SECURITIES AND INVESTMENT LAW (MID – SEMESTER)

Birth of SEBI:
● In 1991 India’s foreign exchange had depleted drastically and thus there was a liquidity
crisis. There was no competition. Very few players in the market and the market was very
secure.
● Till 1991 we had an approval based regime (today we have disclosure based)
● In order to get foreign exchange we loaned out our gold and also liberalised our economy
● However all sectors of the economy were not simultaneously opened
● Banks were not allowed to invest in the securities market
● Harshad Mehta, then a young man (lol spoke like DT) moved to Bombay and took up the
occupation of sub broker and eventually became a broker
● Banks sought a way of investing into the SM
● That’s when he came up with an idea. He started siphoning off money from banks and
invested them in the securities market. He also promised to the top officials in the banks
that there would be no repercussions of this move
● However, due to the scale of funds being siphoned off, securities market was being
manipulated
● He established a company called Grow More, Research and Asset Management
● ACC price of shares was Rs. 200 when he entered the market and kept rising at a very
high rate
● Due to this massive increase in prices, investors kept investing in the securities market
thinking that the prices would rise further
● This increased the demand and this lead to a further increase in prices. From 200 the Acc
price rose to 9000
● Up to this point, the RBI governor thought that the market was responding positively to
the reforms initiated by it and the government. Even the then Premier, Dr. Manmohan
Singh held the same views
● However Sucheta Dalal, a journalist, published an article in the Times of India pointing
out that there was no basis to support such a rise in the prices and indicated that there was
something very wrong
● The day the article was released, the ACC prices crashed from 9000 to below 200.
Securities market crashed
● Questions were asked about the Governor, the Government. There was a furore in
Parliament. Left Wing parties went to the extent of demanding that the market be shut
again
● A joint Parliamentary Committee was established to determine the causes of this
catastrophe
● Meanwhile, people who had invested and lost everything in the SM started committing
suicide.
● Police started criminal prosecutions and Harshad Mehta became a target. He was held out
as the person solely responsible for this scam
● He was arrested and eventually convicted
● However, he was released after a while. He was still extremely respected in the SM and
all companies started scampering to get his services.
● However, he started his own consultancy firm
● However he was jailed again for some other issue and he died in jail
● SEBI was already in existence as a department in the Ministry of Finance since 1988.
However, the government now felt a need to establish SEBI as an independent statutory
body such that such a scam is not repeated again. Thus, this is how SEBI came into
existence
When is a body independent?
● Constitutional bodies are independent. In order to bring any change in such bodies, a
constitutional amendment is required, which requires a special majority in both the
Houses of Parliament and is a huge task
● Statutory bodies, having their own statue, which lays down their jurisdiction and powers,
are also independent bodies. In order to bring any change in those bodies, the provisions
of the statute have to be amended.
● These bodies are experts in themselves and function out of the whims and fancies of the
government.
SEBI became an Act in 1992 and the statute gave wide powers to it
Definitions:
Section 2(i) r/w Section 2(h) of SCRA: Definition of securities
● It is an inclusive definition and is not an exhaustive definition, and other instruments can
also be included under the meaning of securities
● It includes shares, scrips, stocks, bonds, debenture stock and other marketable securities
of a like nature in or of any incorporated company or other body corporate
● It can also include derivatives, government securities, any other instruments that are
declared by the CG to be securities and rights or interest in security
● Parliament has been continuously amending this definition by adding new securities
under Section 2(h) especially since 1991 when we started LPG
● Judicial interpretation can also add securities under this definition
● Only when a particular security is added under this section, SEBI gets jurisdiction
1) Share:
● Shareholders are not owners of a company. A Company has a separate legal identity. For
instance when a company goes bankrupt, its shareholders do not become bankrupt, when
a company dissolves, shareholders doesn’t dissolve.
● Further companies hold property in their own name and the principle of corporate veil
separates the company from its shareholders for all legal purposes
● When a person buys the shares of a company, he gets certain rights in the company in
accordance to the type of shares held by him. These shares give him certain rights in the
management of the company. There is a complete separation of ownership and
management of a company.
● In addition to that, if it happens that the interest of the company and the shareholders are
overlapping, then the interest of the company takes precedence
● Thus, shares are a bundle of rights which are provided by the company itself. The nature
of the right depends upon the type of shares provided
● (Shareholders are holders of those bundle of rights)
2) Debenture
● Debenture holders are also entitled to certain rights like that of a shareholder
● They are not owners of a company
3) Scrips
● It is a generic term related to management.
● Thus, no definition
4) Stocks
● Bundle of shares are known as stocks
● Shares are traded and have independent identity number, while stocks are not traded and
do not have any identity
● Shares cannot be calculated in fraction, stocks can
● Companies Act, 1956 does not define stock. It simply states that shares include stock. It
also permitted conversion of shares into stock – from tradable to non tradable and vice
versa. In Britain one is allowed to convert shares to stock but not stock into shares
(Significance of shares under Section 540(2) UK CA, 2006)
● SCRA is also silent with regard to the definition of stocks
5) Debenture stock
● Same as stock
● All characteristics of stock
6) Bonds – instrument of indebtedness
7) Section 2(ac) of SCRA: Derivatives
● It is an instrument that derives its value from an underlying asset.
● If its value is from a commodity, it is called commodity derivatives (Section 17 RBI Act
and Section 45(u)(a) RBI Act)
Kinds of derivatives:
a) Forward derivative
b) Future derivative
c) Options derivative
d) Swaps
Difference between forward and future
● It is a customised contract (negotiated contracts between parties) – standard form of
contract (unilateral, where terms of the contract cannot be changed but the price can)
● Over the counter trading – trading is through SE and thus are more secure
● They are not as liquid as futures – they are liquid in the sense that they are traded and
transferred freely
● Example of a forward would be – Say A grows wheat which will be ready for sale in 6m.
However, he doesn’t know the price that is going to be prevailing in the market in 6m.
 Thus, he enters into a contract with B wherein B agrees to buy the wheat at a certain
price. This contract does not have any value, while the underlying asset of wheat is of
value
c) Option
There is an option to buy or sell. They are of 2 kinds
(i) Call option – If you have the right to buy an asset at a specified price, on or before a
particular day, then it is called ‘call option’
(ii) Put option – If you have the right to sell an asset at a specified price, on or before a
particular day, then it is a put option
Section 2(i) of SCRA: Spot Delivery Contract
● It is a kind of a contract, whose delivery has to be made on the spot or immediately
● It is the actual delivery of security and the payment of a price, either on the same day as
the date of contract or the next day.
● The actual period taken for dispatch of security or remittance of money through post is
excluded if the two parties entering into the contract do not reside in the same town or
locality
Second para ask
7) Rights in securities
They are considered as securities, although they are securities per se but are regarded as
related
Interpretation of Securities
There are three phases of judicial interpretation of securities
● First phase: 1978 – 1988
● Second phase: 1988 – 2002
● 2002 onwards
First phase: 1978 – 1988
Norman James Hamilton v. Umedbhai S Patel
Whether securities issued by a private company can be considered as securities
Held:
● Securities have two characteristics
● Marketable – In most cases if an instrument is marketable, then it is a security
● Transferable – CA, 2013 in its definition of a private company states that such a
company restricts the transfer of its shares (does not prohibit). A shareholder of a
private company can transfer his shares. However first preference is given to existing
shareholders. This is the rule of pre – emption
● Private company restricts the transfer of shares and doesn’t prohibit it.
● SCRA refers a marketable security, that is, which can be transferred and traded in an open
market (basically open market is SE and since shares of private company are not
traded in SE, it is not a security). However, open market for securities is SE. Since
shares of a private company are not listed on an SE, they are not marketable
● DB upheld the decision of the SJB and viewed that shares which can’t be traded in market
(SE) aren’t securities
DK Holdings Pvt Limited v. Premchand Jute Mills
Held:
● There is no reason to restrict marketable securities only to those which are traded.
● Thus, securities can be listed or unlisted
East Indian Produce v. Naresh Acharya Bahadur
● Section 2(h) SCRA cannot be confined to securities that are defined under it
Second phase: 1988 – 2002
Jagdish Chandra Champaklal Parekh v. Deccan Paper Mills Ltd
Held:
● SCRA would be applicable to shares of a public limited company, which are listed on an
SE.
● Unlisted securities of public ltd companies are not securities under SCRA Section 2(h)
Fascinating Leasing and Finance Pvt Ltd v. SEBI
● Takeover code is applicable to listed securities only
● It cannot be made applicable to unlisted securities
Takeover Code
● It is applicable in cases of a substantial acquisition
● Substantial acquisition refers to acquisition of 25% or more shares of a target company
● When the code is triggered, the acquirer has (ask soham)
Public Disclosures
Two types
● Event based disclosure – Means acquisition related disclosure. If one is acquiring, one
must disclose Eg. by a promoter
● Other disclosures – unrelated to the event. Eg. Shareholder has to disclose his shares in
each quarter
Third Phase: 2002 onwards
Mysore Food Products Ltd v. The Custodian
● SCRA is applicable to unlisted securities as well as to listed securities of a public
company
Naresh K Aggarwal v. Canara Bank Services Ltd
● Legislature has not made any different between listed and unlisted securities
● If it has not made any distinction, we also can’t also make any distinction
● This was reiterated in the case of MCX v. SEBI
SEBI Act, 1992:
Mandate of SEBI:
● Protection of Investors
● Regulation of stock market
● Development of SM
Jurisdiction of SEBI
Statutes from which SEBI derives its jurisdiction
● SEBI Act
● SCRA
● Depositories Act
● Companies Act:
Provisions under the CA
● Chapter 3 of the CA – Section 24 provides for the power of SEBI to regulate issue and
transfer shares and debentures
● Chapter 4 of the CA – Share capital and debentures
● Section 127: Penalty for failure to redistribute dividend
Section 4: Composition of SEBI
There is a
● Chairman – under Section 4(5) – (and other members) he must have ability integrity
standing and experience in the field of law, administration, finance etc. It opens the scope
for bureaucratic persons also
● 2 members from the Ministry of Finance
● 1 member from RBI
● 5 other members – at least 3 of which are whole time members appointed by CG
Section 7A: Members not to participate in meetings of SEBI
● Any director of a company and who as such director has a direct or indirect pecuniary
interest in any matter coming up for consideration at a meeting of the Board.
Section 11: Functions of the Board
● To protect the interest of investors and growth and regulation of SM
Section 15T: Power to Appeal
Any order made by the Board or the AO under this Act can be appealed to the SAT.
Section 24: Offences
● Without prejudice to any penalty awarded by the AO under this Act, if any person
contravenes or attempts to contravene or abets the contravention of any of the provisions
of this Act or of any Rules and Regulations made there under, he shall be punishable with
a term of imprisonment that may extend to 10 yrs, or with fine, that may extend to 25
crores, or both
● If any person fails to pay the penalty imposed by the AO or fails to comply with any of
the directions or orders, then he shall be punishable with imprisonment for a term not less
than 1 month, which may extend to up to 10 yrs or with fine of 25 cr or both.
● (This section is invoked when the gravity of the offence is huge and when documentary
proof is solid)
Section 24B: Power to grant immunity
● The Central Government, on the recommendation of the Board may grant immunity to a
person who has allegedly violated any of the provisions under this Act or any Rules or
Regulations thereunder and has made full and true disclosure with respect to the alleged
violation. It can also impose such conditions as it thinks necessary
● Immunity granted to a person in this case can be withdrawn by the CG if it is satisfied
that it has breached the conditions under which it had been given immunity or had given
false evidence
Section 26: Cognizance
● No Court can take cognizance of an offence committed under the Act or its Rules, unless
a complaint is made by the Board
Section 28A: Recovery of amounts
If a person fails to pay the penalty imposed by the AO or fails to comply with the directions
of the Board for the refund of monies or an order of disgorgement under Section 11B, the RO
can do the following
● Attachment and sale of the person’s MP
● Attachment of the person’s bank accounts
● Attachment and sale of the person’s IP
● Arrest of the person and detention in prison
● Appointing a receiver for the management of the person’s MP and IP
Section 29: Power to make rules – CG
Section 30: Power of the Board to make Regulations as per the provisions under the Act
and rules made thereunder
Enforcement by SEBI
There are three remedies in case of a securities fraud
● Administrative enforcement action
● Criminal Prosecution
● Civil Remedies under statutes such as Companies Act
Enforcement:
● It is the process of putting in execution or imposing a course of conduct or a command to
compel observance of law and make a person perform his legal obligation or duty to the
public.
● The object of enforcement by SEBI is to protect the interests of the investors and promote
the orderly development of the securities market, increase integrity and secure the
confidence of investors.
● The process of enforcement can start in the following ways
● Electronic surveillance by SEBI and other exchanges – Micro level compliance is not
possible by SEBI and thus it takes the assistance of stock exchanges
● Complaints from investors
● Inspection of intermediaries and stock exchanges
● Investigation whether formal or informal
● Media reports
Investigation:
● To enable the exercise of its powers, SEBI is also given the power of investigation by
seeking information under Section 11(3) of SEBI Act
● The following process is followed by SEBI for its investigation
(a) Fact Finding:
● Before enforcement action is taken, there is a need to establish the facts
● Facts can be established by investigation and SEBI Act itself has provided the mechanism
for formal investigation
● However not all enforcement needs to be preceded by investigation. Sometimes facts are
extremely obvious and natural justice is adhered with if the person si simply required to
explain his position
(b) Process:
● A preliminary investigation is done by SEBI wherein it seeks information from concerned
entities and other secondary sources like exchanges, depositories etc
● This is informal and can be done by any department of SEBI and is not required to be
done by a specific person as is the requirement in formal investigations
● If the concerned entity does not cooperate then it can be converted into a formal
investigation and the same has serious consequences for non cooperation
● If SEBI is satisfied that an investigation is to be conducted then it appoints an IO under
Section 11C(1)
(c) Evidence Gathering:
● Once an IO is appointed then he may require the intermediary or a person associated with
the securities market to furnish information related to any irregularity or the alleged
violations
● For this purpose he can send out summons to required persons to furnish documents or
books etc as provided under Section 11C(5) of SEBI Act.
● He may also record the statements of the MD or any employee or intermediary or person
in the securities market by requiring them to appear before him personally and can
examine them under oath
● Under Section 11C(8) and (9) of SEBI Act if the IO believes that any document or
record can be destroyed, then with the satisfaction of the judge, he can break open and
enter into any place and seize documents etc
● The provisions are under CrPC is followed for such seizure
(d) Investigation Report:
● After investigation, the IO drafts the investigation report containing all the information
about the alleged violations and irregularities
● The report must be supported by all the relevant evidence
● This report is submitted to a committee which goes through the report examines and
examines the strength of the evidence collected
● Subsequently the recommendations of the committee and the final report is placed before
the investigation department which vets it following which the report is placed before the
SEBI Chairman/WTM who may raise queries and record reasons for not agreeing with
the actions proposed
● While, if he agrees he can simply approve the action
(e) Adverse Inference:
● For non – cooperation an adverse inference can be drawn against a person
● Consequences are mentioned under Section 11C(6) which includes fines and
imprisonment
(f) Possible Actions
● Disciplinary action under Section 12(3) of SEBI Act (if the person is an intermediary)
● Criminal prosecution under Section 24 SEBI Act.
● Once the approval is gotten, it goes back to the investigation department for action
Inspection:
● The main difference with investigation is that this happens against registered
intermediaries like brokers and bankers
● The scope of inspection is usually more intrusive and complete
Process of enforcement in brief
● Show cause notice is sent to the concern party
Express Enforcement Powers – Administrative Powers
Cease and desist order
● Prohibits a person from violating the SEBI Act or the regulations in the future
● It also carries some consequences
● Chief consequence is the disclosure of this order in all types of regulatory filings which
could tarnish the image of the person
● For this reason, all the requirements of natural justice must be complied with before such
an order is passed
Disciplinary Order
● When a person is a registered intermediary then another penalty can be imposed (PNJ
must be adhered with)
● This is basically a formerly enquiry under Section 12(3) of SEBI Act
● It is a two stage process
● Under Chapter V of the SEBI (Intermediaries) Regulations, 2008 a designated authority
comprising a single officer or three officers not below the rank of division chief is/are
appointed. It sends a show cause notice receives a reply and prepares a report containing
the recommendations of the action that is to be taken.
● Subsequently the report is sent to a WTM, after which a second round of receiving replies
and hearing takes placed. Based on the facts, recommendation, replies and hearing the
WTM arrives at a conclusion
Distinction between disciplinary and penalty proceedings
● Provided under Section 12(3) r/w Chapter V of SEBI (Intermediaries) Regulation,
2008 – Provided under Chapter VIA of SEBI Act r/w SEBI (Procedure for Holding
Inquiry and Imposing Penalty by AO) Rules, 1995.
● Restricted to registered intermediaries – Can be initiated against any market participant
● Two stages – One stage
● Report is recommendatory – Adjudication ends with an order
● Order passed by member of SEBI – Order passed by AO
● PNJ complied with – PNJ complied with
● Appeal to SAT – Appeal to SAT
Remedial Orders
Sections 11 and 11B order – Generally
● Section 11 deals with the functions of SEBI while Section 11B deals with the power of
SEBI
● The SAT had declared that these two provisions were the reason the Board existed
● These two provisions complement each other and should be read together to further the
remedy sought to be achieved
● The directions can be retrospective as they are not considered to be punitive in nature
● Section 11B is procedural in nature. There is a principle which basically states that if law
affects procedural matters then it applies to matters pending as well as future matters.
● SEBI deals with new problems and it must be able to pass such orders as is necessary to
protect the interests of the investors as and when such problems arise
● Thus these powers are very broad and are unhinged by technical restrictions, except that
SEBI cannot use these powers to impose penalty under such an order (Do properly
before exams)
Powers under Section 11B reaches any person
● The 2014 Amendment to the Act widens the scope of the power under Section 11(2)(ia)
● It gives power to SEBI to call for information from any person including any bank or
board or authority established under Central or State Laws
Specific Remedies
Disgorgement:
● It is an equitable remedy and not a penal or even a quasi penal action
● It is essentially forcing the defendant to give up the amount by way of which he unjustly
enriched himself
● Its basic idea is to deprive the defendant of the fruits of his illegal activity and puts him at
the same position he was before the contravention occurred
● The 2014 amendment to the SEBI Act explicitly included the power of disgorgement
within the SEBI Act by way of insertion of Section 11(5), SCRA and Depositories Act
● The amount disgorged is deposited at the Investor Protection and Education Fund of
SEBI which can be utilised in accordance with the regulations governing such funds
● However the limitation is that disgorgement merely restores the wrongdoer to the same
position as before. Thus, it is not by itself a sufficient remedy to rectify and deter the
violator from committing future violations
Restitution:
● While disgorgement is essentially forcing the defendant from giving up the amount by
way of which he unjustly enriched himself, restitution seeks to return the unjust
enrichment back to the victim
● Restitution cannot occur unless money is taken from the wrongdoer by disgorgement or
otherwise
● The restitution made from disgorgement must follow the mandate laid down under SEBI
(Investor Protection and Education Fund) Regulations, 2009.
Asset Freeze:
● The regulator can ask the exchange to freeze assets of buyers and sellers in an exchange
transaction if there is evidence of large scale manipulation
● In an administrative capacity it is limited to market players and intermediaries. If it seeks
to freeze a bank account then SEBI will need the sanction of the court
Disqualification:
● SEBI is empowered under Section 11B to disqualify a person from occupying any office
in the exchange if it is convinced that the presence of such a person in the management of
the exchange would be detrimental to the interests of the exchange
Mandatory Buyback:
● SEBI can also issue directions to buy back the IPO shares issued to the public
Debarring from Accessing capital markets
Divestures
● When shares are acquired in violation of the law, then SEBI can ask the acquirer to sell
the shares in the open market or divest himself of the voting rights acquired by such
acquisition of the shares.
Ex – parte interim order:
SEBI can ass ex part interim orders under Section 11(4) and Section 11B so long as a post
decisional hearing is followed by a speaking order either confirming the interim order or
revoking it on the basis of further evidence collected.
Criminal Prosecution:
Launch of prosecution:
● Prosecution can be filed under Section 24 of SEBI Act, Rules or Regulations or under
Section 11(6) of the SEBI Act for failure to furnish information
● Further, violation of provisions of the SCRA or Depositories Act or certain provisions of
Companies Act could attract prosecution of SEBI
● Limitation: Under Section 469 of CrPC the period of limitation is considered from the
date of offence or date of knowledge or date of identification. Under Section 11(6) of
SEBI Act where punishment is for a year, limitation would also be for a year while under
Section 24 of SEBI Act there is no limitation to filing a prosecution
Difference between administrative or criminal actions
● Before administrative authority (member or adjudicating officer of SEBI) – Before court
of criminal jurisdiction
● The case is decided by proving the preponderance of possibilities – Guilt is required to be
proved beyond all reasonable doubt
● No mens rea required – Mens rea must be proved
● Remedy is as sought – remedy is conviction/fine or acquittal
Collateral estoppels:
● Burden of proof is lesser in civil/administrative matters
● Thus, if a person is held liable under an administrative proceeding, then he is not
automatically liable in criminal proceedings as well
● However, if he is guilty in a criminal proceeding, then he would be considered to be
guilty in civil proceeding as well and he cannot dispute the same
● This is due to the higher burden of proof in criminal proceedings
● This legal disability is called collateral estoppel
Parallel proceedings:
● SEBI has recourse to multiple remedies under civil as well as criminal laws
● One remedy does not preclude the use of other remedies
● Thus it could impose monetary penalty, pass remedial directions and also criminal
prosecution arising out of the same cause of action
● This does not fall in contravention to the double jeopardy clause under the Indian
Constitution (no man can be convicted of the same offence twice) and thus such parallel
remedies are possible
● However SEBI usually adopts just once course of action
● Further SEBI does not usually initiate criminal prosecutions unless the gravity of the
offence is very severe, it is repetitive etc. such that affects the interests of investors
adversely
● Further, the high burden of proof along with the element of mens rea that is to be proven
makes it difficult for SEBI to pursue any criminal action
Quantum of Penalty:
● The decision to impose penalty is subjective under Section 15-I
● However, the AO must take into account 3 factors that are mentioned under Section 15J
for imposition of penalty (i) the amount of disproportionate gain or unfair advantage,
wherever quantifiable (ii) the amount of loss caused to an investor or a group of investors
as a result of said default (iii) repetitive nature of the default
Appeal against SEBI Orders:
General:
● All orders under the SEBI Act or Depositories Act or most orders under SCRA or by
recognised SE’s are appealable to SAT under Section 15T of the SEBI Act
● SAT was created under Section 15K of SEBI Act and is empowered under SEBI Act,
SCRA and Depositories Act to hear appeals
● The SEBI Appellate Tribunal (Procedure) Rules, 1995, Depositories (Appeal to Securities
Appellate Tribunal) Rules, 2000, and the SC(R)(Appeal to Securities Appellate Tribunal)
Rules create the necessary enabling mechanism to hear appeals against orders passed
under those acts
Tribunal not bound by civil procedure:
● The Tribunal is not bound by the principles of civil procedure but upholds the principles
of natural justice
What is appealable before SAT:
● Any order that adversely affects the legal rights of a person is appealable before SAT
● Procedural orders are not appealable
Person aggrieved – Right of appeal:
● Section 15T of SEBI Act allows a person who is aggrieved by an order of the SEBI or
the AO, to file an appeal before the Tribunal.
Powers of SAT:
● Jurisdiction of the SAT in deciding an appeal is wider than supervisory jurisdiction under
Articles 226 and 227.
● This is due to the fact that supervisory jurisdiction of the HC can be exercised only with
regards to a question of law, while jurisdiction of SAT can be exercised on a question of
law as well as fact
● It is the court of last resort on fact
● It doesn’t have any power of contempt
● (No person can file a complaint in a consumer court against SEBI since it does not render
any service for consideration. Thus no case can be made for deficiency in service).
Civil Remedies of SEBI and Writ against SEBI:
● It is SEBI who approaches the courts for securities law violations since a person is
virtually debarred from doing so
● HC or SC can be approached by invoking their writ jurisdiction against SEBI.
SETTLEMENT MECHANISM
● It is mentioned under Section 15JB of SEBI Act
● The defaulter can enter into an agreement with SEBI under Section 15JB provided for
settlement of disputes provided full and true disclosures were made
● The amount received by way of settlement goes to the consolidated fund of India
● There are three main considerations that are taken into consideration
● Nature of the default
● Gravity of the default
● Impact of the default
History:
● SEBI (Settlement of Administrative and Criminal Proceedings) Regulations, 2014 was
already in force
● A high level committee was constituted by SEBI headed by AR Dave, J.
● This committee was formed to review the regulations to make it more robust
● Consequently, it looked into the practice of settlement both at home and abroad. It made
certain recommendations
● Due to these recommendations, SEBI (Settlement Proceedings) Regulations, 2018 came
into force
SEBI (Settlement Proceedings) Regulations, 2018:
Regulation 3: Application
● A person against whom any proceedings have been initiated or are pending or are about
to be initiated can make an application to the Board for settlement in the manner
provided Part A of Schedule – I (1)
● The Applicant must make full and true disclosures in the application in respect to the
alleged defaults (3) (Check proviso)
● The applicant shall make one application for settlement of all the proceedings that been
initiated or may be initiated in respect of the same cause of action (4)
Regulation 4: Limitation
The application must be filed within 60 days of receipt of show cause notice or
supplementary notice(s) to show cause, whichever is later (1)
Regulation 5: Scope of Settlement proceedings
● Application for settlement would not be considered if (1)
● An earlier application with regard to the same alleged default has been rejected
● The audit or inspection or inquiry or investigation is not complete in respect of any
cause of action, except in case of applications involving confidentiality
● Monies due under an order issued under securities law are liable for recovery under
securities laws
● The Board may not settle a specified proceeding, if it is of the opinion that the alleged
default (2)
● Has a wide market impact
● Has caused losses to a large number of investors
 ● Affected the integrity of the market
● The Board may take into consideration the following for settling any proceeding before it
(3)
● Where the applicant has refunded or disgorged the monies due, to the satisfaction of
the Board
● Whether the applicant has provided an exit or purchase option to investors in
compliance with securities laws to the satisfaction of the Board
● Whether the applicant is in compliance with securities laws or any order or direction
passed under securities laws to the satisfaction of the board
● Any factor as may be deemed appropriate by the Board
● The Board may not settle if the applicant is a wilful defaulter or a fugitive economic
offender or has defaulted in payment of any fees due or penalty imposed under securities
laws (4)
● The High Powered Committee has the power to reject an application without examination
by the Internal Committee or HPC
Regulation 6: Rejection of the Application
● An application for settlement can be rejected on the following grounds (1)
● When the applicant refuses to receive or respond to communications sent by the
Board
● Where the applicant does not submit or delays the submission of information,
documentation etc as called for by the Board
● Where the applicant is required to appear, he does not appear before the Internal
Committee on more than one occasion
● When the Applicant violates in any manner the undertaking and wavers as laid down
in Part C of Schedule – I
● When the applicant fails to remit the settlement amount within the period specified in
Regulation 15(2)(a) and/or does not abide by the undertaking and the waivers
Regulation 7: Withdrawal of application
● An Applicant can withdraw his application any time prior to the communication of the
decision of the WTM’s (1)
● An Applicant who withdraws his application in (1) cannot be filed again for the same
cause of action
Regulation 8: Effect of pending application on specified proceedings
● The filing of an application for settlement of any specified proceeding does not affect the
continuance of the proceedings. Only the final order is in abeyance till the application is
disposed off (1)
● Where the application is filed for settlement before proceedings are initiated, the same
shall not be initiated till the application is rejected or withdrawn
Regulation 9: Settlement terms
● The settlement terms may include a settlement amount or non monetary terms, in
accordance with the guidelines specified under Schedule – II
● What non monetary terms include do later
Regulation 10: Factors to be considered to arrive at settlement terms
The following can be considered to arrive at settlement terms
● Conduct of the applicant during audit investigation inspection and inquiry
● Nature, gravity and impact of alleged default
● All other factors necessary in the facts and circumstances in the case
Regulation 11: High Powered Advisory Committee
● The Board Constitutes a High Powered Advisory Committee for consideration and
recommendation of the terms of settlements (1)
● The HPC shall consist of a judicial member who has been a judge of the SC or the HC
and three external members who have expertise in the securities market and matters
connected thereto (2)
Regulation 12: Internal Committee
● This shall be constituted by the Board (1)
● It must comprise an offer not below the rank of Chief General Manager and other officers
as specified by the Board. (2)
Regulation 13: Proceedings before the internal committee
● The Internal Committee examines whether the proceedings may be settled and determines
the terms of settlement (1)
● Powers of the IC (2)
● It can call for relevant documents pertaining to the alleged default in the possession of
the applicant or obtainable by the applicant
● Call for personal appearance of the applicant
● Permit the applicant to submit revised settlement terms within a period not exceeding
10 working days from the date of the IC meeting
● Places the proposed settlement terms before the HPAC
Regulation 14: Proceedings before HPAC
● It considers the proposed settlement terms placed before it along with
● The application, undertaking and waivers of the applicant
● Factors specified in Regulation 10
● Settlement terms and revised settlement terms of the applicant
● Any other material available on record
● It can also seek revision of the settlement terms and send the matter back to IC
Regulation 15: Action on the recommendation of the HPAC
● The Panel of WTMs can accept or reject the recommendations of the HPAC
Regulation 19: Settlement for confidentiality
● Lays down the grounds under which the applicant can take the benefit of confidentiality
(i) must stop violations of securities law (ii) must continue to make full and true
disclosures (iii) cooperate fully (iv) not conceal destroy any documents
Regulation 28: Revocation of Settlement order
● If the applicant fails to comply with the settlement order at any time after the passing of
such an order
● No amount paid as settlement will be refunded in this case
RELATIONSHIP B/W SEBI AND STOCK EXCHANGE
Section 3: Application for recognition of stock exchanges
● Any SE which is desirous of being recognised, may make an application in the prescribed
manner to the CG (1)
● This application must contain such particulars as may be prescribed and a copy of the bye
laws of the stock exchange and also a copy of rules pertaining to: (2)
● The governing body of the SE, its constitution and powers of management and the
manner in which the business is being transacted
● Powers and duties of the officer bearers
● Admission and removal of various classes of members
● Process for registration of partnerships as members of the SE where the rules provide
for such membership
Section 4: Grant of recognition to stock exchanges
● The Central Government may, on making such inquiry as it deems fit or after obtaining
such further information may require
● The rules and bye laws of the stock exchange is in conformity with conditions as may
be prescribed with a view of fair dealing and protection of interests of investors
● That the SE is ready to comply with any other conditions as laid down by the Central
Government after consultation with it
● That it would be in the interest of trade and public interest to grant recognition to the
SE
It may grant recognition to the SE subject to the aforesaid conditions
Regulation 4A: Corporatisation and demutualisation
● On and from the appointed date, all recognised SEs (if not C and D’d) shall be C and D’d
in accordance with the provisions under Regulation 4B
Do Section 4B(8) later
Section 5: Withdrawal of recognition
The Central Government may withdraw the recognition given to an SE if it is of the opinion
that it would be in the interest of trade and the public. It will serve a notice to the SE
indicating the reasons for which it is considering withdrawing its recognition. It will be given
a right of hearing. Subsequently the CG can, by way of notification in the OG withdraw the
recognition granted to the SE.
MCX SE Ltd v. SEBI
● MCX SE was the petitioner and its VC was JS
● Its promoters were (i) MXC (51% holding – VC JS) (ii) FTIL (49% holding – CEO JS)
● Further Lafin held 45.43% in FTIL and 100% of share holding in Lafin was of JS and
family
● Lastly, FTIL held 31.18 in MCX
● MCX SE applied for recognition as an SE
● According to the report submitted by J Kania, Sections 4A and B were added to SCRA
which provided for corporatisation and demutualisation in order to prevent the
concentration of ownership in the hands of a few individuals in an SE
● SEBI came up with MIMPS Regulations which provided that 51% of equity SC of the SE
must be held by the public, and no person, either individually or jointly, directly or
indirectly can hold more than 5% of the total paid up capital of the SE
● In principle approval was granted for a year, but the SE was asked to comply with
MIMPS
● Thus the stake of MXC and FTIL had to be reduced
● In order to do the same, they entered into several agreements with banks for preferential
allotment of shares
● It also entered into an agreement with IL & FS who agreed to buy certain shares in MCX
SE
● Mechanism for reducing shareholding provided under MCX was
● Offer for sale of shares of SHs who have trading rights
● Placement of shares of SHs having trading rights, to persons and institutions
shortlisted by the SE and approved by SEBI
● Private placement of shares to persons other than SHs having trading rights
● Any combination of the above three
● However, even after the various agreements that it had entered into, MCX and FTIL held
around 38% of stake in MCX SE still
● Thus, in order to further reduce their shareholding, they went for cancellation of shares
and the same got the required approval from the HC as required under CA (promoters
were finding it difficult to divest their shares to the public because they were
apprehensive of investing at an institution facing compliance issues)
● The SH of MCX and FTIL reduced to 5% each
● They went to SEBI stating that they had complied with MIMPS regulations. SEBI granted
in principle approval again without prejudice to its right to decide the final application
● MCX SE went to the HC seeking an order asking SEBI to expedite its decision – granted
● However SEBI rejected the application on the ground that the combined shareholding of
MCX and FTIL exceeded 5% and asked the SE to shut down
● Matter went to HC
● Justifications of SEBI
● It was not informed of the buyback agreements that the company had entered into.
Thus there was a lack of trust
● Compliance with MIMPS was a condition precedent to recognition
● It did not divest itself of its shares in the manner under MIMPS
● Commercial difficulties of the directors are of no concern to SEBI. You must comply
with the Regulations
● It applied Takeover Code – definition of persons acting in concert (persons acting
with a common objective). It observed that MCX and FTIL were de jure acting in
concert and they shares clubbed together exceeds 5%
 ● The persons involved were not fit and proper
Held:
● The HC observed that the Takeover Code can be read with MIMPS
● In order for persons acting in concert the following can be considered
● Whether the MD of one company is the MD of the other
● Majority directors of one company are Maj directors in the other
● 1/3rd voting rights are held by the same group of people in both companies
● One is a holding Co and the other is a subsidiary (??)
● If one director is holding majority shares in another Co
● Not present and thus not acting in concert
● When SEBI appealed to SC it stated that it would review MIMPS
STOCK EXCHANGE AND CLEARING CORPORATION REGULATIONS
Replaced MIMPS
Regulation 3: Obligation to seek recognition
No person shall conduct organise or assist in organising a SE or a clearing corp without
obtaining recognition from the Board in accordance with the Act, rules and regulation
Regulation 4: Application for recognition
An SE and CC have to make an application to the Board for recognition in the prescribed
format
Regulation 5: Fee
A clearing corp or an SE seeking recognition must pay the applicable fee
Regulation 6: Documents and particulars for application
An application for recognition as a SE or a CC shall be accompanies with a copy of the MoA,
AoA, bye laws and other documents as prescribed
Regulation 7: Consideration of grant of recognition
An SE or a CC must comply with the following conditions
● It must be a company limited by shares
● It must be demutualised
● The applicant, its directors and shareholders who intend to hold shares are fit and proper
as per Regulation 20
● Applicant satisfies the requirements pertaining to ownership and governance structures
specified in the regulations
● Network requirements are satisfied
● It must have financial capacity, functional expertise and the necessary infrastructure
Regulation 8: Power to make inquiries and call for information
● The Board, before granting recognition has the right to make inquiries or call for further
information, documents etc as it deems necessary
Regulation 9: Grant of Recognition
● If the applicant fulfils all the criteria mentioned under Section 7, then the Board can grant
recognition in terms of Section 4 of the Act (SCRA)
● Further the SE or the CC must comply with additional requirements as may be imposed
by the Board from time to time
Regulation 10: Period of Recognition
● For a stock exchange, it is as per Rule 6 of what?
● While for a CC it cannot be less than one year
Regulation 11: Regulatory fee
● Every recognised SE shall pay regulatory fee as mentioned in SEBI (Regulatory Fee on
SE) Regulations, 2006.
● CC shall pay the fee as specified by the Board
Regulation 13: Withdrawal of Recognition
● As per Section 5 of the Act
Regulation 14: Net worth Requirements
● Minimum net worth of a recognised SE must be 100 crores at all times
● Applicant seeking recognition as a CC must have a net worth of 100 crores
Regulation 17: Shareholding of a recognised SE
● At least 51% of the equity paid up SC must be held by the public
● No person, either individually or jointly, directly or indirectly, shall hold or acquire more
than 5% of the paid up equity share capital in a recognised SE
● Provided that an SE, a depository, a bank, an insurance co, and a public financial
institution can hold or acquire, directly or indirectly, individually or jointly up to 15% of
the paid up ESC of a recognised SE or CC (same rule applicable for a person not resident
in India)
● CC cannot hold shares in any recognised SE
Regulation 18: Shareholding in a recognised CE
Identical to Regulation 17
Regulation 19: Eligibility for holding shares
● No person, whether individually or jointly, or directly or indirectly can acquire any voting
rights of a recognised SE or recognised Clearing Corporation unless he is fit and proper
person
● In case (by acquisition of voting rights) of an increase in voting rights from 2% to 5%,
approval of the Board must be taken within 15 days of the relevant acquisition
● If by acquisition a person’s voting rights exceeds 5% then he must take prior approval of
the Board
● If approval is not granted by the Board, then such a person shall be divested of his entire
shareholding in the SE or the CC
Regulation 20: Fit and proper criteria
● A person is considered to be fit and proper if he is honest, has financial integrity, good
reputation and character etc
Regulation 21: Disclosure of shareholding
● A recognised SE and a RCC shall disclose the pattern of shareholding to the Board,
within 15 days at the end of each quarter
Regulation 22: Record keeping
● Recognised SE and CC must maintain and preserve records
Regulation 23: Composition of governing board
Governing body shall constitute
(i) Shareholder directors,
(ii) Public interest directors,
(iii) MD
● The number of PI directors shall not be less than the number of SHDs
● MD is an SHD
● If an employee is appointed to the governing board of an SE or an RCC then he is also an
SHD
● For a quorum, the number of PID shall not be less than SHD.
● Casting vote in the meetings of the governing board lies with the chairperson
Regulation 24: Conditions for the appointment of directors
● Appointment or reappointment of an SHD shall be done with the prior approval of the
Board
● PID are nominated by the Board
● PIDs are nominated for a period of 3 years. The same can be extended by another 3 years
on the basis of a review by the Board
● PIDs on the board cannot simultaneously be directors in the subsidiary or on the board of
other SEs and recognised CC
● Shall keep the governing board updated about any conflict of interest
● PID can become SHDs only after a cooling off period of 3 years
● PID on the board can become a director on the board of a subsidiary, or the director of a
RSE or RCC only after a cooling off period of 3 years after he ceases to be the director
● Remuneration is that of an independent director under CA
● If there is a conflict of interest, the decision of the Board is final
Regulation 25: Appointment of an MD
● Appointment reappointment and termination of service of an MD shall be subject to the
prior approval of the Board
● Every recognised SE and CC shall subject to guidelines laid down by the Board provide
for the qualifications terms and conditions of service etc of an MD
● Must not have a term exceeding 5 yrs
● Is liable for removal for failing to give effect to the guidelines of the Board
● Board can suo motu terminate the appointment of an MD
Regulation 26: Code of Conduct for directors and KMP
● Directors of an RSE and an RCC shall abide by the Code of Conduct
● Directors of en RSE shall abide by the Code of Ethics
● Board can take suo motu action in case of non compliance with CoC and CoE and can
remove or terminate the appointment of such directors
Regulation 27: Compensation and tenure of KMP
Regulation 30: Appointment of a compliance officer
Every RSE and RCC shall appoint a compliance officer in order to ensure compliance with
the provisions under SCRA and SEBI Act Rules and Regulations therein and for redressal of
investor’s grievance
Regulation 31: Contribution to the Settlement Guarantee Fund
The contribution to the Fund mentioned in Regulation 37, made by an RSE or an RCC shall
be in the manner prescribed by the Board
Regulation 32: Transfer of penalties
Penalties imposed by RSE and RCC shall be transferred to the Investor Protection Fund or
the Fund mentioned in Regulation 37 as the case may be
Regulation 33: Do in the morning if you want
Regulation 35: Agreement between RSE and RCC
● Subject to the conditions mentioned in (2), an RSE can avail the services of RCC by
entering into an agreement with it in writing stipulating their rights and obligations,
charges for clearing and settling and other incidental matters
● Any dispute between the parties shall be settled by arbitration
Section 36: Admission of securities for clearing or settlement
● An RCC has to take the approval of the Board before extending any of its services for
clearing and settling of securities to an RSE
● An RSE cannot introduce any new segment without the prior approval of the Board
Regulation 37: Settlement Guarantee Fund
● Every RSE and RCC shall establish and maintain a SGF
Regulation 39: Equal fair and transparent access
The recognised SE and the RCC shall ensure equal fair and transparent access to all without
any bias towards its associates or entities
Regulation 42: Bye Laws and rules of SE and CC
● RSE and RCC shall, with the prior approval of the Board make bye laws for the
regulation of contracts and clearing and settlement as the case may be as per Section 9 of
the SCRA
● No clause in the MoA or AoA or any constitution document shall be altered without the
prior approval of the Board
Regulation 44: Right of CC
An RCC has the right to recover its dues from clearing members on account of the discharge
of their clearing and settlement functions
Regulation 45: Listing of securities
● A recognised SE can apply for the listing of its securities in another recognised SE, other
than itself if (i) It is compliant with the provisions of these regulations (ii) It has been
functioning continuously for a period of 3 years immediately preceding the date of
application of listed (iii) It has obtained the approval of the Board
● An SE cannot list any securities of its Associates
● Securities of an RCC cannot be listed on any SE
Regulation 46: Dematerialisation
● The securities of an RSE and an RCC must be in DMAT form
Regulation 49: Directions by the Board
Without prejudice to its powers under SCRA SEBI Act and rules and regulations made
thereunder, SEBI can suo motu or on the information given during the pendency of
inspection inquiry or investigation, or on the completion thereof, can issue orders that it
deems fit for the protection of investors, public and trade (i) Can ask an equity shareholder in
an SE or a CC to divest his shareholding (ii) direct transfer of any proceedings or securities to
the IPF or SGF (iii) debar a person from accessing securities market