Key Regulations — the ground floor

Five rulebooks, one map

This is a short chapter. It does not add new SSE rules. It gives you a map of the laws that sit around the Social Stock Exchange, so you know which rulebook a question is talking about.

1. The SEBI Act, 1992

The Act was enacted, in its own words, "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 for matters connected therewith or incidental thereto".

Three verbs to remember from that line: protect investors, promote the development of the market, and regulate it.

What SEBI covers under the Act:

• Regulates stock exchanges, securities markets and intermediaries such as stock brokers, investment advisers and mutual funds.
• Oversees depositories, custodians, foreign portfolio investors and credit rating agencies.
• Prohibits fraudulent practices, insider trading and unfair trade practices.
• Promotes investor education and training for market intermediaries.
• Regulates substantial acquisitions of shares, company takeovers and self-regulatory organisations.
• Conducts inspections, audits and research.
• Levies fees, gathers information from relevant agencies, and performs functions delegated under the Securities Contracts (Regulation) Act, 1956.

The Act also empowers SEBI to impose penalties and start adjudication proceedings against intermediaries who default — for example, failing to furnish information or returns, or failing to enter into an agreement with clients.

2. SEBI ICDR Regulations, 2018

The Issue of Capital and Disclosure Requirements Regulations govern how companies raise capital and disclose information about it. They cover:

• Initial Public Offers (IPOs)
• Rights issues
• Bonus issues
• Indian Depository Receipts

They also deal in detail with Social Stock Exchanges, Social Enterprises, registration and fund raising by NPOs, and issuance of ZCZPs.

The part to remember by number: Chapter X-A of the ICDR Regulations covers Social Stock Exchanges in India.

3. SEBI LODR Regulations, 2015

The Listing Obligations and Disclosure Requirements Regulations set a framework for transparency, accountability and good corporate governance in listed companies. They cover:

• Board composition and the role of independent directors
• Timely disclosure of financial results and material events
• Fair treatment of shareholders and compliance with reporting duties
• Provisions for social enterprises raising capital through the SSE

The part to remember by number: Chapter IX-A of the LODR Regulations sets out the obligations of social enterprises — the rules you studied in Chapter 9 of this workbook.

4. Prevention of Money-Laundering Act, 2002

What money laundering is

Money laundering means disguising financial assets so they can be used without the illegal activity that produced them being detected. The launderer turns money from crime into funds with an apparently legal source.

Under the PMLA, money laundering includes concealment, possession, acquisition, use, projecting, or claiming proceeds of crime as untainted property.

The PMLA is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering.

Section 12 — keeping records

Reporting entities are:

• a banking company
• a financial institution
• an intermediary
• a person carrying on a designated business or profession

They must maintain records of all transactions, in a way that lets individual transactions be reconstructed, for five years from the date of the transaction between the client and the reporting entity.

They must also furnish transaction information to the Director, and keep records of client identities and account details confidential for at least five years. Every piece of information maintained, furnished or verified is to be kept confidential, unless another law provides otherwise.

Section 12AA — enhanced due diligence

Section 12AA of the PMLA sets out enhanced due diligence for reporting entities:

• verify client identities
• examine ownership and financial position
• record the purpose of transactions
• maintain the information for five years

They must also monitor transactions for suspicious activity and increase scrutiny where necessary.

A name clash to watch: Section 12AA also appeared in Chapter 10 — there it was the old NPO registration section of the Income Tax Act. In this chapter, Section 12AA of the PMLA is about enhanced due diligence. Same number, different law.

5. SEBI PFUTP Regulations, 2003

These regulations prohibit fraudulent, unfair and manipulative trade practices in securities.

Fraud includes any act, expression, omission or concealment committed to induce another person or his agent to deal in securities.

Here is the part candidates miss: there may or may not be wrongful gain or avoidance of loss — and that does not matter in deciding whether fraud has been committed.

The workbook's examples of fraud:

Look at (e) closely. A statement can count as fraud even if it is true, when it is made recklessly and carelessly to induce someone to deal.

A naming point

The workbook's section heading and its sample question call these the "SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003". The body text gives the full name as "SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003". Both names appear in Chapter 11 and refer to the same 2003 regulations, so recognise either.