NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

Distance education – MBL II

INVESTMENT LAWS

Legal Framework

Session II

CA. S.Krishnaswamy
13.11.2010
Session I

Investment Laws

Introduction

Capital Market – Money Market

Legal Framework
Constituents

1. Institutions
2.Investors
3.Intermediaries
4.Indexes
5.Initial Public offering
6.Investors Protection
7.Investment Advisers
8.Invigilator
9.Information
10.Inter- Exchange market surveillance
11.Information Technology on Stock Exchange.
Session II

Detailed analysis of Legal Frame Work

Capital Market

Regulatory Framework

The main legislation governing the securities market are

 Securities Contracts (Regulation ) Act, 1956, and (SCRA)

Securities Contracts( Regulation ) Rules 1957
Securities Exchange Board of India Act, 1992 (SEBI)
Companies Act, 1956
Securitization and Reconstruction of Financial Asset
and Enforcement of Security Interest Act 2002.(SERFAESI)
Foreign Exchange Management Act-1999
Securities and Insurance Laws (Amendment and Validation) Act, 2010
And other relevant legislations

Depositories Act, 1996.

Money Laundering Act,2000
Income Tax Act,1961
Securities Transactions Tax Chapter Vl of finance (No 2) Act, 2004.
Securities Contracts (Regulation) Act, 1956:

Mainly deals with establishment of stock Exchanges, listing

agreement and defines ‘Securities most power are now
delegated to SEBI

It provides for direct and indirect control of virtually all aspects of the
securities trading including the running of stock exchanges which aims
to prevent undesirable transaction in securities. It gives the Central
Government regulatory jurisdiction over (a) Stock exchanges through a
process of recognition and continued supervision, (b) contracts in
securities, and (c) listing of securities on stock exchanges. As a
condition of recognition, a stock exchange complies with the
requirements prescribed by the Central Government. The stock
exchange frame their own listing regulations in consonance with the
minimum listing criteria set out in Securities contracts Regulation Rules
1956.
Securities contracts ( Regulation ) Act, 1956

Definition

(aa)“ Corporatisation” means the succession of a recognized stock exchange, being a

body of individuals or a society registered under the Societies Registration Act,
1860 (21 of 1860), by another stock exchange, being a company incorporated for
the purpose of assisting, regulating or controlling the business of buying, selling
or dealing in securities carried on by such individuals or society;

(ab) “Demutualization” means the segregation of ownership and management from

the trading rights of the members of a recognized stock exchange in accordance with
a scheme approved by the Securities and Exchange Board of India;]

4 [5 [(ac)] “derivative” includes—

(A) a security derived from a debt instrument, share, loan, whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
(B) a contract which derives its value from the prices, or index of prices, of
underlying securities;
“option in securities” means a contract for the purchase or sale of a
right to buy or sell, or a right to buy and sell, securities in future, and
includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and
call in securities;

“securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated
company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment

scheme to the investors in such schemes;]

[(ic) security receipt as defined in clause (zg) of section 2 of the

Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002;]
[(id) units or any other such instrument issued to the investors under any
mutual fund scheme;]

(ii) Government securities;

(iia) Such other instruments as may be declared by the Central

Government to be securities; and

(iii) rights or interest in securities;

“stock exchange” means—

(a) any body of individuals, whether incorporated or not, constituted before

corporatisation and demutualisation under sections 4A and 4B, or

(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956)
whether under a scheme of corporatisation and demutualisation or
otherwise,

for the purpose of assisting, regulating or controlling the business of buying,

selling or dealing in securities.]
STOCK EXCHANGES

Application for recognition of stock exchanges.(S.3)

Grant of recognition to stock exchanges.(S.4)

Withdrawal of recognition. (S 5)

Power of recognized stock exchange to make rules restricting voting rights, etc (S. 7A)

Power of recognized stock exchanges to make bye-laws.(S.9)

Power of [Securities and Exchange Board of India] to make or amend bye-laws of

recognized stock exchanges. (S.10)

Power of Central Government to supersede governing body of a recognized stock exchange.

(S.11)
Conditions for listing. (S.21)

Delisting of securities (S.21A)

Procedure and powers of Securities Appellate Tribunal.

Penalties.( S.23.)
Listing Agreement

Important Clauses

1. Share allotment / Transfer

2. Price sensitive information (cl 19)

3. Book Closure

4. Share holding patterns – Quarterly

5. Disruptions

6. Rating information

7. Quarterly financial statement

8. Corporate Governance (Cl 49)

SEBI Act, 1992:

SEBI is Principal law for regulation of securities market in

in India. Has wide ranging powers – also draws from SCRA and
Companies Act,1956 prescribes norms for IPO

The SEBI Act, 1992 was enacted to empower SEBI with statutory
powers for (a) protecting the interests of investors in securities, (b)
Promoting the development of the securities market, and (c) regulating
the securities market. Its regulatory jurisdiction extends over
Corporates issuing securities and all intermediaries and persons
associated with securities market. It can conduct enquiries, audits and
inspection of all concerned participants and adjudicate offences under
this Act. It has powers to register and regulate all the market
intermediaries. Further it can also penalize them in case of violation of
the provision of the Act, Rules and Regulations made there under.
SEBI has full autonomy and authority to regulate and develop an
orderly securities market.
SEBI Act

1.Functions of Board ( S.11)

a) Regulate Business in Stock Exchange

b) Register Intermediaries

c) Register Venture capital funds and collective

investment schemes

d) Promote Self- regulatory organizations;

e) Conducting research for the above purpose

(f) Prohibit Fraudulent and unfair trade practices

(g) Promote investors education

(h) Prohibit insider trading in Securities;

(i) Regulate substantial acquisition of shares and take- over of

companies

(j) Calling for information from, undertaking inspection ,

conducting inquiries and audit of the intermediaries and self-
regulatory organizations.

(k) Delegated power and securities contracts (Regulation) Act

(l) Levying fees or other charges for carrying out the purposes of
this section

la) Calling from or furnishing to any such agencies, as may be specified

by the Board, such information as may be considered necessary by it
for the efficient discharge of its functions;
2. Registration

1. Stock Broker – Sub- Broker

2. Share transfer agents

3. Banker to an issue

4. Trustee of a Debenture Trust

5. Registration to an issue

6. Merchant Banker

7. Underwriter

8. Portfolio manager

9. Investment Advisor

10. Any other- associated with security market

3. Penalties.

4. Appellate Tribunal

5. Rules (S.29)

6. Regulations (S. 30)

 Regulations by SEBI Under section 30 of Act / Rules by Central
Government
(Section 29)

1. SEBI (Stock- brokers and Sub- brokers) Regulations,1992

2. SEBI (Merchant Bankers) Regulations,1992

3. SEBI (Portfolio Managers) Regulations,1993

4. SEBI (Registrars to an issue and share Transfer Agents) Regulations,

1993

5. SEBI ( Underwriters )Rules, 1993

Corporate action involving security Transactions

a. Prohibition of insider Trading Regulation 1992

b. Substantial Acquisition of share and Takeover Regulation 1997.

c. Buy back of securities Regulation 1998.

d. Employee stock options scheme and employee stock purchase

scheme guidelines 1999 also issued U/s 17(2) of income tax Act.

e. Buy Back of shares (Private and unlisted companies ) 1999 Rules.

f. Collective investment scheme regulation 1999.

g. Issue or sweat equity Regulation 2002/Rules.

h. Prohibition of fraudulent and unfair Trade Practice Act.

Institutions

a. Custodian of Securities Regulations 1996

b. Depositories and participate Regulation 1996

c. Depositories and

d. Venture Capital funds

e. Foreign Institutional Investment

f. Mutual Fund Regulations 1996

g. Credit Rating agencies Regulations 1999

h. Self Regulatory organization Regulations-2004

Constituents of Capital Market

Institutions – Self regulatory organization

Stock Exchange –Listing and Delisting Agreements

bye laws
Other associations formed by intermediaries
Depositories Act, 1996:

The Depositories Act, 1996 provides for the establishment of

depositories for securities to ensure transferability of securities
with speed, accuracy and security. For this, these provisions
have been made: (a) making securities of public limited
companies freely transferable subject to certain exceptions;
(b)dematerializing the securities in the depository mode; and
(c) providing for maintenance of ownership records in a book
entry form. In order to streamline the settlement process, the Act
envisages transfer of ownership of securities electronically by
book entry without moving the securities from persons to
persons. The Act has made the securities of all public limited
companies freely transferable, restricting the company’s right to
use direction in effecting the transfer of securities, and the
transfer deed and other procedural requirements under the
Companies Act have been dispensed with.
Companies Act, 1956:

It deals with issue, allotment and transfer of securities and various aspects
relating to company management. It provides for standards of disclosure in
public issues, and annual financial statements in line with Accounting
Standards.

Section 55A mandates administration of certain provisions relating to securities

to SEBI. The section which is self explanatory reads,

Powers of Securities and Exchange Board of India.

55A.The provisions contained in sections 55 to58,59 to 81 (including

sections68A, 77A and 80A),
108,109,110,112,113,116,117,118,119,120,121,122,206,206A and 207, so
far as they relate to issue and transfer of securities and nonpayment of
dividend shall,-

(a) in case of listed public companies;

(b) in case of those public companies which intend to get their securities
listed on any recognized stock exchange in India ,be administered by
the Securities and Exchange Board of India ; and
(c) in any other case, be administered by the Central Government
Explanation.- For the removal of doubts, it is hereby
declared that all powers relating to all other matters
including the matters relating to prospectus, statement in
lieu of prospectus, return of allotment, issue of shares and
redemption of irredeemable preference shares shall be
exercised by the Central Government, or the Registrar of
Companies, as the case may be.

Section 77A, 77AA, 77B now removes prohibition of buy

back of shares and facilitates the option to companies to
buy back its own shares on compliance of certain
conditions.

Also Corporate Governance principles are now embedded

in Section 292A, composition of Audit Committee etc.
 Prevention of Money-Laundering Act -2002

The ‘Colour’ of the money that flows into the capital market is
also critical for a healthy Market. All tainted (Crime related)
money should be kept out of the market so as not to sully the
transactions of genuine investors and upset normal price
mechanism and trading.
Income Tax Act / Securities Transaction Tax

The Act provides a levy of transaction tax on all securities transactions

and levy of a dividend distributions tax; to balance, there is not tax on
dividends, no tax on long term (over1year) capital gains on sale of
shares, derivative transactions not treated as speculative etc.

Summary

• Dividends are wholly exempt

• Capital gains arising on transfer of long term (over 1 year ) shares,

which has
suffered securities transaction --- is wholly exempt.

• Derivatives transactions purchase stock exchange is not controlled

‘Speculative’ and loss if any can be setoff against other income.

• Exemption for certain savings U/s 80C of the Act upto Rs 1Lakh.
 Reserve Bank of India Act

Broadly deals with transactions involving banking derivatives, money

market instruments, Securities etc, in a separate chapter III D and also
deals with non banking institution by giving directions on convertible
debentures etc

Securitization and Reconstruction of Financial Asset and

Enforcement of Security Interest Act 2000.(SERFAESI)

This new legislation permits securitization of assets like Account

Receivables ,Loans & advances as in the case of bank by transfer to a
special purpose vehicle or sold to another entity which may rise money
on the security of these receivables broken into various tranches
Foreign Exchange Management Act, 1999

Foreign Exchange Management Act deals with all aspects of transactions

involving foreign currency and also establishes a directorate of enforcement

Foreign Direct Investment

The Legal basis: Foreign Direct Investment by non-resident in resident entities

through transfer or issue of security to person resident outside India is a ‘ Capital
account transaction ‘ and Government of India and Reserve Bank of India regulate this
under the FEMA, 1999 and its various regulations. Keeping in view the current
requirements, the Government from time to time comes up with new regulations and
amendments / Changes in the existing ones through order / allied rules, Press Notes,
etc. The Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce & Industry Government of India makes policy pronouncements on FDI
through Press Note / Press Releases Which are notified by the Reserve Bank of India
as amendment to notification No. FEMA 20 /2000- RB dated May 3,2000. These
notifications take effect from the date of issue of Press Notes/ Press Releases. The
Procedural instructions are issued by the Reserve Bank of India vide A.P.Dir.(series
circulars. The regulatory framework over a period of time thus Consists of Acts,
Regulations, Press Notes, Press Releases, Clarifications, etc.
The latest circular consolidates into one document all
the prior policies / regulations on FDI which are
contained in FEMA, 1999, RBI Regulations under
FEMA, 1999 and press Notes / Press Releases /
Clarifications issued by DIPP and reflects the current
‘policy framework’ on FDI. It is clarified that this is a
consolidation / compilation and comprehensive listing
of most matters on FDI and is not intended to make
changes in the extant regulations. This Consolidation
deals comprehensively with all aspects of FDI Policy
which are covered under the various press Notes/
Press Releases / Clarifications issued by DIPP.
Global Affiliation; Financial Sector Reforms

1. India is part of IOSCO which sets standards on international

securities Regulations; G 7, G 20,G 30 – groups also discuss
matters relating to financial markets and through financial stability
board sets down standards in various areas of finance.

2. Financial sectors reforms have been taken to strengthen investors

protection and transparency .