Basic Concepts in Securities Laws. CA Jayant Thakur October 2014

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1 Basic Concepts in Securities Laws CA Jayant Thakur October 2014

2 Overview Concepts of and in Securities Laws Principal Laws and Regulations Substantive and procedural issues, and enforcement including penalties and prosecution Focus on issues relevant to CAs and nonspecialists

3 Relevance for CAs Increasing role as Auditors of listed companies/entities, Independent Directors, Audit Committee members, etc. Deemed insiders CFOs New Regulations like Investment Advisors, etc. Increasing powers of SEBI

4 Relevance for CAs Bombay High Court in Price Waterhouse s case ((2010) 103 SCL 96) SAT in Pyramid s case (Order dated March 11, 2011) Recent decisions in merchant bankers case (Keynote, etc)

5 Important Concepts Securities Wide definition Generally listed or proposed to be listed Hence, listed company SEBI Background/brief history From Harshad Mehta to Ketan Parekh to Roy/Raju to now perhaps DLF

6 Broad framework of law Principal Acts Regulations/Rules Guidelines Circulars Cases (SEBI, SAT, Courts, Informal Guidance) Running into 1000s of pages of bare law Regularly amended

7 SEBI Act Enabling, empowering and enforcing Contains powers to make Regulations/Rules, register intermediaries and other bodies, investigate, punish, give relief, etc. More details in subordinate regulations Concept of registration

8 Depositories/SCRA Depositories Act Governing dematerialization and authorities Securities Contracts (Regulation) Act Governs listing, definitions of securities, governance of stock exchanges A common concept of spot contracts Objective Commonly violated

9 Consolidation of Laws Too many laws in financial sector 1999 proposal to merge 3 laws Justice Dhanuka Committee 2013 proposal to merge more laws Justice Srikrishna Commission

10 Listing Agreement Nature a contract Regulated by SEBI Corporate governance Clause 49 Accounts disclosures Clause 41 Deficiency Proposal to make into Regulations Violation Penalty Other actions

11 Regulations considered separately Takeover Regulations Prohibition of insider trading Regulations Corporate governance/clause 49 Settlement Regulations

12 FUTP Regulations Governs frauds, price manipulations and numerous similar acts Front running recent controversies Price rigging, false disclosures, synchronized deals, self-dealing, etc. Numerous cases Wide definition of fraud Disgorgement, Penalties, debarment, prosecution, etc.

13 ICDR Regulations Issue of shares Public/Rights/Preferential/Bonus, etc. Earlier Guidelines Guidelines vs. Regulations

14 Buyback of Securities Buyback of securities reverse of an issue Several ways reverse rights, open market, etc. Helps consolidation/return of funds/market support

15 Sweat Equity Concept of Sweat Equity Stringent Regulations make issue almost commercially impossible Restrictions over issue, pricing/valuation, accounting, remuneration, etc.

16 Delisting Regulations Reverse of Listing Steps/conditions By Promoters Majority of minority approval milestones Stringent Regulations Hated by listed companies/promoters Loved by Investors Recent controversies AstraZeneca etc

17 Investment Advisors/Research Analysts/Portfolio Managers Specialized Regulations Unwitting non-compliance by CAs

18 Collective Investment Schemes Governing various collectively managed assets Almost every week entities caught in violation Often CIS in garb of taking loans, etc. Stringent Regulations Time sharing schemes Gold investment schemes

19 Other Regulations Numerous other Regulations governing stock brokers, AIFs, mutual funds, FIIs, bankers, etc.

20 ESOPs Guidelines Issue of stock options, share purchase schemes for employees Pricing/valuation, accounting, lock in, etc. Guidelines vs. Regulations

21 Informal Guidance Similar to Advance Ruling Cheap advice too! Time bound replies Limited binding nature

22 Securities Lending/Borrowing To enable shareholders to lend to shortsellers Earn some profit Have safety of his assets Be protected of value/returns of assets

23 Investigation Elaborate powers Summons for personal statement/documents Search and seizure recent changes Obtaining records from elsewhere Phone-tapping?

24 Orders (other than penalty) Wide powers Interim Orders Preventive/Remedial/Protective action Zenith Infotech SEBI order 25/03/2013 Suspension/cancellation Debarment Disgorgement Attachment/arrest

25 Penalties Progressively increased Rs. 1lakh per day, Rs. 25 crores, 3/5 times certain amounts Minimum penalty recent amendment Consideration for levy of penalty Shriram Mutual Fund s Supreme Court decision ((2006) 68 SCL 216)

26 Prosecution Wide provisions Exceeded only by Companies Act, 2013 Compounding

27 Inter play with other laws Companies Act, 2013 Overlapping provisions Powers to SEBI SFIO Insurance/RBI ULIPs Laws relating to deposits

28 Miscellanous/Conclusion Role/attitude of SEBI towards CAs higher bar Insider trading Merchant banking CFO Independent Directors/Audit Committee Continuing awareness of developments Detailed knowledge of specific fields

29 THANK YOU!

SECURITIES AND EXCHANGE BOARD OF INDIA ACT,

SECURITIES AND EXCHANGE BOARD OF INDIA ACT, CONTENTS Foreword Authors Note About The Authors From The Editor s Desk About The Editor Supreme Court Judgments High Court Judgments Securities Appellate Tribunal (SAT) Judgments Authorities Of Other