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 (Indian) Judicial Fora Referred SEBI Board Orders Referred SEBI Adjudication Orders Referred SEBI Consent Orders Referred U.S. (Courts/SEC Actions) & U.K. Authorities Cited Reports Referred SEBI Informal Guidances Referred SEBI Annual Reports Referred SEBI Press Releases Referred i iii ix xi xv xxix xxxix xlv lxxii lxxiv lxxxii lxxxix xci xcii xcv xcvii xcviii SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 PREAMBLE A Brief History 1 Preamble 8 An Overview 9 Amendments 12 xvii
xviii Contents CHAPTER I PRELIMINARY 1. Short title, extent and commencement 12 2. Definitions 13 Official Gazette 15 Securities 15 Shares, Scrips, Stocks, Bonds, Debentures, Debenture Stock 17 Marketable Securities 18 Derivatives 23 Units of a Mutual Fund 24 Securitization Certifications or Instruments 24 Government Securities 25 Rights or interests in securities 26 CHAPTER II ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA 3. Establishment and incorporation of Board 27 4. Management of the Board 29 5. Term of office and conditions of service of Chairman and members of the Board 32 6. Removal of member from office 35 7. Meetings 36 7A. Member not to participate in meetings in certain cases 38 8. Vacancies etc., not to invalidate proceedings of Board 39 9. Officers and employees of the Board 40 CHAPTER III TRANSFER OF ASSETS, LIABILITIES, ETC., OF THE EXISTING SECURITIES AND EXCHANGE BOARD TO THE BOARD 10. Transfer of assets, liabilities, etc., of existing Securities and Exchange Board to the Board 42
Contents xix CHAPTER IV POWERS AND FUNCTIONS OF THE BOARD 11. Functions of Board 44 Sub-section (1) 48...such measures... 49...as it thinks fit... 51...regulate... 54 Sub-section (2) 54...without prejudice to the generality of the foregoing provisions... 54 Clause (a) - Regulating the business in Stock Exchanges and Other Securities Market 55 Stock Exchanges as State under Constitution 57 Turnover of Stock Exchanges 57 Clauses (b) and (ba) - Registering and regulating the intermediaries 58 General 58 Fit and Proper Person 59 Due Diligence 64 Maintaining Records & Inspection 67 Clause (b) 68 Stock Brokers 68 Sub-Broker 73 Registrar to an Issue/Share Transfer Agent (RTI/STA) 75 Bankers to an Issue 78 Debenture Trustees 80 Merchant Bankers 83 Underwriters 88 Portfolio Manager 91 Investment Adviser 95... and such other intermediaries who may be associated with securities markets in any manner... 98 Clause (ba) 98 Depositories and Depository Participants 99 Custodian 108
xx Contents Foreign Institutional Investors (FII) 113 Credit Rating Agencies (CRA) 115 Clause (c) 120 Venture capital funds 120 Collective Investment Scheme (CIS) 122 Mutual Funds 122 Clause (d) - Self-Regulatory Organisations 131 Clause (e) - FUTP 134 Clause (f) - Investor Education 134 Clause (g) - Insider Trading 139 Clause (h) - Takeovers 139 Clause (i) - Call for Information 139 Undertaking inspection, conducting inquiries and audits... 140 Persons associated with securities markets 141 Clause (ia) - Call for information - Other Authorities 144 Clause (j) - Powers under SC(R)A 147 Clause (k) - Power to levy fees 148 Clause (l) - Conducting research 151 Clause (la) - Information from/to Agencies 152 Clause (m) - Performing such other functions as may be prescribed 153 Sub-section (2A) - Inspection of listed companies 154 Sub-section (3) - Power of Civil Court 156 Sub-section (4) - Measures 158 any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry 159 Suspending the trading of any security in a recognised stock exchange 162 Restraint on accessing the securities market and prohibiting dealings in securities 163 Suspending office bearers of stock exchange or self-regulatory organisation 165 Impounding, Attachment and Restraint against alienation 166...either before or after passing such orders, give an opportunity of hearing... 167 for reasons to be recorded in writing 169
Contents xxi 11A. Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities 171 11AA. Collective investment scheme 178 CIS Regulations 182 Constitutional Validity 187 Conditions for Collective Investment Schemes 189 Art Funds as Collective Investment Schemes 193...company... 194 CIS and ULIPS 195 11B. Power to issue directions 197 Nature of Directions 200 Directions for Disgorgement 207 Drawing the Line - Disgorgement v/s. Compensation 215 Directions for violations of other statutes 218 Persons to whom directions can be issued 220 Principles of Natural Justice 220 11C. Investigation 221 Grounds of Investigation 226 Investigating Authority 228 Reasonable Grounds to Believe 228 Power to Investigate - Discretionary 231 Preserving and Producing the Records 233 Summoning the Records and Persons 233 Scope of Investigation 235 Penalty 236 Search and Seizure 239 11D. Cease and desist proceedings 240 CHAPTER V REGISTRATION CERTIFICATE 12. Registration of stock brokers, sub-brokers, share transfer agents, etc. 246 Sub-sections (1) and (1A) 248
xxii Contents Intermediary 249 Deal in Securities 251 Sub-section (1B) 252 Sub-section (2) 253 SEBI Registered Institutions 253 Sub-section (3) - Suspension or Cancellation of Registration 255 Suspension under Section 11(4) read with Section 11B 258 Procedure for Enquiry 260 Enquiry Regulations v. Intermediaries Regulations 265 CHAPTER VA PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES, INSIDER TRADING AND SUBSTANTIAL ACQUISITION OF SECURITIES OR CONTROL 12A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control 270 Prevention of Money Laundering 271 Standard of Proof under Section 12A 271 Sub-sections (a), (b) and (c) - Manipulative and Deceptive Devices 273 Trading in Secondary Market 281 Trading Hours in Secondary Market 283 Index-Based Market - Wide Circuit Breaker System 284 Common fraudulent, manipulative and unfair trade practices 285 - Synchronised Trades including Circular Trades, Reverse Trades and Cross Deals 285 - Self Trades 293 - Increasing/Maintaining High Orders 293 - Marking the Close/Ramping 294 - Front Running/Back Running 295 - Tailgating 295 - Scalping 296 - Puffing Advertisements/Rumour Fraud 296 - Pump & Dump 297
Contents xxiii - Poop and Scoop 297 - Ponzi Schemes 297 - Order Book Manipulation 297 - Churning and Burning 298 - Bear Raid 298 - Cornering Free Float 298 - Punting 299 - Parking 299 - Cornering Shares in Public Issues 301 - Private Treaties 301 - Penal Provisions - FUTP Regulations : Prospective in Nature 301 Sub-sections (d) and (e) - Insider Trading 302 Insider Trading Regulations 306 Insider 311 Price Sensitive Information 316 Unpublished 318 Motive irrelevant for insider trading 319 Varied Expressions 320 Prevention of Insider Trading 322 Disclosures 325 Short Swing Profits 329 Sub-section (f) - Takeover Regulations 332 Public Offer/Open Offer 334 Public offer triggers 339 Disclosures 344 Satyam Amendments 346 Takeover Regulation Amendment Committee Report (TRAC Report) 348 CHAPTER VI FINANCE, ACCOUNTS AND AUDIT 13. Grants by the Central Government 349 14. Fund 349 15. Accounts and audit 355
xxiv Contents CHAPTER VIA PENALTIES AND ADJUDICATION 15A. Penalty for failure to furnish information, return, etc. 363 Non-Filing of Disclosures - Whether Technical Violation? 365 Proving the Delivery 366 Non-Furnishing of Information during Investigation 368 Furnishing Incomplete, False or Incorrect Information 369 15B. Penalty for failure by any person to enter into agreement with clients 370 15C. Penalty for failure to redress investors grievances 373 15D. Penalty for certain defaults in case of mutual funds 376 15E. Penalty for failure to observe rules and regulations by an asset management company 380 15F. Penalty for default in case of stock brokers 382 Contract Note 383 Delivery of Security and Payments 386 Excess Brokerage 388 15G. Penalty for Insider Trading 388 15H. Penalty for non-disclosure of acquisition of shares and takeovers 391 15HA. Penalty for fraudulent and unfair trade practices 392 15HB. Penalty for contravention where no separate penalty has been provided 393 15-I Power to adjudicate 396...in addition to... 398 Division Chief 400...in the prescribed manner... 400 Principles of Natural Justice 403 Sub-section (2) - Powers of Adjudicating Officer 407 Mens rea and Nature of Penalty 408...may impose such penalty as he thinks fit... 410 Composite Penalty 412 Defences 413 Power of Review 414 Abatement of Proceedings 414
Contents xxv 15J. Factors to be taken into account by the adjudicating officer 415 15JA. Crediting sums realized by way of penalties to Consolidated Fund of India 424 CHAPTER VIB ESTABLISHMENT, JURISDICTION, AUTHORITY AND PROCEDURE OF APPELLATE TRIBUNAL 15K. Establishment of Securities Appellate Tribunals 426 Conversion of SAT into Financial Sector Appellate Tribunal (FSAT) 427 Percy S Mistry Committee Recommendation 427 Recommendations of Raghuram Rajan Committee & Working Group on Foreign Investment 428 15L. Composition of Securities Appellate Tribunal 429 15M. Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal 430... in consultation with... 431... appointment as member... 432 15N. Tenure of office of Presiding Officer and other Members of Securities Appellate Tribunal 434 15-O. Salary and allowances and other terms and conditions of service of Presiding Officers 436 15P. Filling up of vacancies 437 15Q. Resignation and removal 438 15R. Orders constituting Appellate Tribunal to be final and not to invalidate its proceedings 440 15S. Staff of the Securities Appellate Tribunal 441 15T. Appeal to the Securities Appellate Tribunal 442 Sub-section (1) 443 Order 444 Orders under SEBI (Employee Service) Regulations 449 Person Aggrieved 451 Passing interim orders and interference with interim orders 453 Sub-section (2) - Consent Mechanism 454 Settlement under Income Tax Act vis-à-vis SEBI s Consent Mechanism 459
xxvi Contents SEBI s Consent Mechanism - Akin to U.S. SEC Model 460 Sub-section (3) - Limitation period 461 Sub-section (4) - Opportunity of hearing 463 Sub-section (5) - Service of Orders 464 Sub-section (6) - Expeditious disposal 464 15U. Procedure and powers of the Securities Appellate Tribunal 464 Sub-section (1) - SAT s Procedure 465 Sub-section (2) - SAT s Powers 467 Review and doctrine of merger 467 Setting aside dismissal and ex-parte order 473 Power to do justice and its limitations 473 Power to impose costs 476 Power of remand 479 Enforcement of SAT orders and its power of contempt 482 Binding force of SAT orders 484 Examining constitutional validity of delegated legislation 486 Tribunal Proceedings - Judicial Proceedings 488 15V. Right to legal representation 488 15W. Limitation 490 15X. Presiding Officer, Members and staff of Securities Appellate Tribunals to be public servants 492 15Y. Civil Court not to have jurisdiction 492 15Z. Appeal to Supreme Court 493 CHAPTER VII MISCELLANEOUS 16. Power of Central Government to issue directions 498 17. Power of Central Government to supersede the Board 499 18. Returns and reports 501 19. Delegation 502 20 Appeals 505 20A. Bar of jurisdiction 507 21. Savings 514
Contents xxvii 22. Members, officers and employees of the Board to be public servants 514 23 Protection of action taken in good faith 516 24. Offences 519 Adjudication and Prosecution 522 24A Composition of certain offences 524 24B. Power to grant immunity 526 25. Exemption from tax on wealth and income 529 26. Cognizance of offences by courts 530 Discretionary Power to Prosecute 532 Applicability of the 2002 Amendment to Pending Cases 533 Limitation Period and Continuing Offences 536 27. Offences by companies 539 Corporate Criminal Liability 539 Criminal Liability of Directors and Officers 542 Civil Liability of Natural Persons and the Company for Acts of Each Other 548 28. Power to Exempt 553 29 Power to make rules 554 30. Power to make regulations 557 31. Rules and regulations to be laid before Parliament 562 Laying before the Parliament 564 Review of Subordinate Legislation 568 Public Consultation 569 Objects and Purpose 570 32. Application of other laws not barred 571 33. Amendment of certain enactments 571 34. Power to remove difficulties 574 35. Repeal and saving 576 ANNEXURES 1. SEBI - Administrative Body - 1988 Gazette Notification of Deptt. of Economic Affairs 579
xxviii Contents 2. SEBI Act Consolidated with Amendments as on date 583 3. SEBI Act as enacted in 1992 along with Statement of Objects and Reasons 617 4. Securities Laws (Amendment) Act, 1995 along with Statement of Objects and Reasons 635 5. Part VI of Schedule to Depositories Act, 1996 651 6. Securities Laws (Amendment) Act, 1999 along with Statement of Objects and Reasons 655 7. Securities Laws (Second Amendment) Act, 1999 along with Statement of Objects and Reasons 663 8. Repealing and Amending Act, 2001 675 9. Securities and Exchange Board of India (Amendment) Act, 2002 along with Statement of Objects and Reasons 699 10. Securities and Insurance Laws (Amendment and Validation) Act, 2010 along with Statement of Objects and Reasons 727 11. SEBI Proposals to amend Securities Laws - 124th SEBI Board Meeting Agenda and Decision 735 12. Extracts of Joint Committee to Enquire into Irregularities in Securities and Banking Transactions - Joint Parliamentary Committee Report 1992 - Harshad Mehta 751 13. Report of Justice Dhanuka Committee on Securities Laws 803 14. Report of the S.A. Dave Committee on Collective Investment Scheme 905 15. Extracts of Joint Committee on Stock Market Scam and Matters relating thereto - 13th Lok Sabha - Joint Parliamentary Committee Report 2001 - Ketan Parekh 919 16. Report of Justice M. H. Kania Committee for Suggesting Amendments to Securities and Exchange Board of India Act, 1992 991 SUBJECT INDEX Subject Index 1017