OP. ED.

Introduction

The Securities and Exchange Board of India (SEBI) has always been fraught with the arduous task of curbing insider trading but the difficulty in detecting and prosecuting the perpetrators still remains a challenge. This is primarily due to the fact that there is a dearth of clinching primary evidence which can prove the complicity of ones who commit insider trading thus, in turn having an adverse impact on the success rates and investigation timelines of such cases. SEBI has tried to eliminate this hindrance in the past by seeking powers to intercept and tap phone calls[1] to aid its investigation and surveillance machinery[2]. Moreover, it has also sought to grant immunity to whistleblowers or levy a lesser penalty on those who come forward with full and true disclosure of alleged violations. However, these measures have either not seen the light of day or their full-fledged execution is still a far-fetched thought.

On 10-6-2019, SEBI released a discussion paper[3] which proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. This paper presses the fact that mere regulator’s watch on illegal transactions is not enough to practically eliminate trading on the basis of unpublished price sensitive information (UPSI). In the current scenario, insiders are finding new ways to venture into illegal transactions including transactions through proxy which further makes tracking and proving any claims against such transactions even more taxing. Therefore, in a bid to uphold the sanctity of the securities market and to ensure better tracking, SEBI is intending to introduce an informant mechanism which brings informants to the forefront. The proposed mechanism will have a dedicated reporting window and also seeks to achieve near-absolute confidentiality with regards to the identity of the informants in order to alleviate any kind of deterrence stemming out from fear of discrimination, retaliation and prejudice.

This mechanism is not a sui generis phenomenon, as is evident from the effective application of similar mechanisms adopted by other countries to address the issue of insider trading. The European Union (EU) Market Abuse Regulation provides for a reporting mechanism on similar lines. The proposed mechanism is also somewhat similar to the vigil mechanism prescribed under Section 177(9) of the Companies Act, 2013.

Need

The Committee on fair market conduct has made several recommendations to strengthen the legal framework for prevention of insider trading. Further, in Sahara India[4] vide its order dated 31-8-2012, the Supreme Court stated that Section 11(1) of the SEBI Act, 1992 casts an obligation to protect the interest of the investors in securities by such measures as it thinks fit. However, the Nifty WhatsApp leak incident[5] which witnessed price sensitive data of several Nifty companies being circulated through WhatsApp messages ahead of their scheduled disclosure to exchanges, proved to be the final nail in the coffin. The issue was even more perturbing because most of the leaked data matched those numbers to the tune of the last digit which were released subsequently. SEBI, on the other hand did not have any inkling on the source of the leak, as it did not have direct evidence against the individuals involved in the alleged insider trading.

Hence, SEBI finds it difficult to establish its claims that trading took place while in possession of UPSI. Establishing transmission of UPSI and proving flow of such information makes prosecution of defaulters very difficult for SEBI.

In the light of the aforementioned recommendations and cases, it is indisputable that there is an inherent exigency of measures which restrain instances of insider trading. So in this regard, the proposed informant mechanism will be beneficial as the company employees are likely to be acquainted with the unscrupulous activities of the management which are necessary to be established so that the irregularities may be exposed and timely action can be taken.

Proposed Features[6]

Voluntary Information Disclosure Form (VIDF) — Any informant having complete, original and credible information relating to an act of insider trading can inform SEBI either directly or through an advocate by submitting the VIDF. The informant can keep his identity confidential by submitting the VIDF through an advocate but the confidentiality may be compromised under the following circumstances—

(i) Non-compliance with the given regulations.

(ii) If the nature of the information is such that the informant is required to be examined.

(iii) When it is required in court proceedings.

(iv) For verification at the time of granting rewards.

Lastly, the source of original information has to be provided along with the undertaking that the information has not been sourced from any employee of SEBI.

Office of Informant Protection (OIP) — The OIP will be set up as an independent office and shall be separate from the inspection and investigation departments of SEBI. The OIP will be responsible for devising the policy relating to receipt and registration of VIDF, assessing the veracity of the information received and analysing the application of regulations. Once the information is processed, the same shall be forwarded to the relevant department, which would in turn suggest suitable enforcement action and recover amounts by way of disgorgement. Thereafter, the OIP will make a final decision with regards to issue of grant reward to the informant. The OIP will also be maintaining a hotline that will smoothen the process of submitting information.

Reward — The informant will be rewarded by SEBI only if the information provided by him is true, credible, complete and original. Further, the action taken on the basis of that information should lead to the disgorgement of five crore INR. The quantum of the reward set by SEBI shall be 10% of the monies collected but shall not exceed one crore INR. Moreover, an interim reward not exceeding ten lakhs INR shall be given at the stage of issuance of the final order by SEBI against the person directed to disgorge.

Protection against Victimisation — Listed companies and intermediaries would be required to alter their internal codes of conduct so as to incorporate provisions which ensure that no employee faces suspension, termination, demotion or discrimination, directly or indirectly, on grounds of filing VIDF or assisting SEBI.

Vexatious/Frivolous Complaints — If the OIP determines that any information submitted is of a vexatious or frivolous nature then SEBI may initiate appropriate action against the informant concerned under the securities and other applicable laws.

Amnesty — In cases where an informant facing enforcement action wilfully cooperates and assists SEBI, he/she may be eligible for a reward and settlement with confidentiality in the proceedings that may be initiated against him under the proposed amnesty clause.

Analysis

At first sight, the discussion paper seems to be heavily sourced from the United States Securities and Exchange Commission’s (SEC) framework for protection of whistleblowers which was systematised under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,[7] and the three essential pillars of whistleblower protection policy which are anonymity, bounty and job security.

Under American law, the non-inclusion of the internal reporting requirement in the informant mechanism has been criticised as it tempts the employees to bypass internal compliance in pursuit of rewards. However, it is suggested that the internal compliance committee of a company should be combined with the informant mechanism so that SEBI does not face the same obstructions which regulators in US face owing to the short-sighted policy existing there in this regard.

Moreover, the discussion paper nowhere mentions the liability standards of the legal advisors if the confidentiality of the informant is compromised despite their best efforts. On the contrary, under American law, no liability shall be apportioned on the legal advisors in these cases.

Another shortcoming of the proposed discussion paper is that, it cuts down the smaller but more frequently occurring transactions from its purview. This goes against the very objective of the discussion paper which is to incentivise proactive reporting of insider trading. Hence, it will be better for SEBI to deploy additional resources and make insider trading investigations even more robust.

Additionally, the exception where informant’s confidentiality may be revealed on account of him being required to be present in court proceedings may, in turn, dilute the number of takers in cases where the informant is in a position to furnish primary evidence and is likely to be required for the enforcement as well.

Lastly, to achieve the objective of the discussion paper the upper limit imposed on the quantum of reward should be removed so that the employees are tempted and a proactive reporting mechanism is achieved. Conversely, under the Dodd-Frank Wall Street Reforms and Consumer Protection Act of 2010, there is no upper limit imposed on the quantum of reward and it varies from a range of 10%-30% of the total amounts collected[8] unlike as proposed in the discussion paper.

Conclusion

The discussion paper indicates SEBI’s intention to tighten its grasp on tracking down insider trading and take fitting action. The regulators appear optimistic that the increased protection and potential for financial awards available to the informants will foster increased transparency and a culture of accountability within the financial market.

SEBI must consider extending the informant mechanism to fraudulent and unfair trade practices. Lastly, this amendment would be a big weapon in the arsenal of SEBI as direct evidence gathered will leave fewer lacunae, reducing the chances of overturning of a SEBI order at the appellate stage.


  Fifth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.

††  Fourth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.

[1]  Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.

[2] Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.

[3]  Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.

[4] Sahara India Real Estate Corpn. Ltd. v. SEBI, (2013) 1 SCC 1 : (2012) 174 Comp Cas 154.

[5] NSE, BSE Write to Companies over WhatsApp Earnings Leak, available at <https://www.livemint.com/Money/kIFXwlUs6s8wjFhkYYkjzI/NSE-BSE-write-to-companies-over-WhatsApp-earnings-leak.html>.

[6]  Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.

[7]  S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.

[8]  S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.

Business NewsNews

The Hon’ble Finance Minister as part of the Budget Speech for FY 2019-20 had proposed to initiate steps towards creating a social stock exchange, under the regulatory ambit of Securities and Exchange Board of India, for listing social enterprise and voluntary organizations.

Pursuant to initial discussions with various stakeholders, SEBI has decided to constitute a working group under the Chairmanship of Shri Ishaat Hussain (Director, SBI Foundation; Ex-Director (Finance) Tata Sons Limited). The other members of the working group shall be:

i. Shri TV Mohandas Pai, Chairman of Manipal Global Education; Ex-Director (Infosys)
ii. Ms. Roopa Kudva, MD, Omidyar Network India
iii. Shri Amit Chandra, Chairman, Bain Capital (Private Equity firm); noted philanthropist
iv. Dr. Saurabh Garg, Principal Secretary to Government of Odisha
v. Dr. Shamika Ravi, Director of Research, Brookings India; Member, PM’s Economic Advisory Council
vi. Shri Vineet Rai, – Founder and MD, Aavishkaar Venture Management Services Private Limited
vii. Representative from Ministry of Corporate Affairs
viii. Representative from Department of Economic Affairs
ix. Shri Hemant Gupta, MD &CEO, BSE Samman
x. Representative from NSE
xi. Shri Girish G. Sohani, President, BAIF Development Research Foundation
xii. Shri Amarjeet Singh, Executive Director (SEBI)
xiii. Ms. Ruchi Chojer, CGM (SEBI)
xiv. Shri Jeevan Sonparote, CGM (SEBI) – Convener

The working group shall examine and make recommendations with respect to possible structures and mechanisms, within the securities market domain, to facilitate the raising of funds by social enterprises and voluntary organizations.


Securities Exchange Board of India

[Press Release dt. 19-09-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT), Mumbai: Coram of Justice Tarun Agarwala (Presiding Officer), Dr C.K.G. Nair (Member), and Justice M.T. Joshi (Judicial Member) directed SEBI to look into violation of market norms by Cairn India with respect to withholding of dividends along with interest payable to Cairn UK Holdings, the Appellant.

The Appellant created a foreign subsidiary in India called Cairn India which became a subsidiary of Vedanta in 2010-11. The Appellant filed a complaint stating that Cairn India did not pay the due dividends amounting to Rs 340.64 crores and hence brought an action before SEBI to direct them to pay the due dividends along with an interest of 18 percent per annum. In this action, they alleged that Cairn India was in violation of Sections 24 and 127 of the Companies Act, 2013. They also contended that SEBI had jurisdiction over the matter because the company was also in violation of the Regulation 4(2)(c) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements).

SEBI disposed of the complaint and refused to take any action as it said that the unpaid dividend of over Rs 660.63 crores had already been handed over to the income tax authorities by the company and it could therefore not interfere. The Tribunal was of the view that if a company has violated the provisions of the Companies Act in not releasing the dividend when there was no embargo upon it, it is SEBI’s duty to inquire into the alleged violation and if it exists to take action against the said company under Section 124 of the Companies Act. This aspect has not been considered by SEBI. The Tribunal justified SEBI’s decision that since an amount has been transferred to the income tax authorities pursuant to some orders issued by them, the question of paying the dividend by the appellant along with interest does not arise. Therefore, it is open to the appellant to pursue remedies for the return of the dividend amount from the income tax authorities.

The Tribunal, in this case, allowed the appeal in part saying that while SEBI was correct in not interfering with the income tax authorities, it had to give an opportunity of hearing to the appellants.[Cairn UK Holdings Ltd. v. Securities and Exchange Board of India, 2019 SCC OnLine SAT 72, decided on 19-07-2019]

Business NewsNews

A formal Memorandum of Understanding (MOU) was signed between the Ministry of Corporate Affairs (MCA), Government of India and the Securities and Exchange Board of India (SEBI) today for data exchange between the two regulatory organizations. The MoU was signed by Shri KVR Murty, Joint Secretary, MCA and Smt. Madhabi Puri Buch, Whole Time Member, SEBI in the presence of senior officers from both the organizations.

The MoU comes in the wake of increasing need for surveillance in the context of Corporate Frauds affecting important sectors of the economy. As the private sector plays an increasingly vital role in economic growth, the need for a robust Corporate Governance mechanism becomes the need of the hour.

The MoU will facilitate the sharing of data and information between SEBI and MCA on an automatic and regular basis. It will enable sharing of specific information such as details of suspended companies, delisted companies, shareholding pattern from SEBI and financial statements filed with the Registrar by corporates, returns of allotment of shares, audit reports relating to corporates. The MoU will ensure that both MCA and SEBI have seamless linkage for regulatory purposes. In addition to regular exchange of data, SEBI and MCA will also exchange with each other, on request, any information available in their respective databases, for the purpose of carrying out scrutiny, inspection, investigation and prosecution.

The MoU comes into force from the date it was signed and is an ongoing initiative of MCA and SEBI, who are already collaborating through various existing mechanisms. A Data Exchange Steering Group also has been constituted for the initiative, which will meet periodically to review the data exchange status and take steps to further improve the effectiveness of the data sharing mechanism.

The MoU marks the beginning of a new era of cooperation and synergy between the two regulators.


[Press Release dt. 07-06-2019]

Securities Exchange Board of India

Legislation UpdatesRules & Regulations

No. SEBI/LAD-NRO/GN/2019/21.—In exercise of the powers conferred by Sections 4, 8A and 31 of the Securities Contracts (Regulation) Act, 1956, read with Sections 11 and 30 of the Securities and Exchange Board of India Act, 1992, the Securities and Exchange Board of India hereby makes the following regulations to further amend the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, namely:—

1. These regulations may be called the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2019.

2. Save as otherwise specifically provided for in these regulations, they shall come into force on the date of their publication in the Official Gazette.

3. In the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018,—

(i) in regulation 2, in sub-regulation (1), clause (g) shall be omitted.

    The aforesaid amendment shall deemed to have come into force with effect from October 3, 2018.

(ii) in Regulation 29, in sub-regulation (2),

a) clause (a) shall be substituted with the following words:

“Member and Core Settlement Guarantee Fund committee;”

b) in clause (b), the word “investor” shall be omitted.

(iii) in Regulation 35, after sub-regulation (1) and prior to sub-regulation (2), the following proviso shall be inserted, namely,-

“Provided that in case a recognised stock exchange enters into an arrangement with more than one recognised clearing corporation, it shall enter into a multipartite agreement in writing with such recognised clearing corporations to ensure interoperability among the clearing corporations.”

(iv) in Regulation 37, in sub-regulation (1), the proviso shall be omitted.

(v) in Regulation 38, in sub-regulation (2), in the second proviso, the word “except” shall be omitted.

(vi) in Regulation 42, in sub-regulation (3), after the words and symbols
“Articles/Rules/Bye-laws” the word and symbol “/Regulations” shall be omitted.

(vii) after Regulation 43 and prior to Regulation 44, the following regulation shall be inserted, namely;-

“Obligation of Clearing Corporation in Commodity Derivatives

43A. Every recognized Clearing Corporation providing clearing and settlement services for commodity derivatives shall ensure guarantee for settlement of trades including good delivery.

Explanation: For the purpose of this regulation, “good delivery” shall mean the delivery of goods that is in proper form to transfer title and is of the quality and quantity as per contract specifications of the concerned exchange.”
The aforesaid amendment shall deemed to have come into force with effect from October 3, 2018.

(viii) in SCHEDULE – II, in PART – E,

   a) in the heading, the symbol and word “/Regulations” shall be omitted.

     b) in clause (2),

a. in the heading, after the words and symbols “Articles/Rules/Bye-laws” the symbol and word “/Regulations” shall be omitted.
b. after the word “bye-laws” the symbol and word “, Regulations” shall be omitted.

(ix) in SCHEDULE – II, in PART – H, under the sub-heading “Managing Director / Executive Director:—”, in clause (1), the following words and symbols “In case of reappointment, or extension of appointment, the stock exchange/clearing corporation shall apply to the Board two months before the last working day of such Managing Director.” shall be substituted by the following, namely,—

“The stock exchange/ clearing corporation shall forward the new names to the Board before two months from the last working day of the existing Managing Director.”

(x) in SCHEDULE – II, in PART – H, under the heading “Appointment of Directors”,—

a) the symbols “(I)” shall be inserted before the sub-heading “Procedure for appointment:—”;

b) the symbols “(II)” shall be inserted before the sub-heading “Managing Director/ Executive Director:—”;

c) the symbols “(III)” shall be inserted before the sub-heading “Public Interest Directors:—”;

d) the symbols “(IV)” shall be inserted before the sub-heading “Share Holder Directors”;

e) the symbols “(V)” shall be inserted before the sub-heading “Selection of trading members/clearing members on the Advisory Committee to the governing board:—”;

f) the symbols “(VI)” shall be inserted before the sub-heading “General conditions on appointment of directors:—”


[Notification dt. 04-06-2019]

Securities Exchange Board of India

Legislation UpdatesNotifications

No. SEBI/LAD-NRO/GN/2019/08.— In exercise of the powers conferred under Section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following Regulations to further amend the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, namely:-

1. These regulations may be called the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2019.

2. They shall come into force on the date of their publication in the Official Gazette.

3. In the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 –

   I. in Regulation 2, in sub-regulation (1),-

                      i. clause (x), shall be substituted with the following, namely,-
“ “innovators growth platform” means the trading platform for listing and trading of specified securities of issuers that comply with the eligibility criteria specified in Regulation 283;”

                     ii. in clause (y), the words “institutional trading platform” shall be substituted with the words  “innovators growth platform”.

II. in Regulation 3, in clause (i), the words “institutional trading platform” shall be substituted with the words “innovators growth platform”.

III. in CHAPTER X, in the heading, the words “INSTITUTIONAL TRADING PLATFORM” shall be substituted with the words “INNOVATORS GROWTH PLATFORM”.

IV. in Regulation 282, in sub-regulation (3), the words “and not to retail individual investors” shall be omitted.


Please follow the link for detailed notification: NOTIFICATION

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT), Mumbai: The Coram of Tarun Agarwala, J., (Presiding Officer), Dr C.K.G. Nair (Member) and M.T. Joshi, J., (Member) disposed an application filed for the calculation of rate of interest on a certain principal amount with the direction to the appellant to pay an additional sum of Rs 10 lakhs.

The facts were that in 2004 SEBI raised the demand of Rs 4,64,17,206 towards principal amount and interest under Securities and Exchange Board of India (Interest Regularization Scheme, 2003) as fees under the Brokers Regulations. The said demand was challenged by the appellant before the Tribunal which was allowed in 2005 and SEBI was directed to refund the aforesaid amount which had already been paid by the appellant. The order of the Tribunal was challenged by SEBI before the Supreme Court of India. During the pendency of the appeal, the Supreme Court permitted the appellant to withdraw the amount deposited with this Tribunal. Consequently, the appellant withdrew a sum of Rs 6,20,12,878 towards principal amount and interest accrued thereon. The demand raised by SEBI in 2004 was affirmed and the amount became payable along with interest. SEBI, accordingly called upon the appellant to pay a sum of Rs 11,59,57,867. The contention was whether the appellant should pay a simple interest or compound interest on the principal sum. The Tribunal by an order had held that SEBI was not entitled to charge compound interest and that the appellant was liable to pay simple interest on the amount withdrawn at relevant bank rate/rates prevailing from time to time.

The Tribunal stated that simple interest was required to be calculated which the parties failed to calculate in the correct perspective. Without going into the mechanics of exact calculation, it found appropriate in the interest of justice to direct the appellant to deposit a further sum of additional Rs 10 lakhs. [Prebon Yamane India Ltd. v. SEBI, 2019 SCC OnLine SAT 17, dated 28-03-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal: The Bench of Tarun Agarwala, Presiding Officer and Dr C.K.G. Nair, Member rejected an application filed at a later stage wherein the applicant had failed to provide documents so as to prove that he had resigned as a director from two other companies. 

The facts of the case are that the applicant had prayed for rectification of the order passed in 2004 by Securities Appellate Tribunal. By the rectification application, the applicant sought that an error had crept in the order which needed rectification. It was stated that the appellant was a director of various companies whereas the applicant urged that he was the director of only one company and not in the other two companies, and, therefore, this error which was apparent on the face of the record needed to be rectified. 

The Tribunal found out that the Securities and Exchange Board of India had initiated proceedings under Section 11C(2) of the Act which required the appellant to produce the books, registers and other documents and records relating to the company. In this proceeding, the appellant failed to produce any documents to show that he had resigned as director or was never appointed as a director of the two other companies. The Tribunal held that at a belated stage, it was not open to the applicant to file a rectification application which amounted to reviewing the order of 2004. [Anil D. Doshi v. SEBI, Misc. Application No. 253 of 2018, Order dated 19-02-2019]

Amendments to existing lawsLegislation Updates

In exercise of powers conferred by section 29 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Central Government vide S.O. 4825(E) notified the Securities and Exchange Board of India (Terms and Conditions of Service of Chairman and Members) Amendment Rules, 2018 on 12-09-2018, to amend the SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992, namely:-

2. In the Securities and Exchange Board of India (Terms and Conditions of Service of Chairman and Members) Rules, 1992,-

(i) in rule 3, in sub-rule (2), in the proviso for the word “Member” the words “whole-time member” shall be substituted;

(ii) In rule 19A, in sub-rule (2), the following proviso shall be inserted, namely:-

“Provided that no person shall hold office as the part-time member after he attains the age of seventy years.”

Ministry of Finance

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): G. Mahalingam, whole time Member, in this order granted exemption from application of Section 3(2) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

An application was filed under Section 11(1) and Section 11(2)(h) of the SEBI Act read with Regulation 11(5) of the SAST Regulations, 2011 seeking exemption from application of Section 3(2) of the SAST Act on acquiring of shares and voting rights in the target company. The matter before the Board was that the promoters were willing to transfer by way of gift all the equity shares of the Target Company to the acquirer trusts. The transferor submitted the grounds on which they seek an exemption. Major grounds being the objective with which the transfer is proposed that is seamless intergenerational transfer of the trust fund in view of the fact that the beneficiaries are family members being non-commercial transaction. The other ground being that the ownership or control of the target company had not been affected. Also, pre and post-acquisition shareholding of promoter group would remain same. The acquirer/transferee confirmed that they have adhered to the Guidelines outlined in the Schedule to the SEBI Circular. Board noted all the grounds and ordered that the Target Company shall continue to be in compliance with the minimum public shareholding requirements under the Securities Contracts Regulation Rules, 1957 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Board was of the view that the exemption prayed by the applicants should be granted with certain conditions which the transferor and transferee needs to fulfill. Therefore, exemption from application of Section 3(2) was granted. [Proposed Acquisition of Shares and Voting Rights in Target Company FDC Ltd., In re,2018 SCC OnLine SEBI 156, order dated 21-08-2018]

Legislation UpdatesNotifications

Securities and Exchange Board of India (SEBI), vide circular dated 06-06-2018, SEBI, has, inter alia:

  1. brought to the notice of SEBI registered market intermediaries the various notifications issued by the Government of India on Prevention of Money Laundering Rules, relating to making Aadhaar number issued by the Unique Identification Authority of India (UIDAI) and Permanent Account Number (PAN) or Form No. 60, as defined in Income Tax Rules, 1962 mandatory for both new and existing accounts with financial market intermediaries including securities market intermediaries.
  1. SEBI has further clarified in the above mentioned circular that in case PAN is not submitted by any client at the time of opening of account based relationship, one certified copy of an “officially valid document” (OVD) shall be submitted. However, for securities market, in terms of SEBI circular dated 27-04-2007, the requirement of PAN would continue to be mandatory for completing the KYC process.

To regulate the transactions between clients and brokers, SEBI has further, vide circulars dated 12-07-2018 and 27-08-2003, inter alia, mandated that:

  1. Brokers and sub-brokers should not accept cash from the client for purchase of securities and / or give cash against sale of securities to the clients.
  1. Further, it has been mandated that all payments shall be received / made by the stock brokers from / to the clients strictly by account payee crossed cheques/ demand drafts or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the Reserve Bank of India.
  1. In the case of securities also, giving / taking delivery of securities in “demat mode” should be directly to / from the “beneficiary accounts” of the clients except delivery of securities to a recognized entity under the approved scheme of the stock exchange and / or SEBI.

SEBI, had previously vide circular dated 27-04-2007, mandated that PAN would be the sole identification number for all participants transacting in the securities market, irrespective of the amount of transaction.

Schedule VII of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, inter alia, states that:

  • For registration of transfer of securities, the transferee(s) as well as transferor(s) shall furnish a copy of their PAN card to the listed entity.
  • For securities market transactions and/or for off-market or private transactions involving transfer of shares in physical form, the transferee(s) as well as transferor(s) shall furnish copy of PAN card to the listed entity.

Moreover, SEBI registered intermediaries are required to follow stringent KYC norms on an ongoing basis and are also required to file Suspicious Transaction Reports (STRs) to the Financial Intelligence Unit (FIU) in case of suspicious activities of their clients.

Appropriate action against evasion of taxes/black money, including against cases involving black money investments, is an on-going process. Such action under direct tax laws includes searches, surveys, enquiries, assessment of income, levy of taxes, penalties, etc. and filing of prosecution complaints in criminal courts, wherever applicable. The Income-tax Department does not maintain sector-wise details of the searches conducted.

Ministry of Finance
OP. ED.

The Delhi High Court, has, in Amit Jain v. SEBI[1] set aside a show-cause notice issued and consequent proceedings initiated by the Securities and Exchange Board of India (SEBI) against the petitioner for alleged violations of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations).

The petitioner before the Delhi High Court was a shareholder of a listed company viz. Himalaya Granites Limited (Company). On the basis of certain information shared by the Bombay Stock Exchange Limited (BSE) to SEBI, a group of Assistant General Managers of SEBI allegedly found that the petitioner had violated Regulations 13(3) and (5) of the PIT Regulations and recommended that adjudication proceedings be initiated against him.

The aforesaid recommendations were then considered by a Committee of Division of Chiefs of SEBI who also recommended that the adjudication proceedings under Section 15-A(b) of the Securities and Exchange Board of India Act, 1992 (Act) be initiated against the petitioner.

Further to deliberations and recommendations, the Whole-time Director (WTD) SEBI, appended a noting on the file viz. “Ms Anita Kenkare is appointed as AO.

Accordingly, the Executive Director of SEBI communicated inter alia that (i) SEBI had examined the irregularities observed in the matter of the Company and the possible violations of the provisions of the Act and PIT Regulations; (ii) it prima facie appeared to the WTD that the petitioner had violated Regulations 13(3) and (5) of the PIT Regulations and was satisfied that there existed sufficient grounds to enquire into the affairs and adjudicate upon the alleged violation by the petitioner; and (iii) in exercise of his powers under the Act, the WTD appointed Ms Anita Kenkare as the adjudicating officer (AO).

Following the aforesaid, the AO issued a show-cause notice to the petitioner enclosing a copy of the appointment of the AO, a transaction statement for the alleged period of default by the petitioner and the correspondence issued by SEBI to BSE and the Company.

In response thereto, the petitioner appeared before the AO and subsequently, sought for information including the appointment of the WTD, the powers delegated to the WTD and loss caused to investor or group of investors of the Company by his alleged violation of the PIT Regulations. However, the Assistant General Manager of SEBI refused to disclose the requested information.

The petitioner thereafter, filed a writ petition before the Delhi Court under Articles 226 and 227 of the Constitution of India impugning the show-cause notice and for quashing the proceedings leading to the appointment of the AO to adjudge the penalty to be imposed on the petitioner.

At the hearing before the Delhi High Court, the following issues fell before the Court for its adjudication:

(a) whether the WTD had formed an opinion that there existed grounds for adjudging penalty under Section 15-A(b) of the Act?; and

(b) whether the WTD was required to pass an order under Regulation 14 of the PIT Regulations before taking any step for appointing an adjudicating officer for adjudging any penalty under Section 15-A(b) of the Act?

At the hearing, referring to Regulation 15 of the PIT Regulations, the learned counsel of the petitioner contended that the petitioner was precluded from exercising its right to appeal under the PIT Regulations since SEBI had not passed any order and hence, the petitioner was left with no other option but to approach the present Court.

The learned counsel for the petitioner thereafter contended that in the present case, there is no noting by the WTD expressly stating that he has formed an opinion that there are grounds for adjudging under the provisions of Chapter VI-A of the Act before the appointment of an adjudicating officer, as required under the provisions of Rule 3 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (Inquiry Rules).

Referring to Regulation 4-A of the PIT Regulations, the learned counsel for the petitioner contended that it was mandatory for SEBI, or its delegate being the WTD, to make necessary inquiries for forming a prima facie opinion and to follow the procedure under Chapter III of the PIT Regulations.

The learned counsel for the petitioner also brought the Court’s attention to the caption or heading of Chapter III of the PIT Regulations being “investigation” indicating that the provisions of Regulations 4-A to 10 of the PIT Regulations relate essentially to the investigation that may be conducted by SEBI. Thus, as per the learned counsel for the petitioner, the scheme of the PIT Regulations made it amply evident that SEBI was first required to exhaust the process of investigation and then form a firm opinion, and only thereafter could the question of imposing penalty arise. In addition thereto, the learned counsel for the petitioner also contended that the proceedings for imposing a penalty could not be initiated without a prior order under Regulation 14 of the PIT Regulations.

Reading Regulation 11 with Regulation 14 of the PIT Regulations, the Court explained that initiating any action under Chapter VI-A of the Act is independent from the procedure as specified in the PIT Regulations. Therefore, the contention that SEBI was first required to determine whether the petitioner had violated PIT Regulations before appointing an AO was unmerited. It was further explained that it was also not necessary that the procedure of investigation must be carried out before SEBI can form an opinion that there are grounds for adjudging under any provision under Chapter VI-A of the Act.

While recognising the provision under Rule 3 of the Inquiry Rules, the Court observed that the only noting available on file made by the WTD is “Ms Anita Kenkare is appointed as AO” and there is no scope for inferring formation of an opinion merely for the reason that an adjudicating officer has been appointed and the other officers have forwarded their recommendations for such an opinion. SEBI is required to form an independent opinion that there are grounds for adjudging under Chapter VI-A of the Act. The Court further stated that it is not necessary for SEBI to elaborate its opinion or provide reasons for the same, however, it is required for SEBI to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VI-A of the Act before proceeding to appoint an AO.

The High Court also relied upon Chhugamal Rajpal v. S.P. Chaliha[2] and Central India Electric Supply Co. Ltd. v. ITO[3] to explain that courts have not accepted endorsement made mechanically as indicative of expression of any opinion or satisfaction that necessary statutory conditions have been met. In the present case, the WTD did not even make an endorsement that he is of the opinion that there are grounds for adjudging under Chapter VI-A of the Act and thus, the question of inferring that he had formed such an opinion does not arise.

In light of the aforesaid, the Court set aside the proceedings initiated against the petitioner and set aside the impugned show-cause notice issued to him and clarified that SEBI may examine the file and only after forming an opinion that there are grounds for adjudging under Chapter VI-A of the Act appoint an adjudicating officer for holding an inquiry.

The order passed by the Delhi High Court seems to be in consonance with the maxim delegatus non potest delegare. The jurisprudence of administrative law would affirm that a statutory power ought to be exercised only by the body or officer in whom it has been so conferred.

An implication of this order could be that a WTD is now prevented from delivering mechanical orders solely based upon the recommendations forwarded to it by his or her subordinates. A further implication, one that may even cause severe delays is that; a noticee may exercise its right to seek information from SEBI including but not limited to the “opinion” of the WTD prior to setting the investigation machinery in motion. It may be further possible that proceedings currently sub-judice before SEBI may not proceed further until SEBI responds to these requests from the noticees. One may anticipate a plethora of writ petitions being filed, wherein noticees shall demand their right to natural justice and as a corollary, delay the investigation being undertaken by SEBI.

———————

* Senior Associate practising with the litigation team at DSK Legal, Mumbai.

** Article practising with the litigation team at DSK Legal, Mumbai.

[1]  2018 SCC OnLine Del 9784.

[2]  (1971) 1 SCC 453 : (1971) 79 ITR 603.

[3]  2011 SCC OnLine Del 472 : (2011) 333 ITR 237.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): The whole time member of SEBI,  G.Mahalingam in accordance to the interim order given earlier issued directions under Section 19 of the Securities and Exchange Board of India Act, 1992 and Sections 11(1), 11(B) and 11(4) thereof and regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999  to NICL India Ltd. for engaging in Collective Investment Schemes without ‘certificate of  registration’ from SEBI.

NICL  India Ltd. was involved in illegal mobilization of funds from the public through ‘Collective Investment Schemes’, without obtaining the certificate of registration resulting in the contravention of Section 12(1B) of the SEBI Act, 1992 with Section 11 AA and Regulation 3 of CIS Regulations. It has also been stated that NICL was alleged of contravention of Regulation 4(2)(t) of ‘Prohibition of Fraudulent & Unfair Trade Practice Relating to Securities Market Regulations, 2003.

The interim order that had been said to be passed carried certain directions towards the NICL directors and further in reference to that,  they were asked to file reply, if any.  NICL through the further correspondence of letters kept asking for the extension of time to refund the investor’s money.

SEBI received complaints subsequently in which one was from RBI as well, in regard to the ‘mobilization of public fund’, after NICL had claimed to adhered all the stated directives in the interim order.

Therefore, it was noted by the board that, after providing opportunity of personal hearing and absenteeism in that, SEBI had to conclude by stating that ‘Noticees’ that were engaged in the Collective investment scheme had failed to address prima facie conclusions in the interim order, for which the directors of NICL would be liable which further lead SEBI for the issuance of certain directions that involved the winding up of the NICL’s Collective Investment Scheme and certain other directives for refund of the invested funds. [NICL India Ltd., In Re,2018 SCC OnLine SEBI 128, order decided on 21-06-2018]

Amendments to existing lawsLegislation Updates

In exercise of powers conferred by Section 30 r/w clause (c) of sub-section (2) of Section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board has amended the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2018, w.e.f. 13-03-2018.

1. In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 –

A) after Regulation 7A and before Regulation 8, the following regulation shall be inserted, namely, –

Norms for Shareholding and Governance in Mutual Funds

7B. (1) No sponsor of a mutual fund, its associate or group company including the asset management company of the fund, through the schemes of the mutual fund or otherwise, individually or collectively, directly or indirectly, have –

(a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or

(b) representation on the board of the asset management company or the trustee company of any other mutual fund.

(2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company or the trustee company of a mutual fund, shall not have, directly or indirectly, –

(a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or

(b) representation on the board of the asset management company or the trustee company of any other mutual fund.

(3) Any person not in conformity with the sub-regulations (1) and (2) of this regulation, as on the date of the coming into force of this regulation shall comply with sub-regulations (1) and (2) within a period of one year from the date of the coming into force of this regulation.”

B) in the Seventh Schedule, to clause 2, the following proviso shall be inserted, namely,-

“Provided, investment in the asset management company or the trustee company of a mutual fund shall be governed by clause (a), of sub-regulation (1), of regulation 7B.”

[Notification No. SEBI/LAD-NRO/GN/2018/02]

Footnote:

1. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the Principal Regulations, were published in the Gazette of India on December 9, 1996 vide S.O. No. 856 (E).

2. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 were subsequently amended–

(1) on 15-04-1997, vide S.O. No.327 (E).

(2) on 12-01-1998, vide S.O. No.32 (E).

(3) on 08-12-1999, vide S.O. No.1223 (E).

(4) on 14-03-2000, vide S.O. No.235 (E).

(5) on 28-03-2000, vide S.O. No.278 (E).

(6) on 22-05-2000, vide S.O. No.484 (E).

(7) on 23-01-2001, vide S.O. No.69 (E).

(8) on 29-05-2001, vide S.O. No.476 (E).

(9) on 23-07-2001, vide S.O. No.698 (E).

(10) on 20-02-2002, vide S.O. No.219 (E).

(11) on 11-06-2002, vide S.O. No.625 (E).

(12) on 30-07-2002, vide S.O. No.809 (E).

(13) on 09-09-2002, vide S.O. No.956 (E).

(14) on 27-09-2002, vide S.O. No.1045 (E).

(15) on 29-05-2003, vide S.O. No. 632 (E).

(16) on 12-01-2004, vide F.No. SEBI/LAD/DOP/4/2004.

(17) on 10-03-2004, vide S.O. No. 398 (E).

(18) on 12-01-2006, vide S.O. No. 38 (E).

(19) on 22-05-2006, vide S.O. No. 783 (E).

(20) on 03-08-2006, vide S.O. No. 1254 (E).

(21) on 27-12-2006, vide F. No. SEBI/LAD/DOP/82534/2006.

(22) on 27-12-2006, vide F. No. SEBI/LAD/DOP/83065/2006.

(23) on 28-05-2007, vide F. No. 11/LC/GN/2007/2518.

(24) on 31-10-2007, vide F. No. 11/LC/GN/2007/4646.

(25) on 31-03-2008, vide F. No. 11/LC/GN/2008/21669.

(26) on 16-04-2008, vide F. No. LADNRO/ GN/2008/03/123042.

(27) on 22-05-2008, vide No. LADNRO/GN/2008/09/126202.

(28) on 29-09-2008, vide No. LADNRO/ GN/2008/24/139426.

(29) on 08-04-2009, vide No. LAD-NRO/GN/2009-10/01/159601.

(30) on 05-06-2009, vide No. LAD- NRO/GN/2009-10/07/165404.

(31) on 29-07-2010, vide No. LAD-NRO/GN/2010-11/13/13945.

(32) on 30-08-2011, vide No. LAD-NRO/GN/2011-12/27668.

(33) on 21-02-2012, vide No. LAD-NRO/GN/2011-12/38/4290.

(34) on 26-09-2012, vide No. LAD-NRO/GN/2012-13/17/21502.

(35) on 16-04-2013, vide No. LAD-NRO/GN/2013-14/03/5652.

(36) on 19-06-2013, vide No. LAD-NRO/GN/2013-14/12/6108.

(37) on 19-08-2013, vide No. LAD-NRO/GN/2013-14/18/6384.

(38) on 06-05-2014, vide No. LAD-NRO/GN/2014-15/01/1039.

(39) on 23-05-2014, vide No. LAD-NRO/GN/2014-15/03/1089.

(40) on 30-12-2014, vide No. LAD-NRO/GN/2014-15/19/1973.

(41) on 15-05-2015, No. NROOIAE/GN/2015-16/005.

(42) on 12-02-2016, vide No. SEBI/LAD-NRO/GN/2015-16/034.

(43) on 15-02-2017, vide No. SEBI/LAD/NRO/GN/2016-17/031.

Legislation UpdatesRules & Regulations

In exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, SEBI has issued a circular, dt. 21-03-2018, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Post the transfer of clearing and settlement functions from commodity derivatives exchanges to Clearing Corporations, Clearing Corporations shall be required to comply with all such norms. However, norms related to minimum Liquid Net-worth and Base Minimum Capital requirements applicable for clearing members in commodity derivatives are different from that applicable for clearing members in equity derivatives and currency derivatives. SEBI has thus decided to align norms related to BMC and liquid net-worth for members of clearing corporations in commodity derivatives with those applicable for clearing members in equity and currency derivatives. Hence, members of Clearing Corporations in commodity derivatives segment shall maintain a minimum Liquid Net-worth of at least INR 50 lakhs at all points of time and shall not have any Base Minimum Capital requirement. Clearing member’s liquid assets after adjusting for applicable margins shall be referred to as ‘Liquid Net-worth’ of the clearing member. Initial margins, ELM, additional margins or any other margins as may be specified by SEBI from time to time shall be deducted from the liquid assets of a clearing member to arrive at ‘Liquid Net-worth’ of a member.

SEBI had issued circular CIR/MRD/DRMNP/65/2016 dated 15-07-2016 on “Acceptance of Fixed Deposit Receipts (FDRs) by Clearing Corporations” to Recognised Clearing Corporations, to which the Commodity Derivatives Exchanges have to comply with the provisions of the abovesaid circular within 3 months from the date of this circular. Thus, Trading/Clearing members of commodity derivatives exchanges, who have deposited their own FDRs or FDRs of associate banks, shall replace such collateral with other eligible collateral as per extant norms, within a period of 3 months from the date of issuance of this circular.

SEBI has also issued circular CIR/MRD/DRMNP/008/2018 dated 08-01-2018 on “Margin provisions for intra-day crystallised losses” to Recognised Clearing Corporations, for which the Commodity Derivatives Exchanges have also to comply with the provisions of the abovementioned circular within 3 months from the date of this circular.

[SEBI/HO/CDMRD/DRMP/CIR/P/2018/52, dt. 21-03-2018]

Securities and Exchange Board of India

Business NewsNews

1. SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) and SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) were amended vide notifications dated December 15, 2017. The said amendments, inter-alia, clarified that REITs and InvITs can issue debt securities.

2. For issuance of debt securities, REITs/InvITs shall follow provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (“ILDS Regulations”) in the following manner:

2.1. Regulation 4(5) and Regulation 16(1) of SEBI ILDS Regulations, 2008 shall not be applicable for issuance of debt securities by REITs/InvITs.

2.2. The compliances required to be made with respect to Companies Act, 2013 or any filing to be made to Registrar of Companies in terms of the ILDS Regulations, shall not apply to REITs/InvITs for issuance of debt securities unless specifically provided in this circular.

2.3. All other provisions of ILDS Regulations shall apply to REITs/InvITs subject to there being no conflict with REIT Regulations and/or InvIT Regulations or circulars issued thereunder. In case of conflict, provisions of REIT Regulations and/or InvIT Regulations or circulars issued thereunder shall prevail over ILDS Regulations.

3. For the issuance of debt securities REITs/InvITs shall appoint one or more debenture trustee registered with SEBI under Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993:

Provided that a trustee to the REIT/InvIT shall not be eligible to be appointed as debenture trustee to such issue of debt securities.

4. Any secured debt securities issued by REITs/InvITs shall be secured by the creation of a charge on the assets of the REIT/InvIT or holdco or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon.

5. In addition to the disclosures and compliances prescribed under Circular CIR/IMD/DF/146/2016 dated December 29, 2016 and Circular CIR/IMD/DF/127/2016 dated November 29, 2016, as applicable, REITs/InvITs which have issued debt securities shall be required to comply with following continuous disclosure requirements:

5.1 . Regulations 50, 51, 54, 55, 56, 57, 58, 59 and 60 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and any other provisions of the aforesaid regulations as may be applicable to REITs/InvITs.

5.2. In addition to Financial disclosures made by REITs and InvITs in terms of circular dated December 29, 2016 and November 29, 2016 the following requirements shall apply:

5.2.1. Additional line items that shall be disclosed by REITs/InvITs which have issued/listed their debt securities are as follows:

(a) Asset cover available;

(b) debt-equity ratio;

(c) debt service coverage ratio;

(d) interest service coverage ratio;

(e) net worth;

5.2.2. Modified opinion(s) in audit reports having a bearing on the interest payment or redemption or principal repayment capacity of the REITs/InvITs shall be appropriately and adequately addressed by the board of the manager while publishing the accounts for the said period.

5.2.3. REITs/InvITs shall submit to the stock exchange on a half yearly basis along with the half yearly financial results, a statement indicating material deviations, if any, in the use of proceeds of issue of debt securities from the objects stated in the offer document.

6. With reference to ILDS Regulations and LODR Regulation and circulars issued thereunder, the reference to the following terms made therein, should, for the purpose of this circular, be construed as follows, unless otherwise required:

Reference to To be construed as
Articles of Association! Memorandum of Association Trust Deed
Board of directors Board of Director!Governing Body of the Manager
Directors of the company Directors of the manager
Shares Units
Shareholder Unit holder
Shareholding pattern Unit holding pattern
Share capital Unit capital

7. This Circular is issued in exercise of powers conferred under Section 11(1) of Securities and Exchange Board of India Act, 1992 read with Regulation 33 of REIT Regulations and Regulation 33 of InvIT Regulations.

8. This Circular is available on SEBI website at sebi.gov.in under the categories “Legal Framework” and under the drop down “Circulars”.

[SEBI/HO/DDHS/DDHS/CIR/P/2018/71]

Business NewsNews

SEBI has been monitoring investment by foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (hereinafter referred to as FPIs) in India. Since various stakeholders have been seeking guidance on clubbing of investment limits to be applied to foreign Government/its related entities, the following clarifications are issued:

A. What is the investment limit for foreign Government/foreign Government related entities registered as Foreign Portfolio Investors (FPI)?
Reply: The purchase of equity shares of each company by a single FPI or an investor group shall be below ten percent of the total paid up capital of the company. [Ref. Regulation 21(7) of FPI Regulations].

B. What is an investor group?
Reply: In case, same set of beneficial owners are constituents of two or more FPIs and such investor(s) have a common beneficial ownership of more than 50% in those FPIs, all such FPIs will be treated as forming part of an investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio investor. [Ref. Regulation 23(3) of FPI Regulations and FAQ 58].

C. How to ascertain whether an FPI is forming part of any investor group?
Reply: The designated depository participant engaged by an applicant seeking registration as FPI shall ascertain at the time of granting registration and whenever applicable, whether the applicant forms part of any investor group. [Ref. Regulation 32(2)(a) of FPI Regulations].

Further, at para 2.2 in the Form A of First Schedule, the applicant seeking registration as FPI is required to furnish information regarding foreign investor group. Accordingly, it is the prime responsibility and obligation of the FPI to disclose the information with regard to investor group.

D. How is the beneficial ownership of foreign Government entities/its related entities determined for the purpose of clubbing of investment limit?
Reply: The beneficial owner (BO) of foreign Government entities/its related entities shall be determined in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (hereinafter referred to as PMLA Rules). The said PMLA Rules provide for identification of BO on the basis of two methodologies, namely (a) controlling ownership interest (also termed as ownership or entitlement) and (b) control in respect of entities having company or trust structure. In respect of partnership firms and unincorporated associations, ownership or entitlement is basis for identification of BO.

E. Whether two or more foreign Government related entities from the same jurisdiction will individually be permitted to acquire equity shares in an Indian company up to the prescribed limit of 10%?
Reply: In case the same set of beneficial owner(s) invest through multiple entities, such entities shall be treated as part of same investor group and the investment limits of all such entities shall be clubbed as applicable to a single FPI. [Ref. Regulation 23(3) of FPI Regulations].

Accordingly, the combined holding of all foreign Government/its related entities from the same jurisdiction shall be below ten percent of the total paid up capital of the company.

However, in cases where Government of India enters into agreements or treaties with other sovereign Governments and where such agreements or treaties specifically recognize certain entities to be distinct and separate, SEBI may, during the validity of such agreements or treaties, recognize them as such, subject to conditions as may be specified by it. [Ref. Regulation 21(9) of FPI Regulations].

F. How will the investment by a Foreign Government Agency be treated?
Reply: Foreign Government Agency is an arm/department/body corporate of Government or is set up by a statute or is majority (i.e. 50% or more) owned by the Government of a foreign country and has been included under “Category I Foreign portfolio investors”. [Ref. Regulation 5(a) of FPI Regulations].

The investment by foreign Government agencies shall be clubbed with the investment by the foreign Government/its related entities for the purpose of calculation of 10% limit for FPI investments in a single company, if they form part of an investor group.

G. Whether any investment by World bank group entity IBRD, IDA, MIGA and IFC should be clubbed with the investment from a foreign Government having ownership in such World bank group entity?
Reply: Government of India, vide letter No. 10/06/2010-ECB dated January 06, 2016 has exempted World Bank Group viz. IBRD, IDA, MIGA and IFC from clubbing of the investment limits for the purpose of application of 10% limit for FPI investments in a single company.

H. Where Provinces/States of some countries with federal structure have set up their separate investment funds with distinct beneficial ownership constituted with objectives suitable for their respective provinces, such funds not only have separate source of financing but also have no management, administrative or statutory commonality. Kindly inform whether investments by these foreign Government entities shall be clubbed?
Reply: The investment by foreign Government/its related entities from provinces/ states of countries with federal structure shall not be clubbed if the said foreign entities have different BO identified in accordance with PMLA Rules.

I. How will the foreign Government/ its related entities know the available limit for investment, to avoid breach of the limit?
Reply: The custodian of securities reports the holdings of FPIs/investor groups to depositories who monitor the investment limits. As such, NSDL is in ready possession of aggregate holdings of FPIs/investor groups in any particular scrip. [Ref. Regulation 26(2)(d) of FPI Regulations]. To this effect, SEBI, vide communication dated November 02, 2017 has already advised DDPs/custodians of securities to approach NSDL to get information regarding aggregate percentage holdings of the group entities on whose behalf they are acting in any particular company before making investment decisions. SEBI has no objection to the said arrangement for sharing of data.

J. What if the investment by foreign Government/its related entities cause breach of the permissible limit?
Reply: The FPIs investing in breach of the prescribed limit shall divest their holdings within 5 trading days from the date of settlement of the trades causing the breach. Alternatively, the investment by such FPIs shall be considered as investment under Foreign Direct Investment (FDI) at the FPI’s option. However, the FPIs need to immediately inform of such option to SEBI & RBI, since they cannot hold equity investments in a particular company under FPI and FDI route, simultaneously.

2. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

3. A copy of this circular is available at the links “Legal Framework-Circulars” and “Info for P.I” on our website www.sebi.gov.in. The DDPs/ Custodians are requested to bring the contents of this circular to the notice of their FPI clients.

Securities and Exchange Board of India

 

Business NewsNews

This master circular consolidates and updates the requirements/obligations with regard to Prevention of Unauthorized Trading by Stock Brokers prescribed by the following circulars:

A. CIR/HO/MIRSD/MIRSD2/CIR/P/201 7/108 dated September 26, 2017

B. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124 dated November 30, 2017

C. CIR/HO/MIRSD/MIRSD2/CIR/P/2018/109 dated January 11, 2018

II. SEBI in the past has taken several steps to tackle the issue of “Unauthorized Trades” viz Periodic Running Account Settlement, Post transactions SMS/email by exchanges/Depositories, Ticker on broker/DP websites etc. It was observed that in spite of measures taken, a considerable proportion of investor complaints is of the nature of “Unauthorized Trades”

III. To further strengthen regulatory provisions against unauthorized trades and also to harmonize the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:

a. Physical record written & signed by client,

b. Telephone recording,

c. Email from authorized email id,

d. Log for internet transactions

e. Record of messages through mobile phones,

f. Any other legally verifiable record.

When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/ securities by client in respect of disputed trade, etc. shall also be considered.

IV. Further, wherever the order instructions are received from clients through the telephone, the stock broker shall mandatorily use telephone recording system to record the instructions and maintain telephone recordings as part of its records.

V. The Brokers are required to maintain the records specified at Para III above for a minimum period for which the arbitration accepts investors’ complaints as notified from time to time currently three years. However in cases where dispute has been raised, such records shall be kept till final resolution of the dispute.

VI. If SEBI desires that specific records be preserved then such records shall be kept till further intimation by SEBI.

VII. The earlier circulars on the same subject mentioned in Para 1 of this Master Circular stand rescinded.

VIII. This master circular shall continue to be effective from 1st April 2018.

IX. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above directions in coordination with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the provisions of this circular in their Monthly Development Reports.

X. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

Securities and Exchange Board of India

[CIRCULAR SEBI/HO/MIRSD/DOP1/CIR/P/2018/54]

Business NewsNews

A private placement, rather than a public issue, is the markets regulator’s favoured route to start trading in securities receipts issued by asset reconstruction companies (ARCs). SEBI’s move aimed at allowing only informed investors to trade in the securities. Only certain “qualified buyers” will be permitted to trade in them, and the minimum lot size will be Rs 10 lakh. The intention is to allow only informed investors to trade in these securities. A committee set up by the Securities and Exchange Board of India (SEBI) has made these recommendations, and the regulator’s board meeting on 28-12-2017 approved them.

The offer of Security Receipts (SRs), which are proposed to be listed, may be allowed only to Qualified Buyers through private placement. Initially, security receipts issued by ARCs to banks in exchange for some of their bad loans will be sold to qualified buyers such as financial institutions, banks and alternative investment funds (AIFs) through a process of private placement. Later, high -net-worth individuals (HNIs) and portfolio managers will be allowed to trade in them. Listing of securities receipts was initially proposed to improve liquidity in the securitization industry and help speed up the resolution of the stressed assets in the banking system. SEBI then formed a committee with representatives from the central bank, stock exchanges, credit rating agencies and ARCs to study the matter.

The Reserve Bank of India has defined “qualified buyer” as financial institutions, banks, insurance companies, mutual funds, or any category of non-institutional investors it specifies. Existing holders of security receipts have also been allowed to sell them in an offer for sale (OFS). The net asset value of these receipts may be disclosed quarterly. Existing RBI guidelines require such disclosures twice a year. Listing of these receipts would happen through the Electronic Book Mechanism, which is currently applicable for listing of debt securities. To begin with, SEBI has kept the listing of securities receipts optional. However, if the holder(s) of existing SRs wants to undertake an offer for sale, then such SRs shall be mandatorily listed by the issuers. While the committee suggested that AIFs be allowed to subscribe to the listed SRs, existing SEBI norms limits qualified buyers only to those AIFs which are body corporates.

At the second stage, after seeing the level of interest and the operation of the market, the RBI may consider expanding the definition by including HNIs, portfolio managers having an investible fund base of Rs 10 crore or above and family trusts, with net worth of Rs 500 crore.

[Source: Livemint]

Amendments to existing lawsLegislation Updates

SEBI in exercise of the powers conferred under Section 15JB of the Securities and Exchange Board of India Act, 1992, Section 23JA of the Securities Contracts (Regulation) Act, 1956 and Section 19-IA of the Depositories Act, 1996 r/w Section 30 of the Securities and Exchange Board of India Act, 1992, Section 31 of the Securities Contracts (Regulation) Act, 1956 and Section 25 of the Depositories Act, 1996, the Securities and Exchange Board of India made the following regulations, w.e.f. 27th December, 2017, to further amend the Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) Regulations, 2014.

In the Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) Regulations, 2014,

I. After Chapter VI and before Chapter VII, the following Chapter shall be inserted, namely,

“CHAPTER VIA

Summary Settlement Procedure

Summary Settlement Procedure

14A. (1) Notwithstanding anything contained in Chapter VI, before initiating any specified proceeding the Board may issue a notice of settlement in the format as specified in Schedule-III, calling upon the noticee to file a settlement application in respect of the specified proceeding(s) to be initiated, upon payment of the settlement amount and/or furnishing an undertaking in respect of other non-monetary terms or compliance with other non-monetary terms, as may be specified in the settlement notice in respect of the following alleged defaults,-

i. Late filing of returns, report, document, etc.;

ii. Delay in making disclosures;

iii. Non-disclosure in relation to companies exclusively listed on regional stock exchanges which have exited;

iv. Failure to make disclosures in the prescribed formats;

v. Delay in compliance of any of the requirements of law or with directions issued by the Board;

vi. Such other violations as may be determined by the Board:

Provided that, the specified proceeding(s) shall not be settled under this Chapter, if in the opinion of the Board, the applicant has failed to make a full and true disclosure of facts or failed to co-operate to the satisfaction of the Board:

Provided further that, notwithstanding anything contained in the notice of settlement , the Board shall have the power to modify the enforcement action to be brought against the noticee and the notice of settlement shall not confer any right upon the noticee to seek settlement or avoid any enforcement action.

(2) The noticee may within thirty calendar days from the date of receipt of the notice of settlement,-

(a) file a settlement application in the Form specified in Part-A of the Schedule-I alongwith non-refundable application fee as specified in Part-B and the undertakings and waivers as specified in Part-C of the Schedule-I;

(b) remit the settlement amount as specified in the notice of settlement; and

(c) comply or undertake to comply with other non-monetary terms as specified in the notice of settlement, as the case may be:

Provided that, in case of any discrepancy in calculation of settlement amount specified in the notice of settlement, the noticee may seek rectification of the same at the time of filing the settlement application and in such cases the decision of the Board shall be final and remittance shall be done within thirty calendar days from the date of receipt of the decision of the Board:

Provided further that, the Board may for reasons to be recorded, grant extension of time not exceeding a further period of fifteen calendar days for filing of the settlement application, remittance of the settlement amount and/or furnishing an undertaking in respect of any of the non-monetary terms or compliance with any of the non-monetary terms specified in the notice of settlement.

(3) The Board upon being satisfied with the remittance of settlement amount and undertaking furnished in respect of non-monetary terms or compliance with non-monetary terms, if any specified in the settlement notice, shall pass an order of settlement under Regulation 15.

14B. Notwithstanding anything contained in Chapter VI and in Regulation 14A, with respect to specified proceedings pending as on the date of commencement of this Chapter, the Board may issue a notice of settlement under sub-regulation (1) of Regulation 14A in respect of such proceedings and in such cases the procedure specified in Regulation 14A shall apply mutatis mutandis.

Explanation. – For the purposes of this Chapter, it is clarified that a specified proceeding is not deemed to be initiated and pending, unless the Board has communicated the matter to the authority who shall conduct such proceedings.

14C. Notwithstanding anything contained in these regulations, where a noticee does not file a settlement application under this Chapter or remit the settlement amount and/or comply with other non-monetary terms to the satisfaction of the Board or withdraws the settlement application, the specified proceedings may be initiated or continued, as the case may be and such a noticee shall only be permitted to file a settlement application in respect of proceedings pending before a Court or tribunal after conclusion of proceedings before the Adjudicating Officer or the Board, as the case may be.”

II. In Schedule II, in Chapter I, Item 12 shall be deleted; Existing item (13) shall be renumbered as item (12).

III. After Schedule II, the following Schedule shall be inserted, namely,

Schedule III

(See regulation 14A)

Form

To                                                                                                                                       Date

…….

Address

Sub: Notice of settlement in the matter of ……………………………….

Securities and Exchange Board of India (SEBI) during the investigation/ inspection/ inquiry/ examination in the matter of …………………………………………….has prima facie observed that you have violated the following provisions of the securities laws:

(i) …………..

(ii) …………..

(iii) …………..

(iv) …………..

Extracts of the findings are enclosed.

2. In view of the aforesaid you are liable to be proceeded against under ….(relevant provisions under which the proceedings may be initiated or continued)

3. The aforesaid proceedings (to be) initiated may, be settled and disposed of upon filing of a settlement application under the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 alongwith remittance of a settlement amount of Rs. …………..to SEBI in terms of ….. ………………… (provision) of SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 within 30 calendar days from the date of receipt of this notice and upon complying with the following non-monetary terms:

(i) . …………………

(ii) ………………….…… (please specify any other terms, if any)

4. If remittance of the settlement amount is not made and/ or any of the non-monetary terms are not complied or undertaken to be complied within the specified time, the Board may initiate or continue any specified proceedings against you in accordance with law.

Notwithstanding anything contained in this notice, the Board reserves the right to modify the proceedings and charges (to be) brought against you and this notice shall not confer any right to seek settlement or avoid any action initiated by the Board.

5. If the settlement application is not filed or the settlement amount is not remitted and/or undertaking in respect of other non-monetary terms is not furnished or other non-monetary terms are not complied to the satisfaction of the Board or the settlement application is withdrawn, the specified proceedings may be initiated or continued, as the case may be and you shall be permitted to file a settlement application only in respect of proceedings pending before a Court or tribunal after conclusion of proceedings before the Adjudicating Officer or the Board, as the case may be.

Name, designation and signature

Encl: As above”

Footnote:

1.The SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 were published in the Gazette of India on January 09, 2014 vide No. LAD-NRO/GN/2013-14/37/50.

2.The SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 were subsequently amended on:-

(1) 15th September, 2014 by Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) (Amendment) Regulations, 2014 vide No. LAD-NRO/GN/2014-15/08/1491.

(2) 29th August, 2016 by Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) (Amendment) Regulations, 2016 vide No. LAD-NRO/GN/2016-17/010.

(3) 27th February, 2017 by Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) (Amendment) Regulations, 2017 vide No. LAD-NRO/GN/2016-17/036.

[Notification No. SEBI/LAD-NRO/GN/2017-18/025]

Ministry of Finance