Regulatory Framework — General View

What this chapter covers

This chapter carries about 6 per cent of the III-C examination.

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 Why the market is regulated

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.

The three objects of SEBI:

a. To protect the interest of investors in securities markets

b. To promote the development of securities markets

c. To regulate the securities markets

What warrants regulation. 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.

And the named abuses: 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.

Note the contrast in that list. Disclosure, transparency and surveillance are the cures; insider trading is the disease — which is why the first review question answers Insider Trading as the unhealthy practice.

Appeals. 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 courts are kept 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 financial market regulators

The role of a market regulator is to regulate markets, to ensure integrity and protect the interests of investors.

And one more layer: intermediaries representing some segment of the securities market may form a Self-Regulatory Organization (SRO), recognition requiring conditions 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 to keep apart — 1988 non-statutory, 1992 statutory.

The preamble of SEBI describes the basic functions... 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) lists what SEBI may do. It empowers SEBI to:

• 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 and undertake inspection, conduct inquiries and audits.
• Call for information from or furnish information to other authorities within India or abroad.
• Perform delegated functions under the SCRA.
• Levy fees.
• Conduct research.
• Perform such other functions as prescribed.

Specific 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 at a recognized stock exchange 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, in respect of certain matters, such as the inspection of books and registers and summoning and enforcing the attendance of persons and examining them on oath.

Section 11(4) allows SEBI, if it is in the interest of investors or the Securities Market, to suspend the trading of any security in a recognized stock exchange · restrain persons from accessing the securities markets, and prohibiting any persons associated with securities market from buying, selling or dealing in securities · suspend any office-bearer of any stock exchange or SRO from holding such position · 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 · and 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 attachment.

Section 11(5): amounts disgorged under section 11B of the SEBI Act, section 12A of the Securities Contracts (Regulation) Act, 1956, section 19 of Depositories Act, 1996 or a settlement shall be credited to the Investor Protection and Education Fund established by SEBI.

Section 11A vests SEBI with the power to regulate or prohibit the issue of prospectus, offer document or advertisement which solicits money for the issue of securities, and to specify the requirements for listing and transfer of securities.

Section 11B empowers SEBI 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 to levy penalties after recording its reasons in writing.

Section 11C allows SEBI, on reasonable ground to believe that transactions are detrimental to the investors or the securities market or that a person has violated the Act, to direct any person to investigate the affairs of such intermediary or person associated with the securities market.

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.

Which is the second review question — the Reserve Bank of India.

Its concern: 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.

Its 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 functions. 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. As the regulator and supervisor of the financial system — to prescribe broad parameters of banking operations, 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. As the manager of Foreign Exchange — administering the Foreign Exchange Management Act 1999. As the issuer of currency — to issue currency and coins and to exchange or destroy the same when not fit for circulation. A developmental role. Regulator and Supervisor of Payment and Settlement Systems. And banking functions — banker to the Government, managing issuances of Central and State Government Securities, and 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, with each of the four regions in the country... served by a Local Board.

The Board for Financial Supervision (BFS) was constituted in 1994 as a committee of the Central Board of Directors. Its primary object is consolidated supervision of the financial sector consisting of commercial banks, financial institutions and non-banking finance companies. Its initiatives include:

• Introduction of off-site surveillance system to complement the on-site supervision.
• Introduction of supervisory rating system for banks and financial institutions.
• The scheme of Prompt Corrective Action Framework for weak banks.
• Risk-based supervision of banks.
• An enforcement framework in respect of banks.
• Establishment of a credit registry in respect of large borrowers.

And the 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... 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.

Fifteen powers and functions are given to IRDAI. They include:

• 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 of the policy.
• Specifying qualifications, code of conduct and practical training for intermediaries.
• Promoting efficiency in the conduct of insurance business.
• Specifying the code of conduct for surveyors and loss assessors.
• Inspection and investigation including audit of the insurer.
• Controlling rates and terms and conditions... with regard to general insurance, which are not covered by the Tariff Advisory Committee.
• 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.

Which is the third review question — the PFRDA.

Its reach: 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: to regulate, promote and ensure orderly growth of the National Pension System and pension schemes to which this Act applies · protect the interests of subscribers · and call for information from, undertaking inspection of, conducting inquiries and investigations including audit of, intermediaries and other entities.

The National Pension System (NPS) is 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.

But not everything moved: 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 was needed: 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.

Its object: to develop a strong global connection and focus on the needs of the Indian economy as well as serve as an international financial platform for the entire region and the global economy as a whole.

2.3 The other agencies

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

The 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.

The Department of Financial Services administers government policies relating to public sector banks, life insurance and general insurance, pension reforms, and Development Financial Institutions (DFIs) like NABARD, SIDBI, IIFCL, NHB, EXIM Bank and IFCI.

The 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), and supervises three professional bodies, viz., the Institute of Chartered Accountants of India (ICAI), the Institute of Company Secretaries of India (ICSI) and the Institute of Cost Accountants of India.

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. They 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 of the ROC:

• Registration of companies.
• Maintain a register of Companies/LLP.
• Complete regulation and reporting of companies and their shareholders and directors.
• Administer government reporting of several matters which includes the annual filing of numerous documents.
• Foster and facilitate a business culture.
• Ask for supplementary information from any company when necessary — and the ROC can search for any company and demand to look into the accounts of the company with prior approval from the court.
• File a petition for winding up of a company with the discretion of the government.

Statutory powers. Under Section 81, the Registrar has to maintain a register containing particulars of all charges in respect of each company. Under Section 83, on satisfactory evidence that a charge has been satisfied or property released, the Registrar may enter in the Register of Charges a memorandum of satisfaction... even if no intimation is received by him from the company.

Section 206 confers power on the Registrar to call for information or explanation, and if none is forthcoming or it is inadequate, the Registrar may demand that the company produce for inspection such books and papers as he deems necessary.

Section 209 spells out the power of the Registrar to seize documents and therefore, goes a step beyond Section 206, by which the Registrar may only demand the production of documents. Where there are reasonable grounds to believe records may be destroyed, mutilated, altered, falsified or secreted, the Registrar may make an application to a Magistrate having appropriate jurisdiction to obtain authority to search and seize.

Section 248... confers powers on the Registrar to strike a defunct company off the register.

2.3.2 to 2.3.6 The investigating and intelligence bodies

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, initially with eleven Benches, one Principal Bench at New Delhi and ten Benches elsewhere, later extended to 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.

SFIO. Recommended by a Committee on Corporate Governance under the Chairmanship of Shri Naresh Chandra, and set up by Cabinet decision of 9th January, 2003 with a resolution of 2nd July, 2003 and a charter of 21st of August, 2003. It is a multi-disciplinary organisation consisting of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.

Which cases it takes: those characterized by complexity and having inter-departmental and multi-disciplinary ramifications; substantial involvement of public interest to be judged by size; and the possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures. The decision is the Director, SFIO's, who will be expected to record the reasons in writing.

**A review committee under Shri Vepa Kamesam formerly Deputy Governor, Reserve Bank of India reported on 29th April, 2009. SFIO was established through the Government of India vide Notification NO. S.O.2005(E) dated 21.07.2015, is headed by a Director... in the rank of Joint Secretary, and has headquarters... in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad & Kolkata.

Investigation procedure. Under Section 212 (1) the Central Government may assign an investigation 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 · or on the request of any Department of Central Government or State Government. The investigating officer shall have the powers of the Inspector under section 217, the company and its officers must provide all information, explanation, documents and assistance, an interim report may be directed, and on completion the SFIO shall submit the Investigation Report to the Central Government.

And its laboratory: the Computer Forensic and Data Mining Laboratory (CFDML) was set up in 2013, equipped with state-of-the-art tools for Computer (Media) Forensics on ISO/IEC 17025, and has been notified as Examiner of Electronic Evidence u/s 79A of Information Technology Act, 2000.

EOW. The Economic Offences Wing (EOW) in the Central Bureau of Investigation was created in 1964, and 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.

Its twelve areas include frauds relating to foreign trade, banking frauds, insurance frauds, foreign exchange frauds, frauds involving manipulation of share prices, insider trading and others, narcotics, forgery of travel documents, counterfeit currency, smuggling of antiques, cybercrimes, violation of Intellectual Property Rights and wildlife and environmental offences. State governments have also set up their EOWs.

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 — the central point for 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 — to uncover patterns of transactions suggesting suspicion of money laundering. Sharing of Information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units. Act as Central Repository. Coordination. And Research and Analysis — to monitor and identify strategic key areas on money laundering trends, types and developments.

The international standard-setter: 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, its revised Forty Recommendations providing a complete set of counter-measures against money laundering.

And its statutory powers: under Section 13(2) of the PMLA, 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 of the PMLA, the Director or a specified authority may furnish... any information received or obtained, to any officer, authority or body, if it is deemed to be in the public interest.

Police authorities enforce The Bharatiya Nyaya Sanhita, 2023 (BNS), which has 358 sections divided into 20 Chapters. The relevant offences are 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) · and attempts to commit offences.

Four illustrations. Section 228 relates to the fabrication of false evidence — A makes a false entry in his shop-book for the purpose of using it as corroborative evidence in a Court. Section 314 relates to the dishonest misappropriation of property, committed when a person dishonestly misappropriates or converts to his own use any movable property. Section 316 is about a criminal breach of trust, committed when a person who has been entrusted with property or dominion over property, dishonestly misappropriates it. And forgery (sections 336), making a false document (section 335) and falsification of accounts... an offence under section 334, where a clerk or officer wilfully and with intent to defraud makes a false entry in, omits or alters... any material particular.

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) to exercise jurisdiction, powers and authority under the said Act or any other law in force. 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, and a Judicial Member must be or has been a Judge of High Court for at least five years. There are specific requirements prescribed for a Technical Member.

Seven years and five years.

Its jurisdiction is wider than SEBI. SAT 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 by the following may appeal to the SAT, 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 — against an order of SEBI, an order made by an Adjudicating Officer, or an order of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority.

Note the consent bar — an order made with your consent cannot be appealed.

Procedure — Section 15U(1): the 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) gives it the same powers as are vested in 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 · and any other prescribed matter.

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.

Benches — 15U(4) to (6). The Presiding Officer may... make provisions as to the distribution of the business of the SAT amongst the Benches; may transfer any case pending before one Bench, for disposal, to any other Bench; and where a Bench... consisting of two members differ in opinion, they shall state the point or points on which they differ, and make a reference to the Presiding Officer, the matter being decided according to the opinion of the majority of the members... who have heard the case, including those who first heard it.

Representation — 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 to present his or its case.

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

Section 15Y: no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which SAT... is empowered to decide upon, 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.

Forty-five days to SAT; sixty days to the Supreme Court on a question of law.

2.5 The legislative framework

SEBI Act, 1992 — an act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and related matters.

Securities Contracts (Regulation) Act, 1956 — a legislation designed to prevent undesirable transactions in securities by regulating the business of securities dealing and trading. It covers:

• Granting recognition to stock exchanges.
• Corporatization and demutualization of stock exchanges.
• The power of the Central Government to call for periodical returns from stock exchanges.
• The power of SEBI to make or amend bye-laws of recognized stock exchanges.
• The power of the Central Government (exercisable by SEBI also) to supersede the governing body of a recognized stock exchange.
• The power to suspend the business of recognized stock exchanges.
• The power to prohibit undesirable speculation.

Securities Contracts (Regulation) Rules, 1957 — made under Section 30, containing directions on the application for recognition of an exchange, qualification norms for membership, mode of entering into contracts between members, disciplinary action, audit of accounts of members, books and records, submission of the annual report and periodical returns, and requirements with respect to the listing of securities and of units or any other instrument of a Collective Investment Scheme.

SEBI (Prohibition of Insider Trading) Regulations, 2015, in force w.e.f. May 2015. Any trading done by an insider based on information that is not available in the public domain gives an undue advantage to insiders and affects market integrity. This is not in line with the principle of fair and equitable disclosure.

**An "insider" is any person who is connected with a company or who is in possession of or as having access to unpublished price sensitive information in respect of securities of a company.

Generally available information means an 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, and information published on the website of a stock exchange would ordinarily be considered generally available.

Connected person means any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship... that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

Twelve deemed connected persons include:

• A relative of connected persons.
• A holding company or associate company or a subsidiary company.
• An intermediary as specified in section 12 of the SEBI Act or an employee or director thereof.
• An investment company, trustee company, asset management company or its people.
• An official of a stock exchange or clearing house or corporation.
• Mutual fund trustees and AMC directors.
• A member of the board of directors or an employee, of a public financial institution.
• An official of an SRO.
• A banker of the company.
• A concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his relative or banker of the company, has more than ten per cent of the holding or interest.
• A firm where a connected person is a partner.
• A person sharing household or residence with a connected person.

And the presumption is rebuttable: such a presumption is a deeming legal fiction and is rebuttable.

SEBI (PFUTP) Regulations, 2003. Fraud is defined inclusively as any act, expression, omission or concealment committed whether in a deceitful manner or not... while dealing in securities, 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 includes:

• 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 of a fact.
• A promise made without any intention of performing it.
• A representation, whether true or false, made in a reckless and careless manner.
• Acts declared fraudulent by other law.
• Deceptive behaviour by a person depriving another of informed consent or full participation.
• False statement made without reasonable ground for believing it to be true.
• The act of an issuer of securities giving out misinformation that affects the market price of the security resulting in investors being effectively misled even though they did not rely on the statement itself.

"Dealing in securities" includes buying, selling or subscribing either by themselves or through mule accounts — a mule account being a trading account maintained with a stock broker or a dematerialised account or bank account linked with such trading account in the name(s) of a person, where the account is effectively controlled by another person — as well as such acts which may be knowingly designed to influence the decision of investors in securities and any act of providing assistance to carry out the aforementioned acts.

Eighteen manipulative practices are listed. They include:

• Creating a false or misleading appearance of trading.
• Dealing not intended to affect a transfer of beneficial ownership.
• Inducement for fraudulently securing the minimum subscription.
• Influencing or manipulating the reference price or benchmark price.
• Publishing untrue information.
• Selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities — save where the person was a holder in due course or the securities were previously traded on the market through a bonafide transaction.
• Circular transactions.
• An intermediary predating or otherwise falsifying records including contract notes.
• Front running on a substantial impending transaction.
• Knowingly planting false or misleading news.
• Mis-selling of securities.
• Illegal mobilization of funds by sponsoring... any collective investment scheme.

SEBI (SAST) Regulations, 2011. Regulation 3(1) requires a public announcement where an acquirer would hold twenty-five per cent or more voting rights; Regulation 3(2) on acquiring more than five per cent of the voting rights in a financial year while holding between 25 per cent and the maximum permissible non-public shareholding; and on the Innovators Growth Platform the percentage is 49% instead of 25%. Regulation 4 requires an open offer for any acquisition of control, irrespective of shareholding. Regulation 5(2) treats an indirect acquisition as direct where the target's net asset value, sales turnover or market capitalisation as a proportion of the acquired entity is in excess of eighty per cent.

Companies Act, 2013 — divided into 29 Chapters and 470 sections, with seven Schedules. Section 24... states that the provisions contained in this Chapter, Chapter IV and section 127 shall be administered by SEBI if the company is listed or is proposing to get its securities listed.

Indian Contract Act, 1872 — in force from 1 September 1872. 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.

And the part that matters here: from the perspective of the securities market, the law of agency is especially important and it governs the relationship between an investor (principal) and a broker (agent). Section 226 makes contracts through an agent enforceable as if the contracts had been entered into and the acts performed by the principal in person; Section 211 binds an agent to conduct the business of his principal according to the directions given by the principal; Section 212 requires him to act skilfully... and with reasonable diligence; Section 213 requires him to render proper accounts to his principal on demand; and Section 222 binds the principal to indemnify the agent against the consequences of all lawful acts.

PMLA, 2002. 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 in Part A, Part B and Part C of the Schedule, Part B applying under the Customs Act, if the total value of such offences is Rs.1 crore or more, and Part C deals with offences which have cross-border implications.

FEMA, 1999 — replacing FERA, 1973, and applying 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 acquiring or holding foreign exchange or immovable property outside India; Section 5 covers Current Account transactions and Section 6 Capital Account transactions; Section 10 empowers RBI to authorise dealers; Section 34 ousts civil court jurisdiction; and Section 35 pertains to appeal against any decision or order of 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.

Their own — so they are not the same across exchanges, which is why the fourth review question is False.

But they are supervised: 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.

What they cover: 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 who must comply: 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. Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 has been issued by the Central Government, and the responsibility for collection of stamp duty on transactions by the transferor of securities or issuance by the issuer in the depository system is the responsibility of the depository.

2.5.12 Taxes on securities

Income-Tax Act, 1961, in force from April 1962, consisting 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% of the dividend amount. And deduction of interest expense incurred to earn that dividend income... 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.

And a limit on the whole scheme: these provisions apply in respect of securities held as capital assets, not by persons regularly engaged in the business of buying and selling securities, for whom the losses and gains are computed under the income head 'Business Profits'.

STT. Introduced by Chapter VII of The Finance (No. 2) Act, 2004, it is a tax applicable on the purchase or sale of equity shares, derivatives, equity-oriented funds and equity-oriented mutual funds, on delivery-based purchase or sale, non-delivery-based sale, and sale of derivatives. It also includes unlisted shares sold under an offer for sale to the public included in IPO. It is 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, and off-market transactions are out of the purview of STT.

GST. An indirect tax that came into effect from July 2017, replacing other indirect taxes, levied on the supply of goods and services at every value addition stage. For broking, section 12 (12) of IGST Act provides that 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 of services. 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.

Stock exchanges operating in the GIFT IFSC are permitted to offer trading in securities in any currency other than the Indian rupees.

What may be traded, under the SEBI (IFSC) guidelines, 2015: 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 anything else SEBI specifies.

Currently, NSE and BSE both have exchanges at IFSC, and any intermediary permitted by SEBI for operating within the IFSC shall... appoint a senior management person as "Designated Officer".

Accounting. From August 2020, entities listing debt securities in IFSC prepare their statement of accounts in accordance with 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 that, they must prepare a quantitative summary of significant differences between national accounting standards and IFRS.

Investment advisers. From September 2020, an entity desirous of operating in IFSC as an investment adviser (IA), may form a company or LLP; an IA or parent entity will fulfil the net worth requirement, separately and independently, for each activity undertaken by it; it must conduct an annual audit in respect of compliance with investment adviser regulations; and it must comply with the applicable guidelines issued by the relevant overseas regulator/ authority.

The chapter's review questions confirm that insider trading is the unhealthy practice among the options; that the Reserve Bank of India administers monetary policy; that the Pension Fund Regulatory and Development Authority of India promotes old age income security; and that it is False that stock exchange bye-laws are the same across exchanges — each frames its own, though all need SEBI approval.