SLRFM062003

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Securities Laws and Regulation of Financial

Markets (Guideline Answers)
INTERMEDIATE EXAMINATION
JUNE 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. Off-shore venture funds

ii. Gilt-edged securities.
iii. Money market instruments
iv. Asset management company
v. Responsibilities of debenture trustees.(5 marks each)
Answer 1(i)
Off-Shore venture funds
Off-shore funds are the funds in which investments can be made by the overseas
investors. To augment venture capital funding in India, Government of India
allowed Overseas Venture Capital Investments in approved Domestic Venture
Capital Funds, Venture Capital Companies etc. with the approval of Foreign
Investment Promotion Board (FIPB). Guidelines were issued by Ministry of finance
in September 1995. The domestic institutions have to conform to Government
Guidelines, particularly tax exemption under the Income-tax Act.
Answer 1(ii)
Gilt-edged securities
These securities are issued by Governments such as Central and State Governments,
Semi-Government Authorities, City Corporations, Municipalities, Port Trust, State
Electricity Boards, Metropolitan Authorities, Housing Boards and Large Financial
Institutions. They are held by RBI and are eligible to be reckoned for the purpose of
Statutory Lending Rate of the banks. Though they are long dated securities, they are
in great demand as banks have to buy/sell them for maintaining the level of Net
Demand and Time Liabilities (NDTL). Being a security issued by the sovereign
government, they are considered the most secured financial instruments which
guarantees both safety of the capital and the income.
Answer 1(iii)
Money market instruments
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Money market instruments are liquid with varying degree and can be traded in
money market at low cost. In recent years various new 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. The
market is highly volatile. 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.
Answer 1(iv)
Asset Management Company (AMC)
Under the SEBI Regulations, every mutual fund is required to have an Asset
Management Company (AMC) incorporated in the Companies Act, 1956 to manage
the funds of the mutual fund. The AMC should be approved by SEBI and should
enter into an agreement with the trustees of the mutual fund to formulate schemes,
raise money against units, invest the funds in accrued securities and after meeting
the permissible costs as per norms, distribute income to the share holders of the
funds. AMC is also responsible for operations of Mutual Funds. It has to take all
reasonable steps and exercise due diligence to ensure that the investments of the
funds to any scheme is not contrary to the provisions of these regulations and trust
deed.
Answer 1(v)
Responsibilities of debenture trustees
Debenture trustees are persons or agencies appointed as trustee on behalf of

debenture holders to protect debenture holders interests and keep the assets of the
company charged against debenture under trust. The debenture trustee has to enter
into an agreement with the body corporate before opening of the subscription list for
issue of debentures. No debenture trustee shall act as such for any issue of
debentures in case it is a associate of the body corporate or has lent or is proposing
to lend money to the body corporate. Every debenture trustee shall accept the trust
deeds, which contains the matters specified in schedule IV to the regulations, which
contains the contents of trust deed. Every debenture trustee shall abide by the code
of conduct as per regulations. Every debenture trustee shall appoint a Compliance
Officer. Every debenture trustee is required to file information and documents to
SEBI as and when required by it.
Question 2
(a) The unit price of TSS Scheme of a mutual fund is Rs. 10. The
public offer price (POP) of the unit is Rs. 10.204 and the
redemption price is Rs. 9.80. Calculate -
i. front-end load; and

ii. back-end load.(8 marks)
(b) The closing price of the stock of Veryfine Ltd. at the stock exchange for 10
successive days was as follows:

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Day 1 2 3 4 5 6 7 8 9 10
Closing
Price 25 26 25 24 26 26 28 26 25 27
(Rs.)
You are required to calculate a 7-day moving average of stock price of the
company and comment on its short-term trend (8 marks)
Answer 2(a)
i. Calculation of Front-end Load (Fel)
or Rs. 10.204 = Rs 10/(1-Fel)
10.204 - 10.204 Fel = 10
-10.204 Fel = 10 - 10.204
Fel = 0.1204/10.204
Fel = 1.99% = 2%
ii. Calculation of Back-end Load (Bel)
or Rs. 9.80 = Rs 10/(1- Bel) = Bel = 2%
9.80 - 9.80 Bel = 10
-9.80 Bel = 10 - 9.80
= 0.2/9.80 = 2.04%
Answer 2(b)
Calculation of 7 Day Moving Average:
Trading day Trading-Closing Price Sum of 7 recent prices Moving Average

1 Rs.25
2 26
3 25
4 24

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5 26
6 26
7 28 Rs.180 25.71
8 26 Rs.181 25.86
9 25 Rs.180 25.71
10 27 Rs.182 26.00
Comment : A few days moving average of daily prices are used to detect a short-
term trend in order to make technical analysis of corporate securities. The trend
indicates either Bullish or Bearish tendency. When the moving average lines cuts
from below, the trend is Bearish. In the question, the short term trend indicating the
Bearish phase of the security-market. The rising moving average show Bullish while
falling to Bearish phase.
Question 3
a. Advantage Products Ltd. is a listed company with authorized, issued and

subscribed capital of Rs. 25 crore divided into 2.50 crore equity shares of
Rs. 10 each. The paid-up capital of the company as on 31st December,
2002 was Rs.24 crore and calls in arrears of Rs.1 crore. The Board of
directors of the company proposes to issue bonus shares in the ratio 2:5.
As a company secretary of the Advantage Products Ltd., prepare a note
highlighting the guidelines issued by the Securities and Exchange Board
of India (SEBI) for issue of bonus shares, as applicable to the company.
( 10 marks)
b. “An essential requirement for the growth of an orderly securities market
is the presence of strong and an efficient market regulator.” Discuss in
this context the role and functions of SEBI as set out in the Securities and
Exchange Board of India Act, 1992. (6 marks)
Answer 3(a)
The Chairman
Advantage Products Ltd.,
As desired, the note highlighting guidelines issued by SEBI for issue of bonus
shares is as under :
The Company being a listed company, the provisions of SEBI (Disclosure and
Investor Protection) Guidelines, 2000 would be applicable for the issue of bonus
shares by it. The guidelines relating to bonus issue as contained and applicable to the
company is as follows:
1. The Company has to increase its authorised capital so as to issue the bonus
shares as the post bonus issue capital would exceed its present authorised
capital.
2. The Company has to make the partly paid shares as fully paid-up or have the
same forfeited by following appropriate procedure before issue of bonus
shares.

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3. The Articles of Association of the company shall contain a provision,

permitting capitalization of reserves. In the absence of such provision in the
Articles, the company shall pass a Resolution at its general body meeting
making provisions in the Articles of Association for capitalization.
4. In case the company has issued Fully Convertible Debentures or Partly
Convertible Debentures in the past and the same are outstanding, then similar
benefit of bonus shares are to be extended to the holders of these debentures in
proportion to such convertible part of FCDs or PCDs as the case may be.
These bonus shares can however be issued/allotted to the holders of FCDs
and/or PCDs when the actual conversion of FCDs are convertible part of
PCDs takes place.
5. he bonus issue shall be made out of free reserves built out of the genuine
profits or share premium collected in cash only.
6. Reserves created by revaluation of fixed assets are not capitalized.
7. The declaration of bonus issue, in lieu of dividend, is not made.
8. The company shall implement the proposal i.e., allotment of bonus shares
within a period of six months from the date of approval by the Board of
Directors the proposal to issue bonus shares and the company shall not have
the option of changing the decision.
9. Any company issuing bonus shares is required to meet the criteria that it:
a. has not defaulted in payment of interest or principal in respect of

fixed deposits and interest on existing debentures or principal on
redemption thereof and
b. has sufficient reason to believe that it has not defaulted in respect
of the payment of statutory dues of the employees such as
contribution to provident fund, gratuity, bonus etc.
Our company has made no default in relation to above points.Submitted please.
(XYZ) Company Secretary
Answer 3(b)
Presence of strong and efficient market regulator is definitely an essential

requirement for growth and development of an orderly securities market. SEBI role
in the last two years has been of a promoter as well as a regulator. Section 111 of the
securities and Exchange Board of India Act, 1992 provides for function of SEBI. It
provides that it shall be the duty of the Board to protect the interests of investors in
securities and to promote the development of and to regulate the securities market
by such measures as it thinks fit. The section also provides for the measures which
the Board may take.
The major functions of SEBI are as under:
i. regulates the transactions in stock exchange and security markets;

ii. registers and regulates the working of stock brokers, underwriters
and various other functionaries associated with securities market;
iii. registers and regulates working of collective investment schemes
including mutual funds;
iv. prohibits fraudulent and unfair trade practices relating to security
market;
v. prohibits insider trading;

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vi. promotes investors’ knowledge and training of intermediaries of

securities market;
vii. regulates corporate takeovers;
viii. conducts inquiries and audits of the stocks exchanges, mutual
funds, other persons associated in the Securities market
intermediaries and self-regulatory organizations in the securities
markets.
Question 4
“The dictum caveat emptor (buyer beware) has limited application in the
securities market, which essentially calls for an effective mechanism for
investors’ protection.” Examine the statement and cite various common
grievances of the investors and measures for their redressal. (8 marks)
(b) Vivek invests a sum of Rs. 18,000 with Nidhi Chit Fund on interest @ 8%
for 5 years. What will be the future value of the investment, i.e., the amount at
the end of the 5-year period? (4 marks)
(c) Explain any two of the following terms:
i. e-IPO
ii. BOLT
iii. ICRA
iv. GDR.
(4 marks)
Answer 4(a)
“The dictum caveat emptor” is the maxim from the law of sale of goods, which means that when
buying any thing the buyer must protect his own interests and in case he fails to exercise
reasonable care and caution, he cannot complain later for any loss caused to him due to his
failure or negligence.
However, in the securities market, the transactions are not carried on the principle of Caveat
Emptor and the investors are provided due protection. For their grievance they can seek redressal
from the seller/issuer of securities” under the law.
Redressal mechanism for investor grievances
The following table indicates various grievances which may arise and the authorities to be
approached:
Nature of grievance Can be taken up with

In case of any public issue non-receipt of:
- Refund order - SEBI
- Interest on delayed refund - Dept. of Company affairs (DCA)
- Allotment advice - DCA
- Share certificates - Stock Exchange

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- Duplicates for all of the above - Registrar to the Issue

- Revalidations - Registrars to the Issue
In case of a listed security non-receipt of the Certificates after:
- Transfer - SEBI
- Transmission - SEBI
- Conversion - SEBI
- Endorsement - DCA
- Consolidation - Stock Exchange
- Splitting - Stock Exchange
- Duplicates of securities - Stock Exchange
Regarding listed debentures, non-receipt of:
- Interest due - SEBI

- Redemption - DCA
- Interest on delayed payment - Stock Exchange/Debenture Trustee
- Bad delivery cell of the Stock

Regarding bad delivery of shares
Exchange
Regarding share or debentures in unlisted

DCA
companies
Deposits in collective investment

SEBI
Schemes like plantations etc.
Units of Mutual Funds SEBI
Fixed Deposits in Banks and Finance

Reserve Bank of India
Companies
Fixed Deposits in manufacturing

Department of Company Affairs
Companies
Investor Grievance Centres have also been set up in every recognized stock

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exchange which take up all complaints regarding the trades effected in the exchange
and the relevant member of the exchange. Moreover, two other avenues are always
available to the investors to seek redressal of their companies:
1. Complaints with Consumers Disputes Redressal Forum;

2. Suits in the Court of Law.
Answer 4(b)
Calculation of Future value of Investment in Chit Fund
Vr = p(1+r)5
= 18000(1+0.08)5
= 18000 ´ 1.469
= Rs.26642
Answer 4(c)
i. Electronic IPOs (e-IPOs) : Realising the weakness of physical IPO in terms of

physical paper handling, physical transactions, huge paper work, delayed
allotments, chances of fraud and errors, operational inefficiencies and other
cost and time factors, the system to use the electronic channel as one of the
options for investors to make new shares subscription has been developed. It
ensures an orderly and efficient method for the public to subscribe new shares
and reduce the processing cost of applicant’s application. It is also time
efficient and transparent as all issue activities i.e. of prospectus, filing of
application form, transfer of money, allotment and issue of securities are done
electronically.
ii. BOLT (BSE on-Line-Trading) : BOLT is the modern trading practice
introduced by the Bombay Stock Exchange. Under this arrangements, trading
can be carried out by member-brokers and their authorized assistants from
their workstations. It provides for a search based trading mechanism whereby
two-way quotes are accepted from jobbers and Market Makers and from
brokers on the basis of orders received from investors. The system matches
them according to the logic specified in BOLT.
iii. ICRA : The Investment Information and Credit Rating Agency of India Ltd.,
(ICRA) was set up in the year 1991. It is an independent and a professional
company that provides investment information and credit rating services. The
range of services extended by ICRA includes:
a. Information Services
b. Grading Services (Equity)
c. Rating Services (Debt)
d. Advisory Services.
iv. GDR : GDRs are Global Depository Receipts. They constitute an important
source of raising funds abroad. They are listed and traded in foreign stock
exchanges. They do not carry any voting rights. GDRs offer an advantage that
they enable the holders to convert into number of shares represented by it.
Dividends on GDRs are paid in local currency.

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Question 5
a. How is ‘book building’ process carried out as a part of public issue management?
List out at least four new financial instruments introduced in the Indian capital
market in the past and explain the essential features of any two of (4 marks)
b. Discuss briefly the regulatory framework governing the securities in India. (4 marks)
c. Briefly explain any two of the following most common types of derivatives :(4 marks)
i. Forwards;
ii. Futures;
iii. Options; and
iv. Swaps. (2 marks each)
Answer 5(a)
Book Building is a method of floating a public offer that allows the issuer to price its
offer of securities based on the market demand. Traditionally, when an issuer makes
a public offer, its pricing is a one-sided process, decided privately by the issuer and
the lead manager. The success of failure of the offer depends on whether the market
is willing to subscribe at the price fixed by the issuer.
In a book-building offer, the issuer determines only the offer size or the number of
securities he would like to offer for subscription. He then invites bids from
prospective investors for the offer. Then the offer is priced based on the inherent
demand and the price discovered through the process of bidding.
Answer 5(b)
During the recent years several new instruments have been introduced by the
companies in place of the conventional instruments. These instruments are hybrid in
nature and carry composite features of various types. Some such instruments are
listed below :
1. Zero Coupon Debentures or Bonds
2. Warrants
3. Deep Discount Bonds
4. Floating Rate Notes.
5. Secured Premium Notes
6. Cumulative Convertible Preference Share
7. Non-voting Equity Shares.
Essential features of a few of the above instruments may be stated as under:
Zero Coupon Debentures or Bonds is a type of debenture, which carried zero rate of
interest. However, it may have a convertibility clause to provide reasonable return to
the investors.

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Warrant is an option to buy a specified number of shares at a specified price over a

specified period of time. A warrant may have, inter alia, the following features:
i. There are fixed number of share against each warrant

ii. Price of shares is specified or a formula for determination of price
is laid down.
iii. Period for exercise of option against the warrant is specified.
iv. Warrants may be tradeable at the stock exchange or non-tradable.
There can be various types of warrants such as, detachable warrants, tradable
warrants, mixed warrant, putable warrants, and naked warrants etc.
Deep Discount Bonds (DDB) are issued by a company to the investors at huge
discount to their face value. DDBs are issued normally for long-term period, though
can be issued for short term of 3 to 5 years as well. The investors get their return on
redemption of DDBs at their face value. The DDBs were introduced was by IDBI in
1992 and its response was very encouraging.
Floating Rate Notes (FRN) are the best option for the issue in highly volatile finance
market. FRN do not bind the issuer with a fixed coupon rate, but are linked with a
fixed mode for calculating interest.
Secured Premium Note (SPN) is an instrument, which secured by a mortgage of

immovable property of the company and which is issued at its face value and
redeemed at premium in one or more trenches. 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.
Cumulative Convertible Preference shares are hybrid type of preference shares,

which carry the right of accumulation of dividend till it is paid off together with a
clause providing for conversion into equity shares, either compulsorily or by
exercise of an option.
NOTE: Students are required to give list of four instruments and details
regarding two instruments only.
Answer 5(c)
Regulatory Framework Governing Securities
Following are Acts and regulatory bodies governing the Securities in India:
- The Companies Act, 1956; Ministry of Finance, Deptt. Of Company Affairs

The Securities Contracts (Regulation) Act, 1956 and
SEBI Act, 1992, The Securities & Exchange Board of India
- The Depositories Act, 1996
Answer 5(d)
i. Forwards: A forward contract is a customized contract between two parties

where settlement takes place on a specified date. The settlement date and price
is agreed in advance by the parties concerned.

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ii. Futures: A contract obliging one signatory to buy and another to sell a
standard quality of a financial instrument on a pre-determined price. Future
may be commodity futures or security features.
iii. Options: A contract which gives the holder the right to purchase (call) or sell
(put) the underlying futures.
iv. Swaps: Swap can be defined as a financial arrangement in which two counter
parties agree to exchange streams of payments or cash flows over time on the
basis agreed at the inception of the arrangements. Swaps may be interest rate
swaps or currency swaps.
NOTE: Students are required to explain two types of derivatives only.
Question 6
Your company made a public issue of 3 crore equity shares of Rs.10 each at a
premium of Rs.5 per share aggregating Rs.45 crore, vide prospectus dated 30th
June, 2002. The issue opened on 5th July, 2002 and closed on 10th July, 2002.
The Board of directors made allotment on 20th July, 2002 and application for
listing of the shares was made on 30th July, 2002. The stock exchange failed,
without assigning any reason, to list the shares upto 20th September, 2002.
Advise the course of action to your Board of directors, explaining the

applicable legal provisions and procedures. (16 marks)
Answer 6
Section 73(1A) of the Companies Act, 1956 provides that where a prospectus states
that an application has been made for listing of shares in one or more recognized
stock exchanges, any allotment made shall be void, if the permission has not been
granted by the stock exchange or each such stock exchange or each such stock
exchange, as the case may be before the expiry of ten weeks from the date of the
closing of the subscription lists.
The consequences of the allotment becoming void is provided under Section 73(2),
which states that where the listing has not been granted, the company shall forthwith
repay without interest all moneys received from applicants in pursuance of the
prospectus. In case any such money is not repaid within eight days after the
company becomes liable to repay it, the company and every director of the
company, who is an officer-in-default shall, on and from the expiry of the eighth
day, be jointly and severally liable to repay that money with interest at such rate, not
less than four percent and not more than fifteen percent, as may be prescribed,
having regard to the length of the period of delay in taking the repayment of such
money. However, it provided that where an appeal against the decision of any
recognized stock exchange refusing permission for the shares or debentures to be
dealt in on that stock exchange has been preferred under Section 22 of the Securities
Contracts (Regulation) Act, 1956, such allotment shall not be void until the
dismissal of the appeal.
Thus, in order to remedy the consequence arising under Section 73(2) of the
Companies Act, 1956 an appeal can be made in terms of Section 22 A of the
Securities Contracts (Regulation) Act, 1956 which provides that where a recognized
exchange, acting in pursuance of any power given to it by its bye-laws, refuses to
list the securities of any public company, the company shall be entitled to be

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furnished with reasons for such refusal, and may-
a. within fifteen days from the date on which the reasons for such refusal are
furnished to it, or
b. where the stock exchange has omitted or failed to dispose of, within the time
specified in sub-section(1A) of Section 73 of the Companies Act, 1956, the
application for permission for the shares or debentures to be dealt with on the
stock exchange, within fifteen days from the date of expiry of the specified
time or within such further period, not exceeding one month, as the Securities
Appellate Tribunal may, on sufficient cause being shown, allow, appeal to the
Securities Appellate Tribunal having jurisdiction in the matter against such
refusal, omission or failure, as the case may be, and thereupon the Securities
Appellate Tribunal may, after giving the stock exchange, an opportunity of
being heard-
i. vary or set aside the decision of the stock exchange; or

ii. where the stock exchange has omitted or failed to dispose of the
application within the specified time, grant or refuse the
permission.
And where the Securities Appellate Tribunal sets aside the decision of the
recognized stock exchange or grants the permission, the Stock Exchange shall act in
conformity with the orders of the Securities Appellate Tribunal.
Section 22A(2) further provides that every appeal under sub-section(1) shall be in
such form and be accompanied by such fee as may be prescribed. It is further
provided that the Securities Appellate Tribunal shall send a copy of every order
made by it to the Board and parties to the appeal. The appeal filed before the
Securities Appellate Tribunal under sub-section(1) shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the appeal
finally within six months from the date of receipt of the appeal.
Section 22B lays down the procedure and powers of Securities Appellate Tribunal as
under:
1. The Securities Appellate Tribunal shall be guided by the principles of natural

justice and, subject to the other provisions of this 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.
2. The Securities Appellate Tribunal shall have for the purpose of discharging
their functions under this Act, the same powers as are vested in a civil court
under the Code of Civil Procedure, 1908, while trying a suit, in respect of the
following matters, namely:
a. summoning and enforcing the attendance of any person and

examining him on oath;
b. requiring the discovery and production of documents;
c. receiving evidence on affidavit;
d. issuing commissions for the examination of witnesses or
documents;
e. reviewing its decisions;
f. dismissing an application for default or deciding it ex-parte;
g. setting aside any order of dismissal of any application for default

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or any order passed by it ex-parte; and

h. any other matter which may be prescribed.
3. Every proceeding before Securities Appellate Tribunal shall be deemed to be

a judicial proceeding, within the meaning of sections 193 and of the Indian
Penal Code and the Securities Appellate Tribunal shall be deemed to be a civil
court for all the purposes of section 195 and Chapter XXVI of the Code of
Criminal Procedure, 1973.
Question 7
a. Distinguish between any two of the following:
i. Loan company’ and ‘equipment leasing company’.

ii. ‘Dematerialisation’ and ‘immobilisation’.
iii. ‘Stock broker’ and ‘sub-broker’. (4 marks each)
b. Explain ‘insider trading’. Discuss the inspection and investigation

mechanism for insider trading. What is the penalty for insider trading?(8
marks)
Answer 7(a)
i. ‘Loan company’ and ‘equipment leasing company’
Both the companies are types of Non-Banking Financial Companies. A loan

company provides loans for any type of activity to be undertaken whereas
‘equipment leasing company’ provides the equipment on lease.
ii. Dematerialisation and Immobilisation
Dematerialisation : Dematerialisation is the process by which shares in the

physical/paper form are cancelled and credit in the form of electronic balances are
maintained on highly secure systems at the depository.
Immobilisation : Immobilisation of securities occurs when physical security

certificates are stored or lodged with depository for safe custody. All subsequent
transaction in these securities take place in book-entry form. The actual owner have
the right to withdraw their physical securities as and when desired. The
Immobilisation of fresh issue may be achieved by issuing a jumbo certificate
representing the entire issue in the name of depository, as nominee of the beneficial
owners.
iii. Stock Broker and Sub Broker
Stock Broker : Stock Broker means a person or corporate body, holding membership
of a recognised stock exchange engaged in buying and selling securities for clients
against brokerage.
Sub Broker : Sub Broker is a person affiliated and authorized by a Stock Broker
being a member of stock exchange entitled to and engaged in buying, selling and
dealing in securities.

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Answer 7(b)
Insider Trading
Insider Trading means trading by an insider of a company in breach of a duty of

trust or confidence in the stock of the company on the basis of non-public price
sensitive information to the exclusion of others. If insider trading goes unchecked in
the capital market, persons with insider information will have a consistent edge in
trades executed with such information and those without the information will be
consistent losers on the market. Hence, prohibition on Insider Trading is made under
SEBI (Prohibition of Insider Trading) Regulations 1992.
Inspection & Investigation Mechanism
The provisions of the SEBI (Prohibition of Insider Trading) Regulation 1992 govern
the inspection and investigation in the matters of Insider Trading.
Regulation 4A empowers SEBI to make inquiries to form a prima facie opinion, if it

suspects that any person has violated any provision of these regulations. For this
purpose the Board is empowered to appoint one or more officers to inspect the
books and records of insider(s) or any other persons, as may be deemed necessary.
Regulation 5 further empowers SEBI to investigate and inspect the books of

account, other records and documents of an insider or any other person and appoint
an investigating authority:
a. to investigate into the complaints received from investors, intermediaries or

any other person on any matter having a bearing on the allegations of Insider
Trading; and
b. to investigate suo motu upon its own knowledge or information in its
possession to protect the interest of investors in securities against breach of
these regulations.
Regulation 6 lays down the procedure for such investigation. While Regulation 7
specifies the obligation of the person under investigation, Regulation 8 and 9 deals
with the report of investigation and reply by the insider. Regulation 10 provides for
appointment of Auditor, if necessary and Regulation 11 lays down the powers of the
SEBI to issue direction.
SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)
Regulations, 2002 lay down detailed enquiry procedure, which an Enquiry Officer
appointed by SEBI has to follow in conducting an enquiry.
Penalty for Insider Trading
If insider:
a. either on his own behalf or on behalf of any other person(s), deals in securities
of a body corporate listed on any stock exchange on the basis of any
unpublished price sensitive information; or
b. communicates any unpublished price sensitive information to any person, with
or without his request for such information except as required in the ordinary
course of business or under any law; or

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c. counsels or procures for any other person to deal in any securities of any body
corporate on the basis of unpublished price sensitive information,
he shall be liable to a penalty not exceeding five lakh rupees.
Question 8
a. What is a ‘depository’? List out some of

advantages of depository system.
b. List out the various agencies involved in the
Euro-issue.
(4 marks
c. Mention the rating symbols used by any one
each)
of the three credit rating agencies in India.
d. Explain ‘circuit breaker’.
Answer 8(a)
A depository is a centralized warehouse of securities in dematerlized form. The

eligible securities are warehoused in the depository in computerized form to enable
securities trading and other transactions in electronic mode. Thus, the recordings are
done in the form of a book-entry and securities are not issued or exchanged in
physical form.
The depository system offers an efficient transfer mechanism by interfacing with the
stock market and related clearing operations.
Advantages of Depository System
Some of the advantages of depository systems are as follows:
1. Elimination of all risks associated with physical certificates.

2. Elimination of bad deliveries.
3. No Stamp Duty.
4. Immediate transfer and registration of securities.
5. Faster settlement Cycle.
6. Faster disbursement of non-cash corporate benefits like rights, bonus etc.
7. Reduction in handling of huge volumes of paper.
8. Periodic Status Reports.
Answer 8(b)
The following agencies are normally involved in the Euro issue:
i. Lead Manager
ii. Co-Lead/Co-Manager
iii. Overseas Depository Bank
iv. Domestic Custodian Banks
v. Listing Agent
vi. Legal Advisors
vii. Printers
viii. Auditors
ix. Underwriters.

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Answer 8(c)
CRISIL Debenture Rating Symbols
(a) High Investment Grades
i. AAA - Highest Safety

ii. AA-High Safety
(b) Investment Grades
i. A - Adequate Safety
ii. BBB - Moderate Safety
(c) Speculative Grades
i. BB - Inadequate Safety
ii. B - High Risk
iii. C - Substantial Risk
iv. D - Default
(d) CRISIL Fixed Deposit Rating Symbols
i. FAAA - Highest Safety

ii. FAA - High Safety
iii. FA - Inadequate Safety
iv. FB - Inadequate Safety
v. FC - High Risk
vi. FD - Default
(e) CRISIL Rating for Short-term Instruments
i. P-1 - Degree of Safety regarding timely is very strong.

ii. P-2 - Degree of Safety regarding timely is strong.
iii. P-3 - Degree of Safety regarding timely is adequate.
iv. P-4 - Degree of Safety regarding timely is minimal.
v. P-5 - Default.
CRISIL Rating Symbols for Structured Obligations
(1) High Investment Grades
i. AAA - Highest Safety

ii. AA - High Safety
(2) Investment Grades
i. A - Adequate Safety
ii. BBB - Moderate Safety
(3) Speculative Grades
i. A - Inadequate Safety

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ii. B - High Risk

iii. C - Substantial Risk
iv. D - Default
Rating Symbols of ICRA
(a) Long Term including debentures, bonds and preference shares
i. LAAA - Highest Safety

ii. LAA - High Safety
iii. LA - Adequate Safety
iv. LBBB - Moderate Safety
v. LBB - Inadequate Safety
vi. LB - Risk Prone
vii. LC - Substantial Risk
viii. LD - Default
(b) Medium-term including fixed deposits
i. MAAA - Highest Safety

ii. MAA - High Safety
iii. MA - Adequate Safety
iv. MB - Inadequate Safety
v. MC - Risk Prone
vi. MC - Default
(c) Short-term debt including Commercial Paper
i. A-1 - Highest Safety

ii. A-2 - High Safety
iii. A-3 - Adequate Safety
iv. A-4 - Risk Prone
v. A-5 - Default
(d) Rating Scale for Collective Investment Schemes
(a) Investment Grades
i. CS 1 - High Grade
ii. CS 2 - Adequate Grade
iii. CS 3 - Moderate Grade
(b) Non-Investment Grades
i. CS 4 - Inadequate Grade
ii. CS 5 - High Risk
Rating symbols of CARE
Grade For Debt/Bond/FD/CD/SO For CPs

1. High Investment CARE AAA PR-1

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CARE AA PR-2
2. Investment CARE A PR-3
CARE BBB
3. Speculative CARE BB PR-4
CARE B
4. Poor Grade CARE C PR-5
CARE D
NOTE: Students are required to mention the rating Symbols of any one of the
three credit rating agencies detailed above.
Answer 8(d)
Circuit Breakers
Circuit breakers or price limits have been imposed by BSE to control volatility in the
price movements, vis-a-vis prescribed daily and weekly limit for every stock. The
daily price limit is checked against the stocks closing price in the previous trading
session. The weekly price limit of stock depends on its closing price on the last
trading day in the previous week. The BOLT system is so structured that it rejects
buy or sell orders of a stock at prices outside the price limits, though it does not stop
trading itself.

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SECURITIES

Please purchase LAWS

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:

i. Off-shore venture funds

Off-Shore venture funds

Money market instruments

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Asset Management Company (AMC)

Responsibilities of debenture trustees

Debenture trustees are persons or agencies appointed as trustee on behalf of

i. front-end load; and

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i. Calculation of Front-end Load (Fel)

or Rs. 10.204 = Rs 10/(1-Fel)

10.204 - 10.204 Fel = 10

-10.204 Fel = 10 - 10.204

ii. Calculation of Back-end Load (Bel)

or Rs. 9.80 = Rs 10/(1- Bel) = Bel = 2%

9.80 - 9.80 Bel = 10

-9.80 Bel = 10 - 9.80

Calculation of 7 Day Moving Average:

Trading day Trading-Closing Price Sum of 7 recent prices Moving Average

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a. Advantage Products Ltd. is a listed company with authorized, issued and

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3. The Articles of Association of the company shall contain a provision,

a. has not defaulted in payment of interest or principal in respect of

Our company has made no default in relation to above points.Submitted please.

(XYZ) Company Secretary

Presence of strong and efficient market regulator is definitely an essential

The major functions of SEBI are as under:

i. regulates the transactions in stock exchange and security markets;

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vi. promotes investors’ knowledge and training of intermediaries of

(c) Explain any two of the following terms:

Redressal mechanism for investor grievances

Nature of grievance Can be taken up with

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- Duplicates for all of the above - Registrar to the Issue

In case of a listed security non-receipt of the Certificates after:

Regarding listed debentures, non-receipt of:

- Interest due - SEBI

- Bad delivery cell of the Stock

Regarding share or debentures in unlisted

Deposits in collective investment

Units of Mutual Funds SEBI

Fixed Deposits in Banks and Finance

Fixed Deposits in manufacturing

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1. Complaints with Consumers Disputes Redressal Forum;

Calculation of Future value of Investment in Chit Fund

i. Electronic IPOs (e-IPOs) : Realising the weakness of physical IPO in terms of

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1. Zero Coupon Debentures or Bonds

3. Deep Discount Bonds

4. Floating Rate Notes.

5. Secured Premium Notes

6. Cumulative Convertible Preference Share

7. Non-voting Equity Shares.

Essential features of a few of the above instruments may be stated as under:

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