vi. Other Policies and Programmes having a bearing on the working of the Securities Market

Changes in the regulatory framework of securities market

SEBI (Underwriters) (Amendment) Regulations, 1993

The SEBI (Underwriters) Regulations, 1993 was amended on January 17, 1997 providing, inter-alia, procedure for dealing with application and processing of application for grant of certificate of registration to underwriters. The time frame such as ‘within one month’ has been specified. Amendment has also been made in Chapter V relating to procedure for action in case of default. Time limit for responding to show cause notice has been extended to 30 days instead of 21 days.

SEBI (Foreign Institutional Investors) Regulations, 1995

The SEBI (Foreign Institutional Investors) Regulations, 1995 were amended on February 12, 1997 allowing FIIs to invest proprietary funds and to make investments in dated government securities.

The FII Regulations were further amended on July 10, 1997 providing that transactions in Government Securities may be carried in a manner as specified by the Reserve Bank of India and need not be through the SEBI registered brokers.

The third amendment relating to FII’s Regulations came into force with effect from December 5, 1997 inserting a new clause (d) to Regulation 15(3), inter alia, providing that FIIs or their sub-accounts having an aggregate of securities worth more than ten crore shall settle their transactions entered after January 15, 1998 only in a dematerialised form. Further, the eligibility criteria for registration of FIIs has been amended by incorporating the concept of ‘fit and proper person’.

SEBI (Depositories and Participants) (Amendment) Regulations, 1996

The following amendments to the SEBI (Depositories and Participants) Regulations, 1996 have been made on February 7, 1997.

1. provide that no foreign entity shall hold more than 20 per cent of the equity capital of the depository; and,
2. a clearing house of stock exchanges and a non-banking finance company which has a networth of Rupees 50 crore may also act as participant.
3. The issuer has to enter into an agreement with the depository to dematerialise the securities if the investors exercise an option to hold its securities with the depository in a dematerialised form.
4. The Depository shall hold the details of holdings of the securities of the beneficial owners at the end of each day.
5. In the manner of creating pledge such as investigation by the depository.

Depositories Regulations were further amended on January 21, 1998 for making securities eligible for dematerialised subject to RBI concurrence

• Waiving the requirement of agreement to be signed between issuer and the depositories in case of Government securities.
• Where the State or the Central Government is the issuer of Government securities, the depository shall on a daily basis reconcile the records of the dematerialised securities.
• The information required under regulation 57, shall not be required to be given to the depository in case of government securities.
• Where the State or the Central Government is the issuer of the securities. The Chapter pertaining to inspection of books and records shall be applicable to the State or Central government securities.

The SEBI (Registrars to Issue and Share Transfer Agents) Regulation, 1993 was amended on September 17, 1997 to provide that a registrar to an issue shall not act as a registrar in respect of any issue of securities if it is an associate of the body corporate issuing the securities. An explanation defining ‘associate’ was also excluded.

SEBI (Custodian of Securities) Regulations, 1996

The SEBI (Custodian of Securities) Regulations, 1996 was amended on October 17, 1997, inter-alia, to provide for the appointment of an auditor to inspect and investigate the books of accounts, records, etc. of an applicant. It is also provided that the expenditure incurred by the SEBI in respect of inspection conducted by an outside auditor will be recovered from such applicant or custodian.

SEBI (Annual Report) Rules

The SEBI (Annual Report) Rules has been amended to such that the SEBI shall submit Annual Report to the Central Government within 90 days after the end of each Financial Year instead of 60 days.

SEBI (Merchant Bankers) Regulations, 1992

Merchant Bankers have been barred from undertaking activities other than related to the securities market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19, 1997 to provide that:

1. the applicant should be a fit and proper person;
2. a merchant banker has to seek separate registration for its underwriting or portfolio management activities;
3. the categorisation of merchant bankers I, II, III and IV has been dispensed with;
4. a merchant banker, other than a bank or a public financial institution, has been prohibited from carrying any activities not pertaining to the securities market; and
5. the applicant should be a body corporate other than non-banking finance company.

Merchant banking companies, to be eligible for the above exemption, are required to satisfy the following conditions:

1. such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are carrying on the business of merchant banker in accordance with the Rules / Regulations framed by the SEBI;
2. they acquire securities only as part of their merchant banking business;
3. they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act, 1934;
4. they do not accept / hold public deposits.

The SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations were amended on January 21, 1998 to provide that where a corporate entity has been formed by converting individual or partnership membership card, such corporate entity shall be exempted from payment of registration fee if the erstwhile individual or partner member has paid the fees subject to the condition that such individual or partner shall be a whole-time director of the corporate entity so converted and such director so converted to hold minimum 40 per cent shares of the paid up equity capital of the corporate entity for a period of atleast 3 years from the date of such conversion.

Fit and proper person

Many of the SEBI regulations relating to stock brokers, registrars to an issue, portfolio manager, underwriters, debenture trustees, bankers to an issue, custodian of securities, depositories, venture capital funds were amended on January 5, 1998 to provide that applicant should be a fit and proper person. For determining internal guidelines to ascertain whether the applicant is a fit and proper person, the following criteria have been laid down.

1. whether the applicant is financially sound. If the capital adequacy has been specified in the regulations, the same criteria shall be taken into consideration. In other cases, the financial resources of the applicant shall be taken into consideration;
2. whether the applicant has been convicted by a Court for any offence involving moral turpitude or fraud and sentenced in respect thereof to imprisonment for a period not less than six months;
3. whether any winding up orders have been passed against the applicant;
4. whether any order under the Insolvency Act has been passed against the applicant or any of its directors, or person in management in the preceding five years;
5. whether any order suspending or debarring the applicant from permanently carrying on activities in the financial sector has been passed by any regulatory authority;
6. whether any order, withdrawing or refusing to grant any licence/approval to the applicant which has a bearing on the capital market, has been passed by any other regulatory authority in the preceding five years;
7. any other reason (to be recorded in writing by the Board) which adversely affects the reputation or character of the applicant and has a bearing on the capital market so as to deny the applicant certificate or renewal thereof.

The stock exchanges were advised to amend the listing agreement inter-alia to provide for :

1. Appointment of a senior officer to act as Compliance Officer who will be responsible for monitoring the share transfer process and report to the company’s Board in each meeting. The compliance officer will directly liaise with the authorities such as the SEBI, stock exchanges, ROC, etc. and investors with respect to implementation of various clause, rules, regulations and other directives of such authorities and investor service and complaints related matter.
2. The obligation to undertake a due diligence survey to ascertain whether the RTA is sufficiently equipped with infrastructure facilities such as adequate manpower, computer hardware and software, office space, documents handling facility, etc. to serve the shareholders.
3. Insistence by the company that the RTA produces a certificate from a practising Company Secretary that all transfers have been completed within the stipulated time.
4. Furnishing information regarding loss of share certificates and issue of duplicate certificates.
5. Company to produce a copy of the MoU entered into with the RTA regarding their mutual responsibilities.

When any person acquires or agrees to acquire any security beyond 5 per cent of the voting capital, the acquirer and the company shall comply with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. When any person acquires or agrees to acquire any security exceeding 10 per cent of the voting rights in any company or if a person who holds security which in aggregate carries less than 10 per cent of the voting rights of the company and seeks to acquire the amount of security exceeding 10 per cent of the voting capital, such person shall not acquire any amount of securities exceeding 10 per cent of the voting capital of the company without complying with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

The provisions pertaining to listing were also amended to provide that exemption permitting listing of debt without the pre-existing requirement of prior listing of equity would cover debt instruments fully or partly convertible into equity issued by infrastructure companies, and pure debt instruments issued by municipal corporations. However, the above exemption would be available only if the following conditions are fulfilled:

1. Issue of debt instruments shall be made through a public offer and comply with the rules, regulations, and guidelines issued by the SEBI from time to time.
2. The instruments, irrespective of the maturity shall carry an investment grade credit rating which shall be disclosed in the prospectus.
3. The instruments shall be fully secured by creating appropriate security in favour of the trustees, irrespective of the maturity of the instruments.
4. In the case of issue of pure debt instruments by infrastructure companies, equity issued prior to the public issue of debt shall not be permitted to be listed unless the provisions of Rule 19(2)(b) of the SCR Rules, 1957 are complied with, i.e. a public offer of equity has been made.
5. In the case of issue of debt instruments fully or partly convertible into equity by infrastructure companies, while the PCD/FCD shall be listed directly, the equity held prior to the issue of the PCD/FCD shall be listed only at the time when the equity arising on conversion of the PCD/FCD gets listed.

Disclosure and Investor Protection Guidelines were further amended pursuant to recommendations of Dave Committee and OTCEI. Clarification XVIII was issued on April 17, 1997 which inter-alia provided for amending the eligibility norms for public issues by a company which proposes to list its securities on OTCEI in accordance with the Rules and Regulations of OTCEI. The OTCEI has appointed atleast 2 market makers (1 compulsory and 1 additional market maker), can offer for sale, by shareholders of a company, of securities which have been sold through a bought out deal registered with OTCEI, undertaken in the past or to be undertaken in the future, provided that such company will be eligible for being listed and traded only on OTCEI.

Clarification No. XIX.

The recommendations of the Primary Market Advisory Committee of the SEBI were deliberated upon in the SEBI Board meeting held on March 26, 1997. The recommendations under Clarification no. XIX of the Committee accepted by the SEBI Board have been brought into effect. Part A of this clarification pertains to procurement of minimum subscription in a public issue. The facility of procuring subscription within 60 days of the closure of an issue, (available in underwritten issues), will now be available to promoters in non-underwritten issues. Thus, the promoters can now bring their own money or procure subscription from elsewhere within 60 days of the closure of the issue provided adequate disclosures in this regard have been made in the offer document. Part B of the Clarification XIX modifies the provision of lock-in period of promoters contribution. In case of rights issues at a premium, the requirement of promoters contribution and lock-in will no longer be applicable. In cases of preferential issues (as per the SEBI’s Guidelines dated August 4, 1994) and public issues, wherever the provision of lock-in of promoters contribution are applicable for a period of 5 years, the same shall be reduced uniformly for a period 3 years.

Part C tightens the eligibility norms, prescribed for body corporates to access the capital markets. These norms, inter-alia, specify that corporates which have a three year track record of dividend payment, shall be eligible to make a public issue of equity shares or instruments to be converted into equity shares. The term ‘track record’ is now modified to mean a record which has been established in the respective years. In other words, dividend should be declared in each of the three years to be considered as ‘track record’ for the purpose of meeting the requirement of the SEBI Guidelines.

Part D pertains to the validity of the observation letter issued by the SEBI. Earlier the acknowledgment card issued by the SEBI was valid for a period of three months. Now, the observation letter issued by the SEBI will have a validity for one year i.e. the issue opening date shall be within 365 days from the date the observation letter is issued. In cases where no observation letter is issued, the period of 365 shall be reckoned from the 22^nd day of filing the draft offer document with the SEBI.

Clarification no. XX

The SEBI Board has taken a decision to change the existing provision of Disclosure and Investor Protection guidelines regarding tradeable lot. This change has been brought into effect under Clarification no. XX.

The existing provisions contained in the SEBI guidelines requires the tradeable / marketable lot to be of 100 shares of face value of Rs.10/- each. In order to encourage participation of small investors in highly priced public issue / offers for sale. The SEBI through clarification, gave an option to the issuers to fix the minimum marketable lot on the basis of offer price subject to the condition that the marketable / tradeable lot shall not consist of more than 100 shares in any case. Thus issuer, if so desires, can go for tradeable lot higher than the minimum tradeable lot specified for a particular offer price range provided that lot does not comprise more than 100 shares.

The successful applicants will be issued share certificates / instruments for eligible number of shares in tradeable lots. The minimum tradeable lot, in case of shares of face value of Rs.10/- each, shall at the option of the issuer/offeror be fixed on the basis of offer price as given in the box, provided that the maximum tradeable lot in any case shall not exceed 100 shares.

Amendment of schedule II of the Companies Act

Schedule II of the Companies Act has been amended inter-alia to provide that the statement by the Board of Directors should be filed stating that

1. all monies received out of the issue of shares or debentures to public shall be transferred to a separate bank account other than the bank account referred to in sub-section (3) of section 73;
2. details of all monies utilised out of receipts from issue referred to in sub-item (i) shall be disclosed under an appropriate separate head in the Balance Sheet of the company indicating the purpose for which such monies had been utilised; and
3. details of all unutilised monies receipt from issue of shares or debentures, if any, referred to in sub-item (i) shall be disclosed under an appropriate separate head in the Balance Sheet of the company indicating the form in which such unutilised monies have been invested.

In February 1997 the SEBI constituted a Committee under the Chairmanship of Justice D.R. Dhanuka, Retd. Judge of the High Court of Bombay for the review of inter-alia, the SEBI Act, SCR Act, Depositories Act and the provisions of the Companies Act pertaining to the capital market. The Committee submitted its interim recommendations in respect of working draft of the Companies Bill, 1997. Gist of the main recommendations of the Committee are in the box I.8.

Box I.8: Interim recommendations of Justice D.R. Dhanuka committee

• Definition of the expression "security" be restructured. The expressions "derivative" and "option in securities" can be more appropriately defined in SC(R) Act.
• As per the Working Draft Report, only Part III is proposed to be administered by the SEBI. It is recommended that all the provisions relating to listed companies in so far as they relate to subject matter of capital market wherever found in Companies Act, be administered by the SEBI.
• Provisions relating to prospectus, shelf-prospectus and red herring prospectus require modifications. The SEBI should be the sole authority for framing regulations in relation to the subjects entrusted to it under the new legislation.
• Private Placement should be regulated. Broad parameters should be laid down in the Act. The details of regulatory framework can be left to the SEBI.
• Provisions made in the Working Draft for buy back of securities require several modifications. (i) The provision for buy-back should be restricted to "shares" only. (ii) The company should not be allowed to utilise proceeds of "prior issue" for purpose of "buy-back".(iii) The company should be allowed to re-issue the shares which are bought back, subject to safeguards and stipulations which may be laid down.
• Penal provisions of the Act be made were deterrent.
• Listing period be reduced from 10 weeks to 30 days. It should not be mandatory to have the securities listed on the regional stock exchange.
• Clauses 94-98 of the Working Draft require several amendments. The SEBI may be authorised by the Act to frame regulations relating to transfer of securities of listed companies, etc.
• Obtaining of duplicate share certificate and issue thereof as a result of fraud or collusion be made a serious criminal offence.
• If a person is found guilty of contravening the provisions of the SEBI Act, SC(R) Act or Depository Act, or is penalised by the adjudicating officer under the SEBI Act, should be disqualified from becoming the director of the company.
• Security audit be made compulsory.
• Monetary penalty concept be introduced so that investors can seek remedy of claiming compensation, damages, etc.
• In order to enhance corporate democracy, the concept of Postal Ballot to be introduced to enable shareholders to vote through postal ballot.
• The blank transfer deeds should not be permitted.
• The SEBI should have power of inspection of books of accounts, records of the listed companies.
• Rights issue with right of renounciation be treated as public issue.
• Printing of share certificates be regulated.
• Verification of transfer deeds by companies on payment of nominal fees before lodgment of certificate for transfer.
•  Company’s right to refuse transfer to be limited to violation of the SEBI Act and regulations, or any other law and not on sufficient cause.
• The concept of deemed public company be reintroduced. Section 43A of existing Act is a useful provision in the Act and it should not be deleted.
• The Reserve Bank of India should have power to freeze voting rights in respect of "shares under transfer" concerning banking companies pending consideration of application for acknowledgment If the shares of a banking company are transferred in violation of Banking Regulation Act, 1949 or the circulars / guidelines issued by Reserve Bank having the force of law, the Reserve Bank should have local stand to apply to Company Law Board for rectification of Register on par with the SEBI and other authorities.
• Companies making initial public offer of securities for a sum of Rs.10 crore or more to be issued only in dematerialised form through a depository.

In response to SEBI (Custodian of Securities) Regulations, 1996, the SEBI had received applications from entities who were conducting the activities of custodian before the notification of the regulations. The regulations require custodians to have adequate infrastructural facilities such as office space, vault space, computer systems and appropriate staff for grant of registration. To assess the adequacy of infrastructure and compliance with regulations, an inspection of all applicants was carried out during 1997-98, following which 3 custodians were granted registration during the year.

Substantial acquisitions of shares and take-overs

The SEBI (Substantial Acquisitions of Shares and Take-overs) Regulations, 1997 were notified in February 1997. The 1997 regulations aim at:

• Investor protection in the take-over process
• Greater transparency
• Fairness and equity of treatment to all investors
• Timeliness and accuracy of disclosure of information to investors
• Prevention of frivolous offers
• Enforcement against violations

• Definition of "control" and "parties acting in concert", and requirement of a mandatory public offer by an acquirer once he acquires more than 10 per cent of the voting rights of a listed company or if there is a change in control of the company.
• Consolidation of holdings in a company at the rate of 2 per cent in every 12 month period by any person who holds between 10 per cent and 51 per cent of the shares or voting rights of a company without triggering a mandatory public offer.
• A person holding more than 51 per cent of the shares or voting rights cannot consolidate unless he makes a public offer to acquire the required number of shares.
• Elaborate and stringent disclosure requirements.
• The introduction of the requirement of establishing an escrow account by an acquirer in which the acquirer is required to deposit specified percentage of the consideration payable. For consideration payable by the offeror upto and including Rs. 100 crore, 25 per cent of the consideration payable required to be placed in escrow, and for the consideration payable exceeding Rs. 100 crore, 10 per cent of the consideration payable required to be placed in escrow. This amount would be forfeited in case of default or non compliance by the acquirer.
• Indirect take-over of companies through the acquisition of control of holding investment companies brought under the purview of the regulations, and such a change in control requires a mandatory public offer to be made.

The regulations require cases for exemption from the regulations to be referred to a Panel, which will give its recommendations to the SEBI on whether exemption may be granted. Accordingly a Panel has been set up under the Chairmanship of Justice S M Jhunjhunwala, former justice of the Mumbai High Court with Dr. S A Dave, former chairman, Unit Trust of India, Shri A.R. Gandhi, Senior Partner, N M Raiji & Company, Shri S C Bafna, former Member, Company Law Board and Shri S A Kamath, Banking Ombudsman as members. The Panel considers applications for exemptions from applicability of the regulations in cases which would not be covered by the circumstances specifically enumerated in the non applicability provisions of the regulations. These cases could be acquisitions involving pledges, buy back agreements, acquisitions from the secondary market, transfer among entities which may strictly speaking not be promoters as defined in the regulations. In 1997-98, 26 cases were referred to the Panel.

SEBI (Mutual Funds) (Amendment) Regulations, 1996

4(a) The SEBI (Mutual Funds) Regulations, 1996 was amended on April 1, 1997 to provide that the provisions of the Regulation 52 sub-regulations (3), (4), (5) and (6) will come into effect from April 1, 1997 instead of three months from the date of notification of this regulation for those schemes which have been launched prior to these Regulations.

4(b) The SEBI (Mutual Funds) Regulations were amended in January 1998. These regulations provide for the following:

• Investment by MFs in group companies of sponsors restricted to 25 per cent of the net assets of the fund.
• Investments in unlisted group companies and privately placed securities of group companies by MFs prohibited.
• Assets Management Company (AMC) not to undertake security transactions with associate brokers beyond 5 per cent of quarterly business done by the MF.
• AMC to justify and report to trustees for exceeding the above limit in case of non associate brokers.
• The SEBI is empowered to extend period for raising net worth to Rs.10 crore upto to three years for the AMC.
• AMC cannot float new scheme till net worth is raised.
• MFs are allowed to lend securities in accordance with the Stock Lending Scheme
• Any initial issue exposure over 6 per cent to be borne by AMC
• Abridged Annual Report containing portfolio disclosures to be mailed to all unit holders.
• No need to obtain approval for roll over or conversion of close-ended into open ended schemes provided information relating to such roll over is disclosed to the unit holders and the unit holders who do not consent in writing are allowed to redeem their holdings at full or NAV based price as per the terms of offer.
• Independent trustees to constitute two-thirds of the Board instead of 50 per cent.
• MFs having securities worth Rs.10 crore to settle their transactions only through dematerialised securities as specified by the SEBI.