Regulatory Framework — General View

What this chapter covers

This chapter carries 9 per cent of the III-A examination — the largest single weight in the paper.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Financial Market Regulators and their role—SEBI, RBI, IRDAI, PFRDA · Regulatory Bodies—ROC, EOW, FIU-India · Securities Appellate Tribunal (SAT) · Legislative framework governing the financial markets · Bye-laws of stock exchanges · Taxes on securities

2.1 The regulatory system

Regulation of the securities market is motivated by the need to safeguard the interests of investors. What is paramount is to ensure that investors make informed decisions on the basis of complete transparency and fairness in both primary and secondary market transactions.

Informed decisions, complete transparency, fairness — the three words the whole framework serves.

The basic objective of SEBI is to: a. To protect the interest of investors in securities markets · b. To promote the development of securities markets · c. To regulate the securities markets.

Protect, develop, regulate — three objectives, in that order.

Why more than disclosure is needed: deliberately engineered speculative activities in the stock market or insider trading are undesirable as they can hurt investors at large; companies and mutual funds issuing securities and units ought to furnish adequate disclosures on all relevant facts; stockbrokers ought to execute transactions most efficiently and also refrain from charging excessive brokerage. There can be instances of unethical activities which can be detrimental to investors in general such as insider trading, misusing the power of attorney given by investors to brokers, price manipulation, front running, etc.

Four named abuses — insider trading, misuse of a power of attorney, price manipulation and front running. The first review question asks which is an unhealthy practice: insider trading. Disclosure, transparency and surveillance are all remedies, not diseases.

The appeal route: the ruling given by a regulator may be challenged by petitioning the prescribed authority. In the case of SEBI, for example, the appellate authority is the Securities Appellate Tribunal (SAT). Rulings of the SAT can be challenged in the Supreme Court of India.

And the civil courts are shut out: no civil court shall entertain any suit or proceeding relating to a matter which an adjudicating officer appointed under the SEBI Act, or under a duly constituted SAT, is empowered under the said Act to decide upon. Further, no injunction can be granted by any court or any other authority with regard to any action taken or to be taken pursuant to any power conferred by the SEBI Act.

2.2 The regulators

And a seventh layer, voluntary: intermediaries representing some segment of the securities market may form a Self-Regulatory Organization (SRO). In order to obtain recognition as an SRO from SEBI, certain conditions have to be met as prescribed under the SEBI (Self-Regulatory Organizations) Regulations, 2004. Ideally, an SRO will seek to uphold investors' interests by laying out and maintaining high ethical and professional standards of conduct and encouraging best practices among its members.

2.2.1 SEBI

SEBI was established as a non-statutory body on April 12, 1988. It was established as a statutory body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into effect on January 30, 1992.

Two dates — 12 April 1988 non-statutory, 30 January 1992 statutory.

The preamble of SEBI describes the basic functions of the Securities and Exchange Board of India as "...to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto".

Section 11(2) functions, in outline:

• Regulate the business in stock exchanges and any other securities markets.
• Register and regulate the working of stockbrokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and others, extending to depositories and depository participants, custodians of securities, foreign institutional investors, credit rating agencies.
• Register and regulate the working of venture capital funds and collective investment schemes including mutual funds.
• Promote and regulate self-regulatory organisations.
• Prohibit fraudulent and unfair trade practices.
• Promote investors' education and training of intermediaries.
• Prohibit insider trading in securities.
• Regulate substantial acquisition of shares and takeover of companies.
• Require disclosure of information, to undertake inspection, conduct inquiries and audits.
• Call for information from or furnish information to other authorities within India or abroad.
• Exercise delegated powers under the Securities Contracts (Regulation) Act, 1956.
• Levy fees or other charges.
• Conduct research.
• Perform such other functions as may be prescribed.

The named powers:

Section 11(2A) — the power to inspect any book, or register or other document or record of any listed public company or a public company which intends to get its securities listed... if SEBI has reasonable grounds to assume that the concerned company has been indulging in insider trading or fraudulent and unfair trade practices.

Section 11(3) — SEBI shall have the same powers as are vested in a civil court under the Code of Civil Procedure 1908, including the inspection of books and registers and summoning and enforcing the attendance of persons and examining them on oath.

Section 11(4) — where it is in the interest of investors or the Securities Market, SEBI may:

• Suspend the trading of any security in a recognized stock exchange.
• Restrain persons from accessing the securities markets.
• Suspend any office-bearer of any stock exchange or SRO.
• Impound and retain the proceeds or securities relating to any transaction which is under investigation.
• Attach bank accounts or other property... for up to 90 days.
• Direct any intermediary or person... not to dispose off or alienate an asset constituting a part of any transaction which is under investigation.

Ninety days for an attachment — a figure worth remembering.

Section 11(5) — the amount disgorged... shall be credited to the Investor Protection and Education Fund established by SEBI.

Section 11A — power to regulate or prohibit the issue of prospectus, offer document or advertisement which solicits money for the issue of securities; 11A(1) covers the issue of capital, transfer of securities and other incidental matters, and 11A(2) empowers SEBI to specify the requirements for listing and transfer of securities.

Section 11B — power to issue direction to any intermediary if after making an enquiry it is found that the investor's interest is at stake or action of the intermediary is obstructing the orderly development of the securities market, including the power to direct any person who made a profit or averted loss... to disgorge an amount equivalent to the wrongful gain made or loss averted, and the power to levy penalties after recording its reasons in writing.

Section 11C — power by order in writing [to] direct any person to investigate the affairs of such intermediary or person associated with the securities market and also report to SEBI such investigation.

2.2.2 RBI

Reserve Bank of India (RBI) is the central bank of the country vested with the responsibility of administering the monetary policy.

The second review question asks who administers monetary policy in India — the Reserve Bank of India, not the State Bank of India or the Central Bank of India, which are commercial banks.

Its key concern is to ensure the adequate growth of money supply in the economy so that economic growth and financial transactions are facilitated, but not so rapidly which may precipitate inflationary trends.

The preamble: "…to regulate the issue of Bank Notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth".

Seven main functions:

1. As the monetary authority: to formulate, implement and monitor the monetary policy in a manner as to maintain price stability while ensuring an adequate flow of credit to productive sectors of the economy.

2. As the regulator and supervisor of the financial system: To prescribe broad parameters of banking operations... The objective here is to maintain public confidence in the system, protect the interest of the people who have deposited money with the bank and facilitate cost-effective banking services.

3. As the manager of Foreign Exchange: To administer the Foreign Exchange Management Act 1999.

4. As the issuer of currency: To issue currency and coins and to exchange or destroy the same when not fit for circulation.

5. Developmental role: To perform a wide range of promotional functions to support national objectives.

6. Regulator and Supervisor of Payment and Settlement Systems.

7. Banking functions: a) It acts as a banker to the Government and manages issuances of Central and State Government Securities. b) It acts as a banker to the banks by maintaining the banking accounts of all scheduled banks.

Governance: the general superintendence and direction of RBI's affairs are entrusted to a Central Board of Directors which is appointed by the Government of India. Further, each of the four regions in the country is served by a Local Board.

The Board for Financial Supervision (BFS) was constituted in 1994 as a committee of the Central Board of Directors. The primary objective of the BFS is to carry out consolidated supervision of the financial sector consisting of commercial banks, financial institutions and non-banking finance companies. Its initiatives include the off-site surveillance system, a supervisory rating system, the Prompt Corrective Action Framework for weak banks, risk-based supervision, and a credit registry in respect of large borrowers.

Two statutes: RBI's functions are governed by the Reserve Bank of India Act 1934, whereas the financial sector is governed by the Banking Regulation Act 1949.

2.2.3 IRDAI

The mission of the Insurance Regulatory and Development Authority of India (IRDA) is to regulate, promote and ensure orderly growth of the insurance sector, including the re-insurance business while ensuring the protection of the interests of insurance policyholders. IRDAI was constituted by an act of parliament and according to Section 4 of the IRDA Act 1999, the Authority comprises ten members who are all government appointees.

Ten members, all government appointees.

Fifteen powers and functions, including:

• Issuing a certificate of registration or renewing, modifying, withdrawing, suspending or cancelling such registration.
• Protecting policyholders on assignment of the policy, nomination by policyholders, insurable interest, settlement of insurance claim, surrender value.
• Specifying qualifications, code of conduct and practical training for intermediaries.
• Specifying the code of conduct for surveyors and loss assessors.
• Regulating the investment of funds by insurance companies.
• Regulating maintenance of margin of solvency.
• Adjudication of disputes between insurers and intermediaries.
• Supervising the functioning of the Tariff Advisory Committee.
• Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector.

2.2.4 PFRDA

PFRDA was established on 18 September 2013 in accordance with the provisions of the Pension Fund Regulatory and Development Authority Act, 2013 with the following responsibilities: (a) To promote old age income security by establishing, developing and regulating pension funds, (b) To protect the interests of subscribers to schemes of pension funds and related matters.

The third review question names it from that first phrase — promoting old age income security.

The PFRDA Act is applicable to (i) the National Pension System (NPS) and (ii) any other pension scheme not regulated by any other enactment.

Its powers are to:

• Regulate, promote and ensure orderly growth of the National Pension System and pension schemes.
• Protect the interests of subscribers.
• Call for information from, undertaking inspection of, conducting inquiries and investigations including audit of, intermediaries and other entities.

The NPS: a defined contribution retirement savings scheme regulated by PFRDA. It offers a menu of investment choices and Fund Managers to its subscribers. NPS is mandatory for the new recruits to the Central Government, except the armed forces. NPS is also available for all the citizens of India on a voluntary basis. Meanwhile mandatory programmes under the Employees Provident Fund Organization (EPFO) and other special provident funds continue to operate according to the existing system, under the Employees Provident Fund (EPF) and Miscellaneous Provisions Act 1952.

2.2.5 IFSCA

IFSCA has been established on April 27, 2020 under the International Financial Services Centres Authority Act, 2019. It is headquartered at Gift City, Gandhinagar in Gujarat.

Why it exists: before the establishment of IFSCA, the domestic financial regulators, namely RBI, SEBI, PFRDA and IRDA regulated business in IFSC. As the dynamic nature of business in the IFSCs requires a high degree of inter-regulatory coordination within the financial sector, the IFSCA has been established as a unified regulator with a holistic vision to promote ease of doing business in IFSC and provide a world-class regulatory environment.

Four regulators replaced by one.

2.3 Other agencies

Ministry of Finance (MoF) governs the entire fiscal system of the Government of India. Its departments include Department of Economic Affairs (DEA), Department of Expenditure, Department of Revenue, Department of Financial Services.

DEA is the nodal agency of the Central Government for formulating and monitoring India's economic policies, its main function being formulation and monitoring of macroeconomic policies relating to fiscal policy and public finance etc. as well as the functioning of the capital market including stock exchanges.

Department of Financial Services administers policy on public sector banks · life insurance and general insurance · pension reforms · Development Financial Institutions (DFIs) like NABARD, SIDBI, IIFCL, NHB, EXIM Bank, IFCI.

Department of Investment and Public Asset Management oversees all matters relating to the disinvestment of equity shares of Central Government from Central Public Sector undertakings.

The Ministry of Corporate Affairs is mainly concerned with the administration of the Companies Act, 1956/2013, is responsible for administering the Competition Act 2002 which has replaced the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP), supervises the Institute of Chartered Accountants of India (ICAI), the Institute of Company Secretaries of India (ICSI) and the Institute of Cost Accountants of India, and administers the Partnership Act, 1932, the Companies (Donations to National Funds) Act, 1951 and Societies Registration Act, 1980.

2.3.1 Registrar of Companies

Pursuant to Section 396(1) of the Companies Act, 2013, the Central Government has appointed Registrars at different places to discharge the function of registration of companies as provided in Section 7. ROCs are vested with the primary duty of registering companies created in the respective states and the Union Territories and ensuring that such companies comply with statutory requirements, functioning as a registry of records... available for inspection by members of the public on payment of the prescribed fee.

Seven functions:

• Registration.
• Maintaining a register of Companies/LLP.
• Regulation and reporting of companies and their shareholders and directors.
• Annual filing of numerous documents.
• To foster and facilitate a business culture.
• To ask for supplementary information from any company when necessary — the registrar can search for any company and demand to look into the accounts of the company with prior approval from the court.
• To file a petition for winding up of a company with the discretion of the government.

Statutory powers:

• Section 81 — maintain a register containing particulars of all charges.
• Section 83 — enter a memorandum of satisfaction.
• Section 206 — power... to call for information or explanation, and if inadequate, demand that the company produce for inspection such books and papers.
• Section 209 — power of the Registrar to seize documents, going a step beyond Section 206, by applying to a Magistrate having appropriate jurisdiction where records may be destroyed, mutilated, altered, falsified or secreted.
• Section 248 — powers on the Registrar to strike a defunct company off the register.

Call for information under 206; seize under 209 with a magistrate's authority.

2.3.2 NCLT

The Central Government has constituted National Company Law Tribunal (NCLT) under section 408 of the Companies Act, 2013 w.e.f. 1st June 2016.

In the first phase... eleven Benches, one Principal Bench at New Delhi and ten Benches at New Delhi, Ahmadabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai, headed by the President and 16 Judicial Members and 09 Technical Members, with later benches at Cuttack, Jaipur, Kochi, Amravati, and Indore.

It is a quasi-judicial authority dealing with corporate disputes that are of civil nature arising under the Companies Act and Insolvency and Bankruptcy Code. The NCLT is a single judicial forum dealing with all disputes concerning the affairs of Indian companies.

2.3.3 SFIO

Recommended by the Naresh Chandra Committee on corporate governance, decided upon by the Cabinet on 9th January, 2003, constituted by resolution of 2nd July, 2003, with its charter issued on 21st of August, 2003, and established through notification dated 21.07.2015.

A multi-disciplinary organisation under the Ministry of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing, banking, law, information technology, investigation, company law, capital market and taxation etc. for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.

What it takes up: cases with these features.

• Characterized by complexity and having inter-departmental and multi-disciplinary ramifications.
• Substantial involvement of public interest to be judged by size.
• The possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures.

Whether or not an investigation should be taken up by the SFIO would be decided by the Director, SFIO who will be expected to record the reasons in writing.

Structure: headed by a Director as Head of Department in the rank of Joint Secretary, with headquarters in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad & Kolkata.

Under Section 212(1) of the Companies Act, 2013, the Central Government may assign an investigation to SFIO:

• On receipt of report of the Registrar or Inspector under section 208.
• On intimation of a special resolution passed by a company requesting an investigation into its affairs.
• In public interest.
• On the request of any Department of Central Government or State Government.

Four triggers. SFIO shall submit its report to the Central Government within the period specified in the order, may be directed to file an interim report, and it is the responsibility of the company, its officers and employees... to provide all information, explanation, documents and assistance.

The Computer Forensic and Data Mining Laboratory (CFDML) was set up in 2013, is accredited to ISO/IEC 17025, and has been notified as Examiner of Electronic Evidence u/s 79A of Information Technology Act, 2000.

2.3.4 Economic Offences Wing

The Economic Offences Wing (EOW) in the Central Bureau of Investigation was created in 1964 to deal with serious frauds in banks, stock exchanges, financial institutions, joint-stock companies, public limited companies, misappropriation of public funds, criminal breach of trust, violation of Customs Act, counterfeiting of currency, narcotics, drug trafficking, arms peddling and more.

Following the securities and stock market scam of 1992, it was deemed desirable to strengthen and expand the EOW and accordingly, a full-fledged Economic Offences Division (EOD) was formed in 1994. The EOD has four zones of which one focuses exclusively on large and complicated security and bank frauds.

Twelve areas covered, including:

• Frauds involving manipulation of share prices, insider trading and others.
• Banking, insurance and foreign exchange frauds.
• Cybercrimes.
• Violation of Intellectual Property Rights.

State governments have also set up their EOWs.

2.3.5 FIU-IND

Financial Intelligence Unit – India (FIU-IND) was set up by the Government of India vide O.M. dated 18th November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.

It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Six functions:

• Collection of Information: Act as the central point for receiving Cash Transaction reports (CTRs), Non-Profit Organisation Transaction Report (NTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs).
• Analysis of Information.
• Sharing of Information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units.
• Act as Central Repository.
• Coordination.
• Research and Analysis.

The Financial Action Task Force (FATF) is an inter-governmental body which sets standards and develops and promotes policies to combat money laundering and terrorist financing. The revised Forty Recommendations of FATF provide a complete set of counter-measures against money laundering.

Under PMLA Section 13(2), the Director may impose a fine on any banking company, financial institution or intermediary for failing to comply with the obligations of maintenance of records or to furnish information or to verify the identities of clients, with the same powers as are vested in a civil court; and under Section 66... may furnish... any information received or obtained, to any officer, authority or body, if it is deemed to be in the public interest.

2.3.6 Police authorities

The police authorities are responsible for maintaining law and order and for enabling the enforcement of The Bharatiya Nyaya Sanhita, 2023 (BNS)... The BNS has 358 sections divided into 20 Chapters.

Relevant categories:

• Giving false evidence and offences against public justice (sections 227 to 268).
• Offences against property (sections 303 to 334).
• Offences relating to documents and property marks (sections 335 to 350).
• Attempts to commit offences.

The illustrated sections:

• Section 228 — fabrication of false evidence.
• Section 314 — dishonest misappropriation of property.
• Section 316 — criminal breach of trust, committed by one entrusted with property or dominion over property who dishonestly misappropriates it.
• Section 336 — forgery.
• Section 335 — making a false document.
• Section 334 — falsification of accounts, where a clerk, officer or servant wilfully and with intent to defraud makes a false entry.

2.4 The Securities Appellate Tribunal

The Securities Appellate Tribunal has been set up under the SEBI Act, which hears and disposes of the appeals of any person who has been aggrieved by any order of SEBI or of any adjudicating officer under the Act.

Section 15K(1)... empowers the Central Government to establish Securities Appellate Tribunal (SAT)... SAT shall consist of a presiding officer and such other members, as may be determined by the Central Government.

Qualifications: the Presiding Officer must be a sitting or retired- judge of the Supreme Court or Chief Justice of a High Court or a Judge of High Court for at least 7 years; a Judicial Member is or has been a Judge of High Court for at least five years.

Seven years for the Presiding Officer, five for a Judicial Member.

SAT's reach extends beyond SEBI: it hears and disposes of appeals against orders passed by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013 and against orders passed by the Insurance Regulatory Development Authority of India (IRDAI) under the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999.

Who may appeal, and when: any person aggrieved... provided the aggrieved person had not granted his consent to the order against which the appeal is being made. The appeal must be filed within a period of 45 days from the date on which a copy of the order is received.

Forty-five days — and no appeal against an order you consented to.

Section 15U(1) — SAT 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 shall have powers to regulate its own procedure.

Section 15U(2) — the same powers as a civil court for:

• Summoning and enforcing the attendance of any person and examining him on oath.
• Requiring the discovery and production of documents.
• Receiving evidence on affidavits.
• Issuing commissions for the examination of witnesses or documents.
• Reviewing its decisions.
• Dismissing an application for default or deciding it ex-parte.
• Setting aside any order of dismissal... or any order passed by it ex-parte.
• Any other matter which may be prescribed.

Section 15U(3) — every proceeding before the SAT shall be deemed to be a judicial proceeding and SAT shall be deemed to be a civil court.

Section 15U(4) and (5) — the Presiding Officer distributes business among benches and may transfer any case pending before one Bench... to any other Bench.

Section 15U(6) — where a Bench... consisting of two members differ in opinion, they refer the point to the Presiding Officer, who may hear it himself or refer it, and it shall be decided according to the opinion of the majority of the members... who have heard the case, including those who first heard it.

Section 15V — the appellant may either appear in person or authorize one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers.

Section 15W — the provisions of the Limitation Act, 1963 shall apply.

Section 15Y — no civil court shall have jurisdiction, and no injunction shall be granted by any court or authority.

Section 15Z — any person aggrieved by any decision or order of the SAT may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the SAT to him, on any question of law arising out of the order.

45 days to SAT; 60 days to the Supreme Court, and only on a question of law.

2.5 The legislative framework

The SCRA covers granting recognition to stock exchanges · corporatization and demutualization of stock exchanges · the power of the Central Government to call for periodical returns · the power of SEBI to make or amend bye-laws · the power... to supersede the governing body · the power to suspend the business of recognized stock exchanges · the power to prohibit undesirable speculation.

The Insider Trading Regulations define an "insider" as any person who is connected with a company or who is in possession of or as having access to unpublished price sensitive information, and generally available information as information that is accessible to the public on a non-discriminatory basis and does not include unverified event or information reported in print or electronic media. Information published on the website of a stock exchange would ordinarily be considered generally available.

A connected person is one associated with a company, in any capacity, directly or indirectly, during the six months prior to the concerned act, in a way that allows such a person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. Twelve categories are deemed connected — relatives, group companies, intermediaries, investment and trustee companies, exchange officials, mutual fund trustees and AMC directors, public financial institution directors, SRO officials, a banker of the company, concerns in which a director, relative or banker holds more than ten per cent of the holding or interest, partnership firms, and a person sharing household or residence with a connected person.

But the presumption can be rebutted: such a presumption is a deeming legal fiction and is rebuttable.

The PFUTP Regulations define fraud as including any act, expression, omission or concealment committed whether in a deceitful manner or not... in order to induce another person or his agent to deal in securities whether or not there is any wrongful gain or avoidance of any loss. It covers:

• A knowing misrepresentation of the truth or concealment of material fact.
• A suggestion as to a fact which is not true, by one who does not believe it to be true.
• An active concealment.
• A promise made without any intention of performing it.
• A representation, whether true or false, made in a reckless and careless manner.
• Deceptive behaviour by a person depriving another of informed consent.
• False statement made without reasonable ground.
• The act of an issuer of securities giving out misinformation that affects the market price.

Note "whether or not there is any wrongful gain" — the fraud is complete without profit.

"Dealing in securities" includes buying, selling or subscribing either by themselves or through mule accounts — a mule account being one effectively controlled by another person, whether or not the consideration for transactions in the account are paid by such other person — plus acts which may be knowingly designed to influence the decision of investors and any act of providing assistance.

Eighteen prohibited practices are listed, including:

• Creating a false or misleading appearance of trading.
• Dealing not intended to affect a transfer of beneficial ownership.
• Inducing subscription for fraudulently securing the minimum subscription.
• Influencing or manipulating the reference price or benchmark price.
• Publishing untrue information prior to, or in the course of dealing in securities.
• Selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities (unless the person was a holder in due course or they were previously traded on the market through a bonafide transaction).
• Entering into transactions on behalf of client without the knowledge of or instructions from client.
• Circular transactions.
• Predating or otherwise falsifying records including contract notes.
• Front running, being any order in securities placed by a person, while directly or indirectly in possession of information that is not publicly available, regarding a substantial impending transaction.
• Knowingly planting false or misleading news.
• Mis-selling.
• Illegal mobilization of funds by sponsoring... any collective investment scheme.

Under the SAST Regulations, any acquirer who acquires shares or voting rights, which... would entitle him to exercise twenty-five per cent or more voting rights in a company... is required to make a public announcement of an open offer (Regulation 3(1)); a holder of 25 per cent or more may not acquire more than five per cent of the voting rights in a financial year without an open offer (Regulation 3(2)); in the case of a listed entity which has listed its specified securities on Innovators Growth Platform, the percentage would be 49% instead of 25%; and under Regulation 4, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement.

An indirect acquisition is treated as direct where the target's proportionate net asset value, sales turnover or market capitalisation exceeds eighty per cent of the acquired entity's consolidated figure. Regulation 29(1) requires disclosure at 5% or more, and 29(2) on more than 2% change.

25 per cent triggers; 5 per cent creeps; 2 per cent discloses; 80 per cent converts indirect into direct.

The Indian Contract Act requires that there shall be an agreement and such an agreement should be enforceable by law; under section 10, all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.

For the securities market, agency is the key part: the law of agency is especially important and it governs the relationship between an investor (principal) and a broker (agent). The function of a broker is to establish the privity of a contract between two parties to a transaction for which he earns a commission, i.e., brokerage. Under section 226, contracts through an agent bind as if made by the principal in person; section 211 — an agent must conduct the business of his principal according to the directions given; section 212 — skilfully... and with reasonable diligence; section 213 — render proper accounts to his principal on demand; section 222 — the principal is bound to indemnify the agent against the consequences of all lawful acts.

The PMLA defines the offence: whoever directly or indirectly attempts to indulge, or knowingly assists or knowingly is a party or is involved, in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of the offence of money-laundering. Offences are scheduled in Part A, Part B — where section 132 of the Customs Act, 1962 is a scheduled offence if the total value involved is Rs. 1 crore or more — and Part C, dealing with offences having cross-border implications.

FEMA repealed FERA, 1973, and extends to the whole of India and shall apply to all branches, offices and agencies outside India, owned or controlled by a person resident in India. Section 3 bars dealing in foreign exchange except through an authorized person; Section 4 bars a resident from holding any foreign exchange, foreign security or any immovable property situated outside India; Section 5 covers Current Account transactions, Section 6 Capital Account transactions; Section 10 empowers RBI to authorise persons as authorized dealer, money changer or offshore banking unit; Section 34 excludes civil court jurisdiction; and Section 35 allows appeal from the Appellate Tribunal to the High Court.

2.5.11 Bye-laws of stock exchanges

Indian stock exchanges such as BSE, NSE, MCX, NCDEX, MSEI etc. frame their own Bye-Laws which are binding on all the trading members / brokers registered with the particular exchange. The bye-laws framed by the stock exchanges need to be approved by the SEBI and shall be in conformity with the provisions of the SC(R)A, 1956, SC(R)R, 1957 and the SEBI Act, 1992.

Each exchange frames its own — so they are not the same across exchanges, though all need SEBI approval. The fourth review question is therefore False.

**They cover the admission of trading members, listing requirements, fees, suspension of admission to the stock exchange, transaction and settlement, rights and liabilities of members, arbitration etc., and it is the responsibility of the trading member or the compliance officer or any such person appointed by the trading member to ensure that all the different regulations of the bye-laws are adhered to.

Stamp duty: the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 make the responsibility for collection of stamp duty on transactions by the transferor of securities or issuance by the issuer in the depository system... the responsibility of the depository.

2.5.12 Taxes on securities

The Income-Tax Act, 1961... came into force in April 1962. It consists of twenty-three chapters.

TDS on dividend: vide the Finance Act, 2020, dividend, in excess of Rs. 5000 in a financial year, is taxable in the hands of investors, effective from April 1, 2020. The applicable TDS on dividend is 10% for resident investors. However, if PAN is not available or is not submitted by the investor, the applicable TDS rate should be 20%. For non-resident Indians (NRIs), TDS should be at 20%. Interest expense incurred to earn the dividend is deductible, but the deduction should not exceed 20% of the dividend income.

Capital gains: securities held for more than 12 months before the sale (called a transfer) could result in a Long-Term Capital Gain or Long-Term Capital Loss. If the holding period, however, is 12 months or less, the resultant Gain or Loss is called a Short-Term Capital Gain or Short-Term Capital Loss.

Set-off rules: Long Term Capital Losses can be set off only against Long Term Capital Gains... However, Short Term Capital Gains can be set off either against Short Term Capital Losses or Long-Term Capital Gains, if any. Losses (both Long and Short Term), if not set off in a year due to lack of offsetting income, can be carried forward for 8 assessment years.

Long-term loss: only against long-term gain. Eight assessment years to carry forward.

And a limit on scope: the provisions apply in respect of securities held as capital assets, not by persons regularly engaged in the business of buying and selling securities, whose gains fall under 'Business Profits'.

STT was introduced by Chapter VII of The Finance (No. 2) Act, 2004 and applies to the purchase or sale of equity shares, derivatives, equity-oriented funds and equity-oriented mutual funds — delivery-based purchase and sale, non-delivery-based sale, and sale of derivatives. It covers unlisted shares sold under an offer for sale to the public included in IPO where later listed. It is required to be collected by a recognised stock exchange or by the prescribed person in the case of every Mutual Fund or the lead merchant banker in the case of an initial public offer. Off-market transactions are out of the purview of STT.

GST is an indirect tax that came into effect from July 2017. Under section 12(12) of IGST Act... the place of supply of banking and other financial services, including stock-broking services to any person shall be the location of the recipient of services on the records of the supplier of service, failing which the location of the supplier. GST applies to the business of supplying the stock-broking service and to interest/delayed payment charges charged for delay in the payment of brokerage.

2.6 International Financial Services Centre

An IFSC is thus a jurisdiction that provides world-class financial services to non-residents and residents, to the extent permissible under the current regulations, in a currency other than the domestic currency (Indian rupee) of the location where the IFSC is located.

IFSC at GIFT City, Gandhinagar is a deemed foreign territory dealing in foreign currency. The entities in IFSC are recognised as non-resident entities under the FEMA regulations and get benefits which include exemptions from security transaction tax (STT), commodity transaction tax, dividend distribution tax, capital gains waiver and no income tax.

Under the SEBI (IFSC) guidelines, 2015, exchanges there may deal in equity shares of a company incorporated outside India · depository receipt(s) · debt securities issued by eligible issuers · currency and interest rate derivatives · index-based derivatives · and any other securities as may be specified by SEBI, in any currency other than the rupee.

Any intermediary permitted by SEBI for operating within the IFSC shall... appoint a senior management person as "Designated Officer".

Accounting standards: entities listing debt securities there prepare accounts under International Financial Reporting Standards (IFRS) or US GAAP... or Indian accounting standards (IND-AS) or accounting standards as applicable in the place of their incorporation, failing which they must give a quantitative summary of significant differences between national accounting standards and IFRS.

The chapter's review questions confirm that insider trading is an unhealthy market practice; that the Reserve Bank of India administers monetary policy; that the Pension Fund Regulatory and Development Authority of India was set up to promote old age income security; and that it is false that exchange bye-laws are the same across exchanges — each frames its own, though all require SEBI approval.