chapter Five
(regulation 28-31) deals with disclosure requirements of Shareholding and control and
limit for making disclosures. Chapter Six (regulation 32-35) deals with miscellaneous
provisions relating to power of SEBI and its right to issue directions.

1.2. Objectives:
After reading this unit, you would be able to :
a. Understand the Concepts, meaning of Substantial Acquisition of Shares and Take over.
b. Explain the procedure of open offer.
c. Describe the purpose of Public Announcement
d. Acquaint yourself contents and process of Draft Letter of offer.
e. Study the obligations of Acquirer and Target Company

1.3. Meaning of Takeover and Acquisition:

1.3.1. Meaning of Takeover:

Takeover means when an Acquirer acquires control of the Target company, called as
Takeover. When acquirer acquires substantial quantity of shares or voting rights of the
target company, thus resulting in substantial acquisition of Shares. When an “acquirer”
takes over the control of the “Target Company”, it is termed as Takeover. When an
acquirer acquires “substantial quantity of shares or voting rights” of the Target
Company, it results into substantial acquisition of shares.
1.3.2. Types of Acquisition
There are two types of Acquisition namely i) Direct Acquisition and ii) Indirect
Acquisitions. Direct Acquisition means is an acquirer directly acquiring shares / voting
rights or control of the target company.

11
 Indirect acquisition is defined under Regulation 5(1) of the Takeover Code, as any
acquisition of shares or voting rights in, or control over, any company or other entity,
that would enable any person and PAC to exercise or direct the exercise of such
percentage of voting rights in, or control over, a target company, the acquisition of
which would otherwise attract the obligation to make a public announcement of an
open offer for acquiring shares under these regulations, shall be considered as an
indirect acquisition of shares or voting rights in, or control over the target company.
Accordingly, any acquisition of shares/ voting rights or control of a target company
consequent to acquisition of shares or voting rights or control of another company is
‘indirect acquisition’ for the purposes of the Takeover Code.

1.3.3. Types of ‘indirect acquisitions’

The Takeover Code classifies ‘indirect acquisitions’ into two types as follows:
Indirect Acquisition Deemed to be Direct Acquisition : An indirect acquisition deemed
to be direct acquisition for the purpose of Takeover Code if the proportionate net asset
value or sales turnover or market capitalization of the indirectly acquired target
company, represented as a percentage respectively of the consolidated net asset value
or sales turnover or enterprise value of the directly acquired entity is in excess of 80%,
on the basis of the most recent audited annual financial statements.
All other ‘indirect acquisitions’ that do not fulfil the above-mentioned criterion are
treated as indirect acquisitions for the purposes of the Takeover Code. For all ‘indirect
acquisitions’ which are not deemed as direct acquisition but however, the
proportionate net asset value or sales turnover or market capitalization of the indirectly
acquired target company, represented as a percentage respectively of the consolidated
net asset value or sales turnover or enterprise value of the directly acquired entity is in
excess of 15%, the acquirer is under an obligation to specifically compute and disclose
a value per share for the shares of the indirectly acquired company in the Letter of
Offer.

1.4. Some Important Definitions:

12
 The following are some important definitions from the Takeover code, 2011.
Reg 2.(a) "acquirer" means any person who, directly or indirectly, acquires or agrees to
acquire whether by himself, or through, or with persons acting in concert with him,
shares or voting rights in, or control over a target company;
Reg 2.(b) "acquisition" means, directly or indirectly, acquiring or agreeing to acquire
shares or voting rights in, or control over, a target company;
Reg.2. (e) "control" includes the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually
or in concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements or in any other
manner:
Reg 2.(h) "enterprise value" means the value calculated as market capitalization of a
company plus debt, minority interest and preferred shares, minus total cash and cash
equivalents;
Reg.2. (v) "shares" means shares in the equity share capital of a target company carrying
voting rights, and includes any security which entitles the holder thereof to exercise
voting rights;
Explanation.-- For the purpose of this clause shares will include all depository receipts
carrying an entitlement to exercise voting rights in the target company;
Reg.2.(z) "target company" means a company and includes a body corporate or
corporation established under a Central legislation, State legislation or Provincial
legislation for the time being in force, whose shares are listed on a stock exchange;

Self Assessment Question: (Spend 2 minutes)

1. Who is an Acquirer?
………………………………………………………………………….
……………………………………………………………………………
………………………………………………………………………….
……………………………………………………………………………..
……………………………………………………………………………….

13
 .

1.4.1 Persons Acting in Concert

It is defined according to Regulation 2(q) of takeover code, 2011-

a. Persons Acting in Concert (PACs): Individuals or entities cooperating with a

common goal of acquiring shares, voting rights, or control of a target company.
This includes companies and their subsidiaries, directors, promoters, immediate
relatives, mutual funds, collective investment schemes, venture capital funds,
alternate investment funds, foreign institutional investors, merchant bankers with
clients, portfolio managers with clients, banks, financial advisors, stock brokers,
and significant shareholders in investment companies or funds.
b. Tendering Period: The timeframe within which shareholders can tender their
shares in response to an open offer.
c. Volume Weighted Average Market Price: Calculated by multiplying the number
of traded equity shares by their price, divided by the total number of traded shares.
d. Weighted Average Number of Total Shares: The number of shares at the start of
a period, adjusted for any changes, multiplied by a time-weighting factor.
e. Volume Weighted Average Price: The product of the number of bought equity
shares and their price, divided by the total number of bought shares.

1.5. Open Offer and Trigger Point by an Acquirer:

If an acquirer has agreed to acquire or acquired control over a target company or shares
or voting rights in a target company which would be more than the threshold limits,

14
then the acquirer is required to make an open offer to shareholders of the target
company.
Acquisition of 25% or more shares or voting rights: An acquirer, who (along with
PACs, if any) holds less than 25% shares or voting rights in a target company and
agrees to acquire shares or acquires shares which along with his/ PAC’s existing
shareholding would entitle him to exercise 25% or more shares or voting rights in a
target company, will need to make an open offer before acquiring such additional
shares.
Acquisition of more than 5% shares or voting rights in a financial year: An
acquirer who (along with PACs, if any) holds 25% or more but less than the maximum
permissible non-public shareholding in a target company, can acquire additional shares
in the target company as would entitle him to exercise more than 5% of the voting
rights in any financial year ending March 31, only after making an open offer.
25% shares or voting rights
An acquirer, along with Persons acting in concert (PAC) , if any, who intends to acquire
shares which along with his existing shareholding would entitle him to exercise 25% or
more voting rights, can acquire such additional shares only after making a Public
Announcement (PA) to acquire minimum twenty six percent shares of the Target
Company from the shareholders through an Open Offer.
Creeping acquisition limit
For computing acquisitions limits for creeping acquisition specified under regulation
3(2), gross acquisitions/ purchases shall be taken in to account thereby ignoring any
intermittent fall in shareholding or voting rights whether owing to disposal of shares
or dilution of voting rights on account of fresh issue of shares by the target company.
An acquirer who holds 25% or more but less than maximum permissible non-public
shareholding of the Target Company, can acquire such additional shares as would
entitle him to exercise more than 5% of the voting rights in any financial year ending
March 31 only after making a Public Announcement to acquire minimum twenty six
percent shares of Target Company from the shareholders through an Open Offer.

15
1.5.1. Open Offer:
SEBI Takeover Regulations, 2011 provides certain trigger events wherein the Acquirer is
required to give Open Offer to the shareholders of the Target Company to provide them
exit opportunity.

Open Offer

Mandatory Offer Voluntary Offer

(Reg. 6)

Acquisition of Shares Acquisition of Control Indirect acquisition of

(Reg. 3) (Reg. 4) shares of Control(Reg.
5)

1.5.2. Mandatory Open Offer:

SEBI Takeover Regulations, 2011 provides a threshold for mandatory Open Offer. The
regulations provides that whenever an acquirer acquires the shares in excess of the
threshold as prescribed under regulation 3 and 4 of SEBI Takeover Regulations, 2011,
then the acquirer is required to make a public announcement of offer to the shareholders
of the Target Company.
Regulation 3 of the SEBI Takeover Regulations, 2011 provides that the Acquirer to
give an open offer to the shareholders of Target Company on the acquisition of shares or
voting rights entitling the Acquirer along with the persons acting in concert with him to
exercise 25% or more voting rights in the Target Company.
Further any Acquirer who holds shares between 25%-75%, together with PACs can
acquire further 5% shares as creeping acquisition without giving an Open Offer to the
shareholders of the Target Company upto a maximum of 75%. The quantum of
acquisition of additional voting rights shall be calculated after considering the
following:
(a) No Netting off allowed:

16
 For the purpose of determining the quantum of acquisition of additional voting rights,
the gross acquisitions without considering the disposal of shares or dilution of voting
rights owing to fresh issue of shares by the target company shall be taken into account.
(b) Incremental voting rights in case of fresh issue
In the case of acquisition of shares by way of issue of new shares by the target company,
the difference between the pre-allotment and the post-allotment percentage voting rights
shall be regarded as the quantum of additional acquisition. [Regulation 3(2)]
The most important point to be noted here is that now the Individual Acquirer Shareholding
shall also be considered for determining the Open Offer Trigger Points apart from
consolidated shareholding of Acquirer and Persons Acting in Concert. [Regulation
3(3)]
Regulation 4 of the SEBI Takeover Regulations, 2011 specifies that if any acquirer
including person acting in concert acquires control over the Target Company irrespective
of the fact whether there has been any acquisition of shares or not, then he has to give
public announcement to acquire shares from shareholders of the Target Company.
[Regulation 4]

Self Assessment Question: (Spend 5

minutes)

1. Explain the need of Mandatory openoffer?

………………………………………………………………………….
……………………………………………………………………………
………………………………………………………………………….
……………………………………………………………………………..
………………………………………………………………………………..

1.5.3. Voluntary Open Offer:

Voluntary Open Offer means the Open Offer given by the Acquirer voluntarily without

17
 triggering the mandatory Open Offer obligations as envisaged under the regulations.
Voluntary Offers are an important means for substantial shareholders to consolidate their
stake and therefore recognized the need to introduce a specific framework for such
Open Offers.
Regulation 6 of the Takeover Regulations provides the threshold and conditions for
making the Voluntary Open Offer which are detailed below:
• Eligibility-Prior holding of at least 25% shares
To be eligible for making a Voluntary Open Offer, the regulations mandates the prior
holding of at least 25% stake in the Target Company by the Acquirer along with the
PACs.
• Shareholding of the Acquirer and PACs post completion of Open Offer
Post completion of the Open Offer, the shareholding of the Acquirer along with PACs
shall not exceed the – maximum permissible non-public shareholding.
• Acquisition of shares prior to the Voluntary Open Offer
The Acquirer shall become ineligible to make a Voluntary Open Offer if during the
preceding 52 weeks, the Acquireror PACs with himhasacquiredsharesof the Target
Companywithout attracting theobligation to make a Public Announcement of an Open
Offer. This condition is given because the Voluntary Open Offer is permitted as an
exception to the general rule on the offer size, thus the ability to voluntarily make an Open
Offer should not be available if in the proximate past, any of such persons have made
acquisitions within the creeping acquisition limits permitted under the Regulations.
• Prohibition on the acquisition of shares during the Offer Period
SEBI Takeover Regulations, 2011 prohibits the acquirer who has made a Voluntary
Open Offer from further acquiring the shares during the Offer Period otherwise than
under the Open Offer.
• Restriction of the acquisition of shares post completion of Voluntary Open Offer
An acquirer and PACs who have made a Voluntary Open Offer shall not be entitled to
further acquire shares for a period of 6 months after completion of the Open Offer
except pursuant:
(a) To another Voluntary Open Offer.
(b) To Competing Open Offer to the Open Offer made by any other person for acquiring

18
 shares of theTarget Company.
• Offer size
The Voluntary Open Offer shall be made for the acquisition of at least ten per cent
(10%) of the voting rights in the Target Company and shall not exceed such number of
shares as would result in the post- acquisition holding of the acquirer and PACs with
him exceeding the maximum permissible non-public shareholding applicable to such
Target Company.
1.5.4 Conditional Offer
An offer in which the acquirer has stipulated a minimum level of acceptance is known
as a conditional offer.Minimum level of acceptance implies minimum number of
shares which the acquirer desires under the said conditional offer. If the number of shares
validly tendered in the conditional offer, are less than the minimum level of acceptance
stipulated by the acquirer, then the acquirer is not bound to accept any shares under the
offer. In a conditional offer, if the minimum level of acceptance is not reached, the
acquirer shall not acquire any shares in the target company under the open offer or the
Share Purchase Agreement which has triggered the open offer.

1.6. Public Announcement

1.6.1 Abridged Public Announcement
A short public announcement shall be made on the same day or as prescribed under
Regulation 13(1), (2) and of the Regulations as the date of transaction which triggered
the Open Offer to all the stock exchanges where the shares of the Target Company are
listed for the purpose of dissemination of the information to the public. Further, a copy
of the public announcement shall be sent to SEBI and to the Target Company at its
registered office within one working day of the date of short public announcement.
[Regulation 13 read with Regulation 14(1) and 14(2)]
1.6.2. Detailed Public Announcement-[Regulation 14(3) & (4)]
After the short Public Announcement, a detailed Public Announcement shall be made
by the Acquirer within 5 working days from the date of short Public Announcement. Such
public announcement is required to be published in all editions of any one English
national daily with wide circulation, any one Hindi national daily with wide

19
 circulation, and any one regional language daily with wide circulation at the place
where the registered office of the Target Company is situated and one regional
language daily at the place of the stock exchange where the maximum volume of
trading in the shares of the Target Company are recorded during the sixty trading days
preceding the date of the public announcement. [Regulation 13(4) read with
Regulation 14(3)].
Simultaneously, a copy of the publication shall be sent to SEBI, Stock Exchanges where
the shares of the Target Company are listed and to the Target Company at its registered
office.[Regulation 14(4)]
1.6.3 Offer price
Offer price is the price at which the acquirer announces to acquire shares from the
public shareholders under the open offer. The offer price shall not be less than the price
as calculated under regulation 8 of the SAST Regulations, 2011 for frequently or
infrequently traded shares.
If the target company’s shares are frequently traded then the open offer price for
acquisition of shares under the minimum open offer shall be highest of the following :
Highest negotiated price per share under the share purchase agreement (“SPA”)
triggering the offer;
• Volume weighted average price of shares acquired by the acquirer during 52 weeks
preceding the public announcement (“PA”),
• Highest price paid for any acquisition by the acquirer during 26 weeks immediately
preceding the PA;
• Volume weighted average market price for sixty trading days preceding the PA.
If the target company’s shares are infrequently traded then the open offer price for
acquisition of shares under the minimum open offer shall be highest of the following:
• Highest negotiated price per share under the share purchase agreement (“SPA”)
triggering the offer;
• Volume weighted average price of shares acquired by the acquirer during 52 weeks
preceding the public announcement (“PA”);
• Highest price paid for any acquisition by the acquirer during 26 weeks immediately
preceding the PA;

20
 • The price determined by the acquirer and the manager to the open offer after taking into
account valuation parameters including book value, comparable trading multiples, and
such other parameters that are customary for valuation of shares of such companies.
It may be noted that the Board may at the expense of the acquirer, require valuation of
shares by an independent merchant banker other than the manager to the offer or any
independent chartered accountant in practice having a minimum experience of 10
years.
The shares of the target company will be deemed to be frequently traded if the traded
turnover on any stock exchange during the 12 calendar months preceding the calendar
month, in which the PA is made, is at least 10% of the total number of shares of the
target company. If the said turnover is less than 10%, it will be deemed to be
infrequently traded.

Self Assessment Question (Spend) 3 Mintes

Q. Explain the various methods of Offer Price?

1.7. Provision of Escrow

Not later than two working days prior to the date of the detailed public statement of the
open offer for acquiring shares, the acquirer shall create an escrow account towards
security for performance of his obligations under these regulations, and deposit in
escrow account such aggregate amount as per the following scale:
However, where an open offer is made conditional upon minimum level of acceptance,
hundred percent of the consideration payable in respect of minimum level of
acceptance or fifty per cent of the consideration payable under the open offer,
whichever is higher, shall be deposited in cash in the escrow account.

The escrow account may be in the form of, –

21
 (a) cash deposited with any scheduled commercial bank;
(b) bank guarantee issued in favour of the manager to the open offer by any scheduled
commercial bank; or
(c) deposit of frequently traded and freely transferable equity shares or other freely
transferable securities with appropriate margin.
1.8. Withdrawal of Open Offer
An open offer for acquiring shares can only be withdrawn under specific circumstances:
if required statutory approvals are refused, the acquirer (if a natural person) dies,
stipulated conditions in the acquisition agreement are not met for reasons outside the
acquirer's control, or SEBI deems it necessary. If withdrawn, the acquirer must
announce the withdrawal within two working days, providing reasons in the same
newspapers where the offer was initially published, and notify SEBI, relevant stock
exchanges, and the target company.

1.9. DISCLOSURE OF ACQUISITION AND DISPOSAL--

1. Any acquirer who acquires shares or voting rights in a target company which taken
together with shares or voting rights, if any, held by him and by persons acting in
concert with him in such target company, aggregating to five per cent or more of the
shares of such target company, shall disclose their aggregate shareholding and voting
rights in such target company in such form as may be specified.
(2) [Any person, who together with persons acting in concert with him, holds shares or
voting rights entitling them to five per cent or more of the shares or voting rights in a
target company, shall disclose the number of shares or voting rights held and change
in shareholding or voting rights, even if such change results in shareholding falling
below five per cent, if there has been change in such holdings from the last disclosure
made under sub-regulation (1) or under this sub-regulation; and such change exceeds
two per cent of total shareholding or voting rights in the target company, in such form
as may be specified.]
(3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made
within two working days of the receipt of intimation of allotment of shares, or the
acquisition of shares or voting rights in the target company to,--

22
 (a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.

1.10 CONTINUAL DISCLOSURES--

(1) Every person, who together with persons acting in concert with him, holds shares or
voting rights entitling him to exercise twenty-five per cent or more of the voting rights
in a target company, shall disclose their aggregate shareholding and voting rights as of
the thirty-first day of March, in such target company in such form as may be specified.
(2) The promoter of every target company shall together with persons acting in concert
with him, disclose their aggregate shareholding and voting rights as of the thirty-first
day of March, in such target company in such form as may be specified.
(3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made
within seven working days from the end of each financial year to,--
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.

1.11. Summary

• SEBI take over regulations deals at protecting the interests of investors in

securities of listing companies, providing exit option to minority, and
dissenting shareholders of takeovers.
• code explains in detail about the offer procedure, types of offer, and offer price.
• Role of Manager in offer process and it obligations explained in detail.
• Procedure for public announcement described and with drawl of the same
discussed.
• Obligations of Acquirer, target company and automatic exemptions are
covered, discussed and explained in detail.

1.20: Terminal Questions

1. What is the Role of Manager in Takeover process?

23
2.What are the obligations of Target Company?
3.What are the various modes of payment of offer price?
4. Explain the circumstances to withdraw open offer?

24
MODULE III

UNIT II

SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015

CONTENTS

2.1 INTRODUCTION
2.2 OBJECTIVES
2.3 HISTORICAL EVOLUTION OF INSIDER TRADING
2.3.1 Evolution of Committees in making Insider Trading Regulations
2.3.2 Legislation against Insider Trading in India
2.3.3 Meaning of Insider Trading Laws
2.4 IMPORTANT DEFINITIONS
2.4.1 Insider
2.4.2 Connected Person
2.4.3 Generally available information
2.4.4 Trading
2.4.5 Unpublished price sensitive information
2.5 RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS
2.5.1 Communication or procurement of unpublished price sensitive informatio
2.5.2 Trading when in possession of unpublished price sensitive information
2.6 DISCLOSURES OF TRADING BY INSIDERS
2.6.1 General provisions.
2.6.2 Disclosures by certain persons
2.6.2.1 Initial Disclosures
2.6.2.2 Continual Disclosures
2.6.2.3 Disclosures by other connected persons
2.6.3 Codes of Fair Disclosure And Conduct
2.6.3.1 Code of Fair Disclosure.
2.6.3.2 Code of Conduct

25
 2.6.3.3 Principles of Fair Disclosure for purposes of Code of Practices and
Procedures for Fair Disclosure of Unpublished Price Sensitive
Information
2.6.3.4 Minimum Standards for Code of Conduct for Listed Companies to
Regulate, Monitor and Report Trading by Designated Persons
2.7 INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING
2.8 COMPARISON OF INSIDER TRADING
2.8.1 Introduction to Companies Act
2.8.2 Comparison of Insider Trading as per the SEBI ( Prohibition of
Insider Trading) Regulation,2015 with Companies Act,2013
2.8.3 Case Laws
2.9 ROLE OF SEBI IN PREVENTING INSIDER TRADING
2.9.1 Powers and Penalties of Sebi in Curbing Insider Trading
2.9.2 Establishment of Evidence for the Offence of Insider Trading
2.11 SUMMARY
2.12 TERMINAL QUESTIONS

26
2.1 INTRODUCTION

Insider trading has been a problem for as long as stock exchanges have emerged, and it is widely
regarded as the most serious violation of corporate ethics in all established markets. It has been
subject to legal restrictions for decades and was considered legal, common, and widespread until
the end of World War II. After World War II, it was considered unethical to make a private profit
at the expense of the general body of stockholders until the late 1950s, when insider trading became
common again in the 1960s and early 1970s. Insider trading is becoming a rapidly increasing
problem around the world, as it refers to stock trading by business officials based on secret inside
knowledge, which has long been considered illegal in the business world. Throughout history,
various legislative acts and judicial decisions have shaped the history of insider trading, and the
security market is a global business platform that allows for the trading of stocks and other
securities.

2.2 OBJECTIVES

After reading this unit, you would be able to :

a. Understand the Concepts, meaning of insider trading.

b. Understand the legislative history of insider trading.

c. Describe the restrictions on communication and trading by insiders.

d. Know and understand the disclosures of trading by insiders and institutional

mechanism for prevention of insider trading.

2.3 HISTORY OF INSIDER TRADING LAWS IN INDIA

27
Making connections between the past and the present is critical for gaining a thorough
understanding of the current situation. Global awareness of the nature, impact, and significance of
insider trading has increased dramatically. It has taken a long time to understand the true
consequences of insider trading. Insider trading regulations are the result of many lessons learned
in the past. When discussing the current state of affairs, it is necessary to understand the history of
insider trading as well as the development of legislation to regulate it.

The first record of securities transactions in India comes from loan securities issued by the East
India Company in the 18th century. Bank shares including those of Chartered Bank, Oriental Bank,
and Bank of Bombay, had started trading in Bombay by the 1830s. The Association of Bombay,
later known as the Bombay Stock Market(BSE), was India's first stock exchange and was formally
established in 1875. The BSE has the highest market capitalization, new capital raised, secondary
market turnover, capitalization, number of listed companies, and paid-up capital. It is also the
oldest market, with permanent accreditation that is renewed every five years.

2.3.1 Evolution of Committees in making Insider Trading Regulations

The Morrison Committee was established in 1936 to make laws that would regulate trading
in securities and discourage insider trading. In May 1943, the Defence of India Act, 1939 was
passed, and for the first time it contained a section addressing the capital problem. The
establishment of the Office of Controller of Capital Issues was advised by the Morrison
Committee. The Office of the Controller of Capital Issuance was authorized to issue securities,
including the number, type, and price of securities, among other things. In 1992, the Capital Issue
Act as well as the position of the Controller of Capital Issue (CCI) was repealed as part of the
liberalization process in India. The Thomas Commission was a ground-breaking panel that studied
existing legal systems worldwide, focusing in particular on the legal system in the United States.

The committee who Recommended Prohibition of Insider Trading

YEAR COMMITTEE FINDINGS

28
 1. suggested establishing the National Investment
Commission on the same model as the Securities
1948 Thomas Committee and Exchange Commission (SEC) in the United
States

1. observed a trend of corporate directors engaging

in illegal stock trading

2. believed it was critical to impose an obligation on

a company's director, as well as anyone assumed
to be a director, to notify the company of all
1950 Bhaba Committee matters pertaining to the director's shares and
debentures.

3. determined that unless a director or a person

presumed to be a director is required by law to
inform a company of critical information, the
company's register of directors' holdings will be
impossible to keep up with. Sections 307 and 308
of the Companies Act of 1956 were adopted in
this manner.

1. was formed to investigate sections 307 and 308

of the Companies Act, as well as the Monopolies
and Restricted Trade Practices Act of 1969.

2. The Committee had worked diligently to reach

the conclusion that Sections 307 and 308 of the
1977 Sachar Committee Companies Act of 1956 were insufficient to
prevent insider trading. The Committee
emphasized the importance of disclosing to

29
 shareholders the transactions of directors and
other key managerial personnel in the sale and
acquisition of shares.

1. The Patel Committee defines insider trading as

the trading of a company's shares by individuals
associated with or in the company's management
based on confidential, price-sensitive
information about the company's operations that
they have access to but that is not disclosed to
others.

2. The Patel Committee conducted a thorough

1986 Patel Committee investigation into the operation of stock
exchanges and made several recommendations.
According to the Patel Committee's findings,
insider trading, for example, should be made a
criminal offence.

1989 Abid Hussain 1. According to the Committee's findings, insider

Committee trading should be punishable by both civil and
criminal penalties.
2. During this time, the SEBI began the process of
implementing the legislative framework that will
govern the behavior of all major market
stakeholders, namely issuers, intermediaries, and
exchanges.
3. In its report, a different committee headed by
Kumar Mangalam Birla emphasized the value of
good governance and went into more detail about
the applicability of the insider trading ban.

30
 1. The Committee has made a number of
recommendations to India's legal framework
regarding the prohibition of insider trading, with
the goal of making this area of regulation more
2014 Sodhi Committee predictable, precise, and clear by proposing a
combination of principles-based regulations and
rules.
2018 Vishwanathan 1. The committee made a number of
Committee recommendations, including that the compliance
officer should be financially literate and that
names of people with whom information is
shared be added to a structured digital data base.

2.3.2 Legislation against Insider Trading in India

Although there were stock exchanges before the implementation of Bombay Securities Contracts
Control Act 1925 which went into effect on January 1, 1926, there was no statutory law to regulate
and control the stock market. Because of this, there are numerous unregistered stock exchanges
and forward contract traders. Massive losses were incurred by investors between 1928 and 1938.
With the enactment of the Constitution which into force on January 26, 1950, the Central
Government took over management of stock exchanges and forward markets. Government group
like the Thomas Committee of 1948 studied, among other things, the US prohibitions on short
swing gains under Section 16 of the Securities Exchange Act of 1934 in the 1940s, which is when
for the first time insider trading in India became prevalent.

2.3.3 Meaning of Insider Trading Laws

‘insider trading laws’ means the following provisions of securities laws-

i. Section 15G of the Act;

ii. regulation 3 of these regulations;

31
iii. regulation 4 of these regulations;

iv. regulation 5 of these regulations; and

v. regulation 9 or regulation 9A of these regulations, in so far as they pertain to trading or

communication of unpublished price sensitive information.

SELF ASSESSMENT QUESTION (SPEND TIME: 2 MINUTES)

1. What is the meaning of insider trading laws?

……………………………………………………………………………..

………………………………………………………………………..

……………………………………………………………………………..
2.4 IMPORTANT DEFINITIONS

2.4.1 Insider

The definition of "insider" is intended to bring within its reach any person who is in
possession of or has access to unpublished price sensitive information. Various circumstances are
provided for such a person to demonstrate that they have not indulged in insider trading. The onus
of showing that a certain person was in possession of such information at the time of trading is on
the person levelling the charge, after which the person who has traded may demonstrate that he
was not in such possession or that he has not traded.

INSIDER [Reg 2(g)]

means any person who is

a) a connected person OR b) in possession of a connected

person or having access to
unpublished price sensitive
information
2.4.2 Connected Person

32
 Connected person are those who have a relationship with a company that allows
them access to unpublished price sensitive information. The legal presumption that
immediate family members and other categories of people are connected is rebuttable.

According to reg 2(d) connected person means:

1) any person who has been associated with a company, directly or indirectly, in any capacity
during the six months prior to the act has access to unpublished price sensitive information
or is reasonably expected to allow such access. This includes being in a contractual,
fiduciary or employment relationship with the company, being a director, officer or
employee of the company, or having a professional or business relationship between
himself and the company.
2) Connected persons includes an immediate relative of connected persons, an intermediary,
an investment company, trustee company, asset management company or an employee or
director thereof, an official of a stock exchange or clearing house or corporation, a member
of board of trustees of a mutual fund or a member of the board of directors of a public
financial institution, an official or an employee of a self-regulatory organization recognised
or authorized by the Board, a banker of a company, or a concern, firm, trust, Hindu
undivided family, company or association of persons wherein a director of a company or
his immediate relative or banker of the company has more than ten per cent of the holding
or interest.

2.4.3 generally available information

According to [Reg 2(e)] generally available information means information that is accessible to
the public on a non-discriminatory basis;

The above definition of generally available information is intended to help clarify and appreciate
price sensitive information, such as unpublished price sensitive information published on a stock
exchange's website. Information published on the website of a stock exchange, would ordinarily
be considered generally available

2.4.4. trading.

33
According to [Reg 2(l)] trading means and includes subscribing, buying, selling, dealing, or
agreeing to subscribe, buy, sell, deal in any securities, and "trade" shall be construed accordingly.

2.4.5 Unpublished Price Sensitive Information (UPSI)

According to Reg 2(n) means Information relating to a company or its securities that is not
generally available is likely to materially affect the price of the securities, including financial
results, dividends, changes in capital structure, mergers, de-mergers, acquisitions, delisting,
disposals and expansion of business, and changes in key managerial personnel.

SELF ASSESSMENT QUESTION (SPEND TIME: 5 MINUTES)

1. What is the meaning of insider and UPSI?

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

2.5 RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS

2.5.1 Communication or procurement of unpublished price sensitive information.

[Reg 3]

Insider shall not communicate any UPSI No person shall procure from or cause the
relating to a company or securities listed or communication by any insider of unpublished
furtherance of legitimate purposes, price sensitive information, relating to a
performance of duties, or discharge of legal company or securities listed or proposed to be
obligations listed, except in furtherance of legitimate
purposes, performance of duties or discharge
of legal obligations.

34
 entail an obligation to make an open offer under the takeover
regulations where the board of directors of the listed company is of
informed opinion that sharing of such information is in the best
interests of the company

EXCEPTIONS not attract the obligation to make an open offer under the takeover
regulations but where the board of directors of the listed company is
of informed opinion that sharing of such information] is in the best
interests of the company and the information that constitute
unpublished price sensitive information is disseminated to be made
generally available at least two trading days prior to the proposed
transaction being effected in such form as the board of directors may
determine to be adequate and fair to cover all relevant and material
facts.

The above exception mandates the execution of agreements to

contract confidentiality and non-disclosure obligations between
board of directors and the parties and such parties shall keep
information so received confidential.

2.5.2 Trading when in possession of unpublished price sensitive information

• When in possession of unpublished price-sensitive information, an insider is not permitted

to trade in securities that are listed or proposed to be listed on a stock exchange.

• Connected persons to prove that they did not possess sensitive price information

SELF ASSESSMENT QUESTION (SPEND TIME- 5 MINUTE)

1. Explain in brief the concept of Communication or procurement of unpublished price
sensitive information
……………………………………………………………………………..

35
 2.6 DISCLOSURES OF TRADING BY INSIDERS

2.6.1 General provisions.

This Chapter requires the public disclosure of trades made by the person in question, their immediate
relatives, and other people for whom the person makes trading decisions. By trading while in
possession of unpublished price-sensitive information, it is intended to prevent abuse. Trading in
derivatives of securities must be disclosed, and the traded value of the derivatives must be taken
into consideration. The company must keep the disclosures on file for a minimum of five years.

2.6.2 Disclosures by certain persons

Initial Disclosures Continual Disclosures Other Disclosures

By Connected Persons

Personnel on appointment as Promoters and directors must Company may require other
a key managerial personnel disclose the number of connected persons to disclose
or director of a company must securities acquired or their holdings and trading in
disclose their holding of disposed of within two securities of the company in
securities of the company as trading days of a transaction order to monitor compliance
on the date of appointment if the value of the securities with regulations.
within seven days of traded whether in one
becoming a promoter. transaction or a series, of
transactions over any
calendar quarter exceeds ten
lakh rupees or such other
value as may be specified.
Companies must notify the
stock exchange of any trading

36
 within two trading days of
receiving the disclosure or
becoming aware of it.

2.6.3 Codes Of Fair Disclosure And Conduct

2.6.3.1 Code of Fair Disclosure

Every company that has stock listed on stock exchange is required to create and publish a
code of conduct and set a guideline for fair disclosure of price sensitive information that is
unpublished price sensitive information. This covers the principles such as information equality,
dividend policies, pursuit of inorganic growth, calls and meetings with analysts, and the
publication of transcripts of such calls and meetings. The code must be communicated to the stock
exchanges as soon as possible

2.6.3.2 Code of Conduct

The board of directors of listed companies and the organisation of every intermediary shall
formulate a code of conduct to regulate, monitor and report trading by designated persons and
immediate relatives of designated person, adopting the minimum standard set out in Schedule B
39 and Schedule C. This must be done without diluting the provisions of these regulations.

2.6.3.3 Principles of Fair disclosure for purpose of code of practices and procedures for
disclosure of unpublished price sensitive information.

37
1. Prompt public disclosure of unpublished price sensitive information that could influence price
discovery as soon as credible and concrete information becomes available in order to make
such information widely available.
2. Uniform and universal dissemination of unpublished price sensitive information in order to
avoid selective disclosure.
3. Designation of a senior officer as chief investor relations officer to handle information
dissemination and the disclosure of unpublished price sensitive information.
4. Prompt dissemination of unpublished price sensitive information that is selectively,
inadvertently, or otherwise disclosed in order to make such information widely available.
5. Appropriate and fair responses to regulatory authorities' questions about news reports and
requests for verification of market rumours.
6. Ensuring that information shared with analysts and research personnel is not price sensitive
and unpublished.
7. Developing best practises for creating transcripts or records of meetings with analysts and
other investor relations conferences for posting on the official website to ensure official
confirmation and documentation of disclosures made.
8. Need-to-know handling of all unpublished price sensitive information
2.6.3.4 Minimum Standards for Code of Conduct for Listed Companies to Regulate,
Monitor and Report Trading by Designated Persons

1. The compliance officer shall report to the board of directors, specifically to the Chairman of
the Audit Committee, if any, or to the Chairman of the board of directors at such frequency
as the board of directors may specify [but not less than once a year].

2. All information shall be handled on a need-to-know basis within the organisation, and no
unpublished price sensitive information shall be communicated to any person except in
furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.
The code of conduct shall contain norms for appropriate Chinese Walls procedures, and
processes for permitting any designated person to "cross the wall".

3. Designated Persons and immediate relatives of designated persons in the organisation shall
be governed by an internal code of conduct governing dealing in securities.

38
4. Designated persons may execute trades subject to compliance with regulations, but the trading
window must be closed when the compliance officer determines that a designated person or
class of designated persons can reasonably be expected to have possession of unpublished
price sensitive information. Designated persons and their immediate relatives must not trade
in securities when the trading window is closed.

5. Trading restriction period should be applied from the end of every quarter until 48 hours after
the declaration of financial results. The gap between clearance of accounts by audit committee
and board meeting should be as narrow as possible and preferably on the same day to avoid
leakage of material information]

SELF ASSESSMENT QUESTION (SPEND TIME: 5 MINUTE)

1. Explain the concept of Disclosures by certain persons.

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..
2.7 INSTITUTIONAL MECHANISM FOR PREVENTION OF INSIDER TRADING

According to Regulation 9A:

1. To ensure compliance with the requirements of these regulations to prevent insider trading,
the Chief Executive Officer, Managing Director, or other analogous person of a publicly
traded company, intermediary, or fiduciary shall establish an adequate and effective system
of internal controls.

2. The following must be part of the internal controls:

39
a) All employees who have access to unpublished price sensitive information are identified
as persons in accordance with the following rules:
b) All unpublished price sensitive information must be identified and maintained in
confidence.
c) Appropriate limitations on the dissemination or acquisition of unpublished price sensitive
information shall be imposed as required by these regulations.
d) lists of all employees and other people with whom unpublished price-sensitive information
is shared must be maintained, and all such employees and people must sign confidentiality
agreements or receive notice.
e) All other pertinent conditions outlined in these regulations must be satisfied; (f) a routine
process review should be carried out to gauge the efficiency of such internal controls.

3. The board of directors of each listed company, as well as the board of directors or head(s)
of the intermediaries and fiduciaries organisation, shall ensure that the Chief Executive
Officer, Managing Director, or other analogous person complies with regulation 9 and sub-
regulations (1) and (2) of this regulation.

4. The Audit Committee of a publicly traded company, or another analogous body for an
intermediary or fiduciary, shall review compliance with the provisions of these regulations
at least once per fiscal year and ensure that internal control systems are adequate and
effective.

5. Every listed company shall develop written policies and procedures for investigating leaks
of unpublished price sensitive information or suspected leaks of unpublished price sensitive
information, which shall be approved by the company's board of directors, and shall
accordingly initiate appropriate inquiries upon becoming aware of a leak of unpublished
price sensitive information or suspected leak of unpublished price sensitive information
and promptly notify the Board.

6. The listed company must have a whistleblower policy and make it known to employees in
order for them to report instances of unpublished price sensitive information leaks.

40
 7. If a listed company initiates an inquiry in the case of a leak of unpublished price sensitive
information or a suspected leak of unpublished price sensitive information, the relevant
intermediaries and fiduciaries must cooperate with the listed company in connection with
such inquiry.

2.8 COMPARISON OF INSIDER TRADING

2.8.1 Introduction to Companies Act

The SEBI (Prohibition of Insider Trading) Regulations, 2015 take effect on the 15th of May, 2015,
"when a company is formed under the Companies Act and is listed on a Stock Exchange after
fulfilling the listing agreement". It is critical to understand Section 195 of the Companies Act of
2013. Section 195 of the Companies Act of 2013, which is part of Chapter XII, which deals with
board meetings and powers, is primarily responsible for the prohibition on insider selling of
securities. Section 195 of the Companies Act, 2013, has been removed from the Companies
(Amendment) Act, 2017, because the SEBI (Prohibition on Insider Trading) Regulation, 2015
governs the concept of insider trading. It was only in use for a short time.

Insider Trading as per Sec. 195 of the Companies Act,2013

The Act of 2013 prohibits insider trading, and any insider as defined in the Act who is found guilty
of insider trading faces up to five years in prison and/or a monetary penalty. Insider trading is
defined by the Act as actions taken by directors, key management personnel, or any other person
or their agents dealing with securities or their agents based on non-public price-sensitive
information, either directly or indirectly. Section 195 of the Act prohibited key management
personnel from communicating sensitive information. This section was omitted, however, because
Section 458 of the Companies Act delegated to SEBI the authority to conduct trials against the
accused. Since 1992, the SEBI Regulations on Insider Trading have been monitoring such activity.
Insider Trading is currently governed by the SEBI (Prohibition of Insider Trading) Regulations,
2015, as well as Sections 12A and 15G (Penalty for Insider Trading) of the SEBI Act.

41
2.8.2 Comparison of Insider Trading as per the SEBI ( Prohibition of Insider Trading)
Regulation,2015 with Companies Act, 2013

SEBI ( PROHIBITION THE COMPANIES

OF ACT 2013
INSIDER TRADING)
REGULATION, 2015
INSIDER includes any person states about the non-
who is connected with public price sensitive
the company having information
access to unpublished
price sensitive
information
IMMEDIATE R.2(f) defines an a relative within the
RELATIVE immediate relative provisions of the
Regulations may not be a
relative within the
meaning of the
Companies Act of 2013
IMPRISONMENT no jail term under term up to five years if
Section 15G of the any person contravenes
SEBI Act,1992. Action the provisions of S 195,
in case of insider trading refers to Directors, Key
by any connected Managerial Persons, and
person will have to be any other person of their
initiated by SEBI and agents acting directly or
the current Regulations indirectly who could be
will be followed booked for violation of
Section 195

42
 If any connected person is found guilty, the penalty set out in Section 15G of the SEBI
Act of 1992, as amended, will be applied and not Companies Act, 2013.

2.8.3 Case Laws

1. N. Narayanan v. Adjudicating Officer (2013(3) R.C.R (Civil) 68.)

The Supreme Court upheld a Securities Appellate Tribunal (SAT) appeal

concerning the appellant, who was the sole director of Pyramid Samara Theatre Limited
(PSTL). The SAT upheld a Securities and Exchange Board of India (SEBI) order restricting
the appellant from dealing in securities for two years and imposing a monetary penalty of
Rs. 50 lacs. It was discovered that the company's financial results as disclosed to stock
exchanges were inflated and did not represent the true and fair state of affairs of the
company. The Supreme Court upheld SEBI and the adjudicating officer's orders and found
the appellant guilty of violating both the SEBI Act and the 2003 Regulations. The
judgement does not establish any new legal principles, but it emphasises the importance of
efficient capital markets, which necessitate a strict disclosure regime. It was also observed
that economic offence is a serious crime that, if not dealt with properly, will have an impact
not only on the country's economic growth but will also slow the inflow of foreign
investment.

2. Arun Kumar Agrawal vs. Union of India. (2014) 2 SCC 609.

In the case, the Supreme Court discussed and defined the role of SEBI in the Indian
securities market. It has been observed that SEBI was established to protect the interests
of securities investors and to promote the growth of the securities market. The SEBI Act
grants the Board broad authority to take whatever actions it deems necessary to carry out
its responsibilities. The breadth of SEBI's powers leaves no doubt that it is the supreme
authority for controlling and regulating the Indian securities market. In this era of
globalization, the functions performed by SEBI are critical to the nation's well-being.

3. Sreejesh Harindranath vs. SEBI (EAD-7/BD /NR/2020-21/7794-95)

Harindranath, SpiceJet Ltd.'s General Manager and Financial Analyst, accessed and
traded on Unpublished Price Sensitive Information (UPSI) about the company's financial

43
 condition. He also shared the same information with his brother, Sandeep AC, who traded
on it without disclosing it to the company. SEBI conducted an investigation and
determined that Harindranath had violated Regulation 3(1) of the SEBI (PIT) Regulations,
2015 as well as Section 12A(e) of the SEBI Act, 1992. Sandeep AC was found to have
violated SEBI Act Regulation 3(2) and Sections 12A(d) and (e). As a result, SEBI fined
Harindranath Rs. 23 lakhs and Sandeep AC Rs. 12 lakhs under Section 15HB of the SEBI
Act. Under Section 15 G (ii) of the SEBI Act, Harindranath has been ordered to pay the
money.

2.9 ROLE OF SEBI IN PREVENTING INSIDER TRADING

Insider trading is the practice of using confidential information about a company's buying
and selling of securities, which is not yet available to the general public, for personal gain.
To curb insider trading, the SEBI (Prohibition of Insider Trading) Regulations, 1992 were
introduced, which were later replaced by the SEBI (Prohibition of Insider Trading) Rules,
2015, and updated in 2019 to make them more robust. The Sodhi Committee was formed
to review the previous regulations and suggest measures to combat insider trading.

The Black’s Law Dictionary defines insider trading as the use of material non-public
information in trading the shares of a company by a corporate insider or any other person
who owes a fiduciary duty to the company

SEBI has implemented these rules to prohibit and penalize the use of unpublished price-
sensitive information (UPSI) about a company's securities. The fiduciary relationship
between directors, key management personnel, and the company is crucial in determining
the legality of insider trading.

2.9.1. Powers and Penalties of SEBI in curbing Insider Trading

1. SEBI must determine who is an insider to track insider trading, including key
management staff, the board of directors, auditors and individuals linked to promoters.

44
2. Close relatives of insider are also considered insiders and have access to sensitive
information.

3. Unpublished price sensitive information such as big contract or financial data is the
second important element factor to track insider trading.

4. SEBI’s investigation power have become increasingly important in tacking insider

trading.

5. SEBI can investigate suspected transactions that break insider trading rules under its
broad powers given by the SEBI Act.

6. SEBI can request information and records, perform investigations, question those
connected to the stock market or intermediaries, and inspect account books and documents.

7. SEBI can act as an investigating authority when harmful transactions are happening in
the security markets that affect investors.

8. SEBI can identify the individuals responsible for losses in the security market and
subject them to imprisonment and a fine if they fail to provide relevant information or
support the investigation.

9. The Bombay High Court has stated that SEBI has broad powers under the SEBI Act,
including the power to record calls from telecommunication companies, but these powers
should be used only in extraordinary circumstances.

2.9.2. Establishment Of Evidence For The Offence Of Insider Trading

The concept of men’s rea, or criminal intent, is not explicitly mentioned in the regulations
or acts related to insider trading, but its importance has been discussed in judicial
pronouncements. The Securities and Exchange Board of India (SEBI) Act considers the
act of insider trading itself as sufficient for an individual to be considered guilty of the
offence. However, the interpretation of evidence and the requirement for men’s rea may
vary depending on specific cases and the decisions of the SEBI and Securities Appellate
Tribunal (SAT).

45
 In the case of Rakesh Agarwal v. SEBI, SAT has held that “motive or the intention to
commit the insider trading offence shall be taken into consideration which means men’s
rea is also required. Later, the Bombay High Court in the case of SEBI v. Cabot
International Capital Corporation, it has decided that the offences related to penalty for
insider trading seem to be in civil offence.

When prosecuting an insider trading case, the burden of proving criminal intent lies with
the prosecutor, who must demonstrate that the defendant knowingly committed the offence
and was aware that their actions would breach regulations and acts concerning insider
trading. Overall, the concept of men’s rea may be considered in insider trading cases, but
its relevance may vary depending on the specific circumstances and legal interpretations.

SELF ASSESSMENT QUESTION (SPEND TIME: 5 MINUTES)

1. Explain the powers and penalties of SEBI in curbing insider trading

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

SELF ASSESSMENT QUESTIONS (SPEND TIME: 5 MINUTES)

1. What is the meaning of Front Running?

……………………………………………………………………………..

……………………………………………………………………………..
2. Explain the Role of SEBI as provided under the Act of 1992.
……………………………………………………………………………..

……………………………………………………………………………..

46
2.11 SUMMARY
• To curb insider trading SEBI formulated SEBI (Prohibition of Insider Trading)
Regulations, 2015.
• The Insider Trading Regulations comprises of 5 chapters and 5 schedules.
• Insider means any person who is a connected person or in possession of a connected person
or having access to unpublished price sensitive information;
• The regulation also imposes Restrictions on Communication and Trading of unpublished
price sensitive information
• Disclosure of trades must be of those executed by the person concerned, including
immediate relatives and other persons for whom the person takes trading decisions.
• The code have set the Minimum Standards for Code of Conduct for Listed Companies to
Regulate, Monitor and Report Trading by Designated Persons

2.12 TERMINAL QUESTIONS

1. What are the restrictions on communication and trading by insiders?

2. Explain in detail the Codes of Fair Disclosure and Conduct.
3. What is the institutional mechanism for prevention of insider trading ?
4. Distinguish between Insider Trading as per the SEBI ( Prohibition of Insider Trading)
Regulation,2015 with Companies Act,2013.
5. What is the Role of Regulator in Providing a Manipulation in Free Market ?

47
MODULE III

___________________________________________________________________________

UNIT III

3.1. Alternative Investment Fund Regulations

3.2. Mutual Funds Regulations in India

3.3. Collective Investment Scheme

___________________________________________________________________________

In the earlier unit you were introduced to the SEBI (Prohibition of Insider Trading) Regulation,
2015 and provisions contemplated therein. In this block, you will be introduced with the concept
of Alternative Investment Fund Regulations, Mutual Funds Regulations in India and Collective
Investment Scheme.

ALTERNATIVE INVESTMENT FUND

TABLE OF CONTENTS

3.1.1 Alternative Investment Fund: Introduction

3.1.2 Objective
3.1.3 Registration Of Alternative Investment Funds
3.1.4 Angel Funds
3.1.5 Disclosure Of Information To Maintain Transparency
3.1.6 Winding Up
3.1.7 Summary
3.1.8 Terminal Questions

48
MUTUAL FUNDS REGULATIONS IN INDIA

TABLE OF CONTENTS

3.2.1 Mutual Funds: Introduction

3.2.2 Objective
3.2.3 Key Terminology
3.2.4 Registration Of Mutual Fund
3.2.4.1 Application For Registration And Eligibility Criteria
3.2.4.2 Criteria For Fit And Proper Person
3.2.5 Constitution And Management Of Mutual Fund And Operation Of Trustees, Etc.
3.2.5.1 Trust Deed Registration
3.2.5.2 Contents Of Trust Deed
3.2.5.3 Disqualification For Appointment As Trustees
3.2.5.4 Approval For Appointment For Trustees
3.2.5.5 Rights And Obligations Of The Trustees
3.2.6 Constitution And Management Of Asset Management Company And Custodian
3.2.6.1 Application By An Asset Management Company
3.2.6.2 Appointment Of An Asset Management Company
3.2.6.3 Restrictions On Business Activities Of The Asset Management Company
3.2.6.4 Asset Management Company And Its Obligations
3.2.7 Penalties
3.2.8 Summary
3.2.9 Terminal Questions

COLLECTIVE INVESTMENT SCHEME

TABLE OF CONTENTS

3.3.1 Meaning And Introduction Of Collective Investment Scheme Under Sebi Act
3.3.2 Objective
3.3.3 Sebi (Collective Investments Scheme) Regulaton, 1999

49
 3.3.3.1 Important Terminology And Definitions
3.3.4 Registration Of Collective Investment Management Company (Cimc)
3.3.4.1 No Person Other Than Cims To Launch Scheme
3.3.4.2 Application For Grant Of Certificate
3.3.4.3 Application By Existing Collective Investment Schemes
3.3.4.4 Application To Conform To The Requirements And Furnishing Of
Information
3.3.4.5 Conditions For Eligibility
3.3.4.6 Grant Of Certificate
3.3.4.7 Terms And Conditions
3.3.5 Business Activities And Obligations Of Collective Investment Management Company
3.3.5.1 Restrictions On Business Activities
3.3.5.2 Obligations Of Cimc
3.3.5.3 Submission Of Information And Documents
3.3.6 Trustees And Their Obligations
3.3.6.1 Registration Of Trust Deed Of Collective Investment Scheme And Its Contents
3.3.6.2 Appointment Of And Eligibility For Appointment As Trustee
3.3.6.3 Rights And Obligation Of Trustee
3.3.6.4 Agreement With Cimc
3.3.6.5 Termination Of Trusteeship
3.3.6.6 Termination Of The Agreement With The Cimc
3.3.7 Summary
3.3.8 Terminal Questions

50
ALTERNATIVE INVESTMENT FUND

3.1.1 ALTERNATIVE INVESTMENT FUND: INTRODUCTION

• The AIF Regulations are intended to control funds that pool or raise private capital from
institutional investors or high net worth individuals with the intention of investing that
capital in accordance with a specified investment strategy for the benefit of the investors
and the fund manager, regardless of their place of residence. According to these laws, any
business wishing to manage a private pool of cash for the purpose of investing in securities
or operating as an Alternative Investment Fund ("AIF") must register with SEBI.
• AIF can be established in India in the form of trust or a company or a LLP or body
corporate. It is a private pooled investment scheme where funds are collected from public
as per the investment policy for benefits of investors and specifically to which the provision
of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities
and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any
other regulation shall not be applicable.
• Following shall not be consider as AIF: -
- Employee Stock Option and Purchase Scheme (ESOP) trusts
- Employee welfare trust or gratuity trust
- Other special purpose vehicles not established by fund managers, including
securitization trusts, regulated under a specific regulatory framework;
funds managed by a company registered with the Reserve Bank of India under Section 3 of
the Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, or a company engaged in the reconstruction of financial assets, as well
as any such pool of funds that are subject to direct regulation by another Indian regulator.
• Equity Linked Instruments: - It involves the instruments which are convertible into equity
shares or share warrants, preference share, debentures compulsorily or optionally
convertible into equity.
• Hedge Fund: - It is AIF which includes diverse of complex trading strategies and invests
and trades in securities having diverse risks or complex products including listed and
unlisted derivatives.

51
 • Infrastructure Fund: - AIF which mainly invests in unlisted or listed securities or special
purpose vehicle engaged in or formed for the purpose of operating, developing or holding
infrastructure projects.
• Private Equity Fund: - AIF primarily invests in equity or equity related instrument or
partnership interest of investee company according to stated objective.
• SME (Small Medium Enterprise) Fund: - AIF invests in unlisted securities which are
SME’s or into the listed securities of SME on SME exchange.
• Social Venture Fund: - Social Venture means a company or venture capital or LLP formed
with the purpose of social welfare or solving social problem. The AIF invests in such
securities or units of social ventures which satisfies social performance.
• Unit: - means beneficial interest of the investors in the Alternative Investment Fund or a
scheme of the Alternative Investment Fund and shall include shares or partnership interests.
• Venture Capital Fund: - The AIF which invests primarily in unlisted securities of startups
and early-stage venture capital mainly involved in new product, services, technologies or
IPR based activities and also include angle fund.
• Venture Capital Undertaking: - It is a domestic company which is not listed any stock
exchange in India while making investment; and engaged in business providing services,
production or manufacture things, however, does not include Non-Banking Financial
Company (NBFC), gold financing, activities not permitted under industrial policy or any
other activity specified by board.

3.1.2 OBJECTIVE

• The reading of this module would enhance the concepts of students in respect of
a) Meaning and types of Alternative Investment Fund
b) Registration of Alternative Investment Fund
c) Transparency to be maintained
d) Winding Up procedure of Alternative Investment Fund

52
 ___________________________________________________________________________

3.1.3 REGISTRATION OF ALTERNATIVE INVESTMENT FUNDS

Registration of AIF

No Person shall act as AIF

unless obtained the Certificate
of Registration

Seek Registration in any

of the three Categories

Category I
Investment into start-
Category II
ups or early-stage Category III
ventures or social Not fall in Category I
It includes the diverse or
ventures or SME or and III and does not
complex trading strategies
infrastructure or other borrow leverage or
through investment in
sectors where borrowing other than to
listed or unlisted
government considers meet day-to-day
derivatives.
it necessary and operation.
desirable.
•

3.1.4 ANGEL FUNDS

53
• Angle Funds means a sub-category of Venture Capital Fund under Category I-
Alternative Investment Fund that raises funds from angel investors and invests in
accordance with the provisions of this Chapter.
• The person who invests or proposes to invest into the angle funds and satisfies one of the
below-mentioned condition: -
Individual investor who has net tangible assets of at least two crore rupees excluding value
of his principal residence and who has early-stage investment experience or experience
as entrepreneur or is a senior management professional with at least 10 years of
experience.
• Investment by Angle Fund: - Angle funds shall only invest in venture capital undertaking
which:
a) Incorporated during preceding three years from date of investment;
b) Turnover less than 25 Cr. Rupees;
c) Not promoted or sponsored by or related to any industrial group whose turnover
exceeds 300 Cr rupees;
d) Not companies with family connections with any angle investor;
e) Angel funds shall not invest in associates;
f) 3 years lock-in period for the angel funds who invest in venture capital;
g) Angel fund shall not invest more than 25% of the total investments under all its schemes
in one venture capital undertaking.

Self Assessment Question: What is Angel Fund? (Spend 2 minutes)

Answer:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

54
3.1.5 DISCLOSURE OF INFORMATION TO MAINTAIN TRANSPARENCY

• The AIF must disclose entire information for the purpose of maintain the transparency and
such information is: -
a) Information in respect of financial management risk, operational portfolio etc;
b) Any fee levied by manager or sponsor and fees charged by AIF or Trustee;
c) Any inquires or legal actions initiated by authorities;
d) Any material lability aroused;
e) In case of any breach of provision of placement memorandum or agreement;
f) Change in control of sponsor or manager or investing company;
g) Alternative Investment Fund shall provide at least on an annual basis, within 180
days from the year end, reports to investors including the following information, as
may be applicable to the Alternative Investment Fund:-

a. financial information of investee companies.

b. material risks and how they are managed which may include:

i. concentration risk at fund level;

ii. foreign exchange risk at fund level;

iii. leverage risk at fund and investee company levels;

iv. realization risk (i.e. change in exit environment) at fund and investee
company levels;

v. strategy risk (i.e. change in or divergence from business strategy) at

investee company level;

vi. reputation risk at investee company level;

vii. extra-financial risks, including environmental, social and corporate

governance risks, at fundand investee company level

.
h) Category III AIF shall disclose its quarterly reports to investors;

55
3.1.6 WINDING UP

• Under the following circumstances the AIF shall be wound up: -

a) When tenure of AIF or other schemes launched by AIF gets over; or
b) When winding up of AIF is in the interest of investors as per the opinion of trustee; or
c) When 75% investors pass a resolution of winding up in their meeting; or
d) If SEBI directs in the interest of investors.
• The AIF established as LLP and Company will be wound up as per the provisions of LLP
or Companies Act, 2013 respectively.
• The AIF which is body corporate shall be wound up according to the provisions of the
statute under which it is constituted.
• Procedure for winding up: -

3.1.7 SUMMARY

• The AIF Regulations are intended to control funds that pool or raise private capital from
institutional investors or high net worth individuals with intention to invest such capital
into various schemes.
• Understanding of several funds such as hedge fund, venture capital fund etc is significant.
• Registration and winding up of Alternative Investment Fund is discussed in detail.
• How maintenance of transparency should be made is also described in this module.

___________________________________________________________________________

TERMINAL QUESTIONS

1. What is mean by Alternative Investment Fund?

2. Explain registration of AIF?

3. Explain the procedure of winding up of the AIF?

___________________________________________________________________________

56
MUTUAL FUNDS REGULATIONS IN INDIA

3.2.1 MUTUAL FUNDS: INTRODUCTION

• A mutual fund is a type of trust that unites the savings of several participants who have
similar financial objectives. The funds raised are subsequently invested in assets such as
shares, debentures, and other capital market instruments. According to the number of units
they owned, the income generated by these investments and the capital gains realised are
distributed to the unit holders. Hence, a mutual fund is the best type of investment for the
average person since it provides the chance to invest in a variety of professionally managed
assets at a reasonable price.
• The mutual fund involves the managing of investor’s hard earn money and therefore it is
necessary to regulate mutual funds through SEBI (Mutual Fund) Regulation, 1999.
• Mutual Fund is a form of trust which has Sponsor, Trustees, Asset Management Company
(AMC) who works as frontline warriors and the Custodian, Registrar and Transfer Agent
(RTA), Auditor and Fund Accountants play a vital supportive role to those frontline
warriors. The trust is established by a sponsor or more than one sponsor who is like
promoter of a company. The trustees of the mutual fund hold its property for the benefit of
the unit holders.
AMC manages the funds by making investment in various securities and Custodian holds the
securities of various schemes of the fund in its custody. The trustees are vested with the
general power of superintendence and direction over AMC.
• Independency of directors has given emphasize in SEBI Regulation which requires that at
least two-third of the directors of trustee company or board of trustees must be independent
i.e. they should not be associated with the sponsors. In all 50% of directors of AMC must
be independent. All mutual funds are required to be registered prior to its launching in the
market.
• One basic question here arises after reading theoretical aspect of Mutual Funds is that how
Mutual Funds works in practical market?
The performance of Mutual Funds is denoted by Net Asset Value (NAV) which is the market
value of the securities held by the scheme. Like other securities in the market whose
market value changes on day-to-day basis, NAV of scheme also varies from day-to-day

57
 basis. The NAV per unit is the market value of securities of a scheme divided by the total
number of units of the scheme on any particular date. For example, if the market value of
securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10
lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20.
NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly
- depending on the type of scheme.
___________________________________________________________________________

3.2.2 OBJECTIVE

• The reading of this module would enhance the concepts of students in respect of
e) Registration of Mutual Funds, its operations and management
f) Establishment and Operations of Asset Management Companies
g) Penalties for non-compliance provisions along with landmark case law
h) Various Schemes of Mutual Funds

___________________________________________________________________________

3.2.3 KEY TERMINOLOGY

• Sponsor: - Sponsor means any person who, acting individually or in concert with another
body corporate, establishes a mutual fund. The Sponsor is the principal entity responsible
for creating the Mutual fund. The Sponsor could be compared to a business promoter. The
sponsor is responsible for appointing the trustees with SEBI's prior permission, establishing
an AMC in accordance with the Companies Act of 1956, and registering the trust with
SEBI. As sponsors are essential to a mutual fund's operation, therefore, SEBI has
established a set of stringent requirements for sponsor eligibility.
• Asset Management Company: - As per the Regulation 2(d) AMC means a company formed
and registered under the Companies Act 1956 (1 of 1956) or Companies Act, 2013 (18 of
2013) and approved by the Board under sub regulation (2) of regulation 21.
In simple terms the AMC is the investment manager of mutual fund which has responsibility
to take care the money of investors and assets of mutual funds.
• Trustee: - As per Regulation 2(y) mean the Board of Trustees or the Trustee Company who
hold the property of the Mutual Fund in trust for the benefit of the unit holders. Trustee

58
 works as a supervisory as its vital role is to ensure the protection of interest of investors
and to check compliance with the regulations of SEBI.
• Custodian: - Regulation 2(h) states that Custodian means a person who has been granted a
certificate of registration to carry on the business of custodian of securities under the
Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996. It is
a person who has custody of shares and securities of AMC. Further, it is liable for keeping
investment account of mutual fund.
• Registrar and Transfer Agent (RTA): - All investor records are updated and maintained by
the RTA. Investor servicing is the primary duty of the office and its branches. Processing
investor applications, purchase transactions, and redemptions by investors in various
schemes and programmes are among its duties.

___________________________________________________________________________

3.2.4 REGISTRATION OF MUTUAL FUND

3.2.4.1 Application for Registration

• The sponsor must submit a Form A application to the Board for the purpose of a mutual
fund to be registered. Each registration request made in accordance with regulation 3 must
be accompanied by the non-refundable application cost listed in the second schedule. Any
application that is not entirely complete will be rejected. As long as the applicant is given
a chance to fulfil the necessary requirements within the time frame, the Board may specify
before rejecting any such application.

Eligibility Criteria

• The applicant to obtain a certificate of registration must fulfil the following: -

- Sponsor must have Sound Track Record and General Reputation
- Fit and Proper person
- Exiting Mutual Fund > in the form of Trust, Trust Deed
- Sponsor has contributed or contributes at least 40% to the net worth of the AMC
- Director or Principal Officer of Mutual Fund > no guilty of fraud or not
convicted to any economic offence
- Appointment of trustees to act as trustees for the Mutual Fund

59
 - Appointment of AMC to manage the mutual fund and operate the scheme of
such funds
- Appointment of Custodian > To keep Custody of the Securities or Gold and
Gold related instrument or other assets of the mutual fund

Self Assessment Question: What are eligibility criteria for registration of Mutual Funds?
(Spend 5 minutes)
Answer:
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
______________________________________________
3.2.4.2 Criteria for fit and proper person

• Securities and Exchange Board of India (Criteria for fit and proper person) Regulations,
2004. The provisions of this regulation shall apply to all applicants or mutual funds.
• The registration granted to a mutual fund under regulation 9, shall be subject to the
following terms and conditions: -
a) the trustees, the sponsor, the asset management company and the custodian shall
comply with the provisions of these regulations;
b) the mutual fund immediately inform the board in case of any misleading or false
information or particulars submitted to the Board;
c) the mutual fund immediately inform the board in case of any material change
information or particulars submitted to the Board which have a bearing on the
registration granted by it;
d) payment of fees.

3.2.5 CONSTITUTION AND MANAGEMENT OF MUTUAL FUND AND OPERATION

OF TRUSTEES, ETC.

3.2.5.1 Trust Deed Registration:

60
A mutual fund is established as a trust, with the trust deed executed under the Indian Registration
Act, 1908 by the sponsor in favor of trustees.

3.2.5.2 Contents of Trust Deed:

The trust deed, as per Regulation 15, includes clauses safeguarding unit holders' interests and
outlined in the third schedule. It prohibits clauses limiting or extinguishing the trust's obligations
or indemnifying trustees or AMC for negligence.

3.2.5.3 Disqualification for Appointment as Trustees:

Regulation 16 specifies trustees must be of good standing, without moral turpitude, economic
offences, or violations of securities laws. AMC personnel, directors (including independent), or
employees cannot serve as trustees. At least two-thirds of trustees must be independent, not tied to
sponsors personally or professionally.

3.2.5.4 Approval for Appointment of Trustees:

Trustees must be appointed with prior approval of the Board. Current trustees can establish a
trustee company with Board consent.

3.2.5.5 Rights and Obligations of The Trustees:

Regulation 18 outlines trustees' responsibilities:

1. Ensure compliance of investments with regulations.

2. Obtain necessary information from AMC.

3. Ensure AMC has requisite systems and personnel before scheme launch.

4. Prevent undue advantages to AMC associates.

5. Ensure independent management of mutual fund schemes.

6. Hold funds in trust for unit holders.

7. Oversee all mutual fund transactions.

8. Notify Board of regulatory violations.

9. Manage changes in fund attributes transparently.

61
 10. Regularly review AMC's financial health.

11. Resolve conflicts of interest.

12. Provide detailed reports and certificates on fund activities.

13. Exercise due diligence in all trustee responsibilities.

3.2.6 CONSTITUTION AND MANAGEMENT OF ASSET MANAGEMENT COMPANY

AND CUSTODIAN

3.2.6.1 Application by an Asset Management Company:

• An application for approval of an Asset Management Company (AMC) must be made in
Form D.
• Similar provisions to those for mutual fund registration apply.
3.2.6.2 Appointment of an Asset Management Company:
• The sponsor or trustee can appoint an AMC approved by the Board, following eligibility
criteria.
• AMC appointments can only be changed with prior approval of the board or unit holders.
3.2.6.3 Restrictions on Business Activities of the Asset Management Company:
• AMC cannot act as trustee of any mutual fund.
• Business activities are restricted to management and advisory unless certain conditions
(like segregation of activities, capital adequacy, disclosure of conflicts) are met.
• Services to pooled assets like offshore funds are permitted if not in conflict with mutual
fund activities.
3.2.6.4 Asset Management Company and Its Obligations:
• AMC must ensure investments comply with regulations and business decisions are in the
best interest of unitholders.
• Responsible for acts of employees or procured personnel.
• Quarterly reports submission to trustees.
• CEO ensures compliance with regulations and risk management.
• Limits on securities transactions without justification.
• Prohibited use of sponsor's services for security transactions.

62
 • Detailed disclosures and reporting obligations to trustees.
• Code of conduct compliance required.
• Full disclosure of investment intentions in offer documents.

Self Assessment Question: Which terms and conditions shall be complied with by AMC?
(Spend 5 minutes)
Answer:
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_____________________________________________________
__________________________________________________________________________
3.2.7 PENALTIES

• 15-D: - Penalty for certain defaults in case of mutual funds: -

When a person who is registered with Board as CIS, including mutual fund scheme fails to
comply with terms and conditions of certificate of registration he shall be liable to a
penalty of one lakh rupees for each day during which such failure continues or one crore
rupees, whichever is less;
• 15-E: -Penalty for failure to observe rules and regulations by an asset management
company: -
When any AMC fails to comply the provisions in respect of restrictions on the activities of
AMC, such AMC shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less.
• 15-I: - Board has powers to appoint any officer not below the rank of a Division Chief as
an adjudicating officer for enquiry purpose and while such enquiry adjudicating officer has
power to summon and enforce attendance of any person who is well versed with facts and
circumstances and who shall produce any document which may useful and relevant for the
subject matter.
• 15-J: - Following factors an adjudicating officer must take into cognizance: -
a) amount of disproportionate gain or unfair advantage which made as a result of default;
b) amount of loss caused to an investor or group of investors as a result of the default;

63
 a) repetitive nature of the default.

Self Assessment Question: What are the penalties if non-compliance of provisions?

(Spend 2 minutes)
Answer:-
____________________________________________________________________
3.2.8 SUMMARY
____________________________________________________________________
____________________________________________________________________
• The mutual fund involves the managing of investor’s hard earn money and therefore it is
____________________________________________________
necessary to regulate mutual funds through SEBI (Mutual Fund) Regulation, 1999. The
funds raised through the mutual funds or its various schemes to be invested into the shares,
debentures and other capital market securities.
• Detail procedure in respect of appointment, operation, obligations of Asset Management
Company and appointment of Custodian is provided under this module.
• The penalty provision, in case Trustee or AMC or Custodian fails to comply provision of
regulation or SEBI act, has been discussed.
• The mutual funds have several schemes which is been introduced in this module.

___________________________________________________________________________

3.2.9 TERMINAL QUESTIONS

1. What is the meaning of Mutual Fund and Discuss about its various Schemes?

2. Explain the registration, constitution and operation of mutual funds?

3. Explain the Constitution and Management of Asset Management Company?

64
COLLECTIVE INVESTMENT SCHEME

3.3.1 MEANING OF COLLECTIVE INVESTMENT SCHEME UNDER SEBI ACT

• Introduction: - A trust-based plan known as a collective investment scheme is one that

consists of a pool of assets that is managed by a collective investment scheme manager and
is controlled by the Collective Investment Schemes Rules provided by SEBI. A common
type of investing that is open to everyone is collective investment schemes (CIS).
According on the amount of money each investor can invest, accordingly each of them will
have a proportionate share of the CIS portfolio. The component or portion of the CIS
portfolio that is owned by the investor is referred to as a "unit."
• Trust is popularly known as financial instrument. It permits the financial experts to invest
money on behalf of the CIS investor. A CIS is any plan or arrangement developed or made
available by a company that pools and uses investor contributions or payments in order to
generate revenue, product, or real estate while being managed on the investors' behalf.
• A Collective investment scheme is any scheme or arrangement, which satisfies the
conditions, referred to in sub-section (2) of section 11AA of the SEBI Act.
• Any scheme or arrangement made or offered by any company under which, -
a) the contributions, or payment made by the investors, by whatever name called, are
pooled and utilized for the purposes of the scheme or arrangement;
b) the contributions or payments are made to such scheme or arrangement by the investors
with a view to receive profits, income, produce or property, whether movable or
immovable, from such scheme or arrangement;
c) the property, contribution or investment forming part of scheme or arrangement,
whether identifiable or not, is managed on behalf of the investors;
d) the investors do not have day-to-day control over the management and operation of the
scheme or arrangement.
• The following are not considered as Collective Investment Schemes –
a) any scheme or arrangement made or offered by a co-operative society registered under
the Cooperative Societies Act,1912 or a society being a society registered or deemed
to be registered under any law relating to co-operative societies;

65
 b) any scheme or arrangement under which deposits are accepted by Non- Banking
Financial Companies (NBFC);
c) any scheme or arrangement is a contract of insurance under Insurance Act, 1938;
d) any scheme or arrangement providing for any scheme, pension scheme or the insurance
scheme framed under the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952;
e) any scheme or arrangement under which deposits accepted under Companies Act,
1956;
f) any scheme or arrangement under which deposits accepted by a company declared as
Nidhi or a Mutual Benefit Society under Companies Act, 1956
g) any scheme or arrangement comes under limits of Chit business;
h) any scheme or arrangement where contributions were made in nature of Mutual Funds.

___________________________________________________________________________

3.3.2 OBJECTIVE

• The reading of this module would enhance the concepts of students in respect of
i) Collective Investment Scheme and its registration
j) Nature and Establishment of Collective Investment Management Company
k) Trustees and their obligations
l) Procedure for winding up of company

___________________________________________________________________________

3.3.3 SEBI (COLLECTIVE INVESTMENTS SCHEME) REGULATION, 1999

3.3.3.1 Important Terminology and Definitions

• Regulation 2(h):- Collective Investment Management Company means a company

incorporated under the Companies Act, 2013 (18 of 2013) and registered with the Board
under these regulations, whose object is to organise, operate and manage a collective
investment scheme;
• Regulation 2(i):- Collective Investment Scheme has the meaning assigned to it by sub-
regulation (2) of this regulation;. Therefore, as per sub-regulation 2 ‘collective investment

66
 scheme’ shall have the same meaning as assigned to it under section 11AA of the SEBI
Act.
• Regulation 2(j):- Close-ended scheme means any scheme launched by a Collective
Investment Management Company, in which the period of maturity of the scheme is
specified and there is no provision for re-purchase before the expiry of the maturity of the
scheme.
• Regulation 2(k): - Control or Controlling Interest” means control exercised or controlling
interest held:
(i) in case of a company, by any person or combination of persons who directly or indirectly
own, control or hold shares carrying not less than 10% of the voting rights of such
company; or

(ii) as between two companies, if the same person or combination of persons, directly or
indirectly, own, control or hold shares carrying not less than 10% of the voting rights of
each of the two companies; or

(iii) majority of the directors of any company who are in a position to exercise control over
the Collective Investment Management Company;
• Regulation 2(aa): - Securities Law means SEBI Act, 1992, Securities Contract (Regulation)
Act, 1956 and Depositories Act, 1996.

_________________________________________________________________________

3.3.4 REGISTRATION OF COLLECTIVE INVESTMENT MANAGEMENT COMPANY

(CIMC)

3.3.4.1 No Person Other than CIMS to Launch Scheme

• Regulation 3 of the Sebi (Collective Investments Scheme) Regulation, 1999 has

specifically empowered only to the Collective Investment Management Companies which
has obtain the certificate after satisfying the requirements contemplated under this
regulation to carry on or sponsor or launch a Collective Investment Scheme.

3.3.4.2 Application for Grant of Certificate

67
 • As per Regulation 4, Any person who wishes to conduct any activity as a Collective
Investment Management Company on or after the effective date of these regulations must
submit a Form A application to the Board for the Board's approval.

3.3.4.3 Application by existing Collective Investment Schemes

• Any CIS scheme which is in existence prior to the SEBI (Collective Investment
Regulation), 1999 must make an application to the Board for grant of certificate within a
period of two months from the date of application as per the specification provided in Form
A. Such application has to be filed with fees provided under Second Schedule.

3.3.4.4 Application to conform to the Requirements and Furnishing of Information

• The procedural aspect of filing an application is vital as in case of non-conformity with the
requirements in regulation 6 and regulation 9, the Board has power to reject the application.
However, prior to reject of such application, Board must provide an opportunity to remove
objections within one month. On sufficient ground extension for removal of objections may
be given.
• In order to proceed the application, the Board may instruct the applicant to provide any
further information or clarification that may be needed. In conjunction with the granting of
a certificate, the Board may, at its discretion, request that the applicant or an authorised
representative come before it for personal representation.

3.3.4.5 Conditions for Eligibility (Regulation 9)

• Following conditions are need to be satisfied by the Applicant prior to filing of the
application: -
a) the applicant is set up and registered as a company under the Companies Act, 2013;
b) the applicant has, in its Memorandum of Association specified the managing of
collective investment scheme as one of its main objects;
c) the applicant has a net worth of not less than rupees five crores. However, at the
timing of filing of application net worth may be rupees three crore which shall be
increased to rupees five crore within three years from date of grant of registration.
d) the applicant is a fit and proper person for the grant of such certificate;

68
 e) the applicant has adequate infrastructure to enable it to operate collective investment
scheme;
f) the directors and key personnel of applicant shall be person of honesty and integrity
having adequate professional experience in related field;
g) at least fifty per cent of the directors of CIMC shall consist of persons who are
independent and are not directly or indirectly associated with the persons who have
control over the Collective Investment Management Company;
h) no person, directly or indirectly connected with the applicant has in the past been
refused registration by the Board under the Act;
i) at least one of the directors is a representative of the trustee who is not subject to
retirement;
j) CIMC should not be a trustee of Collective Investment Scheme;
k) If the applicant is existing Collective Investment Scheme, it complies with the
provisions of chapter IX of these regulations.

Self Assessment Question: What are the conditions for eligibility under Regulation
9? (Spend 2 minutes)
Answer: -
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

3.3.4.6 Grant of Certificate

• Regulation 10 speaks about the grant of certificate by board on receipt of application and
only after such application complies the condition provided under regulation 9 and after
payment of prescribed fee. After receiving the registration money, the Board will issue a
certificate in Form B under the terms and conditions it deems to be in the best interests of
investors.

69
 • If the application does not meet the requirements outlined in the regulation, SEBI may
reject it. It provides the applicant with a fair opportunity to be heard. After 30 days of the
judgement, SEBI must notify the applicant of the outcome and provide a statement
outlining the reasons the application was denied.

3.3.4.7 Terms and Conditions

• The certificate granted should be subject to following conditions:

a) Director of CIMC shall not be permitted to be appointed and serve as director of any
other CIMC, unless director is an independent director and received board approval
from CIMC of which such director works as independent director;
b) The CIMC shall immediately notify the Board of in case of any material change in the
information or particulars, which have a bearing on the certificate granted by it;
c) Appointment of director of CIMC shall be made with prior approval of trustee;
d) the CIMC shall not be made any change in the controlling interest of without getting
prior approval of the Board, the trustee and the unit holders holding at least one-half of
the nominal value of the unit capital of the scheme;
e) The CIMC take appropriate steps to redress the grievances of investor within one month
from the date of receipt of the complaint from the aggrieved investor.

___________________________________________________________________________

3.3.5 BUSINESS ACTIVITIES AND OBLIGATIONS OF COLLECTIVE INVESTMENT

MANAGEMENT COMPANY

3.3.5.1 Restrictions on Business Activities:

• Regulation 13 imposes restrictions on CIMCs:

o CIMC cannot engage in activities other than managing schemes.

o It cannot act as a trustee of any scheme or launch schemes for investing in its own
securities.

70
 o CIMC may invest in its schemes if disclosed in the offer document without charging
fees on such investments.

3.3.5.2 Obligations of CIMC:

• CIMC has several obligations:

o Manage scheme funds and properties for unit holders, liable for acts of its
employees or service providers.

o Exercise due diligence in managing schemes, offer documents, and trust deeds.

o Avoid transactions with its associates without reporting to the board and trustees.

o Appoint registrar, share transfer agents, and comply with SEBI guidelines and
directives.

o Provide monthly reports on receipts and payments to the board.

o Hold board meetings at least twice every three months.

o Obtain adequate insurance for scheme property.

o Prevent misuse of position or information by officers or employees.

3.3.5.3 Submission of Information and Documents:

• CIMC must submit quarterly reports within one month after each quarter end.

• Within fifteen days of appointment, provide information on directors' interests.

• Provide annual balance sheet, profit and loss account, and appraisal reports within two
months after the fiscal year end to trustees, SEBI, and unit holders.

___________________________________________________________________________

3.3.6 TRUSTEES AND THEIR OBLIGATIONS

3.3.6.1 Registration of Trust Deed of Collective Investment Scheme and its Contents:

• Collective Investment Scheme is structured as a deed registered under the Indian

Registration Act, 1908.

71
 • The trust deed must include clauses from the Fourth Schedule, ensuring it safeguards unit
holders' interests without limiting or extinguishing CIMC's liabilities.

3.3.6.2 Appointment of and Eligibility for Appointment as Trustee:

• Trustees hold scheme assets for unit holders.

• Only those registered as Debenture Trustees under SEBI (Debenture Trustee) Regulations,
1993, not associated with CIMC controllers, are eligible.

3.3.6.3 Rights and Obligations of Trustee:

• Regulation 21 outlines trustee rights and obligations:

o Obtain necessary information from CIMC and inspect accounts.

o Ensure CIMC maintains necessary infrastructure, key personnel, auditors,

compliance officers, and registers.

o Prevent CIMC from giving undue advantage to associates, ensuring schemes

operate as per regulations.

o Take immediate remedial action and inform the board if business conduct deviates
from scheme documents.

o Custody scheme assets, ensure income calculations, convene unit holder meetings,
review CIMC activities quarterly, and report to the board.

3.3.6.4 Agreement with CIMC:

• Trustees and CIMC enter agreements to manage scheme property, aligning with scheme
objectives.

3.3.6.5 Termination of Trusteeship:

• Grounds for termination include regulatory compliance, unit holder resolution, or board
decision.

72
 • Consequences include appointing a new eligible trustee within three months, with former
trustees' liability continuing for prior acts.

3.3.6.6 Termination of Agreement with CIMC:

• Grounds include CIMC winding up or unit holder resolution with board approval.

• Consequences involve appointing a new CIMC within three months, with terminated
CIMC liable for past acts until a successor is appointed.

Self Assessment Question: How a trusteeship can be terminated? (Spend 5 minutes)

Answer: -
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

Self Assessment Question: Explain about liability for Action in case of Default?
(Spend 2 minutes)
Answer: -
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________

3.3.7 SUMMARY

• Collective Investment Scheme is a common type of investing scheme which consists

of pooling of assets which is managed by CIMC in order to generate revenue, product,
or real estate on investor’s behalf.
• Sebi (Collective Investments Scheme) Regulation, 1999 consists of vital provision
regulating registration, business activities and obligations of CIMC.
• Same Regulation, 1999 also provide the concept and rights & obligations of trustee.

73
 • Detail provision and procedure in respect of winding up of the Collective Investment
Scheme is been provided.
• Provision and liabilities has been provided in detail in case of default while complying the
regulations or provisions of SEBI Act.

___________________________________________________________________________

3.3.8 TERMINAL QUESTIONS

1. What is mean by Collective Investment Scheme?

2. How CIMC is to be registered? And what would be rights and obligation they have?

3. Explain the procedure of initiation to winding up of the scheme?

4. Who are the trustees? Explain their rights and obligations?

74
Module III

UNIT IV

Listing & Delisting of Securities and Law

TABLE OF CONTENTS

4. Introduction

4.1. Objectives

4.2. Advantages of Listing

4.3. Law on Listing of Securities

4.4. Issues Mandating Listing Under ICDR

4.4.1. Other issues mandating listing involve.

4.5. Pre-Listing Compliances for Listed Entities

4.6. Minimum Offer Size

4.7. Listing of Non-Convertible Securities

4.7.1 Applicability of LODR

4.8. Corporate Governance under LODR

4.9. Delisting under SCR

4.10 Conditions for the Voluntary Delisting

4.11. Procedure for Delisting

4.12. Delisting of Debt Securities

4.13. Delisting of Indian Depositary Receipt

4.14. Modes of Exit

4.15 Compulsory Delisting

75
4.16 Delisting of Small Companies

Summary

Terminal Questions

76
4.INTRODUCTION

Listing securities with the stock exchanges serves a lot of purposes of the companies, such as.
Listing equips entrepreneurs for growth opportunities through capital raising, diversification, and
expansion. It brings the listed entities under the spotlight by increasing the marketability of the
securities and therefore enhancing their importance in the market. Listing also builds investor
confidence by increasing transparency of the company. Delisting is the complete reverse of listing,
where securities listed are removed from the stock exchanges and their admission to dealing is
withdrawn.

This unit will discuss the compliances that entities desirous to list their securities must adhere prior
to and after listing the securities on the stock exchanges and finally how the companies can get
delisted from their designated stock exchanges.

Listing of securities with stock exchange is a matter of great importance for companies and
investors, because this provides the liquidity to the securities in the market. Any company
offering its shares to the public for subscription is required to be listed on the stock exchange
and has to comply with the conditions as provided in the SEBI (ICDR) Regulations, 2009.
According to Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, [(SEBI (ICDR) Regulations, 2009)], a company has to file a
draft offer document along with prescribed fees to SEBI through the lead merchant banker, at least
thirty days prior to registering the prospectus with the Registrar of Companies. The company
has to obtain in-principle approval from recognized stock exchanges in which the company
proposes to get its securities listed. A company is required to complete the allotment of securities
offered to the public and/or refund the application moneys within fifteen days from the date of
closure of the issue.

In addition, a company intending to have its share listed has to comply with the listing
requirements prescribed by the Stock Exchange. A company seeking listing of their securities on
the Stock Exchange is required to enter into a formal listing agreement with the Stock Exchange.
The listing agreement specifies all the quantitative and qualitative requirements to be continuously
complied with by the issuer for continued listing. The Stock Exchange monitors such compliance
and companies who do not comply with the provisions of the listing agreement may be

77
 suspended from trading on the Stock Exchange. The listing agreement is being increasingly
used as a means to improve corporate governance.

Only public companies are allowed to list their securities in the stock exchange. Private Limited
companies cannot get listing facility. They should first convert themselves into public limited
companies and their Articles of Association should also contain prohibitions as laid down in the
listing agreement and as applicable to public limited companies.

According to the Companies Act, 2013 “Listed Company" means a company which has any of its
securities listed on any recognized stock exchange.

4.1. Objectives:

At the end of the unit the reader would be able to:

a. Analyse the regulations regarding listing of securities.

b. Discuss the process for Delisting of securities.
c. Examine the Applicability of Listing obligations and Disclosure Regulations.
d. Understand basic understanding of Corporate Governance
e. Discuss the relevant provisions of Securities Contract Act.

4.1.1. Types of Listing

The types of Listing of Securities are as follows: Listing of securities falls under 5 groups –

a. Initial Listing:

If the shares or securities are to be listed for the first time by a company on a stock exchange
is called initial listing.

b. Listing for Public Issue

When a company whose shares are listed on a stock exchange comes out with a public issue of
securities, it has to list such issue with the stock exchange.

c. Listing for Rights Issue

When companies whose securities are listed on the stock exchange issue securities to existing

78
 shareholders onrights basis, it has to list such rights issues on the concerned stock exchange.

d. Listing of Bonus Shares

Shares issued as a result of capitalization of profit through bonus issue shall list such issues also on
the concerned stock exchange.
e. Listing for merger or amalgamation

When new shares are issued by an amalgamated company to the shareholders of the
amalgamating company, such shares are also required to be listed on the concerned stock
exchange.
4.2 Advantages of Listing:
The following advantages are available when securities are listed by a company in the stock
exchange–
(1) Public image of the company is enhanced.
(2) The liquidity of the security is ensured making it easy to buy and sell the securities in the
stock exchange.
(3) Tax concessions are made available both to the investors and the companies.
(4) Listing procedure compels company management to disclose important information to
the investors enabling them to make crucial decisions with regard to keeping or
disposing of such securities.
(5) Listed companies command better support such as loans and investments from Banks and
FIs.

4.3 Law on listing of securities:

According to Section 40(1) of the Companies Act 2013, every company which intends to make
public offer of shares or debentures should make an application to one or more recognized stock
exchanges before making such offer. Sub section 2 of this Section provides that the company shall
state the name of the stock exchanges on which its securities will be dealt with.

Section 24 of the Companies Act, 2013 provides that, any Company which is listed or intend to
get their securities listed on any recognized stock exchange will be administered by regulation
prepared by SEBI for matters relating to issue and transfer of securities and non -payment of

79
dividend.

As per Section 4 of the Securities Contracts (Regulation) Act, 1956, every recognized stock
exchange has the powers to make bye-laws for the listing of securities on the stock exchange,
inclusion of any security for the purpose of dealings and suspension or withdrawal of securities
and the prohibition of trading in any specified security, subject to SEBI approval.

Every company while submitting its application for listing with the stock exchange(s) should
produce a number of documents as enclosures to satisfy the requirements of the concerned stock
exchange. It should also give a number of undertakings as a condition precedent before listing as
sought by the concerned stock exchange. Finally, when the stock exchange(s) agree(s) to list the
securities, the company shall execute a listing agreement with the stock exchange(s).

When a company signs a listing agreement with a stock exchange, it means it has entered into a
legally binding contract with that stock exchange and it has to ensure compliance of each and
every term and condition of the listing agreement. For failure to ensure such compliance the stock
exchange can take an action against the company after giving an opportunity of being heard.

Listing of Securities on Indian Stock Exchanges, thus, is governed by the provisions in the
Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, the Securities Contracts
(Regulation) Rules, 1957, Rules, bye laws, regulations of concerned stock exchange, the listing
agreement entered into by the issuer and stock exchange and circulars/guidelines issued by the
Central Government and SEBI

4.4 PRE-LISTING COMPLIANCES FOR LISTED ENTITIES

Companies seeking listing on stock exchanges must comply with Rule 19, submitting:

1. Memorandum, articles of association, and trust deed for debenture issuance.

2. Copies of all prospectuses issued.
3. Copies of offers, circulars, or advertisements for securities in the past five years.
4. Audited balance sheets for the last five years or shorter period.
5. Statement on dividends, bonuses, and arrears.
6. Certified copies of agreements with vendors, underwriters, brokers, etc.
7. Certified copies of agreements with managing agents, secretaries, treasurers, etc.

80
 8. Certified copies of referenced documents in prospectuses or offers.
9. Statement detailing material contracts and agreements.
10. Company history since incorporation.
11. Details of shares and debentures issued.
12. Statement on commissions, discounts, etc.
13. Certified copies of filing receipts and agreements with financial bodies.
14. Details of forfeited shares.
15. List of top ten security holders.
16. Details of securities applied for trading permission. Additional documents may be required
by the stock exchange as per their bye-laws or specific cases.

Self Assessment Question ( Spend 3 Minutes)

1. Discuss the Pre-Listing Compliances for Listed Entities.

………………………………………………………………………………………

……………………………………………………………………………………………………
..

4.5 Minimum Offer Size

The minimum offer and allotment to public in terms of an offer document shall be-

1. at least twenty five per cent of each class or kind of equity shares or debenture convertible
into equity shares issued by the company, if the post issue capital of the company calculated
at offer price is less than or equal to one thousand six hundred crore rupees;
2. at least such percentage of each class or kind of equity shares or debentures convertible
into equity shares issued by the company equivalent to the value of four hundred crore
rupees, if the post issue capital of the company calculated at offer price is more than one
thousand six hundred crore rupees but less than or equal to four thousand crore rupees; at
least ten percent of each class or kind of equity shares or debentures convertible into equity

81
 shares issued by the company, if the post issue capital of the company calculated at offer
price is above four thousand crore rupees.

However, the company referred to in sub-clause (ii) or sub-clause (iii), shall increase its public
shareholding to at least twenty five per cent within a period of three years from the date of listing
of the securities, in the manner specified by the SEBI. The applicant company, who has issued
equity shares having superior voting rights to its promoters or founders and is seeking listing of its
ordinary shares for offering to the public under this rule and the regulations made by the Securities
and Exchange Board of India in this regard, shall mandatorily list its equity shares having superior
voting rights at the same recognized stock exchange along with the ordinary shares being offered
to the public.

Self Assessment Question ( Spend 3 Minutes)

1. What are the post issue responsibilities of Lead Managers?

……………………………………………………………..
………………………………………………………………

DELISTING OF SECURITIES

Delisting has been governed by the Securities Contract (Regulation) Rules 1957 and the SEBI
(Delisting OF Equity Shares) Regulations, 2021 (delisting regulations) and SEBI (LODR)
Regulations, 2015. Delisting of equity shares as the name suggests is regulated by the delisting
regulations however there is no proper framework for delisting of publicly listed convertible or
non-convertible debt securities.

4.6. DELSITING SECURITIES CONTRACT (REGULATION) RULES 1957

(SCRR)

The SCRR and SCRA has a wide ambit of framework for delisting of securities. It provides
conditions for delisting of any securities. By definition of securities provided in SCRA securities
include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of

82
a like nature in or of any incorporated company or a pooled investment vehicle or other body
corporate.

• Grounds for delisting of Any Securities by Stock Exchanges Rule 21 of SCRR

a) the company has incurred losses during the preceding three consecutive years and it has
negative net worth. If the securities is delisted under clause (1),

1. the company, promoter and director of the company shall be jointly and severally liable
to purchase the outstanding securities from those holders who wish to sell them at a fair
price determined in accordance with regulations made by the SEBI, under the Act; and
2. the said securities shall be delisted from all recognized stock exchanges.

b) trading in the securities of the company has remained suspended for a period of more than
six months;
c) the securities of the company have remained infrequently traded during the preceding three
years;
d) the company or any of its promoters or any of its director has been convicted for failure to
comply with any of the provisions of the Act or the SEBI Act, 1992 or the Depositories
Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and
awarded a penalty of not less than rupees one crore or imprisonment of not less than three
years;
e) the addresses of the company or any of its promoter or any of its directors, are not known
or false addresses have been furnished or the company has changed its registered office in
contravention of the provisions of the Companies Act, 2013; or
f) shareholding of the company held by the public has come below the minimum level
applicable to the company as per the SEBI LODR and the company has failed to raise
public holding to the required level within the time specified by the recognized stock
exchange.
g) No securities shall be delisted unless the company concerned has been given a reasonable
opportunity of being heard.

4.7. Conditions for Voluntary Delisting of Any Securities under Rule 21 of SCRR:

83
 The conditions for Voluntary delisting of securities are as follows:

a) the securities of the company have been listed for a minimum period of three years on the
recognized stock exchange;
b) the delisting of such securities has been approved by the two-third of public shareholders;
and
c) the company, promoter and/or the director of the company purchase the outstanding
securities from those holders who wish to sell them at a price determined in accordance
with regulations made by SEBI under the Act. However, this condition may be dispensed
with by the SEBI if the securities remain listed at least on the National Stock Exchange of
India Limited or the Bombay Stock Exchange Limited.

4.8 Procedure for Delisting Securities contract regulation act 1956

Section 21A provides that a recognised stock exchange may delist the securities, after
recording the reasons therefor, from any recognised stock exchange on any of the ground
or grounds as may be prescribed under this Act.

The securities of a company shall not be delisted unless the company concerned has been
given a reasonable opportunity of being heard.

A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal (SAT) against the decision of the recognised stock exchange delisting
the securities within fifteen days from the date of the decision of the recognized stock
exchange delisting the securities and the provisions of Sections 22B to 22E of this Act,
shall apply, as far as may be, to such appeals.

The Securities Appellate Tribunal may, if it is satisfied that the company was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding one month.

4.9 DELISTING OF DEBT SECURITIES

84
Initially SEBI had released SEBI (Delisting of Securities) Guidelines 2003 which had a wider
ambit than the present delisting regulations. It covered delisting of any security listed on a stock
exchange and not just equity shares. For non-convertible debt securities, in case the listed entity
wishes to recall or redeem the non-convertible debt securities, Regulation 15 of the SEBI (Issue
and Listing of Non-Convertible Securities) Regulation, 2021, the manner of redemption is allowed
to be as per the terms of the issue. Hence delisting shall be governed by terms of the issue as
provided in the offer document.

• Delisting of securities for FPIs

On 29th November 2018, SEBI issued an interpretative letter under the Informal Guidance
Scheme for Genpact Luxembourg S.A.R.L., a registered Foreign Portfolio Investor, which
invested in unsecured NCDs, which sought a query regarding delisting of securities. SEBI
clarified that there is no prohibition against delisting of debt securities since FPIs are
allowed to invest in unlisted securities under Regulation 21 of SEBI (FPI) Regulations.

• Terms of delisting

SEBI clarified in her letter that conditions for listing of NCDs is dependent upon terms of the
listing of NCD. If the terms of the NCD is that they are to be necessarily listed they should
be held till maturity/ redemption. However if the terms make listing of the NCD optional
the same can be delisted after following due procedure under Regulation 59 of the SEBI
(LODR) Regulations 2015.

• Modifying the structure of the non-convertible debt securities and non-convertible

redeemable preference shares

1) The listed entity shall not make material modification without prior approval of the stock
exchange(s) where the non-convertible debt securities or non-convertible redeemable
preference shares, as applicable, are listed, to :

a) the structure of the non-convertible debt securities debenture in terms of coupon,

redemption, or otherwise.
b) the structure of the non-convertible redeemable preference shares in terms of
dividend, redemption, or otherwise.

85
 2) The approval of the stock exchange referred to in sub-regulation (1) shall be made only
after:

a) approval of the board of directors and the debenture trustee and

b) obtaining consent in writing of the holders of not less than three-fourths, by value
of holders of that class of securities. Provided that the listed entity shall provide the
facility of remote e-voting to facilitate such consent.

However, there is no concrete procedure set out for delisting securities other that equity
shares.

4.10 DELISTING OF INDIAN DEPOSITORY RECEIPT.

Regulation 80 of the LODR Regulations prescribe terms for delisting of the Indian depository
receipts as the following:

1. The listed entity shall, if it decides to delist Indian Depository Receipts, give fair and
reasonable treatment to IDR holders.
2. The listed entity shall comply with such norms and conditions for delisting Indian
Depository Receipts as specified by the Board or stock exchange in this regard.
3. The listed entity shall, in case underlying equity shares are delisted, shall delist and cancel
the Indian Depository Receipts.

DELISTING OF EQUITY SHARES

In order to make the existing delisting Regulations for delisting of equity shares more robust,
efficient, transparent and investor friendly, SEBI has issued the SEBI (Delisting of Equity Shares)
Regulations, 2021 (Delisting Regulations) on June 11, 2021, thereby superseding the erstwhile
SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Erstwhile Regulations’). The Erstwhile
Regulations were notified on June 10, 2009. Thereafter, several amendments have been carried
out in the delisting regulations according to the changing need and developments in the securities
market. Thus, to further streamline and strengthen the process to be followed for delisting, the
Delisting Regulations have been introduced.

86
Regulation 2 (j) of the SEBI (Delisting OF Equity Shares) Regulations, 2021 “delisting” means
permanent removal of equity shares of the company from the trading platform of a recognised
stock exchange, either by way of: Voluntary Method & Compulsory Method.

4.11 Modes of Exit via Delisting

The Delisting Regulations, as laid down by SEBI provides two modes of delisting of equity
shares viz; (a) Compulsory and (b) Voluntary:

Further, in the case of voluntary delisting, companies have the following options:

1. delisting from all the recognised stock exchanges ;

2. delisting from any but not all the recognised stock exchanges, including delisting
from Stock Exchange having nationwide trading terminal;
3. delisting from any but not all the recognised stock exchanges, while remaining
listed on the Recognised Stock Exchange having nationwide trading terminal.
SUMMARY

– Listing and De listing of securities with stock exchange is a matter of great importance
for companies and investors,this provides the liquidity to the securities in the market.

– Listing of Securities on Indian Stock Exchanges is essentially governed by the

Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, Securities
Exchange Board of India Act 1992, the Securities Contracts (Regulation) Rules, 1957,
Rules, bye laws, regulations of concerned stock exchange, the listing agreement
entered into by the issuer and stock exchange and circulars/guidelines issued by the
Central Government and SEBI.

– The term delisting of securities means permanent removal of securities of a listed

company from a stock exchange. As a consequence of delisting, the securities of that
company would no longer be traded on that stock exchange.

– Corporate Governance committee for better management in Listing of Securities and

listed entities.

– Delisting of securities can be both voluntary or compulsory is dealt in detail.

87
TERMINAL QUESTIONS

1. What is Minimum offer size?

2. Explain the Corporate Governance under SCRA?
3. Explain the delisting of Debt Securities.

*****************************************************************************

88
89