SLRFM122003

Guidelines
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Securities Laws and Regulation of Financial

Markets (Guideline Answers)
INTERMEDIATE EXAMINATION
DECEMBER 2003
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer SIX questions including Question No. 1 which is COMPULSORY.
Question 1
Write notes on any four of the following
i. Portfolio manager
ii. Mortgage backed securities
iii. Rolling settlement
iv. Global depository receipt
v. Bankers to public issue. (5 marks each)
Answer 1(i)
Portfolio Manager
A portfolio manager is a professional with experience and expertise who studies the
market and adjusts the investment mix for his client on a continuing basis to ensure
safety of investment and reasonable returns therefrom. Portfolio Manager means any
person who pursuant to contract or arrangement with the client, advises or directs or
undertakes on behalf of the client (whether as a discretionary portfolio manager or
otherwise) the management or administration of a portfolio of securities or the funds
of the clients as the case may be. According to SEBI Rules issued on the subject, no
person shall carry on any activity as a portfolio manager unless he holds a certificate
of registration granted by SEBI. A merchant banker acting as a portfolio manager shall
also be bound by the rules and regulations applicable to portfolio manager.
1. Answer 1(ii)
Mortgage backed securities
Mortgage backed securities assure a fixed return which is derived from the
performance of the specific assets. They are issued with a maturity period of 3 to 10
years and backed by pooled assets like mortgages, credit card receivables, etc. There is
a commitment from the loan originator and/or intermediary institution to ensure a
minimum yield on maturity.
The assets to be securitised have the following features :
a. The cash flows generated from the assets should be received periodically in
accordance with a pre-determined schedule.
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b. The actual cash flows generated from the assets should be predictable.
c. The assets should be large in number and total value is to be issued in
securitised form.
d. The assets should be sufficiently similar in nature to enable pooling of their cash
flows.
e. The assets should be marketable.
Answer 1(iii)
Rolling settlement
Rolling settlement is a term used in transactions on stock exchanges settlement and

involves shrinking the netting period to one day. It requires that all transactions on a
particular day to be compulsorily settled after a specified number of days. The length
of the netting period has gone from an undisciplined fortnight to a disciplined week
and with rolling period it goes to a day.
Answer 1(iv)
Global depository receipt
It is a form of depository receipt or certificate created by the Overseas Depository

Bank outside India dominated in dollar and issued to non-resident investors against the
issue of ordinary shares or foreign currency convertible bonds of issuing company. In
simple words, it is basically a negotiable instrument denominated in US dollars. It is
traded in Europe or the US or both. GDR is traded like any other dollar denominated
security in the foreign markets. GDR issue also possesses merits like less issue
formalities, less administrative works as regards dividend payment, information
dissemination, annual general meeting etc. as the issuer deal only with a single
shareholder, the depository; easy availability of foreign exchange and no foreign
exchange risk. Besides issuing companies, foreign investors especially FIIs also get
advantage of investing in the Indian companies. In fact GDR holder enjoy all
economic benefits of the underlying shares but has none of the corporate rights like
right to vote.
Answer 1(v)
Bankers to public issue
Banker to an issue means a scheduled bank carrying on all or any of the following
activities :
1. Acceptance of application and application monies;

2. Acceptance of allotment or call monies;
3. Refund of application monies;
4. Payment of dividend or interest warrants.
Banker to an issue is under obligation to maintain records on applications received

with date, amount received and name of investors, time taken to forward the
applications to issuer/its register. He enters into an agreement with the issuer on
matters connected to number of collection centres, time for forwarding prescribed
details, daily statement to controlling branches. He is required to abide by code of
conduct, observe high standards of integrity and fairness in all his dealings with his

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clients, investors and/or with other members of the profession.
Question No.2
a. The securities lending price (SLP) of a stock is Rs.100 and the transaction
price (TP) is Rs.100.50. Calculate the ‘annualised yield’. What will be the
annualised yield, if the transaction price (TP) is Rs.99. (8 marks)
b. Calculate the value of ‘rights’ if-
Number of rights shares offered (n) = 2,000

Number of shares held (m) = 1,000
Ex-right Price (Pex) = Rs.18
Rights offer price (Pof) = Rs.15
Face value of share = Rs.10 (4 marks)
c. Define any four of the following :(4 marks)
i. SPN
ii. NSDL
iii. ALBM
iv. FCCB
v. ECB
vi. CARE.
Answer 2(a)
SLP = Rs.100
TP = Rs.100.50
Annualized yield = [(TP-SLP)/SLP] x (365/Tender) x 100
[When TP is 100.50] = [(100.50 100)/100] x 365/7 x 100
= 26.07%
Annualized yield = [(TP-SLP)/SLP] x (365/Tender) x 100
[When TP is 99] = [(99 100)/100] x 365/7 x 100
= 52.14%
Answer 2(b)
Number of rights shares offered (n) = 2,000

Number of shares held (m) = 1,000
Ex-right Price (Pex) = Rs.18
Rights offer price (Pof) = Rs.15

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Face value of share = Rs.10

The value of rights shall be as follows :
Vr = n/m x (Pex Pof)
= 2000/1000 x (18 15)
= Rs. 6/-.
Answer 2(c)(i)
SPN : Secured Premium Note (SPN) is an instrument, which is secured by a mortgage

of immovable property of the company and which is issued at its face value and does
not carry any interest and is redeemed at premium in one or more tranches. SPN was
first issued in 1992 by TISCO. There can be attached various rights and entitlements
with a SPN such as, detachable warrant, conversion options, buy back, put and call
option etc.
Answer 2(c)(ii)
NSDL : National Securities Depository Ltd. (NSDL) is one of the two depositories
functioning in India. NSDL provides various services to investors and other
participants in the capital markets such as clearing members, stock exchanges,
investment institutions, banks and issuing corporates. These include basic features like
account opening, dematerialization, settlement of trades and advanced facilities like
pledging, distribution of non-cash corporate actions, and distribution of securities to
allottees in case of public issue etc.
Answer 2(c)(iii)
ALBM : Automated lending and borrowing mechanism (ALBM) is a scheme

introduced by the National Stock Exchange (NSE) that acts as a facilitator for
securities lending. It also facilitates financing in addition to securities lending. ALBM,
in other words, is a modified carry forward system. Lending of securities and funds is
a way by which individuals can take advantage and participate in the bull period. It
allows one to participate in the market without worrying about downside risks and
incidental problems. It involves lending securities to those who had sold without being
in possession of the instruments (Short-Sellers). It helps generate income for those
with idle securities. It also includes lending of funds on those buying shares without
funds.
Answer 2(c)(iv)
FCCB : Foreign Currency Convertible Bonds (FCCBs) is a quasi debt instrument,

which is issued by any corporate entity, intentional agency or sovereign state to the
investors all over the world. They are denominated in any freely convertible foreign
currency. Euro Convertible Bonds are usually issued as unsecured obligation of the
borrowers. FCCBs represent equity linked debt security, which can be converted into
shares or into depository receipts. The investors of FCCBs have the option to convert
it into equity normally in accordance with the pre-determined formula and sometimes
also at a pre-determined exchange rate. The investor also has the option to retain the
bond. The FCCBs by virtue of convertibility offers to issuer a privilege of lower
interest cost than that of similar non-convertible debt instrument.

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Answer 2(c)(v)
ECB : External Commercial Borrowings (ECB) include commercial bank loans;

buyers’ credit; suppliers’ credit, securitised payments such as floating rate notes and
fixed rate bonds; credit from official export credit agencies; and commercial
borrowings from multinational financial institution such as IFC, ADB, AIFC, CDC,
etc. Greater priority is accorded to infrastructure and core sectors. ECB’s upto US$ 5
million may be utilised for general corporate objectives without any end use
restrictions, excluding investments in stock markets or real estate.
Answer 2(c)(vi)
CARE : Credit Analysis & Research Ltd. (CARE) is a credit Rating & Information
Services Company which is promoted by Industrial Development Bank of India
(IDBI) jointly with investment institutions, banks and finance companies. The various
services offered by the company are credit rating of debt instruments, Credit
assessment of Companies for use by banks, FIs, advisory services for structuring
financial instruments, infrastructure financing, municipal finances, securitisation
transactions, credit reports on companies, on request, and rating of collective
investment schemes of plantation companies. Analytical framework of CARE’s rating
methodology is divided into operational characteristics, financial characteristics and
management capabilities.
Question 3
a. The Securities and Exchange Board of India (SEBI) has issued certain
guidelines to regulate the activities of merchant bankers. State the SEBI
guidelines related to role of merchant bankers vis-a-vis offer document. (8
marks)
b. Helping Registry Ltd., is registered with the Securities and Exchange
Board of India (SEBI) as Category-I Registrar and Share Transfer Agent.
During an inspection carried out by SEBI, some irregularities were noticed
in maintenance of record by the company. Consequently, SEBI has
imposed a penalty of Rs.5 lakh on the company. The company wants to file
an appeal against the SEBI’s order before the Securities Appellate
Tribunal (SAT). Prepare a brief note describing the procedure for making
an appeal before the SAT. (8 marks)
Answer 3(a)
Merchant banker is responsible for managing the public issue of a company. SEBI
(Disclosure & Investor Protection) Guidelines, 2000 puts a responsibility on the
merchant banker to assure that offer document contains all material information which
is true and adequate so to enable the investors to make an informed decision on the
investments in the issue. His role primarily includes the following :
i. Verification of the contents of a prospectus or letter of offer in respect of an

issue and reasonableness of the views expressed therein.
ii. Carrying out of Due Diligence.
iii. Submission of timely reports, etc. to SEBI.
iv. Ensuring compliance with SEBI Guidelines.
v. Enquiring that adequate steps are taken for fair allotment of securities and
refund of application money without delay in accordance with offer document

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and SEBI Rules & Regulations.
Answer 3(b)
1. Section 15T and 15U of SEBI Act 1992 deal with the appeal procedure and
powers of Securities Appellate Tribunal, Section 15T of the Act lays down that
any person aggrieved-
a. by an order of the SEBI made, under this Act, or the rules or regulations made
there under; or
b. by an order made by an adjudicating officer under this Act.
may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the

matter.
2. No appeal shall lie to the Securities Appellate Tribunal from an order made :
a. by SEBI;
b. by an adjudicating officer;
with the consent of the parties.
3. Every appeal under Sub-section (1) shall be filed within a period of 45 days
from the date on which a copy of the order made by SEBI or the Adjudicating
Officer, is received by him and it shall be in such form and be accompanied by
such fee as the case may be as may be prescribed. These details have been
prescribed in the Rules.
The Securities Appellate Tribunal may entertain an appeal after the expiry of 45 days
if it is satisfied that there was sufficient cause for not filing within that period.
4. On receipt of an appeal, the Securities Appellate Tribunal may, after giving the
parties to the appeal, an opportunity of being heard, pass such orders thereon as
it thinks fit, confirming, modifying setting aside the order appealed against.
5. The Securities Appellate Tribunal shall send a copy of every order made by it to
SEBI, parties to the appeal and to the concerned Adjudicating Officer.
6. The appeal filed before the Securities Appellate Tribunal shall be dealt with by
it as expeditiously as possible and endeavor shall be made by it to dispose of the
appeal finally within six months from the date of receipt of the appeal.
7. Section 15U lays down that the Securities Appellate Tribunal shall not be bound
by the procedure laid down by the Code of Civil Procedure, 1908, but shall be
guided by the principles of natural justice and, subject to the other provisions of
SEBI Act, and of any rules, the Securities Appellate Tribunal shall have powers
to regulate their own procedure including the places at which they shall have
their sittings.
8. Section 15V permits the Appellant either to appear in person or authorise one or
more of practising Chartered Accountants, Company Secretaries, Cost
Accountants or Legal Practitioner or any of its Officers to present his or its case
before the Securities Appellate Tribunal.
9. As per the Section 15W, the provisions of the Limitations Act, 1963 shall apply
to an appeal made to Securities Appellate Tribunal.
10. 10. Section 15Y lays down that no civil court shall have jurisdiction to entertain
any suit or proceeding in respect of any matter which an Adjudicating Officer

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appointed under the SEBI Act or a Securities Appellate Tribunal under said Act
is empowered by or under said Act to determine and no injunction shall be
granted by any court or other authority in respect or any action taken or to be
taken in pursuance of any power conferred by or under the said Act.
11. Section 15Z lays down that any person aggrieved by any decision or order of the
Securities Appellate Tribunal may file an appeal to the SupremeCourt within 60
days from the date of communication of the decsion or order of the Securities
Appellate Tribunal to him or any question of fact or law arising out of such
order.
12. It has been provided that the Supreme Court may, if it is satisfied that the
appellant was prevented by sufficient cause from filing the appeal within the
said period, allow it to be filed within a further period not exceeding 60 days.
Question 4
a. What are the two segments of capital market? Give a brief account of some
important reforms initiated in the Indian capital market during the last one
decade.
(8 marks)
b. Your friend is keen to invest his savings in mutual fund schemes and seeks
your opinion. Prepare a brief note for him indicating various benefits as
well as risks involved in mutual fund schemes. (4 marks)
c. Discuss the role of stock exchanges in redressal of investors’ grievances.
(4 marks)
Answer 4(a)
The Capital Market comprises two major segments, namely :
i. Primary Market; and

ii. Secondary Market.
Primary Market consists of the companies making issue of securities of one kind or
the other, as well as the public at large, subscribing these securities. The offer of
securities on Right basis to the shareholders is also a part of primary market segment.
Secondary Market which is popularly known as the stock market, involves the buying
and selling of securities already issued on the stock exchanges. The constituents of the
secondary market are the brokers, general investors, financial institutions, mutual
funds, investment institutions and foreign agencies etc.
Some of important reforms initiated in Indian Capital Market during the last one decade are
as follows :
1. Public Sector bonds brought under SEBI purview.

2. Capital adequacy norms prescribed for stockbrokers and other market
intermediaries.
3. Private and foreign mutual funds for the benefit of small investors to provide
investment avenues managed by experts and portfolio managers.
4. National Stock Exchange, Over the Counter Exchange of India and Inter-

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connected Stock Exchange of India made operational.

5. Insider trading declared illegal and regulation made for fraudulent and unfair
trade practices.
6. Regulations made to regulate substantial acquisition of shares/control of listed
companies.
7. Authorised Lending Borrowing Mechanism (ALBM) introduced in modified
form after ban on badla system.
8. Setting up investor protection trusts and bad delivery cells at all Stock
Exchanges.
9. Reforms in primary market and mutual funds to bring more transparency and
accountability.
10. Introduction of depository concept (electronic mode).
11. Stricter vigilance and market surveillance mechanism.
12. Introduction of buy-back of shares and its regulation.
13. Introduction of book building concept for IPOs.
14. Trading on internet permitted.
15. Steps for practising good corporate governance practices.
16. Trading in options, futures and derivatives.
17. Rolling settlements at stock exchanges.
18. Empowerment of shareholders through legislative changes in Companies Act,
1956.
19. Better transparency and disclosure through listing agreement.
Answer 4(b)
10.4.2003
Dear XYZ
Please find elaborated below few points indicating various benefits as well as risks
involved in mutual fund schemes, as desired please.
Here is the list of various benefits for small investors which arise as a result of their
parking funds with mutual funds :
1. Security and reduced risk as the investment risk is spread in variety of

investment.
2. Availability of expert advice of professional management.
3. Diversification of portfolio for best returns.
4. Automatic reinvestment of returns.
5. Best selection and timing of investments through professional approach.
6. Liquidity of investment.
7. Adequate transparency and periodic disclosures.
8. Economies of scale operate, maximise return and minimise costs.
9. Wide investment opportunities.
10. Variety of schemes are available to cater to the needs of different types of
investors.
Risk involved in Mutual Funds
l Excessive diversification of portfolio, losing focuses on the securities of key

segments.
l Over concentration in investments in high priced blue chip securities, offering

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less than average returns.

l Large payments of brokerage and commission due to necessity of effecting high
turnover.
l Poor planning of investments.
l Unresearched forecast on income, profits and Government policies.
l Failure to identify risks of the scheme vis-a-vis the market risk.
l Sometimes, lack of transparency in functioning.
l Delay in refunds on maturity.
l Small unit holders not the beneficiaries due to large chunk taken over by
corporates.
l Some Mutual Funds, Characterized by secrecy, unwillingness to move towards
transparency despite legislation.
l Trades in large blocks of securities in stock markets leads to volatility and major
market movement.
Regards
Sincerely yours
ABC
Answer 4(c)
In respect the grievances of investor, complaints can be lodged with the Stock
Exchanges.
The following are various grievances, which may arise, and the Stock Exchanges may
be approached:
In case of any public issue, non-receipt of Share Certificates.
In case of a listed security, non-receipt of the Certificates after consolidation, splitting,

duplicates of securities.
Regarding listed debentures, non-receipt of interest on delayed payment.
Investor Grievance Centres have also been set up in every recognised stock exchange,
which take up all complaints regarding the trades affected in the exchange and the
relevant member of the exchange. SEBI has also issued rules, regulations and
guidelines to monitor the working of stock exchanges.
Question 5
a. Discuss the role and functions of ‘depository participant’ in a depository system. What
are the eligibility criteria for registration as a depository participant. (4 marks)
b. List at least four money market instruments and explain the essential features of any
two of them. (4 marks)
c. What is ‘non-banking financial company’ (NBFC)? Narrate different categories of
NBFCs recognised by the Reserve Bank of India. (4 marks)
d. Briefly explain any two of the following :
i. Demutualisation of stock exchanges

ii. Due diligence certificate
iii. Venture capital fund
iv. Collective investment scheme. (2 marks each)

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Answer 5(a)
Role & Functions of Depository Participant
1. act as an agent of the depository.

2. Opening and maintaining of demat account of the investor.
3. Processing dematerialisation and rematerialisation of securities.
4. To make debit/credit in the demat accounts of the investors/his clients as per
instructions given by the account holder.
5. Providing statements of accounts to the investors
6. Facilitating pledge or hypothecation of securities held in demat account.
Eligibility criteria for Depository Participant
SEBI regulations have selected various categories of market participants who are
eligible to become depository participants. These categories already have a well-
established customer interface network and are, therefore, the ideal choice to become
the agents of a depository. These categories are :
1. Public Financial Institutions

2. Scheduled Banks
3. RBI approved foreign banks operating in India
4. State Financial Corporations
5. Certified custodians of securities
6. Clearing corporations of stock exchanges
7. Registered stock brokers
8. Non-Banking Financial Companies
9. Registrars and transfer agents.
The regulations specify certain net worth requirements for certain categories. Also
NBFCs are allowed to hold securities on their own behalf only and not clients.
Answer 5(b)
Money market instruments are liquid with varying degree and can be traded in money
market at low cost. In recent years various instruments such as 182 days treasury bills,
certificate of deposits and commercial paper have been introduced. Inter bank call
money transactions still form the major part of money market. Treasury Bills and
Certificate of Deposit (CD) are now widely used and use of Commercial Paper (CP) is
also picking up. The other instruments used are Money market mutual funds and call
money, term money and notice money.
i. Treasury Bills : The treasury bills have not developed as an active monetary
instrument in the market as these bills of 91 days do not provide an yield which
is positive. Due to their high liquidity and safety, 182 days treasury bills despite
low rates represent the most important instrument of money market and a
versatile one in the hands of the effective fund managers of firms, companies
and banks.
ii. Commercial Bills : Commercial bills are basically negotiable instruments
accepted by buyers for goods or services obtained by them on credit. Such bills
being bills of exchange can be kept upto the due date and encashed by the seller
or may be endorsed to a third party in payment of dues owing to the latter.
iii. Certificate of Deposits (CD) : A certificate of deposit is a discount of title to a

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time deposit. Being a bearer document, certificate of deposit is readily

negotiable and attractive both to the Banker and to the Investor in as much as
the banker is not required to encash the deposits prematurely while the investor
can sell the same in the secondary market.
iv. Commercial Paper (CP) : The Commercial Paper refers to unsecured promissory
notes issued by credit worthy companies to borrow funds on a short term basis.
v. Money Market Mutual Funds : In India, the decision to promote MMMFs was
announced by RBI while unveiling its credit policy in April 1991. These funds
invest in short-term debt securities in the money market like certificates of
deposits, commercial paper, Government trading bills etc. Owing to their large
size, the funds normally get a higher yield on such short-term investments than
an individual investor. Money Market Mutual Funds used to be regulated by the
Reserve Bank of India and money market schemes of other mutual funds were
regulated by SEBI. However, on 7th March 2000 the RBI withdrew these
guidelines and it was notified by SEBI later on that the MMMF schemes like
any other mutual fund schemes, would exclusively be governed by SEBI
(Mutual Funds) Regulations, 1996.
Answer 5(c)
A Non-banking financial company is a financial institution incorporated as a company

and which has a principal business of receiving deposits under any scheme and
arrangement and lending in any manner. The most common types of NBFCs in India
include :
a. Hire Purchase Companies;

b. Leasing Companies;
c. Investment Companies; and
d. Loan Companies.
Answer 5(d)(i)
Demutualization of Stock Exchanges : Demutualisation refers to the transition process

of an exchange from a “mutually-owned” association to a company “owned by
shareholders”. In other words, transforming the legal structure of an exchange from a
mutual form to a business corporation form is referred to as demutualisation. The
above, in effect means that after demutualisation, the ownership, the management and
the trading rights at the exchange are segregated from one another.
Answer 5(d)(ii)
Due Diligence Certificate : Lead manager is required to submit due diligence

certificate to SEBI. This is done with an objective of giving an attestation by the
merchant banker that due diligence in terms of SEBI guidelines has been carried out
by him in respect of the proposed issue of securities.
Answer 5(d)(iii)
Venture Capital Fund : Venture fund is a fund established in the form of a company or
a trust to raise money through loan, donation, issue of securities or units and make
investments generally in the new start ups by the first generation technocrats and
professional entrepreneurs, who do not have resources.

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Answer 5(d)(iv)
Collective Investment Scheme : A collective investment scheme is any scheme or

arrangement, which satisfies the conditons, referred to in sub-section (2) of Section
11AA of the SEBI Act. Any scheme or arrangement made or offered by any company
under which the contributions, or payments made by the investors, are pooled and
utilised with a view to receive profits, income, produce or property, and is managed on
behalf of the investors is a Collective Investment Scheme. Investors do not have day-
to-day control over the management and operation of such scheme or arrangement.
Question No.6
a. Discuss briefly the salient provisions in the listing agreement with regard to corporate
governance. (12 marks)
b. List out the salient features of the ‘code of conduct’ prescribed by the SEBI for stock
brokers. (4 marks)
Answer 6(a)
Clause 49 of the listing agreement deals with good Corporate Governance practices
and the salient provisions are as follows:
1. Board of Directors : Board should have optimum combination of executive and

non-executive directors with not less than 50% of the Board consisting of non-
executive directors. If the Board has a non-executive Chairman then at least 1/3
of the Board should consist of independent directors and in case of an executive
Chairman, at least half of the Board should consist of independent directors.
2. Audit Committee : A qualified and independent Audit Committee shall be
constituted. It shall have minimum three members (all non-executive); majority
shall be independent and at least one director having financial and accounting
knowledge. The Chairman of the Committee shall be an independent director
and he shall be present at the AGM to answer shareholder queries. The Audit
Committee shall meet thrice a year. The Audit Committee shall oversee the
Company’s financial reporting process and disclosure of financial information.
It shall review the annual accounts before submission to the Board. Besides
performing other functions, it shall also review the internal audit function and
internal control systems.
3. Remuneration of Directors : Remuneration of non-executive directors shall be
decided by the Board. The details of the remuneration shall be disclosed in the
annual report.
4. Board Procedure : This deals with minimum number of four meetings in a year
with a maximum gap of four months between two meetings. Certain minimum
information is to be made available to the Board.
5. Management : Management discussion and analysis report should form part of
the annual report. It should contain details regarding (a) industry structure and
developments; (b) opportunities and threats; (c) segment wise or product wise
performance; (d) outlook; (e) Risks and concerns; (f) Internal Control Systems
and their adequacy; (g) discussion on financial performance; (h) material
developments in Human Resources.
6. Shareholders : Information to Shareholders to be given about appointment of
new directors, their background, expertise in specific areas, details of
directorships. Information on quarterly results should be put on website of
company. There is also requirement for constitution of a Committee for
redressal of shareholder grievances.

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7. Report on Corporate Governance : The annual report shall contain a separate

section on Corporate Governance with a detailed compliance report on
Corporate Governance. It should contain information on composition and
category of Board of Directors attendance of each Director, Composition of
Committees viz. Audit committee, Remuneration Committee, disclosures on
materially significant related party transaction, means of communication etc.
8. Compliance : The company should also obtain a certificate from the auditors of
the company regarding the compliance of the above conditions and annex it to
the directors’ report which is sent to all the members of the company. The
certificate should be filed with the Stock Exchange on which the shares of the
company are listed. This certificate is necessary otherwise this will lead to the
violation of the requirements of the listing agreement.
Answer 6(b)
Code of conduct for stockbrokers has been prescribed in SEBI (Stock Brokers and
Sub-Brokers) Regulations, 1992. The Code of conduct requires the stock brokers to
observe the following :
A. General
l Maintain high standards of Integrity

l Exercise of due skill and care
l Not to indulge in manipulative, fraudulent malpractices
l Compliance with statutory requirements
B. Duty to Investors
l Proper and timely execution of orders

l Issue of contract note
l Shall not breach the trust of his clients
l Shall not give misleading information/quotations/advice to clients.
l Not to deal or transact in business of defaulting clients
l Fairness to clients
l Proper investment advice
l Adequately trained staff of stock broker
C. Stock Broker vis-a-vis other Stock Broker
l Fair conduct of dealings

l Protection of clients interests
l To fulfill obligation in transactions with stockbrokers
l No advertisement and publicity unless permitted by stock exchanges
l No Inducement of clients with unfair means
l Not to make false or misleading returns.
Question No. 7
a. What do “promoters’ quota shares” mean ? What is the rationale behind prescribing
the lock-in period on promoters’ quota shares ? (4 marks)
b. ”The broad objectives of the money market are to provide a balancing mechanism for
short surpluses and deficiencies.” (4 marks)
c. What is the role and obligations of a ‘compliance officer’ appointed in terms of the

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SEBI guidelines ? (4 marks)

d. What is ‘financial system’ and what are its constituents ? (4 marks)
Answer 7(a)
“Promoters quota shares” means the shares kept reserved for allotment to promoters in
case of issue of shares by listed companies. The SEBI (Disclosures and Investor
Protection) Guidelines 2000 stipulates the minimum prompter’s contribution and also
the limit upto to which the promoters shall participate in the issue of securities. The
rationale behind prescribing the lock-in-period on promoters’ quota shares is to restrict
the promoters from selling their stake in the company after inducing the public to
invest this money. Further to ensure that the promoters take serious efforts to make the
project successful for which public money is raised by issue of shares.
Answer 7(b)
Money market is a place for trading money and short term financial assets that are as
liquid as money. It provides a platform for short term surplus of lenders or investors
and short term requirement of borrowers. The instruments can be traded at low cost
and are highly liquid. Instead of stock exchanges, institutions like Discount and
Finance House of India and Securities Trading Corporation of India provide liquidity
through primary dealers. Money market deals with raising and deployment of funds
for short duration and provides institutional source for providing working capital to
the industry.
Answer 7(c)
Company Secretary is the Compliance Officer of the company who is responsible for
monitoring the share transfer process and report to the Company’s Board in each
meeting. The Compliance Officer directly liaises with the authorities such as SEBI,
Stock Exchanges, ROCs and Investors with respect to implementation of various
clauses, rules, regulations and other directives of such authorities and investor services
and compliances of related matters. The management and compliance is, thus, the
responsibility of employee Company Secretary.
Answer 7(d)
A financial system is a set of institutional arrangements through which the financial

surpluses are mobilized from the units generating such surpluses. Thus, the financial
system of a country is conglomeration of various sub markets. Financial Markets,
Financial Institutions and Intermediaries and Financial Instruments are the three
components of organisational structure of Indian financial system. Financial market
provide channels for allocation of savings to investment and provide a variety of assets
to savers as well as various forms in which the investors can raise funds. Indian
Financial Markets have two major components-money market and capital market. The
second constituent of the financial system comprises the financial
institutions/intermediaries. In contrast to financial markets, these are institutional
source of finance to industry. The third constituent of financial system is financial
product and recently the Indian financial system witnessed a significant growth in new
financial instruments.
Question No.8

Guidelines
a. You are the company secretary of Perfect Systems Ltd., which is a listed
company having paid-up share capital of Rs.50 crore. The company
contemplates an ambitious expansion plan of setting up cyber malls in
metro-cities and estimates capital investment of Rs.10 crore. The promoters
and development financial institution both agree to invest Rs.5 crore each
in company’s equity. The Board wants to make them preferential allotment
of shares and seeks your opinion.
Prepare a note explaining the rules and guidelines applicable and list out the
steps to be taken by the company for making preferential allotment.(10 marks)
b. Distinguish between the following :
i. ‘Income fund’ and ‘growth fund’,

ii. ‘Listed securities’ and ‘permitted securities’. (3 marks each)
Answer 8(a)
1 January, 2004
Board of Directors
Pefect Systems Ltd.
Respected Sir,
As desired, a note explaining rules and guidelines applicable and steps to be taken
for making preferential allotment is placed for your consideration
Rules & Guidelines applicable for preferential Issue of Shares
Chapter XIII of the SEBI (Disclosure & Investor Protection) Guidelines, 2000
prescribes the guidelines for preferential issue of securities. The salient features of
these guidelines are as follows :
1. The pricing for shares should not be less than higher of the average of weekly
high and low of the closing prices of the related shares quoted on stock
exchange during six months or two weeks preceding the relevant date. Relevant
date for this purpose means the date 30 days prior to the date on which the
meeting of general body of shareholders is held in terms of Section 81(A) of the
Companies Act, 1956 to consider the proposed issue.
2. The price at which shares could be allotted in case of conversion of
PCDs/FCDs/Other convertible instruments is required to be determined.
3. The explanatory statement, specifying the objects of issue, shareholding pattern
before and after the offer, proposed time for completion of allotment, intention
of promoters/directors to subscribe to the issue, should be annexed to the notice
of general meeting.
4. The proposed resolution should include relevant date on the basis of which price
of shares should be calculated.
5. Instruments allotted on preferential basis are subject to the lock-in-period of 3
years from the date of their allotment. However, not more than 20% of total
capital shall be subject to lock-in of three years from the date of allotment.
6. Allotment of shares on preferential basis are required to be completed within 3
months from the date of passing of the resolution.
7. Certificate from auditors regarding compliance of guidelines in respect of

Guidelines
preferential issue is required to be obtained.

8. Disclosure regarding details of money utilised and purpose for such utilisation
and details of unutilised monies are required to be disclosed in the Annual
Report of the Company.
9. In case of FIIs, preferential allotment should be in accordance RBI’s guidelines.
The procedure for making the preferential allotment shall 'inter alia' require the
following steps :
a. Information to stock exchange about the convening of meeting.

b. Convene and hold Board Meeting and get approval of the proposal and for
convening of Extra Ordinary General Meeting.
c. Inform the Stock Exchanges about the decision of the Board.
d. Obtain certificate of auditors about pricing of shares.
e. Draft Notice of EGM giving all requisite details in the Explanatory statement.
f. Convene and hold EGM and obtain approval of shareholders u/s 81(1A).
g. Inform stock exchanges about the approval.
h. Obtain “in-principle” approval from stock exchanges for listing of further shares
to be allotted.
i. File Form 23 with ROC.
j. Obtain application and money from promoters and FI.
k. Convene & hold Board Meeting and allot shares.
l. Send Information to the Stock Exchanges.
m. Since allotment is less than 10% of the paid-up capital of the company
formalities under Takeover Code shall not be required to be completed.
n. File Form 2 with ROC
o. Issue Share Certificate and mark Lock-in if and to the extent applicable.
p. Submit Listing application and obtain listing approval.
Submitted please
(XYZ)
Company Secretary
Perfect Systems Ltd.
Answer 8(b)
i. Income Fund : The Fund primarily offer fixed income to investors. Naturally
enough, the main securities in which investments are made by such funds are
the fixed income yielding ones like bonds.
Growth Fund : These Funds offer growth potentialities associated with investment in
capital market namely : (i) high source of income by way of dividend and (ii) rapid
capital appreciation, both from holding of good quality scrips. These funds, with a
view to satisfying the growth needs of investors, primarily concentrate on the low risk
and high yielding spectrum of equity scrips of the corporate sector.
ii. ‘Listed Securities’ and permitted securities’ : Securities which are listed on any
recognised stock exchange are known as Listed Securities.
The Securities listed on some of recognised stock exchanges, when permitted to be

traded by those stock exchanges where they are not listed are called permitted
securities. Such permission is given if suitable provision exists in the regulations of

Guidelines
the concerned stock exchanges.

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Securities Laws and Regulation of Financial

Time allowed: 3 hours Maximum marks: 100

NOTE: Answer SIX questions including Question No. 1 which is COMPULSORY.

Write notes on any four of the following

Mortgage backed securities

The assets to be securitised have the following features :

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Rolling settlement is a term used in transactions on stock exchanges settlement and

Global depository receipt

It is a form of depository receipt or certificate created by the Overseas Depository

Bankers to public issue

1. Acceptance of application and application monies;

Banker to an issue is under obligation to maintain records on applications received

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clients, investors and/or with other members of the profession.

Number of rights shares offered (n) = 2,000

c. Define any four of the following :(4 marks)

Number of rights shares offered (n) = 2,000

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Face value of share = Rs.10

SPN : Secured Premium Note (SPN) is an instrument, which is secured by a mortgage

ALBM : Automated lending and borrowing mechanism (ALBM) is a scheme

FCCB : Foreign Currency Convertible Bonds (FCCBs) is a quasi debt instrument,

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ECB : External Commercial Borrowings (ECB) include commercial bank loans;

i. Verification of the contents of a prospectus or letter of offer in respect of an

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and SEBI Rules & Regulations.

may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the

with the consent of the parties.

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The Capital Market comprises two major segments, namely :

i. Primary Market; and

1. Public Sector bonds brought under SEBI purview.

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connected Stock Exchange of India made operational.

1. Security and reduced risk as the investment risk is spread in variety of

Risk involved in Mutual Funds

l Excessive diversification of portfolio, losing focuses on the securities of key

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less than average returns.

In case of any public issue, non-receipt of Share Certificates.

In case of a listed security, non-receipt of the Certificates after consolidation, splitting,

Regarding listed debentures, non-receipt of interest on delayed payment.

i. Demutualisation of stock exchanges

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Role & Functions of Depository Participant

1. act as an agent of the depository.

Eligibility criteria for Depository Participant

1. Public Financial Institutions

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time deposit. Being a bearer document, certificate of deposit is readily

A Non-banking financial company is a financial institution incorporated as a company

a. Hire Purchase Companies;

Demutualization of Stock Exchanges : Demutualisation refers to the transition process

Due Diligence Certificate : Lead manager is required to submit due diligence

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Collective Investment Scheme : A collective investment scheme is any scheme or

1. Board of Directors : Board should have optimum combination of executive and

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7. Report on Corporate Governance : The annual report shall contain a separate

l Maintain high standards of Integrity