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Securities Exchange Board of India (SEBI) was set up to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock
market but initially SEBI was not able to exercise complete control over the stock
market transactions. SEBI is a body corporate having a separate legal existence and
perpetual succession.

The Securities and Exchange Board of India was set up in 1988, it was left as a watch
dog to observe the activities but was found ineffective in regulating and controlling
them. As a result on April 12, 1992, SEBI was granted legal status in accordance with
the provisions of the Securities and Exchange Board of India Act, 1992.


With the growth in the dealings of stock markets, lot of malpractices also started in
stock markets such as price rigging, unofficial premium on new issue, and delay in
delivery of shares, violation of rules and regulations of stock exchange and listing
requirements. Due to these malpractices the customers started losing confidence and
faith in the stock exchange. So government of India decided to set up an agency or
regulatory body known as Securities Exchange Board of India (SEBI).

The Preamble of the Securities and Exchange Board of India describes the basic
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" protect the interests of investors in securities and to promote the

development of, and to regulate the securities market and for matters connected
therewith or incidental thereto"

SEBIThese Guidelines have been issued by the Securities and Exchange Board of India
under Section 11 of the Securities and Exchange Board of India Act, 1992.
(a) These Guidelines may be called the Securities and Exchange Board of India
(Disclosure and Investor Protection) Guidelines, 2000.
(b) These Guidelines shall come into force from the date specified by the Board.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote
the development of stock exchange and to regulate the activities of stock market. The
objectives of SEBI are:
1) To regulate the activities of stock exchange.
2) To protect the rights of investors and ensuring safety to their investment.
3) To prevent fraudulent and malpractices by having balance between self
regulation of business and its statutory regulations.
4) To regulate and develop a code of conduct for intermediaries such as brokers,
underwriters, etc.

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Organisational Structure of SEBI:

SEBI is managed by six members one chairman (nominated by Central
Government), two members (officers of central ministries), one member (from RBI)
and remaining two members nominated by Central Government.
1) SEBI is working as a corporate sector.
2) Its activities are divided into five departments. Each department is headed by
an executive director.
3) The head office of SEBI is in Mumbai and it has branch office in Kolkata,
Chennai and Delhi.
4) SEBI has formed two advisory committees to deal with primary and secondary
5) These committees consist of market players, investors associations and
eminent persons.
Objectives of the two Committees are:

To advise SEBI to regulate intermediaries.

To advise SEBI on issue of securities in primary market.
To advise SEBI on disclosure requirements of companies.
To advise for changes in legal framework and to make stock exchange more

5) To advise on matters related to regulation and development of secondary stock
These committees can only advise SEBI but they cannot force SEBI to take action on
their advice.


SEBI has to be responsive to the needs of three groups, which constitute the market:

The issuers of securities

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The investors

The market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and
quasi-executive. It drafts regulations in its legislative capacity, it conducts
investigation and enforcement action in its executive function and it passes rulings
and orders in its judicial capacity. Though this makes it very powerful, there is an
appeals process to create accountability. There is a Securities Appellate Tribunal
which is a three-member tribunal and is presently headed by a former Chief Justice of
a High court -Mr. Justice N.K.Sodhi. A second appeal lies directly to the Supreme
Court. SEBI has enjoyed success as a regulator by pushing systemic reforms
aggressively and successively. SEBI has been active in setting up the regulations as
required under law. SEBI has also been instrumental in taking quick and effective
steps in light of the global meltdown and the Satyam fiasco. It had increased the
extent and quantity of disclosures to be made by Indian corporate promoters. More
recently, in light of the global melt down, it liberalised the takeover code to facilitate
investments by removing regulatory structures. In one such move, SEBI has increased
the application limit for retail investors to Rs 2 lakh, from Rs 1 lakh at present.

Powers of SEBI:
For the discharge of its functions efficiently, SEBI has been invested with the
necessary powers which are:
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1. To approve bylaws of stock exchanges.

2. To require the stock exchange to amend their bylaws.

3. Inspect the books of accounts and call for periodical returns from recognised
stock exchanges.

4. Inspect the books of accounts of a financial intermediary.

5. Compel certain companies to list their shares in one or more stock exchanges.

6. Levy fees and other charges on the intermediaries for performing its functions.

7. Grant licence to any person for the purpose of dealing in certain areas.

8. Delegate powers exercisable by it.

9. Prosecute and judge directly the violation of certain provisions of the

companies Act.

Functions of SEBI

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One of the key functions of the Board is to supervise and monitor the activities of the
exchanges, clearing houses and the settlement system, strengthen market
infrastructure and ensure that appropriate risk management systems are in place.
a) Inspection of Stock Exchanges: On-site supervision through inspection of
stock exchanges is considered an effective regulatory tool. Under the policy of
risk-based supervision which has been adopted from the year under review,
stock exchanges having a significant turnover were taken up for onsite
inspection. These were The Bombay Stock Exchange ( BSE), Calcutta Stock
Exchange (CSE), National Stock Exchange (NSE), Inter Connected Stock
Exchange( ISE), Ludhiana Stock Exchange

(LSE), Hyderabad Stock

Exchange (HS E ) and Ahmadabad Stock Exchange (ASE).

The objectives of the inspection were to ensure that i. The exchange provides a fair, equitable and growing market to

the exchange has complied with the conditions, if any, imposed on it at
the time of renewal/ grant of its recognition under section 4 of the


SC(R) Act, 1956.

The exchanges organization, systems and practices are in accordance
with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and


rules framed thereunder,

The exchange has implemented the directions, guidelines and


instructions issued by the SEBI from time to time,

There are adequate internal control mechanisms and risk management

A Special inspection of Calcutta Stock Exchange (CSE), Uttar Pradesh Stock

Exchange (UPSE), Ludhiana Stock Exchange (LSE) and Jaipur Stock
Exchange (JSE) was also carried out during the year.
The post inspection follow up was also strengthened through -

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Increase in periodicity of review of compliance reports.

Mandating review of action taken on the report by a sub-committee of the
Governing Board of the stock exchanges at least twice each quarter and


submission of the review to the Governing Board of the exchange.

Issue of letters of displeasure for failure to comply with the previous


inspection reports and unsatisfactory compliance.

Personal meetings to discuss the status of implementation of findings of
inspection reports.

b) Inspection of Subsidiaries of Stock Exchanges: A Six subsidiaries of stock

exchanges were inspected during the financial year 2002-03 viz ASE Ca p i t
a l Ma r k e t s



Subsidiary of ASE), ISE Securities &

Services Ltd (ISS - Subsidiary of ISE), LSE Securities Ltd


Subsidiary of LSE) , HSE Securities Ltd (HSESL - Subsidiary of HSE),

SKSE Securities Ltd (SKSESL - Subsidiary of Saurashtra Kutch Stock
Exchange) and VSE Securities Ltd (VSL- Subsidiary of Vadodara Stock
Exchange). A special inspection of MPSE Securities Ltd (MPSESL
Subsidiary of MPSE) was carried out. Follow up action included discussion
with the parent exchanges of the subsidiaries. Letters of displeasure were
issued to the parent stock exchanges of those subsidiaries for which findings











suggestions/observations of inspection reports.

c) Restructuring of Management of Subsidiaries: The inspection of the
subsidiaries of stock exchanges revealed deficiencies in their functioning and
risk management systems The management structure of the subsidiaries
needed to undergo change in order to enable them to be able to provide a safe
and transparent market and effectively discharge their
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investor protection. A Circular dated February 11, 2003 has,

therefore, been issued to stock exchanges directing them to carry out the
changes in management structure of their subsidiaries.
d) Illegal Trading in Securities: It had come to the notice of the SEBI that
certain persons were engaging in trading in securities outside the purview of
the stock exchanges (illegal trading in securities). Such trading particularly
in Gujarat has come to be known as DABBA trading. There were also reports
in the media regarding illegal use of terminals provided to the brokers by the
National Stock Exchange in Kolkata and other places. Media had also reported
Kerb trading in the cities of Kanpur, Kolkata, Mathura, Ahmadabad, Rajkot
and Mumbai. Since these activities are illegal and pose a systemic risk besides
luring common investors into the net the Board tool immediate action by
sending t e a m s t o some cities of Gujarat viz . Ahmadabad, Vadodara
and Rajkot to conduct surprise inspections. Since it is not possible to identify
the persons who carry on these activities the Chief Ministers of all the States
were requested through letters and reminders to use the local police force to
check these illegal activities. NSE, BSE and other Stock Exchanges were
altered to verify involvement of their members and take coercive action. The
public were also cautioned through a notice issued in the newspapers in
English, Hindi and major regional languages about the illegal activities and
educating them about the perils of such illegal trades.

2) Registration and Regulation of the Working of Intermediaries

In order to interpose between issuers and investors, regulators recognize various
classes of intermediaries in the capital market. Regulation through intermediaries has
been found, perhaps more effective

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certain spheres of activity. SEBI, over the

period, recognized many types of capital market intermediaries in India and

operations during the year is reviewed in the following sections.
a) Primary Market: Intermediaries such as merchant bankers, underwriters,
debenture trustees, bankers to an issue, registrars to an issue and share transfer
agents and portfolio manager are the intermediaries that function in the inter
alia in the primary markets. From the below Table it may be seen that number
of registered intermediaries declined (except for portfolio managers) as a
result of, consolidation of intermediary activities, enhanced compliance and
disclosure systems and the general down trend in the primary markets.
Variation in Nos.
Category I
Registrar to an
issue and Share
Category II
Transfer Agent
Banker to an Issue
Debenture Trustee
Merchant Banker
Portfolio Manager
b) Secondary Market: Brokers are one of the most important links between the
Type of intermediary

investors and the market. Their association with the stock exchanges and
investors dates back to as early as nineteenth century.
Broker Registration details of registered brokers:
Total No. of
Brokers as on

during the
year 20022003

Reconciliation Cancellation/
Surrender of

Total No. of
Brokers as on

Exchange wise, and their composition, and ownership pattern. There are 3835
corporate brokers in India as on March 31, 2003 and they constituted about 40
per cent of total brokers. Percentage of corporate brokers is found to be at the
highest at NSE, OTCEI and BSE at 89 per cent, 76 and 67 per cent
respectively and together constitute over fifty percent of the corporate brokers
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in all exchanges. NSE and BSE together have over one-third of corporate
brokers between them. On the smaller exchanges such as Guwahati and
Jaipur percentage of corporate brokers are negligible. The composition of
membership has been shifting to the corporate entities over the years.
MULTIPLE MEMBERSHIPS: Entities are allowed to obtain membership at
more than one stock exchange.
The multiple memberships range between two to six. It may be seen that 854
entities have membership at two exchanges while 3 entities have membership
at 6 exchanges. About ten per cent of the total brokers have multiple
Sub-Broker Registration: Sub brokers are intermediaries between
the broker and the investor. SEBI Requirements include registration of
sub-brokers through the stock exchanges at which the broker is a
c) Registration of FIIs: As at March 31, 2003 there were 502 FIIs and 1361
sub-accounts registered with SEBI. During the year 49 FIIs were granted fresh
registration whereas 34 FIIs were granted renewal of registration. 163 subaccounts got registered and the registration of 71 sub-accounts was renewed.

d) Registration of Custodian of Securities: Eleven entities stood registered as

custodian of securities as of March 31, 2003 compared to 12 entities as of
March 31, 2002.



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a) Registration of Collective Investment Schemes (CIS): Subsequent to the

notification of Regulations, SEBI had received applications for grant of
registration from 50 CIS entities. Out of these 50 CIS entities, SEBI had
granted provisional registration to six CIS entities, while applications of
44 CIS entities were rejected and they were ordered to wind up their schemes
and make repayment to their investors. During the year 2002-2003, the
provisional registration granted to one CIS entity expired. Thus, the total
number of provisionally registered CIS entities is five.
In terms of Regulations, an existing collective investment scheme which has
i. failed to make an application for registration to the Board;
ii. not been granted provisional registration by the Board;
having obtained provisional registration fails to comply with the

provisions of Regulation 71;

is not desirous of obtaining provisional registration;

Is required to wind up its existing schemes, make repayment to the investors

and thereafter submit Winding up and Repayment Report


has received Winding up and Repayment Report from 57 CIS entities.

Prosecution under Section 24 of SEBI Act, 1992 has been filed by SEBI
against 139 erring CIS entities. Other actions such as debarring the promoters/
directors/ managers/ persons in charge of the business of the scheme from
operating in the capital market; writing to the State Governments to register
civil/ criminal cases against the erring entities for apparent offences of fraud,
cheating criminal breach of trust and misappropriation of public funds; writing
to the Department of Company Affairs to initiate the process of winding up of
the erring 555 CIS entities has also been taken up. Requests




police authorities to file the First Information Reports against 49

CIS entities for offences such as criminal breach of trust, cheating, etc. In
CWP No. 3352/98 in the matter of Shri. S. D Bhattacharya and others vs.
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SEBI, the Honourable High Court, and Delhi impleaded all the CIS entities.
Earlier, the court had, inter-alia, restrained them from selling, disposing of and
/or alienating their immovable properties or parting with the possession of the
same. Their directors had also been interdicted from transferring their
immovable property in any manner whatsoever. The Honourable High Court
also made it clear that its order will not come in the way of companies
intending to refund the money to their investors. In an order dated January 22,
2002, the Honourable High Court h a s ordered to freeze the bank accounts
of 513 erring CIS entities and their directors/promoters till they comply with
the regulations / SEBI Directions regarding repayment to their investors.

b) Mutual Funds Registered with SEBI: During the year, registration was
granted to two new mutual funds in the private sector viz HSBC Mutual Fund
and Deutsche Mutual Fund. With the enactment of the UTI (Repealment
Ordinance), the UTI was divided into the UTI-I and UTI-II. UTI-II known as
UTI Mutual Fund was registered with SEBI on January 14, 2003. During the
year 2002-03, the certificate of registration granted to two mutual funds was
cancelled viz JF Mutual Fund (formerly known as Jardine Fleming Mutual
Fund) and Pioneer ITI Mutual Fund (formerly known as Kothari Pioneer
Mutual Fund). In case of JF Mutual Fund, the schemes were taken over by Sun
F&C Mutual Fund whereas the schemes of Pioneer ITI Mutual Fund were
merged with Templeton Mutual Fund.
c) Venture Capital Funds:

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Domestic and Foreign Venture Capital Funds: During the year, registration
was granted to nine new domestic venture capital funds (DCVFs). Registration
was also granted to four foreign Venture Capital Investors (FVCIs).







a) Development of Stock Exchanges as Self Regulatory Organisations: There
are 23 stock exchanges recognized under Section 4 of the Securities Contracts
(Regulation) Act, 1956.These exchanges were recognized /set up over a period
of time to stimulate growth of capital market through channelizing the savings
of individuals and small investors. These exchanges are suitably empowered
by the section 9 of SC(R)A, 1956 to make bye laws for the conduct of
business, regulation and control of contracts.
SEBI is contemplating development of Self Regulatory Organizations (SROs)
for market intermediaries. Stock exchanges are already acting as SROs and the
SRO structure needs to be strengthened further. The objective for promoting
intermediaries like Stock Exchanges as Self Regulatory Organizations (SROs)
is that since they have a better feel on the ground reality, they should take care
of the micro aspects of regulation. The other inherent advantages of self
regulation are:
i. Self regulation becomes the responsibility of market professionals and

may result in greater acceptance of rules by the members of SRO.

It also provides market players with greater flexibility to respond to


securities market.
It avoids duplication of responsibilities: it is observed over years of
experience that if the regulatory body gets into micro regulation, it
loses the sight of fundamentals and lands up in duplication of
responsibilities, besides.

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SROs are expected to have a better understanding of ground realities.

However, for any organization /body like Stock Exchange to effectively

function as an SRO, it is necessary that it has the capacity to enforce
compliance to byelaws, rules and regulations laid down by itself. Further,
these SROs should be able to enforce and establish rules which prevent
fraudulent and manipulative trade practices and promote just and equitable
principles of trade. Presently such powers are conferred to the exchanges by
the section 9 of SC(R)A, 1956 whereby they can make bye laws for the
conduct of business, regulation and control of contracts. However, developing
Stock Exchanges as Self Regulatory Organizations and enhancing their
effective regulatory role puts additional responsibility on SEBI to ensure that
SROs are efficiently carrying out/conducting their monitoring responsibilities.


SEBI took up investigations in 122 cases in 2002-03 bringing the total cases taken up
for investigation till end of this financial year to 654 cases. Of these 122 cases,
investigation into 102 cases has been completed during 2002-2003.


a) Securities Market Awareness Campaign: SEBI, launched the nation-wide
Securities Market Awareness Campaign to empower investors with education
in the securities market in a ceremony held at Vigyan Bhawan, New Delhi on
January 17, 2003. The campaign was inaugurated by Shri A.B. Vajpayee,
Honourable Prime Minister, and Republic of India. Shri Jaswant Singh,
Honourable Union Minister for Finance and Company Affairs delivered the

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keynote address. Several prominent personalities contributing to the growth

of the Indian Securities Market and other eminent personalities were also
present. The inaugural session of the programme featured a curtain raiser
audio visual encompassing the theme of the campaign Empowering Investors
A SEBI Initiative. It showed that people in India have respect for money
but treat it with a little knowledge. A mnemonic especially created by Shri
R.K. Laxman, for the SEBI campaign was also unveiled by Honourable Prime
Minister. The inaugural session was followed by three technical sessions
where in

discussions emphasising empowerment of investors through

education and the roles played by intermediaries, issuers and professionals in

investor education were held by eminent personalities. This campaign is
expected to sustain the felt need for investor education and awareness across
the country.
During the year 2002-03, 13 cases of alleged insider trading were taken up for
investigation. A total of 14 cases of insider trading were completed during the
financial year.


During the 2002-03, 83 cases were referred for adjudication under section 15 of SEBI
Act, 1992 for alleged violation of the provisions of SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 and a total of Rs. 73,95,000/- was received
towards monetary penalties.


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Conditions for issue of securities

(The companies issuing securities offered through an offer document shall satisfy the
following at the time of filing the draft offer document with SEBI30 and also at the
time of filing the final offer document with th Registrar of Companies/ Designated
Stock Exchange :)

Filing of offer document

1) No company shall make any issue of a public issue of securities, unless a draft
prospectus has been filed with the Board, through an eligible Merchant Banker,
atleast 21 days prior to the filing of Prospectus with the Registrar of Companies
Provided that if, within 21 days from the date of submission of draft
Prospectus, the Board specifies changes, if any, in the draft Prospectus
(without being under any obligation to do so), the issuer or the Lead Merchant
banker shall carry out such changes in the draft prospectus before filing
the prospectus with ROCs.

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2) (No listed company shall make any issue of security through a rights issue where
the aggregate value of securities, including premium, if any, exceeds Rs.50 lacs,
unless the letter of offer is filed with the Board, through an eligible Merchant
Banker, at least 21 days prior to the filing of the Letter of Offer with Regional
Stock Exchange (RSE).

Provided that if, within 21 days from the date of filing of draft letter of
offer, the Board specifies changes, if any, in the draft letter of offer,
(without being under any obligation to do so), the issuer or the Lead
Merchant banker shall carry out such changes before filing the draft letter
of offer with RSE.)

3) Companies barred not to issue security:

No company shall make an issue of securities if the company has been
prohibited from accessing the capital market under any order or direction
passed by the Board.
4) Application for listing:
No company shall make any public issue of securities unless it has made
an application for listing of those securities in the stock exchange (s).
5) Issue of securities in dematerialised form
a) No company shall make public or rights issue or an offer for sale of
securities, unless:
i. The company enters into an agreement with a depository for
dematerialisation of securities already issued or proposed to be
issued to the public or existing shareholders;

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The company gives an option to subscribers/ shareholders/

investors to receive the security certificates or hold securities in
dematerialised form with a depository.

A depository shall mean a depository registered with the Board under
the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996.

Initial Public Offerings by Unlisted Companies

1) An unlisted company may make an initial public offering (IPO) of equity
shares or any other security which may be converted into or exchanged with
equity shares at a later date, only if it meets all the following conditions:
a) The company has net tangible assets of at least Rs. 3 crores in each of
the preceding 3 full years (of 12 months each), of which not more than
50% is held in monetary assets:
Provided that if more than 50% of the net tangible assets are held in
monetary assets, the company has made firm commitments to deploy
such excess monetary assets in its business/project;
b) The company has a track record of distributable profits in terms of
Section 205 of the Companies Act, 1956, for at least three (3) out of
immediately preceding five (5) years;
Provided further that extraordinary items shall not be considered for
calculating distributable profits in terms of Section 205 of Companies
Act, 1956;

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c) The company has a net worth of at least Rs. 1 crore in each of the
preceding 3 full years (of 12 months each);
d) In case the company has changed its name within the last one year,
atleast 50% of the revenue for the preceding 1 full year is earned by the
company from the activity suggested by the new name; and
e) The aggregate of the proposed issue and all previous issues made in the
same financial year in terms of size (i.e., offer through offer document
+ firm allotment + promoters contribution through the offer
document), does not exceed five (5) times its pre-issue net worth as per
the audited balance sheet of the last financial year.)

2) An unlisted company not complying with any of the conditions specified in

Clause 2.2.1 may make an initial public offering (IPO) of equity shares or any
other security which may be converted into or exchanged with equity shares at
a later date, only if it meets both the conditions (a) and (b) given below:
a) The issue is made through the book-building process, with at least 50%
of the issue size being allotted to the Qualified Institutional Buyers
(QIBs), failing which the full subscription monies shall be refunded.
The project has at least 15% participation by Financial Institutions/
Scheduled Commercial Banks, of which at least 10% comes from the
appraiser(s). In addition to this, at least 10% of the issue size shall be
allotted to QIBs, failing which the full subscription monies shall be
b) The minimum post-issue face value capital of the company shall be Rs.
10 crores.

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There shall be a compulsory market-making for at least 2 years from

the date of listing of the shares, subject to the following:
i. Market makers undertake to offer buy and sell quotes for a

minimum depth of 300 shares;

Market makers undertake to ensure that the bid-ask spread
(difference between quotations for sale and purchase) for their


quotes shall not at any time exceed 10%.

The inventory of the market makers on each of such stock
exchanges, as on the date of allotment of securities, shall be at
least 5% of the proposed issue of the company.)

A. An unlisted public company shall not make an allotment pursuant to a public

issue or offer for sale of equity shares or any security convertible into equity
shares unless, in addition to satisfying the conditions mentioned in Clause
2.2.1 or 2.2.2 as the case may be, the prospective allottees are not less than one
thousand (1000) in number.)
B. For the purposes of clauses 2.2.1 and 2.2.2 above:
a) Net Tangible Assets shall mean the sum of all net assets of the
company, excluding intangible assets, as defined in Accounting
Standard 26 (AS 26) issued by the Institute of Chartered Accountants
of India.
b) Project means the object for which the monies proposed to be raised
to cover the objects of the issue.
c) In case of partnership firms which have since been converted into
companies, the track record of distributable profits of the firm shall be
considered only if the financial statements of the partnership business
for the said years conform to and are revised in the format prescribed
for companies under the Companies Act, 1956 and also comply with
the following:

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adequate disclosures are made in the financial statements as

required to be made by the companies as per Schedule VI of the


Companies Act, 1956;

the financial statements shall be duly certified by a Chartered
Accountant stating that:
The accounts as revised or otherwise and the disclosures
made are in accordance with the provisions of Schedule
VI of the Companies Act, 1956; and
The accounting standards of the Institute of Chartered
Accountants of India (ICAI) have been followed and
that the financial statements present a true and fair

picture of the firms accounts.

d) In case of an unlisted company formed out of a division of an existing
company, the track record of distributable profits of the division spun
off shall be considered only if the requirements regarding financial
statements as specified for partnership firms in sub-clause (iv) above
are complied with.
e) Qualified Institutional Buyer shall mean:
i. public financial institution as defined in section 4A of the

Companies Act, 1956;

scheduled commercial banks;
mutual funds;
foreign institutional investor registered with SEBI;
multilateral and bilateral development financial institutions;
venture capital funds registered with SEBI;
foreign venture capital investors registered with SEBI;
state industrial development corporations;
insurance companies registered with the Insurance Regulatory

and Development Authority (IRDA);

x. Provident funds with minimum corpus of Rs. 25 crores.
xi. Pension funds with minimum corpus of Rs. 25 crores).

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3) Offer for sale: (An offer for sale shall not be made of equity shares of a
company or any other security which may be converted into or exchanged
with equity shares of the company at a later date, unless the conditions laid
down in clause 2.2.1 or 2.2.2, as the case may be and in clause 2.2.2A, are
4) Offer for sale can also be made if provisions of clause 2 are complied at the time
of submission of offer document with Board.

Public Issue by Listed Companies

1) A listed company shall be eligible to make a public issue of equity shares or
any other security which may be converted into or exchanged with equity
shares at a later date:
Provided that the aggregate of the proposed issue and all previous issues
made in the same financial year in terms of size (i.e., offer through offer
document + firm allotment + promoters contribution through the offer
document), issue size does not exceed 5 times its pre-issue net worth as per the
audited balance sheet of the last financial year.
Provided (further) that in case there is a change in the name of the issuer
company within the last 1 year (reckoned from the date of filing of the offer
document), the revenue accounted for by the activity suggested by the new
name is not less than 50% of its total revenue in the preceding 1 full-year
2) A listed company which does not fulfil the conditions given in the provisos to
Clause 2.3.1 above shall be eligible to make a public issue, subject to
complying with the conditions specified in clause 2.2.

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Exemption from Eligibility Norms

1) The provisions of clauses (2.2 and 2.3) shall not be applicable in case of:
a) A banking company including a Local Area Bank (hereinafter referred
to as Private Sector Banks) set up under sub-section (c) of Section 5 of
the Banking Regulation Act, 1949 and which has received license from
the Reserve Bank of India; or
b) A corresponding new bank set up under the Banking Companies
(Acquisition and Transfer of Undertaking) Act, 1970 Banking
Companies (Acquisition and Transfer of Undertaking) Act, 1980, State
Bank of India Act 1955 and State Bank of India (Subsidiary Banks)
Act, 1959 (hereinafter referred to as public sector banks);
c) An infrastructure company:
i. whose project has been appraised by a Public Financial
Institution (PFI) or Infrastructure Development Finance
Corporation (IDFC) or Infrastructure Leasing and Financing

Services Ltd. (IL&FS) or a bank which was earlier a PFI;

Not less than 5% of the project cost is financed by any of the
institutions referred to in sub-clause (a), jointly or severally,
irrespective of whether they appraise the project or not, by way

of loan or subscription to equity or a combination of both;

d) Rights issue by a listed company.

Credit Rating for Debt Instruments

1) No issuer company shall make a public issue or rights issue of debt
instruments (whether convertible or not), unless the following conditions are
also satisfied, as on date of filing of draft offer document with SEBI and also

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on the date of filing a final offer document with ROC/ Designated Stock
Credit rating of not less than investment grade is obtained from not less
than two credit rating agencies registered with SEBI and disclosed in
the offer document;
The company is not in the list of willful defaulters of RBI;
The company is not in default of payment of interest or repayment of
principal in respect of debentures issued to the public, if any, for a
period of more than 6 months.
2) An issuer company shall not make an allotment of non-convertible debt
instrument pursuant to a public issue if the proposed allottees are less than
fifty (50) in number. In such a case the company shall forthwith refund the
entire subscription amount received. If there is a delay beyond 8 days after the
company becomes liable to pay the amount, the company shall pay interest
@15% p.a. to the investors.)
3) Where credit ratings are obtained from more than two credit rating agencies,
all the credit rating/s, including the unaccepted credit ratings, shall be
4) All the credit ratings obtained during the three (3) years preceding the pubic or
rights issue of debt instrument (including convertible instruments) for any listed
security of the issuer company shall be disclosed in the offer document.

Outstanding Warrants or Financial Instruments

No unlisted company shall make a public issue of equity share or any security
convertible at later date into equity share, if there are any outstanding financial
instruments or any other right which would entitle the existing promoters or shareholders
any option to receive equity share capital after the initial public offering.
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Partly Paid-up Shares

No company shall make a public or rights issue of equity share or any security
convertible at later date into equity share, unless all the existing partly paid-up shares
have been fully paid or forfeited in a manner specified in clause 8.6.2.

Means of Finance
No company shall make a public or rights issue of securities unless firm arrangements
of finance through verifiable means towards 75% of the stated means of finance,
excluding the amount to be raised through proposed Public/ Rights issue, have been

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1) A company proposing to issue capital to public through the on-line system of

the stock exchange for offer of securities shall comply with the requirements
as contained in this Chapter in addition to other requirements for public issues
as given in these Guidelines, wherever applicable.
2) Agreement with the Stock exchange
a) The Company shall enter into an agreement with the Stock
Exchange(s) which have the requisite system of on-line offer of
b) The agreement mentioned in the above clause shall specify inter-alia,
the rights, duties, responsibilities and obligations of the company and
stock exchange (s) inter se. The agreement may also provide for a
dispute resolution mechanism between the company and the stock
3) Appointment of Brokers
a) The stock exchange, shall appoint brokers of the exchange, who are
registered with SEBI, for the purpose of accepting applications and
placing orders with the company.
b) For the purposes of this Chapter, the brokers, so appointed accepting
applications and application monies, shall be considered as collection
c) The broker/s so appointed, shall collect the money from his/their client
for every order placed by him/them and in case the client fails to pay
for shares allocated as per the Guidelines, the broker shall pay such

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d) The company/lead manager shall ensure that the brokers having

terminals are appointed in compliance with the requirement of
mandatory collection centres, as specified in clause 5.9 of Chapter V of
the Guidelines.
e) The company/lead manager shall ensure that the brokers so appointed
are financially capable of honouring their commitments arising out of
defaults of their clients, if any.
f) The company shall pay to the broker/s a commission/fee for the
services rendered by him/them. The exchange shall ensure that the
broker does not levy a service fee on his clients in lieu of his services.
4) Appointment of Registrar to the Issue
The company shall appoint a Registrar to the Issue having electronic
connectivity with the Stock Exchange/s through which the securities are
offered under the system.
5) Listing
The company may apply for listing of its securities on an exchange other than
the exchange through which it offers its securities to public through the on-line
6) Responsibility of the Lead Manager
a) The Lead Manger shall be responsible for co-ordination of all the
activities amongst various intermediaries connected in the issue /
b) The names of brokers appointed for the issue along with the names of
the other intermediaries, namely, Lead managers to the issue and
Registrars to the Issue shall be disclosed in the prospectus and
application form.

7) Mode of operation

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a) The company shall, after filing the offer document with ROC and
before opening of the issue, make an issue advertisement in one
English and one Hindi daily with nationwide circulation, and one
regional daily with wide circulation at the place where the registered
office of the issuer company is situated.
b) The advertisement shall contain the salient features of the offer
document as specified in Form 2A of the Companies (Central
Governments) General Rules and Forms, 1956. The advertisement in
addition to other required information, shall also contain the following:
i. The date of opening and closing of the issue
ii. The method and process of application and allotment
The names, addresses and the telephone numbers of the stock
brokers and centres for accepting the applications.
c) During the period the issue is open to the public for subscription, the
applicants may
i. Approach the brokers of the stock exchange/s through which
the securities are offered under on-line system, to place an
order for subscribing to the securities. Every broker shall accept

orders from all clients who place orders through him;

Directly send the application form along with


cheque/Demand Draft for the sum payable towards application

money to the Registrar to the Issue or place the order to
subscribe through a stock- broker under the on-line system.
d) In case of issue of capital of Rs. 10 crores or above the Registrar to the
Issue shall open centres for collection of direct applications at the four
metropolitan centres situated at Delhi, Chennai, Calcutta and Mumbai.
e) The broker shall collect the client registration form duly filled up and
signed from the applicants before placing the order in the system as per

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"Know your client rule" as specified by SEBI and as may be modified

from time to time.
f) The broker shall, thereafter, enter the buy order in the system, on
behalf of the clients and enter details including the name, address,
telephone number and category of the applicant, the number of shares
applied for, beneficiary ID, DP code etc. and give an order
number/order confirmation slip to the applicant.
g) The applicant may withdraw applications in terms of the Companies
Act, 1956.
h) The broker may collect an amount to the extent of 100% of the
application money as margin money from the clients before he places
an order on their behalf.
i) The broker shall open a separate bank account [Escrow Account] with
the clearing house bank for primary market issues and the amount
collected by the broker from his clients as margin money shall be
deposited in this account.
j) The broker shall, at the end of each day while the issue is open for
subscription, download/forward the order data to the Registrar to the
Issue on a daily basis. This data shall consist of only valid orders
(excluding those that are cancelled). On the date of closure of the issue,
the final status of orders received shall be sent to the Registrar to the
k) On the closure of the issue, the Designated Stock Exchange, alongwith
the Lead merchant banker and Registrars to the Issue shall ensure that
the basis of allocation is finalised in fair and proper manner on the

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lines of the norms with respect to basis of allotment as specified in

Chapter VII of the Guidelines, as may be modified from time to time.
l) After finalisation of basis of allocation, the Registrar to the
Issue/company shall send the computer file containing the allocation
details i.e. the allocation numbers, allocated quantity etc., of successful
applicants to the Exchange. The Exchange shall process and generate
the broker-wise funds pay-in obligation and shall send the file
containing the allocation details to member brokers.
m) On receipt of the basis of allocation data, the brokers shall immediately
intimate the fact of allocation to their client /applicant. The broker shall
ensure that each successful client/applicant submits the duly filled-in
and signed application form to him along with the amount payable
towards the application money. Amount already paid by the applicant
as margin money shall be adjusted towards the total allocation money
payable. The broker shall, thereafter, hand over the application forms
of the successful applicants who have paid the application money, to
the exchange, which shall submit the same to the Registrar to
Issue/company for their records.
n) The broker shall refund the margin money collected earlier, within 3
days of receipt of basis of allocation, to the applicants who did not
receive allocation.
o) The brokers shall give details of the amount received from each client
and the names of clients who have not paid the application money to
the exchange. The brokers shall also give soft copy of this data to the

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p) On the pay- in day, the broker shall deposit the amount collected from
the clients in the separate bank account opened for primary issues with
the clearing house/bank. The clearing house shall debit the primary
issue account of each broker and credit the amount so collected from
each broker to the "Issue Account".
q) In the event of the successful applicants failing to pay the application
money, the broker through whom such client placed orders, shall bring
in the funds to the extent of the clients default. If the broker does not
bring in the funds, he shall be declared as a defaulter by the exchange
and action as prescribed under the Bye-Laws of the Stock Exchange
shall be initiated against him. In such a case, if the minimum
subscription as disclosed in the prospectus is not received, the issue
proceeds shall be refunded to the applicants.
r) The subscriber shall have an option to receive the security certificates
or hold the securities in dematerialised form as specified in the
s) The concerned Exchange shall not use the Settlement/Trade Guarantee
Fund of the Exchange for honoring brokers commitments in case of
failure of broker to bring in the funds.
t) On payment and receipt of the sum payable on application for the
amount towards minimum subscription, the company shall allot the
shares to the applicants as per these Guidelines. The Registrar to the
issue shall post the share certificates to the investors or, instruct the
depository to credit the depository account of each investor, as the case
may be.

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u) Allotment of securities shall be made not later than 15 days from the
closure of the issue failing which interest at the rate of 15% shall be
paid to the investors.
v) In cases of applicants who have applied directly or by post to the
Registrar to the issue, and have not received allocation, the Registrar to
the issue shall arrange to refund the application monies paid by them
within the time prescribed.
w) The brokers and other intermediaries engaged in the process of
offering shares through the on-line system shall maintain the following
records for a period of 5 years :
i. orders received
ii. applications received
details of allocation and allotment
iv. details of margin collected and refunded
v. details of refund of application money
x) SEBI shall have the right to carry out an inspection of the records,
books and documents relating to the above, of any intermediary
connected with this system and every intermediary in the system shall
at all times co-operate with the inspection by SEBI. In addition the
stock exchange have the right of supervision and inspection of the
activities of its member brokers connected with the system.

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The Securities and Exchange Board of India (frequently abbreviated SEBI) is the
regulator for the securities market in India. It was formed officially by the
Government of India in 1992 with SEBI Act 1992 being passed by the Indian
Regulating the business in the stock market and other securities market. Registering
and regulating the working of stockbrokers and other intermediaries associated with
the securities market. Registering and regulating the working of collective investment
schemes including mutual funds.
Promoting and regulating the self-regulatory organizations. Promoting investors
education and training of intermediaries of securities market.
Prohibiting fraudulent and unfair trade practices relating to securities market.
Prohibiting insider trading in securities. Other securities markets. Registering and
regulating the working of collective investment schemes, including mutual funds is a
responsibility of SEBI.
SEBI is responsible for prohibiting fraudulent and unfair trade practices Prohibiting
insider trading in securities, with the imposition of monetary penalties, on erring
market intermediaries.
Regulating substantial acquisition of shares and takeover of companies. Calling for
information from, carrying out inspection, conducting inquiries and audits of the stock

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exchanges and intermediaries and self regulatory organizations in the securities

To promote investor's education and training of intermediaries of securities markets.
Prohibit Fraudulent and Unfair Trade Practices.


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