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Securities laws and Capital Markets Notes

CS Executive Securities laws and Capital Markets Notes Applicable for 2019 Exams.


Securities Contracts (Regulation) Act, 1956

  • The Securities Contracts (Regulation) Act, 1956 was enacted by Parliament to prevent undesirable transactions in securities by regulating the business of dealing therein, and by providing for certain other matters connected therewith.
  • Section 2 of this Act contains definitions of various terms used in the Act.
  • Section 17A of the Act provides for public issue and listing of securities.
  • The Act prescribes various penalties against persons who might be found guilty of offences under the Act.
  • Section 21 of the Act provides that where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.
  • Section 31 provides that without prejudice to the provisions contained in Section 30 of SEBI Act, 1992, SEBI may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.
  • The Government promulgated the Securities Contracts (Regulations) Rules, 1957 for carrying into effect the object of the SCRA Act, 1956.
  • Rule 19 dealt with the requirement with respect to the listing of securities on a recognised stock exchange.
  • Rule 19A provides the detailed provision regarding continuous listing agreement.

Securities and Exchange Board of India Act, 1992

  • The SEBI Act, 1992, was inserted to protect the interests of the investors and to promote the development of, and to regulate the securities markets by such measures as it thinks fit.
  • SEBI regulates the securities market and SAT acts as a watchdog to ensure justice.
  • The SEBI Act, 1992 empowers an aggrieved person for remedies against SEBI’s order or penalties by establishing Securities Appellate Tribunal.
  • Any person aggrieved by any decision or order of the SAT can file an appeal to Supreme Court.
  • Section 15 Y of the SEBI Act provides that no civil court shall have jurisdiction to entertain a suit or proceeding in respect of any matter in which an adjudicating officer (`AO’) is appointed under the Act or SAT is empowered by or under the Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act.
  • SEBI is empowered to issue directions under section 11B of the Act.
  • SEBI is further empowered to conduct inspections of registered intermediaries.
  • Besides inspection, SEBI is empowered to conduct investigations in case of breach of any regulation or in case of action determental to the interest of investors.

Depositories Act, 1996

  • The legal framework for depository system in the Depositories Act, 1996 provides for the establishment of single or multiple depositories.
  • There are two Depositories functioning in India, namely the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL).
  • All the securities held by a depository are dematerialized and are in a fungible form.
  • In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.
  •  A Depository Participant (DP) is the representative (agent) of the investor in the depository system providing the link between the Company and investor through the Depository.
  • The Depository Act, 1996 and SEBI (Depositories and Participants) Regulations, 1996 regulates the function of Depositories and participants.
  • Regulation 55A of SEBI (Depositories and Participants) Regulations, 1996 provides that every issuer shall submit audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company Secretary or a qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital, listed capital and capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and the in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such further issued capital.
  • Both the Depositories in India have allowed Practising Company Secretaries to undertake internal audit of the operations of Depository Participants (DPs).
  • Depository Participants are subject to concurrent audit by a Practising Company Secretary or qualified Chartered Accountant. Concurrent Audit includes audit of process of demat account opening, control and verification of delivery instruction slips.

An Overview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

  • Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus.
  • All listed companies whose equity shares are listed on a stock exchange and unlisted companies eligible to make a public issue and desirous of getting its securities listed on a recognised stock exchange pursuant to a public issue, may freely price its equity shares or any securities convertible at a later date into equity shares.
  • Public Issue of shares are regulated by SEBI (Issue of Capital and Disclosure Requirements)
    Regulations, 2009.
  • The promoters should contribute not less than 20% of post-issue capital, in case of a public issue by an unlisted company.
  • In case of a public issue by an unlisted company, at least 10% or 25% of the post issue capital should be offered to the public and a listed company making public issue should make the net offer of at least 10% or 25% of the issue size to the public.
  • A merchant banker holding a valid certificate of registration is required to be appointed to manage the issue.
  • Every company making a public issue is required to appoint a compliance officer and intimate the
    name of the compliance officer to SEBI.
  • Public issue must be kept open for atleast 3 working days but not more than 10 working days including the days for which the issue is kept open in case of revision in price band.

An Overview of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

  • SEBI has notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) on September 2, 2015 after the consultation process. The Listing Regulations came into force w.e.f. December 1, 2015.
  • A listed entity shall appoint a Qualified Company Secretary as a Compliance Officer.
  • The Listed entity shall comply with the following compliance under Listing Regulations:-
    • One Time Compliances
    • Quarterly Compliances
    • Half yearly Compliances
    • Yearly Compliances
    • Event based Compliance
  • The listed entities which has listed its specified securities on any recognised stock exchange(s) either on the main board or on SME Exchange or on institutional trading platform has to comply with certain corporate governance provisions which are specified in Regulations 17 to 27 of the Listing Regulations.
  • The Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and at least 50% of the board of directors shall comprise of nonexecutive directors.
  • The Board Committees are required to be constituted under Listing Regulations:
    • Audit Committee
    • Nomination and Remuneration committee
    • Stakeholders Relationship Committee
    • Risk Management Committee
  • The listed entity shall formulate a vigil mechanism for directors and employees to report genuine
  • The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.
  • All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

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

  • SAST aims at protecting interest of the investors in securities of a listed company providing amongst others, an opportunity for the public shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a listed company, consolidation of holdings by existing shareholders and related disclosures and penalties for non- compliance etc.
  • The Takeover Regulations, 1997 stand repealed from October 22, 2011, i.e. the date on which SAST Regulations, 2011 come into force.
  • 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
  • Regulation 6 of the Takeover Regulations provides the threshold and conditions for making the Voluntary Open Offer.
  • An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.
  • Regulation 10 & 11 provides for automatic exemptions and exemptions by SEBI.
  • The public announcement shall be sent to all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public.
  • In SEBI Takeover Regulations, 2011, the obligation to give the disclosures on the acquisition of certain limits is only on the acquirer and not on the Target Company.

SEBI (Buy-Back of Securities) Regulations 1998

  • “Buy-back” means the purchase of its own shares or other specified securities by a company.
  • Buy-back of securities is a corporate financial strategy which involves capital restructuring and is prevalent globally with the underlying objectives of increasing earnings per share, averting hostile takeovers, improving returns to the stakeholders and realigning the capital structure.
  • Buy-back of shares is regulated by Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 1998 in case of listed companies.
  • The main objective of buy-back may be to improve earnings per share; to improve return on capital, return on net worth and to enhance the long-term shareholder value; to provide an additional exit route to shareholders when shares are under valued or are thinly traded; to enhance consolidation of stake in the company; to prevent unwelcome takeover bids; to return surplus cash to shareholders; to achieve optimum capital structure; to support share price during periods of sluggish market conditions and to  service the equity more efficiently.
  • Buy-back of securities may be made :
    1. from the existing security holders on a proportionate basis; or
    2. from the open market; or
    3. from odd lots, that is to say, where the lot of securities of a public company whose shares are listed on a recognized stock exchange is smaller than such marketable lot as may be specified by the stock exchange; or
    4. by purchasing securities which had been issued to employees of the company pursuant to a scheme of stock option or sweat equity.

SEBI (Delisting of Equity Shares) Regulations, 2009

  • 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 at that stock exchange.
  • Delisting can be voluntary or compulsory.
  • SEBI has notified the SEBI (Delisting of Equity Shares) Regulations, 2009 by its publication dated 10th June, 2009.
  • The delisting regulations are applicable to delisting of equity shares of a company from all or any of the recognised stock exchanges where such shares are listed.
  • There are certain circumstances as prescribed by SEBI where delisting is not permissible.
  • Chapter III of delisting regulations gives an option to the listed company to either get itself delisted from all the recognised stock exchanges where it is listed or only from some of the few stock exchange(s) having nation wide terminals.
  • In voluntary delisting, a company decides its own to permanently remove its securities from stock
  • A recognised stock exchange may by order delist any equity shares of a company on any grounds prescribed under the rules made under section 21 of SCRA, 1956.
  •  When a company has been compulsorily delisted the company, its whole time directors, its promoters and the companies which are promoted by any of them shall not directly or indirectly access the securities market or seek listing for any equity shares for a period of ten years from the date of such delisting.

SEBI (Share Based Employee Benefits) Regulations, 2014 – An Overview

  • As per Section 62(1) (b) of Companies Act 2013, A Company can offer shares through employee stock option to their employees through special resolution subject to the conditions specified under Rule 12 of Companies (Share Capital and Debentures) Rules 2014.
  • Issue of Employee Stock option by a listed entity is regulated by SEBI (Share Based Employee Benefits)  Regulations, 2014.
  • SEBI has, on 28th October 2014 notified SEBI (Share Based Employee Benefits) Regulations, for regulation of all schemes by companies for the benefit of their employees involving dealing in shares, directly or indirectly, with a view to facilitate smooth operation of such schemes while preventing any possible manipulation and matters connected therewith or incidental thereto.
  • A company may implement schemes either :-
    • directly or
    • by setting up an irrevocable trust(s)
  • An employee shall be eligible to participate in the schemes of the company as determined by the
    compensation committee.
  •  In case of winding up of the schemes being implemented by a company through trust, the excess monies or shares remaining with the trust after meeting all the obligations, if any, shall be utilised for repayment of loan or by way of distribution to employees as recommended by the compensation committee.

SEBI (Issue of Sweat Equity) Regulations, 2002 – An Overview

  • Section 2 (88) of the Companies Act, 2013 defines “sweat equity shares” which means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
  • Where the equity shares of the company are listed on a recognized stock exchange, sweat equity shares should be issued in accordance with regulations made by the Securities and Exchange Board of India in this regard.
  • These regulations shall not apply to an unlisted company. However, unlisted company coming out with initial public offering and seeking listing of its securities on the stock exchange, pursuant to issue of sweat equity shares, shall comply with the SEBI (ICDR) Regulations, 2009.
  • In case of Issue of sweat equity shares to promoters, the same shall also be approved by simple
    majority of the shareholders in General Meeting.
  • The Sweat Equity shares shall be locked in for a period of three years from the date of allotment.
  • The Sweat Equity issued by a listed company shall be eligible for listing only if such issues are in accordance with these regulations.

SEBI (Prohibition of Insider Trading) Regulations, 2015

  • To curb insider trading SEBI formulated SEBI (Prohibition of Insider Trading) Regulations, 2015 and which prescribes code of fair disclosure and conduct to be followed by listed companies and entities connected with them.
  • The Insider Trading Regulations comprises of five chapter and two schedules encompassing the
    various regulations relating to Insider Trading.
  • Insider means and includes deemed to be a connected person. The definition of deemed to be a
    connected person is very elaborate.
  • The regulations not only seeks to curb dealing in securities, they also seek to curb communicating or counseling about securities by the insiders.
  • The regulations provide for initial as well as continual disclosures by members of the company by the directors/ employees/ designated employees/promoter/promoter group at regular interval.

Mutual Funds

  • Mutual fund is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
  • Mutual funds are regulated by SEBI (Mutual Fund) Regulations, 1996.
  • Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or passively
  • There are five principal constituents and three market intermediaries in the formation and functioning of mutual fund.
  • The NAVs of all Mutual Fund schemes are declared at the end of the trading day after markets are closed, in accordance with SEBI Mutual Fund Regulations.
  • Holding period return is calculated on the basis of total returns from the asset or portfolio – i.e. income plus changes in value.
  • SEBI (LODR) Regulations, 2015 is applicable to the AMC managing the mutual fund scheme whose units are listed on the recognised stock exchange.

Collective Investment Schemes

  • A collective investment scheme is a trust based scheme that comprises a pool of assets that is managed by a collective investment scheme manager and is governed by the Collective Investment Schemes Regulations given by SEBI.
  • A scheme should be constituted in the form of a trust and the instrument of trust should be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908 executed by the Collective Investment Management Company in favour of the trustees named in such an instrument.
  • Collective Investment Management Company is regulated by SEBI (Collective Investment Schemes) Regulations, 1999.
  • SEBI (Collective Investment Schemes) Regulations, 1999 defines Collective Investment Management Company to mean a company incorporated under the Companies Act, 2013 and registered with SEBI under these regulations, whose object is to organize, operate and manage a collective investment scheme.

SEBI (Ombudsman) Regulations, 2003

  • In the developing countries, the growing number of investors, technically advanced financial markets, liberalised economy etc. necessitates imparting of financial education for better operation of markets and economy and in the interest of investor.
  • SEBI has also launched a comprehensive securities market awareness campaign for educating investors through workshops, audio-visual clippings, distribution of educative investor materials/ booklets, dedicated investor website etc.
  • SCORES is a web based centralized grievance redress system of SEBI which enables investors to lodge and follow up their complaints and track the status of redressal of such complaints online from the above website from anywhere.
  • SEBI has issued SEBI (Ombudsman) Regulations, 2003 which deals with establishment of office
    of Ombudsman, powers and functions of Ombudsman, procedure for redressal of Grievances and implementation of the award.
  • SEBI (Informal Guidance) Scheme, 2003 deals with various aspects such as the nature of request fees to be accompanied along with letter disposal of requests, SEBI discretion not request and certain types of request and confidentiality of requests, etc.


  • A wide variety of financial institutions have been set up at the national level. They include development banks like IDBI, SIDBI, IFCI, IIBI; specialised financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI and investment institutions like LIC, GIC, UTI; etc.
  • All FPIs are required to be mandatorily registered into three broad categories i.e. Category I, Category II, Category III under SEBI (Foreign Portfolio Investors) Regulations, 2014
  • Venture Capital is generally equity investments made by Venture Capital funds, at an early stage in privately held companies, having potential to provide a high rate of return on their investments.
  • Debenture is a document evidencing a debt or acknowledging it and any document which fulfils either of these conditions is a debenture.
  • The FCCBs are unsecured instruments which carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company.
  • Issue of IDRs is regulated by section 390 of the Companies Act, 2013, Rule 13 of the Companies (Registration of Foreign Companies) Rules, 2014 and Chapter X & XA of SEBI (ICDR) Regulations, 2009.
  • Book Building means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is build up and a ‘Fair Price’ and ‘Quantum’ of securities to be issued is finally determined.
  • ASBA is an application for subscribing to an issue, containing an authorization to block the application money in a bank account.
  • Stock exchange is a market place for buying and selling of securities and ensuring liquidity to them in the interest of the investors.
  • Securities traded in the stock exchanges can be classified as Listed cleared Securities and Permitted Securities.
  • The trading in the securities of the company takes place in dematerialised form in India.
  • There are various factors and monetary policies which has a significant impact on the working of stock markets in India like RBI Monetary Policy, Consumer Price Index (CPI) , Wholesale Price Index (WPI) and US FED Policy

Securities Market Intermediaries

  • The role of intermediaries makes the market vibrant, and to function smoothly and continuously. Intermediaries possess professional expertise and play a promotional role in organising a perfect match between the supply and demand for capital in the market.
  • As per Section 11 of SEBI Act, it is the duty of SEBI to register and regulate the working of stock
    brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors and such other intermediaries who may be associated with securities market in any manner.
  • Merchant Bankers are the key intermediaries between the company and issue of capital. The activities of the Merchant Bankers in the Indian capital market are regulated by SEBI (Merchant Bankers) Regulation, 1992.
  • Underwriting is compulsory for a public issue. It is necessary for a public company which invites public subscription for its securities to ensure that its issue is fully subscribed.
  • Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts.
  • A stock broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter into a transaction.
  • A portfolio manager with professional experience and expertise in the field, studies the market and adjusts the investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns therefrom.
  • Every Portfolio manager is required to appoint a Practising Company Secretary or a Practising
    Chartered Accountant for conducting the internal audit.
  • Custodian of securities means any person who carries on or proposes to carry on the business of providing custodial services.
  • Investment adviser means any person, who for consideration is engaged in the business of providing investment advice to clients or other group of persons and includes any person who holds out himself as an investment adviser, by whatever name called.

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