Securities Law and Regulations

- Nitesh Bhati, Faculty, NISM

Structure of Financial Market

Financial
Market

Capital
Market

Primary
Market

Secondary
Market

Money
Market

Credit
market

Forex
Market

Insurance
Market

Financial Intermediaries
Merchant Banker
Banker to Issues
Registrars

Transfer Agents
Depositories
Stock Exchanges
Clearing House / Clearing Corporations

Stock Brokers
Portfolio Mangers
Mutual Funds
Custodians

Financial Securities
Securities is defined under SCRA, 1956. Includes
Stock

Equity shares
Preference Shares
Debenture
Warrants
Derivatives

Financial Market Regulators

Ministry of finance (MOF)
Ministry of Corporate Affairs (MCA) Registrar of Company (ROC)

Securitas and Exchange Board of India (SEBI)

Reserve Bank of India (RBI)
Insurance Regulatory and Development Authority
Pension fund Regulatory and Development Authority
Forward market Commission forward and future commodity market

Securities Market -Regulatory Framework

MCA

SEBI

RBI

SEs

Others

Companies Act, 1956 / Companies Act, 2013

Securities Contracts (Regulations) Act 1956

SEBI Act, 1992
Depositories Act, 1996

Reserve Bank of India Act, 1934

Foreign Exchange Management Act,1999

Stock Exchange(s) - Listing approval

Listing Agreement

Sector specific regulatory Banking, insurance, telecom, media, etc

Companies Act, 2013

The Companies Act, 2013

The Companies Act, 2013 has been notified in the Official Gazette on 30th
August, 2013.
Power of Central Government to notify different date for implementation of
different provision of the act - Section 1(3)
First Commencement Notification on 12th September, 2013
Till now 283 sections, out of 470 sections, are implemented

Other provisions of Companies Act, 1956 is still in force.

Nitesh Bhati, Faculty, NISM

Memorandum of Association
Name
Registered Office

Object
Liabilities
Share capital
Nomine Name for One Person Company
(Sec. 4 and Schedule I Table A to E)

Corporate and Allied Laws

Nitesh Bhati

10

Articles of Association
AOA contains regulations for management of the company

(Sec. 4 and Schedule I Table F to J)

Corporate and Allied Laws

Nitesh Bhati

11

Corporate Veil
Meaning
Salomon Vs Salomon and Co.

Lifting of Corporate Veil

Corporate veil is used for Fraud or improper conduct
Company has abused its corporate personality for unjust and in equitable
purpose
Company is formed for tax evasion

Corporate and Allied Laws

Nitesh Bhati

16

Types of Company
Public Company
Members: 7 to unlimited
Private Company
Members: 2 to 200

One Person Company

Member: Only 1
Nitesh Bhati, Faculty, NISM

17

Issue of securities - 23
Public company
Public offer through prospectus

Private placement
Right issue or bonus issue
Private company
Private placement
Right issue or bonus issue

Nitesh Bhati, Faculty, NISM

18

Private Placement Sec 42

Private Placement through issue of a private placement offer document
Initiation to subscribe shall not made to more than fifty person (excluding
QIB, employee under ESOPs) in a financial year.
No public advertisements
No cash payment
Offer to selected group of person whose name are recorded by the
company prior to the invitation to subscribed
Such person shall receive the offer by name

Nitesh Bhati, Faculty, NISM

19

Public Offer
Issue of securities to public through prospectus
Public Offer includes
Initial Public Offer
Further Public Offer

Corporate and Allied Laws

Nitesh Bhati

20

Listing

Listing on Stock
Exchange
Initial Public
Offer (IPO)
Private
Placement /
Right Issue

Incorporation
of company

21

Companies Act Snap Short

Incorporation of company
Board of Directors
Management and Administration

Accounts of Company, Audit and Dividend distribution

Compromises, Arrangements and Amalgamations
Registration of Charge
Corporate Governance Independent Directors

Corporate Social Responsibilities

Liquidation
Winding up
E filing and dissemination on MCA-21

22

SEBI Act, 1992

23

Preamble of SEBI Act, 1992

To protect the
interests of
investors in
securities,

To promote the
development
of securities
market, and

To regulate the
securities
market

24

Power and Function of SEBI Sec. 11(1)

11 (1) Subject to the provisions of this Act, it shall be the
duty of the Board to protect the interests of investors in
securities and to promote the development of, and to
regulate the securities market, by such measures as it
thinks fit.

25

Power and Function of SEBI Sec. 11(2)

Regulate the business in stock exchanges
Register and regulate the working of stockbrokers, sub-brokers, and
share transfer agents, bankers to an issue, trustees of trust deeds,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers and others associated with the
securities market.
SEBIs powers also extend to registering and regulating the working
of depositories and depository participants, custodians of securities,
foreign institutional investors, credit rating agencies, and others as
may be specified by SEBI.
Register and regulate the working of venture capital funds and
collective investment schemes including mutual funds

26

Power and Function of SEBI Sec. 11(2)

Promote and regulate SROs
Prohibit fraudulent and unfair trade practices relating to the securities
market.

Promote investors education and training of intermediaries in the securities

market.
Prohibit insider trading in securities
Regulate substantial acquisition of shares and takeover of companies

Require disclosure of information, to undertake inspection, to conduct

inquiries and audits of stock exchanges, mutual funds, other persons
associated with the securities market, intermediaries and SROs in the
securities market. The requirement of disclosure of information can apply to
any bank or any other authority or board or corporation

27

Power and Function of SEBI Sec. 11(2)

Calling for information from or furnishing information to other authorities
within India or abroad having functions similar to SEBI in matters relating to
prevention or detection of violations in respect of securities laws

Perform such functions and to exercise such powers under the Securities
Contracts (Regulation) Act, 1956 as may be delegated to it by the Central
Government
Levy fees or other charges pursuant to implementation of this regulation

Conduct research for the above purposes

Calling from or furnishing to such agencies specified by the Board,
information as may be considered necessary for discharge of its functions
Performing such other functions as may be prescribed

28
Policy
Making
Registration / Recognition
Inspection / inquiries
Surveillance
Investigations,
processing of complaints
Promoting Investor Education
and training

Regulation / Guidelines /Circulars

Executive
function

Enforcement
powers

Suspend Trading
Prohibit any person to trade
Penalties and Adjudications
Attachment

29

SEBIs Powers as civil court Sec 11(3)

SEBI shall have the same powers as are vested in a civil court under the
Code of Civil Procedure in respect of certain matters, such as
the inspection of books and registers
summoning and enforcing the attendance of persons, and
examining them on oath.

30

SEBIs power on Issuance of securities Section 11A

SEBI empowers to make specify regulations with respect to
matters relating to issue of capital, transfer of securities and other incidental
matters

the manner in which such matters are required to be disclosed by the

Companies.

SEBI is vested with the power to regulate or prohibit issue of prospectus,

offer document or advertisement which solicits money for issue of securities

31

Summary - Role of SEBI (Para No. 2.2.1)

Section 11(1) Basic function
Section 11(2) Function includes making regulation, administration and
enforcement

Section 11(3) Powers as a civil court

Section 11(4) Power to take action, in interest of investors, either on pending of
investigation or on completion of investigation
Section 11(5) Disgorgement power
Section 11 A Power to regulate and prohibit issue of offer document for issue
of shares and transfer of securities
Section 11AA- Collective Investment scheme
Section 11B Direction to intermediaries registered with SEBI
Section 11 C Investigation Search and Seizer

32

Penalties and Adjudication Sec 15

Section 15A: Penalty for failure to furnish information, return etc
Section 15B: Penalty for failure by any person to enter into agreements with
clients
Section 15C: Penalty for failure to redress investors grievances
Section 15D: Penalty for certain defaults in case of mutual funds
Section 15E: Penalty for failure to observe rules and regulations by an asset
management company (AMC)
Section 15F prescribes the penalty payable by a stock broker registered
under the SEBI Act

33

Penalties and Adjudication Sec 15

Section 15G: Penalty for insider trading
Section 15H: Penalty for non-disclosure of acquisition of shares and
takeovers
Section 15HA: Penalty for fraudulent and unfair trade practices
Section 15HB: Penalty for Contravention where no separate penalty has
been provided

34

Appellate Authorities

SAT

SEBI

Supreme
Court

35

Securities Appellate Tribunal (SAT)

SAT is not bound by the procedure laid down by the Code of Civil Procedure,

SAT shall be guided by the principles if natural justice

SAT has powers to regulate their own procedures.
Any proceeding before the SAT shall be deemed to be a judicial proceeding
within the meaning of provisions as given under the Indian Penal Code.

SAT has same powers as are vested in a civil court under the code of civil
procedure while trying a suit in respect of the following matters, namely: 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 its ex-parte;
Setting aside any order of dismissal of any application for default or any order passed
by it ex-parte.

36

Registration of Intermediaries Sec. 12

Certificate of registration require fo stockbroker, sub-broker, share transfer
agent, banker to an issue, trustee of trust deed, registrar to an issue,
merchant banker, underwriter, portfolio manager, investment adviser or
such other intermediary who may be associated with the securities market
SEBI may however by order, suspend or cancel a certificate of registration
as under the provisions in the regulations after giving the person concerned
a reasonable opportunity of presenting his/her case.

37

Prohibition of Manipulative and Deceptive

Devices, Insider Trading, takeover 12A
Section 12A prescribes that no person shall directly or indirectly
Prohibition of Fraudulent and Unfair Trade Practices (FUTP)
a. Use or employ, in connection with the issue, purchase or sale of any securities,
which are either listed or proposed to be listed on a recognised stock exchange,
any manipulative or deceptive device or contrivance in contravention of the
provisions of this Act or any rules made thereunder;
b. Employ any device, scheme or artifice to defraud in connection with issue or
dealing in securities which are listed or proposed to be listed on a recognised stock
exchange;
c. Engage in any act, practice, course of business which operates or would operate
as fraud or deceit upon any person, in connection with the issue, dealing in securities
which are listed or proposed to be listed on a recognised stock exchange, in
contravention of the provisions of this act;

38

Prohibition of Manipulative and Deceptive

Devices, Insider Trading, takeover 12A
Insider Trading Regulation
d. Engage in any insider trading activity;
e. Deal in securities while in possession of material or non-public information or
communicate such material or non-public information to any other person, in a
manner which is in contravention of the provisions of this Act or rules /regulations
made hereunder

Substantial Acquisition and Takeover Regulation (SAST)

f. Acquire control of any company or securities more than the percentage of the
equity share capital of a company whose securities are listed or proposed to be
listed on a recognised stock exchange in contravention of the regulations made
under this Act.

39

Securities Contract (Regulation) Act,

1956
The Securities Contracts (Regulation) Act, 1956 is a legislation to prevent
undesirable transactions in securities by regulating the business of securities dealing
and trading. In pursuance of its objects, the act covers a variety of issues, of which
some are listed below:

1. Granting recognition to stock exchanges

2. Corporatization and demutualization of stock exchanges
3. The power of the Central Government / SEBI to call for periodical returns from
stock ex-changes
4. The power of SEBI to make or amend bye-laws of recognized stock exchanges
5. The power of the Central Government (exercisable by SEBI also) to supersede the
governing body of a recognized stock exchange
6. The power to suspend business of recognized stock exchanges
7. The power to prohibit undesirable speculation

40

Securities Contract (Regulation) Act,

1956.
Call for Periodical Returns from members (Brokers)
Power of SEBI and Central Govt. to make inquiry

Contract and Option in Securities Contract by member (Broker) as a

principal
Penalties and procedures

41

Securities Contracts (Regulation) Rules,

1957
Rules are made for the purpose of implementing the objects of the SCRA

Formalities to be completed including submission of application for recognition of a stock

exchange

Qualification norms for membership of a recognized stock exchange

Mode of entering into contracts between members of a recognized stock exchange

Obligation of the governing body to take disciplinary action against a member, if so directed by
the SEBI

Audit of accounts of members

Maintaining and preserving books of accounts by every recognized stock exchange and by
every member

Submission of the annual report and periodical returns by every recognized stock exchange

Requirements with respect to listing of securities on a recognized stock exchange

Requirements with respect to the listing of units or any other instrument of a Collective Investment
Scheme on a recognized stock exchange

42

Securities Contracts (Regulation) Rules,

1957
Eligibility criteria for membership of a recognized stock exchange
Contract between members

Audit of accounts of members

Book of accounts of broker to be maintain for 5 years
Contract note/books, counterfoil of transaction to be maintain for 2 years

43

Public Shareholding in IPO : SCRR

19(2)(b)

25 %
400 Cr
10%

Issue <= 1600 cr

1600 cr < Issue size <= 4000 cr
Issue size > 4000 cr

In case public shareholding is less than 25 % at the time of IPO, company

has to increase public shareholding to 25% within three years of listing.

44

Compliance

45

Compliance
Certification / Verification / confirmation
Due Diligence

Audit

46

Compliance
Compliance means
conforming
by
registered intermediaries, and
issuer companies

To rules and regulations, notifications, guidelines and instructions issued by

SEBI,
stock exchanges,
depositories,
the Board of Directors (BoD) of the Company, and
other competent authorities.

47

Appointment of Compliance Officer

Appointed under
SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992,

SEBI (Intermediaries) Regulations, 2008

Independent Reporting to
Mandatory reporting: Periodic submission of reports as per provisions of
regulations

Critical Reporting: Compliance Officer must immediately and

independently report, any non-compliance observed, to SEBI and BOD.

48

Responsibilities of Cos to Stakeholders

External Stakeholders include Central Government, SEBI, Stock Exchanges
and other regulatory authorities like Registrar of Companies, Reserve Bank
of India, Income Tax, investors, issuers and other intermediaries.
Internal Stakeholders include the Board of Directors, Officers and
employees.

49

SEBI (Certification of Associated person

in Securities Markets) Regulation, 2007
The SEBI, delegates the following powers and functions to National Institute
of Securities Markets:
(a) The functions of NISM in respect of certification for associated persons in the
securities market shall include putting in place and implementing the certification
process, procedure and policies.
(b) NISM in consultation with SEBI may lay down standards which may, (i) specify that
all or any portion of such standards shall be applicable to all or any category of
associated persons working or associated with all or any class of intermediaries in
securities market; (ii) specify that no associated person in any such class may be
qualified to be employed or engaged or continued to be employed or engaged by
an intermediary unless he is in compliance with such standards of examination,
continuing professional education requirements and such other qualifications as
NISM in consultation with the SEBI may specify.

50

Manner of Obtaining NISM Certification

Principal
Passing the relevant certificate examination, as may be specified by NISM.
Successfully completing a related 2 day CPE Program5
Delivering at least four sessions in specific 2 day CPE program, as may be
specified by NISM.
Other than Principal (other than Principal who has attainted 50 years age and has
10 year experience)

Passing the relevant certificate examination, as may be specified by NISM.

Successfully completing a related 2 day CPE Program
Other
Passing the relevant certificate examination, as may be specified by NISM.

51

Validity and CPE

Certification valid for 3 years
Continuing Processional Education (CPE) for re validating for 3 years

52

SEBI (Prohibition of Insider Trading)

Regulations, 1992 / 2015

53

Key Definition
Insider : Any person who is or was a Connected Person or a Deemed to
be Connected Person and who is reasonably expected to have access to
unpublished price sensitive information in respect of securities of a
company or who has received or has had access to such unpublished
price sensitive information.
Connected Person : Director, KMP, Same management or group company,
Intermediaries involves such as Merchant Banker, Broker, banker, relative
etc.

54

Key Definition
Price sensitive information is any information which relates directly or indirectly
to a company and which if published, is likely to materially affect the price of
securities of that company. The following are deemed to be price sensitive
information:
Periodic financial results of the company.
Intended declaration of dividends (both interim and final).
Issue of securities or buy back of securities.

Any major expansion plans or execution of new projects.

Amalgamation, mergers or takeovers.
Disposal of the whole or substantial part of the undertaking.
Any significant changes in policies, plans or operations of the company.

55

Prohibition on Dealing, Communicating

or Counseling
Prohibition of Insider trading Regulations, prohibits
a connected or deemed to be connected person from dealing in securities
of company listed on any stock exchange, on his own behalf or on behalf
of any other person when in possession of unpublished price sensitive
information, and
from communicating, counseling or procuring, directly or indirectly any
unpublished price sensitive information to any person who while in
possession of such unpublished price sensitive information shall not deal in
securities.
However, the above restrictions do not apply to any communication required
in the ordinary course of business or under any law.

56

Disclosures and Internal Procedure

Prevention of Insider trading
All listed companies and organisations associated with securities markets
including the intermediaries as mentioned in section 12 of the SEBI Act,
AMC and trustee of the MFs, SROs, stock ex-changes, public financial
institutions and the professional firms such as auditors, accountancy firms,
law firms etc, shall frame a code of internal procedures and conduct.

57

Code of Conduct for Prevention of Insider

Trading
As per the SEBI Act, an organisation / firm needs to appoint a compliance
officer who is responsible for
setting forth policies and procedures
monitoring adherence to the rules for the preservation of Price Sensitive
Information,
pre-clearing of all designated employees and their dependents trades,
monitoring of trades and the implementation of the code of conduct under the
overall supervision of the partners / proprietors.

58

Prevention of Insider trading

Preservation of Price Sensitive Information and Need to Know
Chinese Wall

Pre-clearance of Trades
Reporting Requirement for Transactions in Securities
Restricted /Grey List

59

Prevention of Insider trading

Other Restrictions
Directors/designated employees/partners shall execute order within one week
after ap-proval of pre-clearance is given.

Directors/designated employees/partners shall hold their investments for a

minimum period of 30 days in order to be considered as being held for
investment purposes.
Where the securities are sold off before the holding period due to some
personal emergency, the Compliance officer shall waive off that period and
make a record in writing with the valid reason.

Analysts, if any, employed with the organisation/firm while preparing research

reports of a client company shall disclose their shareholdings /interest in such
company(s) to the Compliance Officer. Analysts who prepare research report
of a listed company shall not trade in securities of that company for thirty days
from preparation of such report.

60

SEBI (Prohibition of Fraudulent and Unfair

Trade Practices) Regulations, 2003

62

Fraud Reg. 2(1)(c)

Regulation 2(1) (c) defines fraud as inclusive of any act, expression,
omission or concealment committed to induce another person or his agent
to deal in securities. There may or may not be wrongful gain or avoidance
of any loss. However, that is inconsequential in determining if fraud has
been committed. Some of the instances cited are as follows:
a) A wilful misrepresentation of the truth or concealment of material fact in order
that an-other person may act, to his detriment
b) A suggestion as to a fact which is not true, by one who does not believe it to be
true
c) An active concealment of a fact by a person having knowledge or belief of the
fact
d) A promise made without any intention of performing it
e) A representation, whether true or false, made in a reckless and careless manner

63

Prohibition of Certain Dealing in Securities

Chapter II of the regulations prohibits certain dealings in securities covering buying,
selling or issuance of securities. The regulations prohibit a person to, directly or
indirectly:
buy, sell or deal in securities in a fraudulent manner;
use or employ in connection with issue, purchase or sale of any security listed or
proposed to be listed, any manipulative or deceptive device or contrivance in
contravention of the provisions of SEBI Act or rules or regulations made thereunder;
employ any device, scheme or artifice to defraud in connection with dealing in or issue
of any security listed or proposed to be listed;
engage in any act, practice, course of business which would operate as a fraud or
deceit in connection with any dealing in or issue of securities, which are listed or proposed
to be listed.
indulge in a fraudulent or an unfair trade practices in securities.

64

Prohibition of Manipulative, Fraudulent and

Unfair Trade Practices
Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud
and may include all or any of the following:

a) indulging in an act which creates false or misleading appearance of trading in the securities
market;

b) dealing in a security not intended to effect transfer of beneficial ownership but intended to
operate only as a device to inflate, depress or cause fluctuations in the price of such security for
wrongful gain or avoidance of loss;

c) advancing or agreeing to advance any money to any person thereby inducing any other
person to offer to buy any security in any issue only with the intention of securing the minimum
subscription to such issue;

d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or
moneys worth for inducing such person for dealing in any security with the object of inflating,
depressing, maintaining or causing fluctuation in the price of such se-curity;

e) any act or omission amounting to manipulation of the price of a security;

f) publishing or causing to publish or reporting or causing to report by a person dealing in

securities any information which is not true or which he does not believe to be true prior to or in
the course of dealing in securities;

65

Prohibition of Manipulative, Fraudulent

and Unfair Trade Practices

g) entering into a transaction in securities without intention of performing it or without intention of change of
ownership of such security;

h) selling, dealing or pledging of stolen or counterfeit security whether in physical or de-materialized form;

i) an intermediary promising a certain price in respect of buying or selling of a security to a client and waiting till a
discrepancy arises in the price of such security and retaining the difference in prices as profit for himself;

j) an intermediary providing his clients with such information relating to a security as can-not be verified by the
clients before their dealing in such security;

k) an advertisement that is misleading or that contains information in a distorted manner and which may
influence the decision of the investors;

l) an intermediary reporting trading transactions to his clients entered into on their behalf in an inflated manner in
order to increase his commission and brokerage;

m) an intermediary not disclosing to his client transactions entered into on his behalf in-cluding taking an option
position;

n) circular transactions in respect of a security entered into between intermediaries in or-der to increase
commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations
in the price of such security;

66

Prohibition of Manipulative, Fraudulent

and Unfair Trade Practices
o) encouraging the clients by an intermediary to deal in securities solely with the object of
enhancing his brokerage or commission;
p) an intermediary predating or otherwise falsifying records such as contract notes;
q) an intermediary buying or selling securities in advance of a substantial client order or
whereby a futures or option position is taken about an impending transaction in the same
or related futures or options contract;
r) planting false or misleading news which may induce sale or purchase of securities.
s) misselling of units of a mutual fund scheme. Mis-selling means sale of units of a mutual
fund scheme by any person, directly or indirectly by making false or misleading state-ment
or concealing or omitting material facts of a scheme or concealing the associated risk
factors of the scheme or not taking reasonable care to ensure suitability of the scheme to
the buyer.
t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or
causing to be carried on any collective investment scheme by any person.

67

Investigation - Regulation 8(1),

It shall be the duty of every person who is under investigation:
a) To produce books, accounts and documents that may be required by
the Investigating Authority and also to furnish statements and information
that is sought.
b) To appear before the Investigating Authority personally when required to
do so and to answer questions posed by the authority

68

SEBIs power to take actions Interim or

Final
SEBI may without prejudice to the provisions contained in sub-sections (1), (2),
(2A) and (3) of section 11 and section 11B of the SEBI Act, by an order in the
interests of the investors and the securities market issue or take any of the
following actions or directions either pending investigation or enquiry or on
completion of the investigation or enquiry namely
(a) Restrain persons from accessing the securities market,
(b) Impound and retain the proceeds or securities in respect of any
transaction which is in violation or prima facie in violation of these
regulations,
(c) Direct an intermediary or any person associated with the securities
market in any manner not to dispose of or alienate an asset forming part of
a fraudulent and unfair trans-action.

69

SEBI action against an intermediary:

Suspend the registration of the intermediary;
Cancel the registration of the intermediary.

70

SEBI (Intermediaries) Regulations,

2008

71

General Obligations of Intermediaries

The SEBI (Intermediaries) Regulations, 2008 prescribes that an intermediary
shall provide SEBI with a certificate of its compliance officer on the 1st of
April every year, certifying the compli-ance by the intermediary with all the
obligations, responsibilities and the fulfilment of the eligi-bility criteria on a
continuous basis under these regulations and the relevant regulations. The
intermediary also needs to display the copy of the certificate at all the
offices including the branch offices.
Appointment of Compliance Officer

72

Inspection and Disciplinary Proceedings

Obligation of the intermediary on Inspection
It shall be the duty of every director, proprietor, partner, trustee, officer, employee and any
agent of an intermediary which is being inspected, to produce to the inspecting au-thority
such books, accounts, records including telephone records and electronic re-cords and
documents in his custody or control and furnish to the inspecting authority with such
statements and information relating to its activities within such time as the in-specting
authority may require.
2. The intermediary shall allow the inspecting authority to have reasonable access to the
premises occupied by such intermediary or by any other person on its behalf and also
extend reasonable facility for examining any books, records including telephone records
and electronic records and documents in the possession of the intermediary or any such
other person and also provide copies of documents or other material which in the opin-ion
of the inspecting authority are relevant for the purposes of the inspection.
Appointment of Auditor : SEBI may also appoint a qualified auditor to inspect the books of
account of the affairs of an in-termediary. The SEBI may also appoint a qualified valuer or
direct a qualified valuer to be ap-pointed by the intermediary, if so considered necessary.

73

Action in Case of Default and Manner of

Suspension and Cancellation of Certificate

Hearing
Opportunity
Show-Cause
Notice 21
Days
Enquire

Non
Compliance

Order /
Ex-parte
order

74

Action in case of Default

(i) Suspension of certificate of registration for a specified period;
(ii) Cancellation of certificate of registration;

(iii) Prohibiting the noticee to take up any new assignment or contract or

launch a new scheme for the period specified in the order;
(iv) Debarring a principal officer of the noticee from being employed or
associated with any registered intermediary or other registered person for
the period specified in the order;

75

Directions
SEBI may, in the interest of the securities market, in the interest of the investors or for the
purpose of securing the proper management of any intermediary, issue, necessary direction
including but not limited to the following a) directing the intermediary or other persons associated with securities market to refund
any money or securities collected from the investors under any scheme or otherwise, with
or without interest;
b) directing the intermediary or other persons associated with securities market not to access the capital market or not to deal in securities for a particular period or not to associate with any intermediary or with any capital market related activity;
c) directing the recognized stock exchange concerned not to permit trading in the securities or units issued by a mutual fund or collective investment scheme;
d) directing the recognized stock exchange concerned to suspend trading in the securities
or units issued by a mutual fund or collective investment scheme;
e) any other direction which SEBI may deem fit and proper in the circumstances of the
case.

76

Code of Conduct
High Standards of Service

Conflict of Interest
Compliance and Corporate Governance

77

Prevention of Money Laundering

Act, 2002

78

Prevention of Money Laundering Act,

2002
Effective
July 1, 2005
Objective
prevent money laundering
to provide for confiscation of property derived from or
involved in, money- laundering, and
for matter connected therewith or incidental thereto
Authority

Directorate of Enforcement in the Department of

Revenue, Ministry of Finance
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Offence of Money laundering - Sec. 3

Whosoever
directly or indirectly attempts to indulge,
knowingly assists,

knowingly is a party, or
is actually involved

in any process or activity connected with the proceeds of crime including

its concealment,

possession,

acquisition, or

use

and projecting or claiming it as untainted property

shall be guilty of offence of money - laundering

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Punishment for money laundering

Sec. 4
Rigorous imprisonment for a term which shall not be less than three years
but which may extent to seven years (ten years in case of offense specified
under para 2 of Part A of the Schedule), and

shall also liable to fine

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Enforcement Powers under PMLA

Attachment of property
Survey

Search and Seizure/freeze records & property

Search of Person
Arrest a Person
summon and record the statements of persons

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Action under Act

Order of Confiscation
Passed by Adjudicating Authority
Effect: all the right and title of property shall best absolutely in Central
Government free from all encumbrances

Order under Sec. 4

Passed by Special Court (Session Courts which are designated as such under this
Act)
Effect: imprisonment and fine

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Burden of proof Sec. 24

In any proceeding relating to proceeds of crime under this Act :
In case of a person charged with the offence of money-laundering under
section 3, the Authority or Court shall, unless the contrary is proved, presume that
such proceeds of crime are involved in money laundering, and
In the case of any other person, the Authority or Court may presume that such
proceeds of crime are involved in money-laudering

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Provision for protection - 62

Any authority or officer exercising power under this Act or any rule made
thereunder, for search or arrest of any person,
without reason record in writing
Shall for every such offence be liable for conviction for imprisonment upto
two years or fine upto fifty thousand rupees or both.

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Obligation of Bank/FI/Intermediaries
Reporting Entities (Sec 2(wa)): means
Banking company,
Financial institution,
Intermediaries, or
A person carrying on a designated business or profession

Every reporting entity shall (Sec 12):

Maintain a record of all transactions,
Furnish to director information relating to such transaction, whether attempted or executed,
the nature and value of which may be prescribed
Verify the identity of its clients
Identify the beneficial owner, if any, of such of its client
Maintain record of documents evidencing identity of its client and beneficial owner as well
as account files and business correspondence relating to its clients

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Obligation of Bank/FI/Intermediaries
Maintain a record of all transactions which include:
All cash transactions of the value of more than Rs. 10 lakh or its equivalent
in foreign currency.

All series of cash transactions integrally connected to each other which

have been valued below Rs. 10 lakh or its equivalent in foreign currency
where such series of transactions take place within one calendar month
and the aggregate value of such transaction exceeds Rs. 10 lakh.
All suspicious transaction whether or not made in cash. For the purpose of
suspicious transactions apart from transactions integrally connected,
transactions remotely connected or related shall also be considered.
The records have to be maintained for a period of 10 years from the date of
cessation of the transactions

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Power to impose fine

Director, under the Act, may
Make inquiry with regard to the obligation of reporting authority
May direct to get its records audited by an accountant from a panel maintained
by Govt.

Director finds that a reporting entity or its designated director on the Board
or any of its employee has failed to comply with obligations, he may
Issue a warning
Direct to comply with specific instruction
Direct to send reports at such interval as may be prescribed
By order impose a monetary penalty on reporting entity, its designated director,
or any of its employee not be less than 10,000 but may extend to one lakh.
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Protection to Reporting Authority

No civil or criminal proceeding against reporting entity, its director and
employee for furnishing information

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Highlights of SEBI Circular on Anti-Money

Laundering
Obligation to establish policies and procedures - Senior Management
Policies and Procedures Coverage
Written Anti-Money Laundering Procedures
(a) Policy for acceptance of clients
(b) Procedure for identifying the clients
(c) Transaction monitoring and reporting especially Suspicious Transactions Reporting
(STR)

Client Due Diligence

Client Identification Procedure (CIP) - Know your Client (KYC) policy
Record Keeping
Monitoring of Transactions

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Client Due Diligence

Obtaining sufficient information in order to identify persons who beneficially own or control
securities account.

Verify the customers identity using reliable, independent source documents, data or information;

Identify beneficial ownership and control, i.e. determine which individual(s) ultimately own(s) or
control(s) the customer and/or the person on whose behalf a transaction is being conducted;

Verify the identity of the beneficial owner of the customer and/or the person on whose behalf a
transaction is being conducted, corroborating the information provided in relation to (c);

Conduct ongoing due diligence and scrutiny, i.e. perform ongoing scrutiny of the transactions
and account throughout the course of the business relationship

knowledge of the customer, its business and risk profile, taking into account, where necessary,
the customers source of funds;

Understand the ownership and control structure of the client; and

Periodically update all documents, data or information

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Suspicious Transaction Monitoring &

Reporting
Suspicious Transaction Monitoring & Reporting
Clients whose identity verification seems difficult or clients that appear not to cooperate;
Asset management services for clients where the source of the funds is not clear or not in
keeping with clients apparent standing /business activity;
Clients based in high risk jurisdictions;
Substantial increases in business without apparent cause;
Clients transferring large sums of money to or from overseas locations with instructions for
payment in cash;

Attempted transfer of investment proceeds to apparently unrelated third parties;

Reporting to Financial Intelligence Unit-India

Cash Transactions Reports should be submitted to FIU-IND by 15th of the succeeding month.
The Suspicious Transaction Report (STR) shall be submitted within 7 days of arriving at a
conclusion that any transaction, is of suspicious nature.

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Thank You

Nitesh Bhati, Faculty, NISM