Dr.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

ACADEMIC SESSION:

2017– 2018

INVESTMENT AND SECURITY LAW

PROJECT

PROTECTION OF INVESTORS IN PRIMARY AND SECONDARY MARKET: ROLE

OF SEBI

Submitted to: Submitted by:

Dr. Manoj Kumar Ashish Singh

Asst. Professor (Law) B.A.LL.B.(Hons.)

RMLNLU IX semester

Roll No. 36
 CERTIFICATE OF ORIGINALITY

I hereby declare that this submission is my own work and that, to the best of my
knowledge and belief, it contains no material previously published or written by
another person, except where due acknowledgment is made in the project.

The plagiarism report has been attached at the end of the paper which shows the
similarity index to be ___%.

-ASHISH SINGH
 ACKNOWLEDGEMENT
I would take great pleasure in thanking my Investment and Security Law professor,
Dr. Manoj Kumar, for his infallible support all through the course of this project.
This endeavour would not have been in its present shape had he not been there
whenever I needed him. He has been a constant source of support all the while.

Also I would like to extend my sincere thanks to the library staff for always helping
me out with finding excellent books and material almost every time I needed. They
too have been a constant support system in the completion of this project.

Last but surely not the least- I would like to thank my friends for their timely critical
analysis of my work and special feedback that worked towards the betterment of this
work.

-ASHISH SINGH
 PREFACE
India's economy is one of the fastest growing economies in the world. Sir Atlay has said while
submitting the enquiry report on the Native Bombay stock exchange in 1924 "The stock and share
market is a vital factor in the economic life of progressive nations. Order and confidence are
equally essential elements in its continued prosperity and growth". In present scenario of
globalization and liberalization, the economic growth of a country like India requires a huge
participation of investors and shareholders in securities market. Moreover, unless and until there
is a strong regulator of this vast and technical market, the investor and shareholder's rights cannot
be protected. Eventually, investors will stop to invest in these markets; therefore, growth of
country's economy may be impeded.

While presenting the budget for 1987-88, the then Prime Minister, Late Shri Rajiv Gandhi has
assured the Parliament that for a healthy growth of capital markets, for protecting the rights of
investors and for preventing trading malpractices the Government would set up a separate body
for the regulation and orderly functioning of the Stock Exchange and the securities industry.

The decontrolled market attracted various scams; the main scam is Harsad Mehta in1992. It is said
that 50 thousands crore rupees of investors got lost by this scam. Therefore, an effective regulator
can curb the menace of irregularities prevalent in securities market.

The SEBI was given a statutory status on 30th January, 1992 by an ordinance to provide for the
establishment of SEBI. A bill to replace the Ordinance was introduced in Parliament on 3rd March,
1992 and was passed by both Houses of Parliament on 1st April, 1992. The bill became an act on
4th April 1992, the date on which it received the President's assent (Act No. 15of 1992). In the
Statement of Objects and Reasons appended to the SEBI Bill, 1992, the objects of the Act were
stated as follows:

"Securities and Exchange Board of India (SEBI) was established in 1988 through a Government
Resolution to promote orderly and healthy growth of the securities market and for investors'
protection." SEBI has been monitoring the activities of stock exchanges mutual funds and
merchants bankers etc to achieve these goals.
 CONTENTS
LIST OF ABBREVIATION ........................................................................................................... 6

INTRODUCTION .......................................................................................................................... 6

LITERATURE REVIEW ............................................................................................................... 9

STATEMENT OF PROBLEM ..................................................................................................... 10

OBJECTIVE OF RESEARCH ..................................................................................................... 10

RESEARCH METHODOLOGY.................................................................................................. 10

PROTECTION OF INVESTORS IN PRIMARY MARKET ...................................................... 11

SEBI’s ROLE IN IPOs ............................................................................................................. 12

PROTECTION OF INVESTORS IN SECONDARY MARKET ................................................ 13

Grant of recognition to stock exchanges ................................................................................... 14

PROTECTION OF INVESTOR’S INTEREST FROM FRAUDULENT AND UNFAIR TRADE

PRACTICES ................................................................................................................................. 17

PROTECTION OF INVESTOR’S INTEREST THROUGH REGULATION OF STOCK

BROKERS .................................................................................................................................... 19

PROTECTION OF INVESTOR’S INTEREST FROM INSIDER TRADING ........................... 20

PROTECTION FROM UNHEALTHY TAKEOVERS THROUGH SEBI (SUBSTANTIAL

ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS...................................... 22

CONCLUSION ............................................................................................................................. 24

BIBLOGRAPHY .......................................................................................................................... 26

Books and Articles Referred ..................................................................................................... 26

Web Sources ............................................................................................................................. 26

 LIST OF ABBREVIATION
 PSU- Public Sector Undertaking

 RBI- Reserve Bank of India

 SEBI- Securities and Exchange Board of India

 SRO- Self Regulatory Organisations

 MMMFs- Money Market Mutual Funds

 NAVs- Net Asset Value

 GETF- Gold Exchange Traded Funds

 SEBI (DIP) Guidelines 2000- SEBI (Disclosure & Investor Protection) Guidelines, 2000

 NSE- National Stock Exchange

 BSE- Bombay Stock Exchange

 IPO- Initial Public Offering

 SCL- Supreme Court Law Juornal

INTRODUCTION
“The joint stock companies had its origin in the middle of 19th Century, enabling the pooling of
small savings from the general public into the companies' treasury and issuing shares to the
investors in lieu thereof. Initially the benefit of limited liability did not attach to these corporate
securities called company shares. In other words, investments in companies carried the same
unlimited liability for the investors as was the case with investments in proprietorship concerns
and partnership firms. The investors control the management group through their representatives
at the Board meetings and other company meetings, where the affairs of the company are managed
by professionals.”
“The capital market is a market for financial investments that are direct or indirect claims to
capital1. The capital market comprises the complex of institutions and mechanism through which
intermediate term funds and long term funds are pooled and made available to business,
government and individuals.”

“An efficient capital market is essential for raising capital by the corporate sector of the economy
and for the protection of the interest of investors in corporate securities. There arises a need to
strike a balance between raising of capital for economic development on one side and protection
of investors on the other. Unless the interests of investors are protected, raising of capital, by
corporates is not possible. An efficient capital market can provide a mechanism for raising capital
and also by protecting investors in corporate securities2.”

“The primary market provides the channel for sale of new securities. The issuer of securities sells
the securities in the primary market to raise funds for investment and/or to discharge. In other
words, the market wherein resources are mobilised by companies through issue of new securities
is called the primary market. These resources are required for new projects as well as for existing
projects with a view to expansion, modernisation, diversification and upgradation.”

“Secondary market refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done
in the secondary market. Secondary market comprises of equity markets and the debt markets. The
secondary market enables participants who hold securities to adjust their holdings in response to
changes in their assessment of risk and return.”

“An investor is a person who is an individual or a corporate legal entity investing his capital in
another venture or business but does not do the business himself or itself. The investor has no role
to play in the day-to-day management of the business or its control except as permitted by the law.

1
Gart A; Handbook of the money and capital market quorum Books New York 1988.
"2 Vashisht, A K Gupta and R K ( 2005) "Investment Management and Stock Market : Strategies for Successful
Investing" Deep & Deep Publications Pvt Ltd. New Delhi, I Edition p.5, 10.
Investor carries on business when they buy and sell assets, arranges for other to buy and sell assets,
manages assets belonging to others, or operates collective investment schemes.3”

Investors are a heterogeneous group, they may be large or small, rich or poor, expert or lay man
and not all investors need equal degree of protection12. An investor has three objectives while
investing his money, namely safety of invested money, liquidity position of invested money and
return on investment.4

“The Securities and Exchange Board of India (SEBI) was constituted on 12 April 1988 as a non-
statutory body through an administrative Resolution of the Government for dealing with all matters
relating to development and regulation of the Securities market and investor protection and to
advise the government on all these matters. SEBI was given statutory status and powers through
and ordinance promulgated on January 30, 1992. SEBI was established as a statutory body on 21
February 1992. The ordinance was replaced by an Act of Parliament as 4th April 1992. The
Preamble of SEBI Act, 1992 enshrines the objectives of SEBI - to protect the interest of investor
in securities market and to regulate the securities market."

“The power and functions of the board as per act are very wide and effective, which can deal the
securities market in very effective manner to protect the interest of investors and shareholders.

All modern economies, therefore, recognise the need for sound regulation of securities markets.
This is needed not just for proper functioning of these markets, but also for their very survival. It
is good regulation that will ensure that markets are safe and perceived to be safe by the public at
large. It is good regulation that will ensure that necessary information is available to the public so
that they can take informed decisions about investments. It is good regulation that will further
ensure that while engines of growth are allowed to move at full speed, there is no space for
manipulators in the system. Today securities market regulation has evolved to include three
principal objectives: (a) Fair, efficient and transparent markets; (b) Investor protection; (c)
Reduction of systemic risk. I am happy to say that SEBI is shouldering the responsibility in all

3
Vashisht, A K Gupta and R K ( 2005) "Investment Management and Stock Market : Strategies for Successful
Investing" Deep & Deep Publications Pvt Ltd. New Delhi, I Edition p.5, 10.
4
Mayya MR 1996 "Investor Protection" Bharat Law House Pvt Ltd. New Delhi I Edition , p. 1.
these three areas with great deal of efficiency and commitment5. Thus the SEBI has issued various
regulations in respect of each of the intermediaries such as stock brokers and sub broker, share
transfer agents and registrars to an issue, banker to an issue, debenture trustees, merchants bankers,
underwriters portfolio manager, depositories , participants, custodian of securities, foreign
institutional investors, credit rating agencies, venture capital funds, collective investment schemes
including mutual funds, etc to regulate and ensure fair play by these intermediaries. SEBI has also
issued regulations to prohibit insider trading and to regulate substantial acquisition of shares and
takeover of companies. All these rules and regulations, circulars and guidelines serve the objective
of affording necessary protection to the investors. Over and above this, various penalties and
adjudications which could be imposed on persons including the various intermediaries who are
held to have contravened provisions of the enactment and committed defaults. The Act thus
provides sufficient deterrents to those who may indulge in defaults and illegalities and malpractices
on the market to the detriment of the investors.

LITERATURE REVIEW

 Taxman’s SEBI Manual June 2010, 16th Edition, Taxman Publishing Pvt. Ltd

“This book provides insight into the multi-dimensional process of coordinating and supervising
primary and secondary market. This book focuses on the key issues like mergers, takeovers, IPO,
Credit Rating agencies and unfair trade practices. This book explains as how SEBI plays a role of
regulator of these markets.

 R Nandagopal V Srividya, Emerging financial Markets (Excel Books, 1st Edn., New
Delhi, 2007)

“Emerging Financial Markets' is organized into three sections namely; *) Financial Markets &
Instruments, *) Behavioural Finance , *) Banking . The areas covered are Private Banking,
Banking, Mutual Funds, Capital Markets, Fixed Income Securities, Behavioral Finance, Insurance,
Derivatives and Risk Management.”

5
Text of the Hon'ble Prime Minister’s speech on the occasion of inauguration of SEBI
Bhavan on October 06, 2006.
  Balaji Rao DG, Investing in Financial markets is not Rocket Science: Investing
Knowledge Simplified (Partridge Publications, 2015)

“Given the uncertain times that we live in depending on bank fixed deposits, gold and/or real estate
to build our wealth or reach our financial goals would be a futile attempt. It is time that we start
looking beyond the obvious and start educating ourselves with the all important knowledge of
managing our finances by understanding the opportunities. If we ignore or shy away from
acquiring such knowledge there would be no one to blame except ourselves.”

 G. Ramesh Babu, Management Of Financial Institutions In India (Concept

Publishing Company, New Delhi, 2007)

In this book, an attempt has been made to give a comprehensive coverage to the management of
financial institutions in India. It provides an elaborate discussion on money and capital market,
development of finance institutions, banking as well as non-banking financial institutions, interest
rates, risk, return, commercial bank, Securities and Exchange Board of India (SEBI), international
financial aspects and management of mutual funds in the country.

STATEMENT OF PROBLEM
“The main statement of problem of this paper is whether the stock market has been transformed
from proverbial den of thieves to one of the most transparent automated and well-regulated in the
world- with record foreign institutional investment inflows a testimony to this.

OBJECTIVE OF RESEARCH
“The present paper is related to the role of SEBI in primary and secondary markets. Examining
the SEBI’s regulations as to how far they are meant for a transparent running of capital market
while keeping the interest of investors safe.”

RESEARCH METHODOLOGY
“The research is largely doctrinal and analytical. Doctrinal research asks what the law is on a
particular point and is concerned with the analysis of legal doctrine and how it had been developed
and applied while analytical research involves critical thinking skills and the evaluation of facts
and information related to the research. By using the secondary data, a set of indicators is
developed and analyzed.”

PROTECTION OF INVESTORS IN PRIMARY MARKET

“The term Investor Protection is a wide term encompassing various measures designed to protect
the investors from malpractices of companies, merchant bankers, depository participants and other
intermediaries. Investor Beware should be the watchword of all programs for mobilization of
savings for investment. As all investment has some risk element, this risk factor should be borne
in mind by the investors and they should take all precautions to protect their interest in the first
place. If caution is thrown to the winds and they invest in any venture without a prior assessment
of the risk, they have only to blame themselves. Investors are a heterogeneous group, they are large
or small, rich or poor, expert or lay and not all investors need equal degree of protection for their
invested amount from the corporate securities.”

SEBI has issued soon after it was brought into existence in 1992 as a statutory body, a number of
circulars and guidelines on disclosure and investor protection and has been amending and
improving them from time to time to meet and deal with contraventions of the Act and distortions
and malpractices in the market “To Protect the Interest of Investors and Shareholders”. These
guidelines have been revised and consolidated in early 2000 as a compendium on SEBI (Disclosure
& Investor Protection) Guidelines, 2000.

SEBI has been emphasizing on the importance of disclosure standards for corporate in
disseminating relevant and correct information to the investors.

“Previously Issue of Securities has been dealt with by SEBI (DIP) Guidelines 2000. Presently Issue
of Securities is regulated by SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009. These regulations shall apply to the following:

a) a public issue;
b) a rights issue, where the aggregate value of specified securities
 c) offered is fifty Lakh rupees or more;
d) a preferential issue;
e) an issue of bonus shares by a listed issuer;
f) a qualified institutions placement by a listed issuer;
g) an issue of Indian Depository Receipts.”

The primary market provides the channel for sale of new securities. The issuer of securities sells
the securities in the primary market to raise funds for investment and/ or to discharge. In other
words, the market wherein resources are mobilised by companies through issue of new securities
is called the primary market.

SEBI’s ROLE IN IPOs

“Because of the public participation, SEBI oversees that such companies act in a reasonable and
fair manner, especially with reference to the minority shareholders.6 For example, such companies
should have a board of directors, where at least half the members are independent of the
promoters/company. Moreover, companies have to comply with the listing agreement, which
among other things, stipulate continuing disclosures in specified formats and frequency. Any
company making an IPO is required to file a draft offer document with SEBI for its observations.
Draft offer document in respect of issues of size upto Rs. 100 crore shall be filed with the
concerned regional office of the Board under the jurisdiction of which the registered office of the
issuer company falls. Officials of SEBI at various levels examine the compliance with SEBI ICDR
Regulations 2009 and ensure that all necessary material information is disclosed in the draft offer
documents. The validity period of SEBI’s observation letter is three months only i.e. the company
has to open its issue within three months period.:

“The investors should make an informed decision purely by themselves based on the contents
disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should
in no way be construed as a guarantee for the funds that the investor proposes to invest through
the issue. However, the investors are generally advised to study all the material facts pertaining to

6
www.iepf.gov.in/IPO_investing.asp
the issue including the risk factors before considering any investment. They are strongly warned
against any ‘tips’ or news through unofficial means.”

SEBI introduced proper Code Of Conduct applicable to everyone who is a part of the process of
buying and selling of securities, stock exchange, etc. Following are the areas of concern:

a) Rules and Regulations to regulate intermediaries such as Broker, underwriters, etc.

b) Registers and Regulates the working of merchant Bankers, sub-brokers, stock-brokers,
share transfer agent, trustees, etc.
c) Registers the working of mutual Funds.
d) SEBI regulates turnover of the companies.

PROTECTION OF INVESTORS IN SECONDARY MARKET

The trading in secondary market is conducted by stock exchanges. It is primary duty of the
Securities and Exchange Board of India to regulate these stock exchanges, so that investor’s rights
can be protected.

“The secondary market enables those who hold securities to adjust their holdings in response to
changes in their assessment of risk and return. They also sell in securities for cash to meet their
liquidity needs. The price signals, which subsume all information about the issuer and his business
including, associated risk, generated in the secondary market, help the primary market in allocation
of funds.”

“India currently has two major stock exchanges--the National Stock Exchange, established in
1994, and the Bombay Stock Exchange (BSE), the oldest stock exchange in Asia, established in
1875. Until 1992 the BSE had a monopoly, marked with inefficiencies, high costs of
intermediation, and manipulative practices, so external market users often found themselves
disadvantaged. The economic reforms of the early nineties created four new institutions: the
Securities and Exchanges Board of India (SEBI), the National Stock Exchange, the National
Securities Clearing Corporation, and the National Securities Depository. The National Stock
Exchange (NSE) is a limited liability company owned by public sector financial institutions and
now accounts for about two-thirds of the stock trading in India, as well as virtually all of its
derivatives trading. The National Securities Clearing Corporation is the legal counter-party to net
obligations of each brokerage firm, and thereby eliminates counter-party risk and the possibility
of payments crises. It follows a rigorous ‘risk containment’ framework involving collateral and
intra–day monitoring. The NSCC, duly assisted by the National Securities Depository, has an
excellent record of reliable settlement schedules since its inception in the mid-1990s.”

“The Securities and Exchanges Board of India has introduced a rigorous regulatory regime to
ensure fairness, transparency and good practice. For example, for greater transparency, the SEBI
has mandated disclosure of all transactions where the total quantity of shares is more than 0.5% of
the equity of the company. Brokers must disclose to the Stock Exchange, immediately after trade
execution, the name of the client and other trade details, and the Exchange must then disseminate
this information to the general public on the same day. The new environment of improved
transparency, fairness, and efficient regulation led BSE to also become a transparent electronic
limit order book market in 1996, with an efficient trading system similar to the NSE. Equity and
equity derivatives trading in India has skyrocketed to record levels over the last ten years.”

“Listing agreement is very important document for investor protection. Listing of Securities on
Indian Stock Exchanges is essentially governed by the provisions in the Companies Act, 1956, the
Securities Contracts Regulation Act 1956, the Securities Contracts (Regulation) 1957, Rules, bye
laws, Regulations concerned stock exchanges, listing agreement entered into by the issuer and
stock exchange and circulars/guidelines issued by the Central Government and SEBI. The
Securities Contract (Regulation) Act, 1956 contains main provisions regarding recognition of
stock exchanges and listing of securities.”

Section 3 and 4 of the Securities Contract (Regulation) Act, 1956 contains the provisions relating
to recognition of Stock Exchanges. The central Government has the power to grant recognition to
stock exchanges. Simultaneously, the SEBI is also empowered to give recognition and such powers
as Central Government can exercise in relation to grant of recognition etc.

Grant of recognition to stock exchanges

“If the Central Government is satisfied, after making such inquiry as may be necessary and after
obtaining such further information and satisfied himself that the rules and bye-laws of a stock
exchange applying for registration are in conformity with such conditions as may be prescribed
with a view to ensure fair dealing and to protect investors. The central Government is satisfied that
the stock exchange is willing to comply with any other conditions (including conditions as to the
number of members) which the Central Government, after consultation with the governing body
of the stock exchange and having regard to the area served by the stock exchange and its standing
and the nature of the securities dealt with by it, may impose for the purpose of carrying out the
objects of this Act; and the Central Government or SEBI, as the case may be, find that in the
interest of the trade and also in the public interest to grant recognition to the stock exchange; it
may grant recognition to the stock exchange subject to the conditions imposed upon it. The
conditions which the Central Government may prescribe under may include, among other matters,
conditions relating to the qualifications for membership of stock exchanges, the manner in which
contracts shall be entered into and enforced as between members and the representation of the
Central Government on each of the stock exchange by such number of persons not exceeding three
as the Central Government may nominate in this behalf; and the maintenance of accounts of
members and their audit by chartered accountants whenever such audit is required by the Central
Government.7”

Every grant of recognition to a stock exchange under this section shall be published in the Gazette
of India and also in the Official Gazette of the State in which the principal office as of the stock
exchange is situate, and such recognition shall have effect as from the date of its publication in the
Gazette of India. The application for the grant of recognition shall not be refused except after
giving an opportunity to the stock exchange concerned to be heard in the matter; and the reasons
for such refusal shall in writing.

“In the case of Madhubhai Amathalal Gandhi Vs. The Union of India8, The petition challenging
constitutional validity of notification issued by Central Government under Section 4 of Contracts
(Regulation) Act, 1956 contending that Standard prescribed for classification of active member
and other members of Stock Exchange is unreasonable and violative of Article 14. The onus on
petitioner to prove that classification is unreasonable and petitioner had not placed any material to

7
Section 3 of the SCR Act, 1956.
8
AIR 1961 SC 21.
prove that standard for ascertaining active membership is arbitrary or unreasonable. The Supreme
Court held that the classification is reasonable and not violative of Article 14 of constitution.”

If the Central Government/ SEBI is of opinion that the recognition granted to a stock exchange
should, in the interest of the trade or in the public interest, be withdrawn, the Central Government
may serve on the governing body of the stock exchange a written notice in this regard and after
giving an opportunity to the governing body to be heard in the matter, the Central Government
may withdraw, by notification in the Official Gazette, the recognition granted to the stock
exchange. However, it will not have any effect on the validity of any contract entered into before
the date of such notification.9

“Every recognised stock exchange shall furnish to the Securities and Exchange Board of India
such periodical returns relating to its affairs as may be prescribed. Every recognised stock
exchange and every member thereof shall maintain and preserve for such periods not exceeding
five years such books of account, and other documents as the Central Government, after
consultation with the stock exchange concerned, may prescribe in the interest of the trade or in the
public interest, and such books of account, and other documents shall be subject to inspection at
all reasonable times by the Securities and Exchange Board of India. The SEBI, if it is satisfied that
it is in the interest of the trade or in the public interest so to do, may, by order in writing call upon
a recognised stock exchange or any member thereof to furnish in writing such information or
explanation relating to the affairs of the stock exchange or appoint one or more persons to make
an inquiry in the prescribed manner in relation to the affairs of the governing body of a stock
exchange.10”

“SEBI satisfied on the request of stock exchange or of its own motion that it is necessary to make
bye laws or amend bye laws, the bye laws or amendment in bye laws can be made by it. These bye
laws shall be published in Gazette. The making or the amendment or revision of any bye-laws
under this section shall in all cases be subject to the condition of previous publication.11”

9
Section 5 of the SCR Act, 1956.

10
Section 6 of the SCR Act, 1956.
11
Section 10 of the SCR Act, 1956.
“The Securities Contracts (Regulation) Act, 1956 contains provision to regulate these stock
exchanges. Under these provisions, the SEBI has been given powers to recognise these stock
exchanges to conduct business in secondary market. While giving recognition to them, the SEBI
can impose any conditions in the interest of investors. Under the SCR Act certain formalities has
been prescribed to be followed by intending stock exchanges. If the SEBI is of the opinion that it
is in the interest of investors to withdraw the recognition, then it can withdraw the recognition.
The civil court has no jurisdiction in the matter of recognition of stock exchanges or withdrawal
of recognitions. The aggrieved person can appeal to the Securities Appellate Tribunal. Moreover,
any person aggrieved by the decision of the SAT may file an appeal to Supreme Court of India.
The SCRA has also provides certain penalties who fails to comply with the provisions of it.”

“Any company wants to trade its securities at market; it has to be listed with any recognised stock
exchanges. The most important documents to be executed by company and stock exchange is
Listing agreement. Therefore, this agreement contains rules and regulations to be followed by
company and stock exchanges in the interest of investors and shareholder. By investing in
secondary market, investors have certain rights e.g. to get dividends, right to receive income from
collective investment scheme, right to receive income from mutual funds. The SEBI is looking
these aspects in the interest of investors and shareholders. Therefore, the Securities and Exchange
Board of India is regulating the working of stock exchanges and company at Secondary market
under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities
Contracts Regulation Rules 1957.”

PROTECTION OF INVESTOR’S INTEREST FROM

FRAUDULENT AND UNFAIR TRADE PRACTICES
“Before the enactment of SEBI Act, 1992, the securities markets were full of fraudulent trade
practices. The investors and shareholder lost their faith in this market and moved to withdraw their
investment, by searching other avenues. In the beginning years of SEBI, to stop fraudulent trade
activities from securities market was major task. As the nature of securities market was very
technical. Due to the ignorance of legal provisions, investors were not able to know the trend of
market. Some miscreants have obtained the advantage of ignorance and technicalities and make
monies by making false statements, by spreading rumours in markets, concealment of material
facts, connivance with other agents etc. It was necessary to stop those practices in securities market
to take back the confidence of investor and to protect the rights of investors.”

“Therefore, in exercise of the powers conferred by section 30 of the Securities and Exchange Board
of India Act, 1992, the Board makes regulation, namely the Securities and Exchange Board of
India (Prohibition of Fraudulent and unfair Trade Practices relating to Securities Market)
Regulations, 2003.12”

These SEBI Regulations prohibiting the Fraudulent and Unfair Trade Practices relating to
Securities Market have been divided various heads namely Definitions, Prohibition of certain
dealings in securities, suspension or cancellation of Registration etc.

Fraud, includes any act, expression, omission or concealment committed whether in a deceitful
manner or not by a person or by any other person with his connivance or by his agent while dealing
in securities in order to induce another person or his agent to deal in securities, whether or not
there is any wrongful gain or avoidance of any loss.13

“The SEBI has prohibited the buying, selling in securities in a fraudulent manner. It has prohibited
manipulation and deceptive trade device in contravention of these provisions. It prohibit scheme
to defraud, the practice of business of fraud. It has also prohibited act of false or misleading
appearance etc. If there is reasonable ground to believe that the transactions are being done
detrimental to the investor’s interest, the board has power to investigate the matter and punish
accordingly. While imposing punishment, it can suspend, restrains those persons from securities
market. It can impound the records of those transactions. By using powers under these regulations,
the SEBI has decided many matters and impose penalties upon fraudusters. Notwithstanding repeal
of the regulations any violation of regulations 3, 4, 5 and 6 of the SEBI (Prohibition of Fraudulent

12
GAZETTE OF INDIA , EXTRA-ORDINARY, PART (II) OF SECTION 3, SUBSECTION
(Ii) PUBLISHED BY AUTHORITY SECURITIES AND EXCHANGE BOARD
OF INDIA NOTIFICATION, Mumbai, The 17th July, 2003, S.O. 816(E).
13
Regulation 2 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations, 2003.
and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 shall be investigated
and proceeded against in accordance with the procedure laid down in these regulations.”

PROTECTION OF INVESTOR’S INTEREST THROUGH

REGULATION OF STOCK BROKERS
The intermediaries and persons associated with securities market shall buy, sell or deal in securities
after obtaining a certificate of registration from SEBI, as required by Section 12 of SEBI Act.
Trading in securities market requires some link from intermediaries to client and stock exchange.
Therefore, it is necessary to watch on the working of these intermediaries. The Stock brokers are
very important link between stock exchanges and investor. Hence, in the exercise of powers
conferred by section 30 of the Securities and Exchange Board of India Act, 1992, the board has
made regulation to regulate the working of Stock Broker and Sub brokers.

“For working with stock exchanges, stock broker’s registration is mandatory. A stock broker
applies in the prescribed format for grant of a certificate through the stock exchange or stock
exchanges, as the case may be, of which he is admitted as a member.14”

“The stock exchange forwards the application form to SEBI as early as possible as but not later
than thirty days from the date of its receipt. SEBI takes into account for considering the grant of a
certificate all matters relating to buying, selling, or dealing in securities and in particular the
following, namely, whether the stock broker15:

a) is eligible to be admitted as a member of a stock exchange,

b) has the necessary infrastructure like adequate office space, equipment and man power to
effectively discharge his activities,
c) has any past experience in the business of buying, selling or dealing in securities,
d) is subjected to disciplinary proceedings under the rules, regulations and bye-laws of a stock
exchange with respect to his business as a stockbroker involving either himself or any of
his partners, directors or employees, and

14
Regulation 3 of the SEBI (Stock Broker & Sub Brokers) Regulations,1992.
15
Regulation 5 of the SEBI (Stock Broker & Sub Brokers) Regulations,1992.
 e) is a fit and proper person.”

“SEBI on being satisfied that the stock- broker is eligible, grants a certificate to the stock-broker
and sends intimation to that effect to the stock exchange or stock exchanges, as the case may be16.
Where an application for grant of a certificate does not fulfill the requirements, SEBI may reject
the application after giving a reasonable opportunity of being heard.”

“The stock-broker holding a certificate at all times abides by the Code of Conduct.17 SEBI has
regulated the business of stock broker and sub broker through the provisions of the SEBI (Stock
brokers and Sub brokers) Regulations, 1992. Besides the legal provisions, it prescribed code of
conduct for the Stock Broker and sub broker. It has also prescribed prosecution and punishment to
stock broker and sub broker in case of contravention of these regulations as well as provisions
prescribed under the Act. The stock broker is also empowered to impose certain condition on sub
brokers and stock exchanges have also empowered to impose conditions on stock broker. So, by
delegation of legislation, the SEBI is monitoring the conduct of securities market. Moreover, it has
right to inspect the books of account, other records and documents of the stock broker. The Board
shall after consideration of inspection or investigation report takes such action as it may deem fit.
The board can under these regulations appoint an auditor to investigate into the books of account
and affairs of the stock brokers. The board can impose monetary as well as imprisonment upto ten
years. Henceforth, under these regulations the SEBI has wide powers to control the working of
Stock Broker and Sub broker, who are the key intermediaries of the securities market and they are
directly deals with investors. By using powers, the SEBI is protecting the interest of investors and
shareholders in very effective manner.”

PROTECTION OF INVESTOR’S INTEREST FROM INSIDER

TRADING
Insider trading is the use for gain of secret information about publicly traded investments by those
who are privy to that information and who should not be taking advantage of their knowledge of
that information. The common investors are denied the same opportunities as the insider dealers

16
Regulation 6 of the SEBI (Stock Broker & Sub Brokers) Regulations,1992.
17
Schedule II of Regulation 7 of the SEBI (Stock brokers and Sub brokers) Regulations,
1992.
to make profits because they do not have access to the information which the insiders have. It is
easier to identify the beneficiaries of insider dealing than the persons who lose thereby. The extent
of losses occurring is impossible to calculate. Insider dealing also leads to loss of confidence of
investors in stock market as they feel that the market is rigged and only the few who have inside
information benefit and make profits from their investments. SEBI had framed the Insider Trading
Regulations with the approval of the Central Government under the Securities and Exchange Board
of India Act, 1992 which were notified in the Gazette of India, Extraordinary, Part III, Section 4
on 19th November 1992.

“With a view to strengthening the existing Insider Trading Regulations and to create a framework
for prevention of insider trading, a committee was constituted by SEBI under the Chairmanship of
Shri Kumar Mangalam Birla. The recommendations of the Committee were considered by the
SEBI Board and the amended regulations notified in the Gazette on 20th February 2002. Securities
and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter
referred to as `the Regulations') seek to govern the conduct of the insiders, connected persons and
persons who are deemed to be connected persons on matters relating to Insider Trading. `Insider
trading' is the buying or selling or dealing in the securities of a listed company by a director, officer,
an employee of the firm or by any other person such as internal auditor, statutory auditor, agent,
advisor, analyst, consultant, etc., who has knowledge of material `inside' information not available
to the general public. The dealing in securities by an `insider' is illegal when it is predicated upon
the utilization of 'insider' information to profit at the expense of other investors who do not have
access to the same information. The prices of most securities reflect the available public
information about those companies. Hence, any investor who acts on nonpublic information does
so at the cost of public confidence in the securities market and in the process corrupts the `level
playing field'.”

“Besides the provision of insider trading in the Securities and Exchange of India Act, 1992, the
SEBI in exercise of powers given in sectionv30 of the act has made regulation18 to stop insider
trading. As the concept of Insider trading is most dangerous to investor, who has no information
of insider activities of company. While those have much information about price sensitive

18
SEBI (Prohibition of Insider Trading) Regulation, 1992.
information can earn more, therefore, the leakage of inside information can defeat the very purpose
of object of SEBI to protect the interest of investor and shareholders. The SEBI under the
regulation of Prohibition of insider trading, incorporated prohibition of dealing in securities by
insider of the company, as they already have sensitive information. The board has very wide
powers to deal insider trading by punishing them monetary as well as imprisonment. The board
has also prescribed code of conduct for companies. It has made mandatory to companies, its
directors, its officer to disclose their interests. In exercise of powers under regulations and Act,
The SEBI has imposed monetary penalties on many persons and also filed complaint for criminal
prosecutions. Therefore, under these regulations and provisions of Act, SEBI is going to achieve
its primary objective to protect the interest of investors.”

PROTECTION FROM UNHEALTHY TAKEOVERS THROUGH

SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
TAKEOVERS) REGULATIONS
In order to promote fairness in the capital market and to protect the Interest of small Investors,
SEBI has framed regulation, providing for Acquisition of shares and takeover of listed companies
commonly known as "Takeover code".

“In the matter of Shirish Finance & Investment (P) Vs M Sreenivasulu Reddy19 a division of
Bombay High Court elucidated the object of these provisions of the takeover regulations in these
words: “The regulations disclose a scheme to bring about transparency in the transactions relating
to acquisition of large blocks of shares which may ultimately lead to a takeover. On the basis of
furnished particulars the shareholder is enabled to take a decision as to whether he should retain
his holdings or dispose of them for the price offered. Thus the transparency in dealings as well as
fairness to the shareholders of the company are ensured.””

“In the matter of Punjab State Industrial Development Corporation Ltd. Vs SEBI20 the SAT held
that the take over code is not mean to ensure proper management of the business of companies or

19
(2002) 35 SCL 27 (Bom).
20
(2001) 32 SCL 631 (SAT).
to provide remedies in the event of mismanagement. It has a limited role. It’s main objective is to
ensure the equality of treatment and opportunity to all shareholders and afford protection to them,
in the event of substantial acquisition of shares and takeovers. The test is as to whether the other
shareholders have been treated unfairly in the context of takeover.”

Takeover of companies is a well-accepted and established strategy for corporate growth.

International experience of takeovers and mergers and amalgamations has been varied.
Nonetheless, one of its important lessons is that, its appeal as an instrument of corporate growth
has usually been the result of an admixture of corporate ethos of a country, shareholding pattern
of companies, existence of cross holdings in companies, cultural conditions and the regulatory
environment. In Indian, however, the market for takeovers has not yet become significantly active,
though following economic reforms, there is now a discernible trend among promoters and
established corporate groups towards consolidation of market share, and diversification into new
areas, albeit in a limited way through acquisition of companies, but in a more pronounced manner
through mergers and amalgamations. The first attempt at regulating takeovers were made in a
limited way by incorporating a clause, viz, Clause 40 in the listing agreement which provided for
making a public offer to the shareholders of a company by any person who sought to acquire 25%
or more of the voting rights of the company. In 1990, even before, SEBI became a statutory body,
Government in consultation with SEBI amended clause 40 by-

 Lowering the threshold acquisition level for making a public offer by the acquirer from 25
% to 10%;
 Bring within its fold the aspect of change in management control under certain
circumstances as a sufficient ground for making a pubic offer ;
 Introducing the requirement of acquiring a minimum of 20% from the shareholders
 Stipulating a minimum price at which an offer should be made;
 Providing for disclosure requirements through a mandatory public announcement
followed by mailing of an offer document with adequate disclosures to the shareholders of
the company; and
 Requiring a shareholder to disclose his shareholders at level of 5%or above to serve as an
advance notice to the target company about the possible takeover threat.
These changes helped in making the process of acquisition of shares and takeovers transparent,
provided for protection of investors’ interests in greater measure and introduced and element of
equity between the various parties concerned by increasing the disclosure requirement. The SEBI
act enacted in 1992 empowered SEBI to regulate substantial acquisition of shares and takeovers
and made substantial acquisition of share and takeovers a regulated activity for the first time. The
SEBI regulations for Substantial Acquisition of Shares and Takeover were notified by SEBI in
November 1994. Clause 40(A &B) of the listing agreement also remained in force. The regulations
preserved the basic framework of Clause 40(A &B) by retaining the requirements of initial
disclosure at the level of 5% threshold limit of 10% for public offer to acquire minimum percentage
of shares at a minimum offer price and making of a public announcement by the acquirer followed
by letter of offer. The process of substantial acquisition of shares and takeovers is complex. SEBI
has now gained considerable experience and insight into the complexities in this area through
administration of the Regulations. The object of the regulations is to ensure transparency in the
transactions and to assist the regulatory bodies to effectively monitor such transactions. The
provision help to safeguard the interest of investors/ existing shareholders of the company and for
providing a shareholder an opportunity to exit at that stage in case, change in the shareholdings
pattern or control over the target company is not to the satisfaction of a shareholders.

CONCLUSION
The capital markets in India were underdeveloped, opaque, dominated by a handful of players, and
concentrated in a few cities. Manipulation and unfair practices were perceived to be widespread
and rampant, prompting an overseas researcher to describe it as a “snake pit”. The transformation
of the Indian securities markets was initiated with the establishment of the Securities and Exchange
Board of India (SEBI) in 1989, initially as a informal body and in 1992 as a statutory autonomous
regulator with the twin objectives of protecting the interests of the investors and developing and
regulating the securities markets over a period of time. SEBI has been empowered to investigate,
examine, visit company premises, summon records and persons and enquire and impose penalties
commensurate with misconduct. The first and foremost challenge for the fledgling regulator was
to create a regulatory and supervisory framework for the market, a job that proved formidable,
because vested interests resisted every new step. However, with the designing and notification of
32 regulations/guidelines (amended many times over), during a decade and half of its existence,
the
apparatus steadily evolved and has come to grips with the situation. SEBI has instituted a
consultative process of framing regulations. All reports / concept papers / policy proposals are
posted on SEBI web site www.sebi.gov.in for comments from market participants and the public.
The comments are compiled and considered before finalizing regulations. Even the draft
regulations are put on the website before notification for legal pundits to comment if the law
framed is in consonance with the spirit of initiatives. This has a profound impact not only in terms
of receiving valuable input and building public opinion before framing regulations / guidelines but
also in improving the quality, acceptability and implementibility. SEBI has formed a number of
committees comprising of eminent experts and market practitioners to support it in the design of
reforms for different aspects of the markets. The regulator posts all its orders, including those
delivered on appeals against its orders, on its website. On request, it provides informal guidance
on payments of nominal fees and issues no action letter so that the participants can seek clarity on
any aspect and adopt appropriate business strategy in consonance with the applicable regulations.
SEBI has put time lines for performance of its various functions like registration and renewal on
the web-site. These measures work as a self-disciplining mechanism within SEBI and provide full
transparency to its functioning.
“Thus, SEBI would and should continue to travel on the learning curve with a view to reorient and
reconfigure ground rules (regulations), its investigating abilities and investor protection measures.
If above suggestion will have consideration by the SEBI, it may help to protect the interest of
INVESTORS AND SHAREHOLDER in securities market. Nonetheless, India will do well as it
is fully convinced that capital markets allow people to do more with their savings and ideas and
talents than would otherwise be possible. In the process, it would also facilitate increasingly larger
number of citizens participating in the capital market in some form or other and share the
opportunity of profiting from economic gains. Let me conclude with a recent opinion expressed
by Mr. Steeve Vickers, President International Risk 'Finance ASIA' published in Finance Asia.com
on Sept, 29th 2005, "The stock market has been transformed from proverbial den of thieves to one
of the most transparent automated and well-regulated in the world- with record foreign institutional
investment inflows a testimony to this".”
 BIBLOGRAPHY
Books and Articles Referred
 Taxman’s SEBI Manual June 2010, 16th Edition, Taxman Publishing Pvt. Ltd

 Shroff, KRP., History and Present Position of The Stock Market in India(The Stock

Exchange Bombay, 1962)

 R Nandagopal V Srividya, Emerging financial Markets (Excel Books, 1st Edn., New

Delhi, 2007)

 Balaji Rao DG, Investing in Financial markets is not Rocket Science: Investing

Knowledge Simplified (Partridge Publications, 2015)

 G. Ramesh Babu, Management Of Financial Institutions In India (Concept Publishing

Company, New Delhi, 2007)

Web Sources

 http://www.sebi.com

 http://www.nseindia.com

 http://bseindia.com

 http://mca.gov.in

 http://investmentworld.com