Regulation

UNIT 5

REGULATION

Objectives

The objectives of this unit are to:

highlight history of regulation of securities of market in India

discuss current status of regulation relating to securities market in India

trace origin, functions, organization and activities of Securities and Exchange

Board of India

indicate role of self-regulation vis--vis legislative regulation of securities

market.

Structure
5.1
5.2
5.3
5.4
5.5

Introduction
Types of Regulation
History of Securities Market Regulation
Securities Contracts (Regulation) Act, 1956
Securities and Exchange Board of India
5.5.1
5.5.2
5.5.3
5.5.4

5.6
5.7
5.8
5.9

Origin
Functions
Organization
Activities

Self-Regulation
Summary
Self-assessment Questions / Exercises
Further Readings
Appendix 5.1: Securities Contracts (Regulation) Act, 1956
Appendix 5.2 : SEBI Regulations on i) Stock Brokers and Sub-brokers, ii)
Insider Trading, and iii) Substantial Acquisition and Takeover.

5.1

INTRODUCTION

In Unit 4, you have seen how, from a scattered and small beginning in the 19th
century, India's securities market has risen to great heights by the beginning of the
decade of the 90s. The mobilization from primary market has exceeded Rs.27,000
crore in 1992. The market capitalization of outstanding issues have exceeded Rs.
1,00,000 crore. Starting their operations from under a Banyan Tree and Neem Tree,
the Bombay Stock Exchange in 1875 and Calcutta Stock Exchange in 1908
respectively, today we have 24 stock exchanges. The history of growth of primary and
secondary markets in India have witnessed spells of non-regulation, self-regulation,
half-hearted government regulation and close-set regulation. In this Unit we shall
discuss the legal framework of securities market in India. What has been the history of
securities market regulation in India? What are different Acts, Rules and Regulations
which affect securities market? What is the nature, role and functions of Securities and
Exchange Board of India? What is the international perspective on securities market
regulation? What promises does self-regulation hold in the present environment?
These are some of the questions we shall address one by one in the unit. Let us begin
by discussing the history of securities market regulation in India.

5.2

TYPES OF REGULATION

The regulatory framework relating to financial services can be broadly classified into
three main types. One set of regulations determine the types of activities that different
forms of institution are permitted to engage in. These regulations can be called as
structural regulations. For example, the Securities and Exchange Board of India

21

Securities market in
India

(SEBI) insists that merchant bankers and stock broking institutions to separate all their
fund-based activities. Similarly, the Reserve Bank of India (RBI) has prescribed the
activities that commercial banks can provide to the investors. Structural regulation
thus involves demarcation lines between the activities of financial institutions but
many of them have in fact been eroding in recent years. Banks are now providing
various services like leasing, term loan, credit cards, etc., in addition to their
traditional service of working capital lending. The rationale behind the expanding the
activities that can be provided by the financial service companies is the desire of
regulatory authorities to create greater competition.
There are regulations that cover the internal management of financial institutions and
other financial service organisations in relation to capital adequacy, liquidity and
solvency. The SEBI for instance has prescribed minimum net worth requirement for
various financial service firms that come under its jurisdiction. The objective of these
regulation is to restrict the firms without adequate resources enter into this field.
Recently, the RBI has regulated the non-banking finance companies in raising public
deposits. These regulations are known as prudential regulations as they aim to evolve
certain prudential norms for the operation of the industry.
There are number of investor protection regulations. All regulatory agencies in the
financial sector claim that the primary objective of the regulation by them is to protect
the interest of investors. It is generally perceived that investors are the weakest
participants of the financial markets and hence need protection from malpractice,
fraud and collapse. The information asymmetry between the investors and financial
intermediary or institution affects the investors and thus regulatory agencies step-in to
protect the interest of the investors. Thus, investor protection regulations are often in
the nature of demanding larger disclosure of information.
The regulations can also be classified on their scope. There are regulations which deal
with the macro aspects of the system. For example, legislation enacted in the
Parliament like Banking Regulation Act, Securities Contracts Regulation Act, etc., to
deal with the macro aspects of respective institutions. The regulatory authorities under
the legislation evolve rules, guidelines and regulations that govern the micro aspects
and operational issues. In addition to the regulations passed under formal statue and
regulators, there are self-regulations from the industry association. For example, the
foreign exchange dealers have their own self-regulation in addition to several other
statues and guidelines that govern their activities. Similarly, the merchant bankers
association is developing self-regulation that will govern their members in addition to
SEBI regulation. In the US and other developed markets, there are associations for
financial analysts which admit the members after they pass examination and evolve
code of conducts when they desire to practice as financial analyst.
The regulations in general aim to ensure the soundness and safety of financial
institutions, maintain the integrity of the transmission mechanism and protect the
consumers of financial services. The regulations also ensure freedom of operation to
improve the efficiency and provide adequate scope for innovation that benefit the
investors and other participants. The success of the regulation thus not only depends
on its ability to ensure investors protection but also determined by the level of
advancement and sophistication the system has achieved. In other words, regulation
should not block the development of financial service industry.

5.3

22

HISTORY OF SECURITIES MARKET REGULATION

The first legislative measure providing for regulation of stock exchanges was enacted
in 1925 namely, the Bombay Securities Contracts Control Act 1925. This Act was
enacted to regulate and control certain contracts for the purchase and sale of securities
in the city of Bombay and elsewhere in the Bombay Presidency. Indeed till then there
were no established trading rules. The public was not prohibited from entering the
trading floor, where clients often transacted business among themselves. The need for
regulation had arisen to check manipulation by brokers, which had resulted in two
severe market crashes between 1919 and 1925. In 1918-19 some brokers manipulated
the price of two highly traded stocks Standard Mill and Madhavji Mill resulting in a
crash. Fourteen brokers defaulted, forcing them to sell off their cards. The public
criticism that followed the manipulative
practices and the market slump of the early 1920s moved the Bombay Legislative
Council to set up a committee to look into the activities of the Bombay Stock Exchange

Sir wilfred Atlay, former chairman of the London Stock Exchange, was chosen to head
the committee. In its report the committee stated:

Regulation

"The most sinister manifestation of speculation in Bombay is the recent occurrence of

corners in the market and the policy and practice of the Association with regard to
corners appears to us to constitute the head and front of their offending."
Even before the government of Bombay could consider action on the basis of the Atlay
Committee Report, the exchange experienced another crash in 1025. Later that year,
the Securities Contracts Control Act 1925 was passed by the government of Bombay.
Under that Act, "stock exchange" was defined as "any association, organization or body
of individuals, whether incorporated or not, established for the purpose of assisting,
regulating and controlling business in buying, selling and dealing in stocks, shares,
bonds, debentures, debenture stock and any other like securities". Section 4 of the Act
required a stock exchange had to submit rules for the regulation and control of
transactions in securities other than ready deliver contracts and furnish such
information in regard to such recognition as the Governor-in-Council might require.
Section 6 of the Act provided that every contract for the purchase or sale of securities,
other than a ready delivery contract, entered into after a date to be notified in this
behalf by the Governor-in-Council should be void unless the same was made subject to
and in accordance with the rules duly sanctioned under section 4 and every such
contract should be void unless the same was made between members or through a
member of a recognized stock exchange; and no claim should be allowed in any civil
court for the recovery of any commission, brokerage fee or reward in respect of any
such contract. But this Act defined "ready delivery contract" to mean "a contract of the
purchase or sale of securities for performance of which no time is specified and which
is to be performed immediately or within a reasonable time". It was also stated therein
by way of explanation that what was reasonable time was in each particular case a
question of fact. This Act did not achieve its purpose, for under section 6 thereof
contracts entered into in contravention to the provisions of that section were not made
illegal but only void with the result that even members of a stock exchange not
recognized under the Act were able to do business in that line. What is more, the
explanation to the definition of "ready delivery contract" which was excluded from the
operation of the Act was so elastic that in the name of ready delivery contracts,
unrecognized stock exchanges and individuals were able to carry on business in
forward contracts. Gambling in shares went on unchecked in Bombay as elsewhere. It
was, thus, found that the impact of this Act on the regulation of trading in securities
was not significant.
Huge losses suffered by the investing public during 1928 and 1938 brought forth public
criticism and the Government of Bombay appointed a committee called Morrison
Committee in 1936. Recommendations made by this committee were not found to be
useful. The Government of India appointed a committee in May, 1948, headed by Dr. P
J Thomas, Economic' Advisor to the Ministry of Finance, to submit a report on a
suitable law to regulate the stock exchanges in India. Under the constitution of India
`Stock Exchanges' is a central subject vide entry 48 in list (union list) in the seventh
schedule and therefore, the Union Government has exclusive authority to make laws on
the subjects. In 1952, a draft Bill on Stock exchange regulation was prepared by the
Government and this Bill was referred to an expert committee under the chairmanship
of A D Gorwala A Bill called the Securities Contracts (Regulation) Bill, prepared on
the lines of the draft recommended by the Gorwala Committee was introduced in
Parliament in 1954 and with some amendments Securities Contracts (Regulation) Act,
1956 was passed. The Securities Contracts (Regulation) Act ,1956 along with the
Securities Contracts (Regulation) Rules of 1957 have been the main laws regulating
securities market in India

5.4

SECURITIES CONTRACTS (REGULATION)

ACT, 1956

As noted above Securities Contracts (Regulation) Act 1956 and the rules made there
under, namely in Securities Contracts (Regulation) Rules, 1957 are the main laws
governing stock exchanges in India.

23

Securities market in
India

The preamble to the Securities Contracts (Regulation) Act states that it is `an act to
prevent undesirable transactions in securities by regulating the business of dealing
therein, by prohibiting options and by providing certain other matters connected
therewith". This Act provides for the direct and indirect control of virtually all aspects
of securities trading and the running of the stock exchanges. The Act makes every
transaction in securities in any notified State or area illegal and punishable by fine and
1 or imprisonment if it is not entered into between or with members of a recognized
stock exchange in the state or area. It also makes every such securities contracts void.
The Act thus prohibits the existence of other than recognized stock exchanges and
provides the mechanism of recognizing stock exchanges. Application to the Central
Government for recognition must include a copy of the rules relating, in general, to
the constitution of the stock exchange and in particular to, among other things, the
admission into the stock exchange of various classes of members, the exclusion,
suspension, expulsion and readmission of members, and the procedure for registration
of partnership as members. In determining whether to grant recognition, the Central
Government may make whatever inquiry is necessary and impose in the rules and
bye-laws of the stock exchanges whatever conditions are required to ensure "fair
dealing" and to "protect investors". These conditions concern, inter alia, the
qualifications for members, the manner in which contracts are to be entered into and
enforced, the representation of not more than three Central Government nominees on
the board of the stock exchange, and the maintenance of books and records by
members and their audit by chartered accountants. The Central Government has the
power to impose further conditions, other than in the rules, such as limiting the
number of members. Finally, the Central Government has the power unilaterally to
withdraw recognition.
After it recognizes a stock exchange, the Central Government exerts regulatory
control over it. Periodic reports are furnished to the Central Government. Certain
books and records are maintained for a period of five years. The Central Government
can make an inquiry itself, or through an appointed third party, into the affairs of a
stock exchange or any of its members. All officers, directors, members and others
who have had dealings in the matter under inquiry are required to produce requested
documents, statements, or information.
The Central Government retains control over the stock exchange's bye-laws and its
rule amendments. A stock exchange, subject to previous Central Government
approval, has the authority to make bye-laws for the regulation and control of
contracts and the regulation of trading. Similarly, no rule amendments have effect
until they are approved by the Central Government. The Central Government,
furthermore, has the power to direct stock exchange to amend its rules; and if it fails
to do so, the Government may directly amend such rules. The Securities Contract
(Regulation) Act grants the Central Government power to supercede governing body
of a recognized exchange. The suspension of business may be complete or subject to
conditions. Suspensions may not last more than seven days initially but may be
extended from time to time. The Central Government may supercede the governing
body of any exchange by declaration and then appoint any person or group of persons
to exercise and perform all the power and duties of the governing body.
Other powers granted to the Central Government include the ability to stop further
trading in specified securities for the purpose of preventing undesirable speculation,
and the power to compel a public company " in the interest of the trade or in the
public interest" to list its securities on any of the recognized exchanges.
Appendix 5.1 reproduces Securities Contracts (Regulation) Act, 1956.
Activity-1
i)

24

What is a recognized stock exchange?

ii)

How many recognized stock exchanges are there now in India?

Regulation

.
iii) Name any three important reasons to have stock exchanges.

iv) Study some of the recent changes in SCRA relating to derivatives contracts.
......
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..................................................................................................................................
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5.5

SECURITIES AND EXCHANGE BOARD OF INDIA

Many developed countries like U.K. and U.S.A. had long back created separate
Boards for the regulation of the securities market. While U.K. has the Securities and
Investment Board (SIB) and U.S. has the Securities and Exchange Commission
(SEC). The Indian Government's intention to set up a separate Board for the
regulation and orderly functioning of the capital market was first declared in the
Budget Speech by Shri Rajiv Gandhi, the then Prime Minister and Minister of
Finance, while presenting the Budget for the year 1987-88. He stated:
"The capital markets in India have shown tremendous growth in the last few years.
Approvals for capital issues have exceeded Rs. 5,000 crores in 1986-87. They were
only about Ra.5O0cnureuio108B'8 l. For a healthy growth of a capital markets,
investors must be fully protected. Trading malpracrices must be prevented.
Government have decided to set up a separate board for the regulation and orderly
functioning of Stock Exchange and the securities industry".
5.5.1

Origin

By a Notification issued on 12th April, 1988, Securities and Exchange Board of India
(SERI), was constituted as an interim administrative body to function under the over
all administrative control of the Ministry of Finance, Government of India.
In July 1988, the SEBI, constituted as aforesaid, published an approach paper on
comprehensive legislation for securities market.
In the Budget Speech for the year 1990-91, the then Finance Minister stated:
"The previous Government had announced the formation of the Securities and
Exchange Board of India (SEBI) in 1988. Three years have passed and the legislation
for giving statutory authority to 8BB{bam not been introduced. We will ensure that
this is done in this budget session".
In the Budget Speech for 1991-92, the Finance Minister said:
"While presenting the budget for 1987-80,our former Prime Minister the late Shri
Rajiv Gandhi had assured this House 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 Board for the regulation and orderly functioning
of the stock exchanges and the securities industry. Although the Board was set up,
legislation to give the Board adequate powers was unfortunately not enacted. This
shall now be done forthwith and full statutory powers will be given to the Securities
and Exchange Board of India for administrating the relevant provisions of the
Securities contracts (Regulation) Act and the

25

Securities market in
India

Companies Act. Transferring these powers from the Controller of Capital Issues and
the Government to an independent body would enable it to effectively regulate,
promote and monitor the working of the stock exchanges in the country. A
comprehensive package of reforms relating to trading on the stock exchange,
including a system of national clearing and settlement and setting up of a central
depository, is also under active consideration".
Finally, in the budget Speech for 1992-93, the Finance Minister said:
"Financial sector reform also includes reform of the capital market, which will
increasingly play a vital role in mobilizing and allocating resources from the public.
Several initiatives announced in my budget speech last year have since been
implemented. The Securities and Exchange Board of India (SEBI), has now been
established on a statutory basis. As we gain experience, additional powers will be
given to SEBI to strengthen its capability."
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
rd
in Parliament on 3 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 Presidents assent. However, as provided for in section (3), this Act is to be deemed
to have come into force on 30th January, 1992, i.e., the date on which the SEBI
Ordinance was promulgated.
5.5.2

Functions

Under Section 11 of the SEBI Act it is provided that subject to the provisions of this
Act, it shall be the duty of the Board to protect the interest of investors in securities
and to promote the development of and to regulate the securities market, by such
measures as it thinks fit. It is further provided that without prejudice to the generality
of the foregoing provisions, the measures referred to therein may provide for:
a)
regulating the business in stock exchanges and any other securities markets;
registering and regulating the working of stock brokers, sub-brokers, share
b)
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisers and
such other intermediaries who may be associated with securities markets in any
manner;
registering and regulating the working of collective investment schemes,
c)
including mutual funds.
promoting and regulating self-regulatory organisations;
d)
prohibiting fraudulent and unfair trade practice relating to securities markets.
e)
promoting investors education and training of intermediaries of securities
f)
markets;
prohibiting insider trading in securities;
g)
regulating substantial acquisition of shares and take-over of companies;
h)
calling for information from, undertaking inspection, conducting inquiries and
i)
audit of the stock exchanges and intermediaries and self-regulatory
organisations in the securities market;
j)
performing such functions and exercising such powers under the provisions of
the Capital Issue (Control) Act, 1947 (29 of 1947) and the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central
Government.
k)
levying fees or other charges for carrying out the purpose of this section;
1)
conducting research for the above purpose;
m) performing such other functions as may be prescribed.

26

In sum and substance, Securities and Exchange Board of India has been constituted to
promote orderly and healthy development of the securities market and to provide
adequate investor protection. It aims to remove the unhealthy practices prevalent in
the Indian capital market and create an environment to facilitate mobilisation of
resources through the

securities market. Thus the Board plays a dual role by adopting regulatory functions
as well as playing an important developmental role. Its functions include :-

Regulation

1) To deal with all matters relating to development and regulation of the securities
market.
2) To administer various legislations affecting securities market.
3) Regulation of the market intermediaries viz: stock exchanges, stock brokers,
merchant bankers, mutual funds, etc.
4) To provide adequate investor protection.
5.5.3

Organization

The management of SEBI vests in the Board which consists of the following
members, namely:a)

a Chairman;

b)

two Members from amongst the officials of the Ministries of the Central
Government dealing with Finance and Law;

c)

one Member from amongst the officials of the Reserve Bank of India

d)

two other Members , to be appointed by the Central Government.

The general superintendence, direction and management of the affairs of the SEBI
vests in a Board of Members, which may exercise all powers and do all acts and
things which may be exercised or done by the Board. Save as otherwise determined by
regulations, the Chairman shall also have powers of general superintendence and
direction of the affairs of the Board and may also exercise all powers and do all acts
and things which may be exercised or done by the Board.
The Chairman and the Members referred to at (a) and (d) above shall be appointed by
the Central Government and the members referred to at (b) and (c) above shall be
nominated by the Central Government and the Reserve Bank of India respectively.
For day to day functions the activities of SEBI have been divided into five operational
departments viz.,
1. Primary markets-policy, intermediaries, investor grievances and guidance, etc.
2. Issue Management & Intermediary department
3. Secondary market-policy, operations and exchange administration, new
investment products and insider trading, etc.
4. Secondary market-exchange
intermediaries, etc

administration,

inspection

and

non-member

5. Institutional investment-Mutual funds and FIIs, mergers and acquisitions, research

& publications and internal regulation.
Each department is headed by an Executive Director. Besides these five departments,
there are legal and investigation departments.
5.5.4

Activities

The first major activity undertaken by SEBI was the preparation of an Approach paper
on comprehensive legislation for Securities markets. Since inception, SEBI has issued
a number of guidelines, rules, draft regulations, consultative papers, etc., in order to
regulate and develop the securities market and protect investors interest. Some
important guidelines, etc. issued by SEBI include:
a)

Rules regarding registration of intermediaries such as share transfer agents,

bankers to the issue, debenture trustees to the trust deeds, registrars to an
issue, underwriters, portfolio managers and investment advisors, stock
brokers and sub-brokers associated with the securities market.

27

Securities market in
India

b)

Guidelines for merchant bankers stating authorised activities of merchant

bankers, the authorisation criteria and the terms of authorisation.

c)

Code of conduct for merchant bankers, the violation, intentional or

otherwise, of which will make the merchant banker guilty of misconduct or
unprofessional conduct.

d)

Categorization of merchant bankers, under which merchant bankers have

been categorized into three categories. Category 1 merchant bankers are
authorized to act in the capacity of lead manager/co-manager/advisor or
consultant to an issue, portfolio manager and underwriter to an issue as
mandatory required. Category 11 merchant bankers are authorized to act in
the capacity of co-manager/advisor or consultant to an issue or portfolio
manager. Category III merchant bankers are authorized to act only in the
capacity of advisor or consultant to an issue.
It is also prescribed that Category I merchant bankers must have a minimum
net worth of Rs. 1 crore, the category II merchant banker a minimum
networth of Rs. 50 lakh, and the Category' III merchant bankers a minimum
networth of Rs. 20 lakh. Initial authorization fee for categories I, II and III
will be Rs. 5 lakh, 3 lakh and Rs. 1 lakh respectively.

e)

Circular regarding monitoring of merchant bankers where under penalty

points for non-compliance or defaults by merchant bankers would be
assigned which in turn would form the basis for suspension/cancellation of
authorisation of merchant bankers.

f)

Guidelines on portfolio management services which cover such aspects as

portfolio management activities, client relationship, investment tenure fees
to be paid to the portfolio manager, client's money account, investment of
client fund, periodical reports to clients and administrative powers of the
SEBI in this regard.

g)

Guidelines for lead managers for interse allocation of responsibilities which

require that wherever there are more than one lead manager to the issue
inter se allocation of the pre-issue and post-issue activities/sub-activities
will be properly made and information in this regard sent to SEBI.

h)

Guidelines regarding purchase of non-convertible part of debentures

(khokhas) from the subscribers

i)

Regulation for registrars and share transfer agents

j)

Regulation on insider trading

k)

Guidelines for mutual funds and asset management companies

l)

Draft regulation for substantial acquisition of shares in listed companies

m)

Consultative paper on free market pricing of capital issue

n)

Guidelines on capital issues/Guidelines for Disclosure and Investor

Protection along with clarifications from time to time.

o)

Guidelines on issue of securities by Development Financial Institutions

p)

Formation of two advisory committees, one on primary market and the

other on secondary market comprising members from profession, academic
and investing public.

SEBI has brought out some Acts, Regulations and Guidelines during the last one
decade covering various activities relating to securities market and intermediaries
connected with securities market.

28

1.

Depositories Act, 1996.

2.

SEBI (Depositories and Participants) Regulations, 1996.

3.

SEBI (Bankers to an Issue) Regulations, 1994.

4.

SEBI (Custodian of Securities) Regulations, 1996.

5.

SEBI (Debenture Trustees) Regulations, 1993.

6.

SEB1 (Foreign Institutional investors) Regulations, 1995.

7.

SEBI (Prohibition of Insider Trading) Regulation, 1992.

8.

SEBI (Merchant Bankers) Regulations, 1992.

9.

SEBI (Mutual Funds) Regulations, 1996.

10.

SEBI (Portfolio Managers) Regulations, 1993.

11.

SEBI (Registrars to an Issue and Share Transfer) Regulations, 1993.

12.

SEBI (Stock Brokers and sub Brokers) Regulations, 1992.

13.

SEBI (Substantial Acquisition and Takeover) Regulations, 1997.

14.

SEBI (Buy-back of Securities) Regulations, 1998

15.

SEBI (Underwriters) Regulations, 1993.

16.

SEBI (Venture Capital Funds) Regulations, 1992.

17.

SEBI (Central Lisiting Authority) Regulations, 2003

Regulation

Some of the above Regulations are amended from time to time to include the
necessary changes from the practical experience. Some of the important guidelines are
given in the Appendix 5.2.

5.6

SELF REGULATION

In the foregone sections, we have discussed the regulatory framework applicable to

primary and secondary markets in India. The focus of discussion has been on what
may be called legislative regulation of securities market. In addition to legislative
regulation, self-regulation is equally important. Indeed in developed securities markets
like U.K. self-regulation plays an important role. There exist a number of selfregulatory organizations (SROs) which really complement legislative regulation.
The spirit of self-regulation had been prevalent in the Indian securities market as well.
If one looks at the powers given to recognized stock exchanges in India to make and
enforce bye-law under the Securities Contracts (Regulation) Act, 1956, one tends to
conclude that Indian stock exchange have been envisaged as self-regulatory
organizations. Just to elaborate the point let us look at section 9 of the Securities
Contracts (Regulation) Act, 1956, which states as follows:
Any recognized stock exchange may, subject to the previous approval of the Central
Government (till 1991) and Securities and Exchange Board of India (since 1992)
make bye-laws for the regulation and control of contracts.
In particular, without prejudice to the generality of the foregoing power, such byelaws may provide for:
a) The opening and closing of markets and the regulation of the hours of trade;
b) A clearing house for the periodical settlement of contracts and difference
thereunder, the delivery of the payment for securities, the passing on of delivery
orders and the regulation and maintenance of such a clearing house;
c) The submission to the Central Government (till 1991) and Securities and
Exchange Board of India (since 1992) by the clearing house as soon as may be
after each periodical settlement of all or any of the following particulars as the
Central Government (till 1991) and Securities and Exchange Board of India (since
1992) may, from time to time to another,

29

Securities market in
India

The total number of each category of security carried over from one
settlement period to another;

ii)

The total number of each category of security contracts which have been
squared up during the course of each settlement period;

iii)

The total number of each category of security actually delivered each

clearing;

d)

The publication by the clearing house of all or any of the particulars submitted
to the Central Government (till I991) and Securities and Exchange Board of
India (since 11992) under the clause subject to the directions, if any, issued
by the Central Government (till 1991). Securities and Exchange Board of India
since 1992) in this behalf;

e)

The regulation or prohibition of blank transfers;

f)

The number and classes of contracts in respect of which settlements shall be

made or difference paid through the clearing house;

g)

The regulation, or prohibition of badlas or carry-over facilities;

h)

The fixing, altering or postponing of days for settlements;

i)

The determination and declaration of market rates, including the opening,

closing, highest and lowest rates for securities;

j)

The terms, conditions and incidents of contracts, including the prescription of

margin requirements, if any, and conditions relating thereto, and the forms of
contracts in writing;

k)

The regulation of the entering into, making performance, recession and

termination, of contracts, including contracts between members or between a
member and his constituent or between a member and a person who is not a
member, and the consequences of default or insolvency on the part of a seller or
buyer or intermediary, the consequences of a breach by a seller or buyer, and
the responsibility of members who are not parties to such contracts;

l)

The regulation of taravani business including the placing of limitations thereon;

m)

The listing of securities on the stock exchange, the inclusion of any security for
the purpose of dealings and the suspension or withdrawal of any such securities,
and the suspension or prohibition of trading in any specified securities;

n)

The method and procedure for the settlement of claims or disputes, including
settlement by arbitration;

o)

The levy and recovery fees, fines and penalties;

p)

The regulation of the course of business between parties to contracts in any

capacity;

q)

The fixing of a scale of brokerage and other charges;

r)

30

i)

The making, comparing, settling and closing of bargains;

s)

The emergencies in trade which may arise, whether as a result of pool or

syndicated operations or cornering or otherwise, and the exercise of powers in
such emergencies including the power to fix maximum and minimum prices for
securities;

t)

The regulation of dealings by members for their own account;

u)

The separation of the functions of jobbers and brokers;

v)

The-limitations on the volume of trade done by any individual member in

exceptional circumstances;

w)

The obligation of members to supply such information or explanation and to

produce such documents relating to the business as the governing body may
require.

3)

The bye-laws made under this section may:

a)

Specify the bye-laws, the contravention of which shall make a contract

entered into otherwise than in accordance with the bye-laws void under
sub-section (1) of section (14);

b)

Provide that the contravention of any of the bye-laws shall render the
member concerned liable to one or more of the following: punishments,
namely:
i)

Regulation

Fine

ii) Expulsion from membership,

iii) Suspension from membership for a specified period,
iv) Any other penalty of a like nature not involving the payment of
money.
4)

Any bye-laws made under this section shall be subject to such conditions in
regard to previous publications as may be prescribed, and, when approved by
the Central Government (till 1991) and Securities and Exchange Board of India
(since 1992) shall be published in the Gazette of India and also in the Official
Gazette of the State in which the principal office of the recognised stock
exchange is situated and shall have effect as from the date of its publication in
the Gazette of India:

Provided that if the Central Government (till 1991) and Securities and Exchange
Board of India (since 1992) is satisfied in any case that in the interest of the trade or in
the public interest any bye-laws should be made immediately, it may, by ordering in
writing, specifying the reasons thereof, dispense with the condition of previous
publication.
The foregone discussion clearly shows that Indian stock exchanges have been
envisaged as self-regulatory bodies. Of late, merchant banks and mutual funds have
also been envisaged as SROs. Unfortunately, the record of Indian stock exchanges as
SROs has been dismal. Despite various malpractices prevalent in stock exchanges,
hardly any disciplinary action had been initiated against any member of the stock
exchange. Recent inspection by SEBI of some of the stock exchanges have clearly
brought out that their bye-laws relating to margins, etc. have been observed more in
breach. Nevertheless it can't be denied that self-regulation is a necessary complement
to legislative regulation of securities market in any country.
Activity-2
i)

ii)

What do the following stand for:

SEBI

..

SIB

..

SEC

..

List down any five important changes that SEBI has brought in the last five
years.

iii)

Briefly explain the need for self-regulation in monitoring security market

dealings.

5.7 SUMMARY
In this Unit, we have discussed the legal and regulatory framework applicable to the
securities market in India. We have observed that while there are a host of Acts which
affect and regulate the securities market in India, the two most important were
Securities

31

Securities market in
India

Contract (Regulation) Act, 1956 and set of Regulations and Guidelines issued by
Security Exchange Board of India. In 1992, the Securities and Exchange Board of
India Act, 1992 was passed to create Securities and Exchange Board of India as a
statutory body to act as a nodal regulatory body for the regulation and development of
securities market in India and protect and promote investors interest. This unit has
also discussed the origin, functions, organization and activities of SEBI at some
length. After discussing the current status of regulations governing securities markets
in India, this unit has also highlighted the role of self-regulation vis--vis legislative
regulation. You are advised to study the Appendes given along with this unit and the
other regulation of SEBI which are available in SEBI's website in order to better
appreciate the legal and regulatory framework of the securities markets in India.

5.8

SELF-ASSESSMENT QUESTIONS/EXERCISES

1.

Effective regulation is an essential condition for orderly growth of securities

market' Discuss.

2.

Write a brief note on the history of regulation of securities market in India.

3.

Between self-regulation and legislative regulation, which is more relevant for

India and why?

4.

Discuss the objectives and functions of Securities and Exchange Board of India.

5.

`SEBI is an independent Board.' Do you agree? Why?

6.

Who can be a Member of a Stock Exchange in India?

7.

In a short span of its existence, SEBI has been able to fully meet its objectives.'
Critically comment.

8.

What measures have been adopted in India to protect investors' interest in the
securities market?

5.9

FURTHER READINGS

Casey, John L., Ethics in the Financial Market Place, New York: Scudder, Stevens &
Clark, 1990
Hammer, Richard M., Gilbert Simonetti Jr., and Charles T Crawford, eds. Investment
Regulation around the world, Somerset, N.J.: Ronald Press, 1983
Ramaiya, A, Guide to the Companies Act, Agra Wadwa & Co., (refer latest edition
and Volumes relating to SEBI Regulations)
Web Sites:
U.S. Security Exchange Commission: www.sec.gov
Financial Service Authority, UK: www.fsa.gov.uk
SEBI, India: www.sebi.gov.in

32

APPENDIX 5.1
THE SECURITIES CONTRACTS (REGULATION) ACT, 1956*
(ACT NO:42 OF 1956)

Regulation

An Act to prevent undesirable transactions in securities by regulating the business of

dealing therein.[***]1 by providing for certain other matters connected therewith.
Be it enacted by Parliament in the Seventh Year of the Republic of India as follows:

CHAPTER I : PRELIMINARY
Short title, extent and commencement
1.
(1) This Act may be called the Securities Contracts (Regulation) Act, 1956.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by
notification in the Official Gazette appoint.2
Definitions
2.
In this Act, unless the context otherwise requires,(a) "contract" means a contract for or relating to the purchase or sale of
securities; (aa) "derivative" includes A. a security derived from a debt instrument, share. loam whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
B. a contract which derives its value from the prices, or index or prices, of
underlying securities;'
(b) "Government security" means a security created and issued. whether
before or after the commencement of this Act, by the Central
Government or a State Government for the purpose of raising a
public loan and having one of the forms specified in clause (2) of
section 2 of the Public Debt Act, 1944 (18 of 1944);
(c) "member" means a member of a recognised stock exchange:
(d) "option in securities" means a contract for the purchase or sale of a
right to buy or sell, or a right to buy and sell, securities in future, and
includes a teji, a mandi,a tezimandi, a galli, a put, a call or a put and
call in securities;
(e) "prescribed" means prescribed by rules made under this Act;
(f) "recognised stock exchange" means a stock exchange which is for the
time being recognised by the Central Government under section 4;
(g) "rules", with reference to the rules relating in general to the
constitution and management of a stock exchange, includes, in the
case of a stock exchange which is an incorporated association, its
memorandum and articles of association;
(ga) "Securities Appellate Tribunal" means a Securities Appellate
Tribunal established under sub-section (1) of section 15K of the
Securities and Exchange Board of India Act, 1992.4
1

The words "by prohibiting options and" omitted by the Securities Laws
(Amendment)Act, 1995, west: 25-3-1995.

The Act came into force on 20 February, 1957 vide Notification No.SRO '528,
dated 6 February, 1957 published in Gazette of India, Extraordinary, Part II. section
3, page 549, dated 16 February, 1957.

Inserted by Securities Laws ( Second Amendment ) Act,1999 vide Gazette

notification dated December 16, 1999.
1

I bid

*As Amended Upto 03/01/2000

Source: SEBI's Website

33

Securities market in
India

(h)

Securities include(i)

(ii)

shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated company
or other body corporate;
(ia)

derivative;

(ib)

units or any other instrument issued by any collective investment

scheme to the investors in such schemes,'

Government securities;

(iia) such other instruments as may be declared by the Central Government to

be securities; and
(iii) rights or interests in securities;
(i)

spot delivery contract means a contract which provides for,(a)

actual delivery of securities and the payment of a price therefor either on

the same day as the date of the contract or on the next day, the actual
period taken for the despatch of the securities or the remittance of money
therefor through the post being excluded from the computation of the
period aforesaid if the parties to the contract do not reside in the same
town or locality;

(b)

transfer of the securities by the depository from the account of a

beneficial owner to the account of another beneficial owner when such
securities are dealt with by a depository;]'

(j)

"stock exchange" means anybody of individuals, whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities.

2A.

Words and expressions used herein and not defined in this Act but defined in the
Companies Act, 1956 or the Securities and Exchange Board of India Act; 1992
or the Depositories Act, 1996 shall have the same meanings respectively
assigned to them in those Acts.'

Ibid

Substituted for "(ii) Government Securities; and" by the Securities and Exchange
Board of India Act, 1992, w.e.f. 30-1-1992.

Substituted for the following:

(i) "spot delivery contract" means a contract which provides for the actual
delivery of securities and the payment of a price therefor either on the same
day as the date of the contract or on the next day, the actual period taken for
the despatch of the securities or the remittance of money therefor through the
post being excluded from the computation of the period aforesaid if the parties
to the contract do not reside in the same town or locality;"
by the Depositories Act, 1996 (22 of 1996), w.e.f. 12-8- 1996.

34

supra n.3

CHAPTER II : RECOGNISED STOCK EXCHANGES

Application for recognition of stock exchanges
3. (1)
Any stock exchange, which is desirous of being recognised for the purposes
of this Act may make an application in the prescribed manner to the Central
Government.
(2)
Every application under sub-section (1) shall contain such particulars as
may be prescribed, and shall be accompanied by a copy of the bye- laws of
the stock exchange for the regulation and control of contracts and also a
copy of the rules relating in general to the constitution of the stock exchange
and in particular, toa. the governing body of such stock exchange, its constitution and powers
of management and the manner in which its business is to be
transacted;
b. the powers and duties of the office bearers of the stock exchange;
c. the admission into the stock exchange of various classes of members,
the qualifications, for membership, and the exclusion, suspension,
expulsion and readmission of members therefrom or thereinto;
d. the procedure for the registration of partnerships as members of the
stock exchange in cases where the rules provide for such membership;
and the nomination and appointment of authorised representatives and
clerks.
Grant of recognition to stock exchanges
4. (1)
If the Central Government is satisfied, after making such inquiry as may be
necessary in this behalf and after obtaining such further information, if any,
as it may require:
(a) that the rules and bye-laws of a stock exchange applying for
registration arc in conformity with such conditions as may be
prescribed with a view to ensure fair dealing and to protect investors;
(b) 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 acid the nature of the securities dealt with by it, may
impose for the purpose of carrying out the objects of this Act; and
(c) that it would be 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 as aforesaid and in such form as may be prescribed.
(2)
The conditions which the Central Government may prescribe under clause
(a) of sub-section (1) for the grant of recognition to the stock exchanges
may include, among other matters, conditions relating to (i)
the qualifications for membership of stock exchanges;
(ii)
the manner in which contracts shall be entered into and enforced as
between members;
(iii) the representation of the Central Government on each of the stock
exchanges by such number of persons not exceeding three as the
Central Government may nominate in this behalf; and
(iv) the maintenance of accounts of members and their audit by chartered
accountants whenever such audit is required by the Central
Government.
(3)
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 situated, and such
recognition shall have effect as from the date of its publication in the
Gazette of India.
(4)
No rules of a recognised stock exchange relating to any of the matters
specified in sub-section (2) of section 3 shall be amended except with the
approval of the Central Government. Withdrawal of recognition 5. If the
Central Government is of the opinion that the recognition granted to a stock
exchange under the provisions of this Act should, in

Regulation

35

Securities market in
India

the interest of the trade or in the public interest, be withdrawn, the Central
Government is considering the withdrawal of the recognition for the
reasons stated in the notice 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:
Provided that no such withdrawal shall affect the validity of any contract entered into
or made before the date of the notification, and the Central Government may, after
consultation with the stock exchange, make such provision as it deems fit in the
notification of withdrawal or in any subsequent notification similarly published for the
due performance of any contracts outstanding on that date. Power of Central
Government to call for periodical returns or direct inquiries to be made 6. (1)
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.
(2) 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].10
(3) Without prejudice to the provisions contained in sub-sections (1) and (2), the
[Securities and Exchange Board of India]11, 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 writinga. call upon a recognised stock exchange or any member thereof to furnish in
writing such information or explanation relating to the stock exchange as
the [Securities and Exchange Board of India]12 may require; or
b. appoint one or more persons to make an inquiry in the prescribed manner in
relation to the affairs of any of the members of the stock exchange in
relation to the-stock exchange and submit a report of the result of such
inquiry to the [Securities and Exchange Board of India].13
(4) Where an inquiry in relation to the affairs of a recognised stock exchange or the
affairs of any of its members in relation to the stock exchange has been
undertaken under sub-section (3)(a) every director, manager, secretary or other officer of such stock exchange;
(b) every member of such stock exchange:
(c) if the member of the stock exchange is a firm, every partner, manager,
secretary or other officer of the firm; and
(d) every other person or body of persons who has had dealings in the course of
business with any of the persons mentioned in clauses (a), (b) and (c)
whether directly or indirectly; shall be bound to produce before the
authority making the inquiry all such books of account, and other
documents in his custody or power relating to or having a bearing on the
subject-matter of such inquiry and also to furnish the authorities within such
time as may be specified with any such statement or information relating
thereto as may be required of him.
Annual reports to be furnished to Central Government by stock exchanges 7.
Every recognised stock exchange shall furnish the Central Government with a copy of
the annual report, and such annual report shall contain such particulars as may be
prescribed. Power of recognised stock exchange to make rules restricting voting
rights, etc. 7A. (1) A recognised stock exchange may make rules or amend any rules
made by it to provide for all or any of the following matters, namely:
9

Substituted for "Central Government" by the Securities and Exchange Board of India
Act, 1992, w.e.f. 30-1-1992.

36

10

lbid

11

Ibid

12

lbid

13

lbid

(a)

the restriction of voting rights to members only in respect of any matter placed before
the Regulation stock exchange at any meeting;
(b) the regulation of voting rights in respect of any matter placed before the stock
exchange at any meeting so that each member may be entitled to have one vote only,
irrespective of his share of the paid-up equity capital of the stock exchange;
(c) the restriction on the right of a member to appoint another person as his proxy to
attend and vote at a meeting of the stock exchange; and
(d) such incidental, consequential and supplementary matters as may be necessary to
give effect to any of the matters specified in clauses (a), (b) and (c).
(1) No rules of a recognised stock exchange made or amended in relation to any matter
referred to in clauses (a) to (d) of sub-section (1) shall have effect until they have
been approved by the Central Government and published by that Government in the
Official Gazette and, in approving the rules so made or amended, the Central
Government may make such modifications therein as it thinks fit, and on such
publication, the rules as provided by the Central Government shall be deemed to have
been validly made, notwithstanding anything to the contrary contained in the
Companies Act, 1956 (1 of 1956). Power of Central Government to direct rules to
be made or to make rules 8. (I) Where, after consultation with the governing bodies
of stock exchanges generally or with the governing body of any stock exchange in
particular, the Central Government is of the opinion that it is necessary or expedient
so to do, it may, by order in writing together with a statement of the reasons therefor,
direct recognised stock exchanges generally or any recognised stock exchange in
particular, as the case may be, to make any rules or to amend any rules already made
in respect of all or any of the matters specified in sub-section (2) of section 3 within a
period of [two months]14from the date of the order.
(2) If any recognised stock exchange fails or neglects to comply with any order made
under sub-section (1) within the period specified therein, the Central Government
may make the rules for, or amend the rules made by, the recognised stock exchange,
either in the form proposed in the order or with such modifications thereof as may be
agreed to between the stock exchange and the Central Government.
(3) Where in pursuance of this section any rules have been made or amended, the rules
so made or amended shall be published in the Gazette of India and also in the Official
Gazette or Gazettes of the State or States in which the principal office or offices of
the recognised stock exchange or exchanges is or are situate, and, on the publication
thereof in the Gazette of India, the rules so made or amended shall, notwithstanding
anything to the contrary contained in the Companies Act, 1956 (I of 1956), or in any
other law for the time being in force, have effect as it they had been made or
amended by the recognised stock exchange or stock exchanges, as the case may be.
Power of recognised stock exchange to make bye-laws 9. (1) Any recognised stock
exchange may, subject to the previous approval of the [Securities and Exchange
Board of India],15 make bye-laws for the regulation and control of contracts.
(4) In particular, and without prejudice to the generality of the foregoing power, such
bye-laws may provide for
(a) the opening and closing of markets and the regulation of the hours of-trade;
(b) a clearing house for the periodical settlement of contracts and differences
thereunder, the delivery of and payment for securities, the passing on of
delivery orders and the regulation and maintenance of such clearing house;
(c) the submission to the [Securities and Exchange Board of India]16 by the
clearing house as soon as may be after each periodical settlement of all or any
of the following particulars as the [Securities and Exchange Board of
India]17may, from time to time require, namely:
(i) the total number of each category of security carried over from one
settlement period to another.
14
Substituted by the Securities Laws (Amendment) Act, 1995, w.e.f 25-3-1995 for six
months .
15
Substituted for "Central Government" by the Securities and Exchange Board of India Act,
1992, w.e.f. 30-1-1992.
16
Ibid
17
Ibid

Regulation

37

Securities market in
India

(d)

(e)
(f)
(g)
(h)
(i)
(j)

(k)

(l)
(m)

(n)
(o)
(p)
(q)
(r)

(3)

38

18
19

(ii) the total number of each category of security, contracts in respect of

which have been squared up during the course of each settlement period.
(iii) the total number of each category of security actually delivered at each
clearing;
the publication by the clearing house of all or any of the particulars submitted to
the [Securities and Exchange Board of lndia]18 under clause (c) subject to the
directions, if any, issued by the [Securities and Exchange Board of India]19 in
this behalf;
the regulation or prohibition of blank transfers;
the number and classes of contracts in respect of which settlements shall be
made or differences paid through the clearing house;
the regulation, or prohibition of badlas or carry-over facilities;
the fixing, altering or postponing of days for settlements;
the determination and declaration of market rates, including the opening,
closing, highest and lowest rates .for securities;
the terms, conditions and incidents of contracts, including the prescription of
margin requirements, if any, and conditions relating thereto, and the forms of
contracts in writing;
the regulation of the entering into, making, performance, rescission and
termination, of contracts, including contracts between members or between a
member and his constituent or between a member and a person who is not a
member, and the consequences of default or insolvency on the part of a seller or
buyer or intermediary, the consequences of a breach or omission by a seller or
buyer, and the responsibility of members who are not parties to such contracts;
the regulation of taravani business including the placing of limitations thereon;
the listing of securities on the stock exchange, the inclusion of any security for
the purpose of dealings and the suspension or withdrawal of any such securities,
and the suspension or prohibition of trading in any specified securities;
the method and procedure for the settlement of claims or disputes, including
settlement by arbitration;
the levy and recovery of fees, tines and penalties;
the regulation of the course of business between parties to contracts in any
capacity;
the fixing of a scale of brokerage and other charges;
the emergencies in trade which may arise, whether as a result of pool or
syndicated operations or cornering or otherwise, and the exercise of powers in
such emergencies including the power to fix maximum and minimum prices for
securities;
(s) the regulation of dealings by members for their own account;
the separation of the functions of jobbers and brokers;
(t)
(u) the limitations on the volume of trade done by any individual member in
exceptional circumstances;
(v) the obligation of members to supply such information or explanation and
to produce such documents relating to the business as the governing body
may require.
The bye-laws made under this section may:
(a) specify the bye-laws, the contravention of which shall make a contract
entered into otherwise than in accordance with the bye- laws void under
sub-section (1) of section 14;
(b) provide that the contravention of any of the bye-laws shall render the
member concerned liable to one or more of the following punishments,
namely:
fine,
(i)
(ii) expulsion from membership,

lbid
lbid

(4)

(iii)
suspension from membership for a specified period,
(iv)
any other penalty of a like nature not involving the payment of money.
Any bye-laws made under this section shall be subject to such conditions in regard to
previous publication as may be prescribed, and, when approved by the [Securities and
Exchange Board of India]20 shall be published in the Gazette of India and also in the
Official Gazette of the State in which the principal office of the recognised stock exchange
is situate, and shall have effect as from the date of its publication in the Gazette of India:
Provided that if the [Securities and Exchange Board of India]21 is satisfied in any case that
in the interest of the trade or in the public interest any bye-laws should be made
immediately, it may, by order in writing specifying the reasons therefor, dispense with the
condition of previous publication. Power of [Securities and Exchange Board of 1ndia]22
to make or amend bye-laws of recognised stock exchanges 10. (1) The [Securities and
Exchange Board of India ]23 may, either on a request in writing received by it in this behalf
from the governing body of a recognised stock exchange or on its own motion, if it is
satisfied after consultation with the governing body of the stock exchange that it is
necessary or expedient so to do and after recording its reasons for so doing, make bye-laws,
for all or any of the matters specified in section 9 or amend any bye-laws made by such
stock exchange under that section.
Where in pursuance of this section any bye-laws have been made or amended, the
(2)
bye-laws so made or amended shall be published in the Gazette of India and also in
the Official Gazette of the State in which the principal office of the recognised stock
exchange is situated, and on the publication thereof in the Gazette of India. the byelaws so made or amended shall have effect as if they had been made or amended by
the recognised stock exchange concerned.
(3)
Notwithstanding anything contained in this section, where the governing body of a
recognised stock exchange objects to any bye-laws made or amended under this
section by the [Securities and Exchange Board of India]24 on its own motion, it may,
within [two months]25 of the publication thereof in the Gazette of India under subsection (2), apply to the [Securities and Exchange Board of India]26 for revision
thereof the [Securities and Exchange Board of India]27 may, after giving an
opportunity to the governing body of the stock exchange to be heard in the matter,
revise the bye-laws so made or amended, and where any bye-laws so made or
amended are revised as a result of any action taken under this sub- section, the byelaws so revised shall be published and shall become effective as provided in subsection (2).
(4)
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:
Provided that if the [Securities and Exchange Board of India]28 is satisfied in
any case that in the interest of the trade or in the public interest any bye-laws should
be made, amended or revised immediately, it may, by order in writing specifying the
reasons therefor, dispense with the condition of previous publication. Power of
Central Government to supersede governing body of a recognised stock
exchange 11. (1) Without prejudice to any other powers vested in the Central
Government under this Act, where the Central Government is of the opinion that the
governing body of any recognised stock exchange should be superseded, then, not
withstanding anything contained in any other law for the time being in force, the
Central Government may serve on the governing body a written notice that the
Central Government is considering the supersession of the governing body for the
reasons specified in the notice and after giving an opportunity to the governing body
to be heard in the matter, it may, by notification in the Official Gazette declare the
governing body of such stock exchange to be superseded, and may appoint any
person or persons to exercise and perform all the powers and duties of the governing
body, and where more persons than one are appointed, may appoint one of such
persons to be the chairman and another to be the vice-chairman thereof.

Regulation

20

lbid

21

lbid

22

lbid

23

Ibid

24

Ibid

25

Substituted by the Securities Laws (Amendment) Act, 1995, w.e.f. 25-1-1995 for "six months".

26

supra n.13

27

lbid

28

Ibid

39

Securities market in
India

(2)

On the publication of a notification in the Official Gazette under sub-section (1),

the following consequences shall ensue, namely(a)

the members of the governing body which has been superseded shall, as
from the date of the notification of supersession, cease to hold office as
such members;

(b)

the person or persons appointed under sub-section (1) may exercise and
perform all the powers and duties of the governing body which has been
superseded;

(c)

all such property of the recognised stock exchange as the person or

persons appointed under sub-section (1) may, by order in writing, specify
in this behalf as being necessary for the purpose of enabling him or them
to carry on the business of the stock exchange, shall vest in such person or
persons.

(3)

Notwithstanding anything to the contrary contained in any law or the rules or

bye-laws of the recognised stock exchange the governing body of which is
superseded under sub-section (1), the person or persons appointed under that
sub-section shall hold office for such period a may be specified in the
notification published under that sub-section and, the Central Government may
from time to time, by like notification, vary such period.

(4)

The Central Government may at any time before the determination of the period
of office of any person or persons appointed under this section call upon the
recognised stock exchange to reconstitute the governing body in accordance
with its rules and on such re-constitution all the property of the recognised stock
exchange which has vested in, or was in the possession of, the person or persons
appointed under sub-section (1), shall re-vest, as the case may be, in the
governing body so re-constituted:

Provided that until a governing body is so re-constituted, the person or persons

appointed under sub-section (1), shall continue to exercise and perform their powers
and duties. Power to suspend business of recognised stock exchanges 12. If in the
opinion of the Central Government an emergency has arisen and for the purpose of
meeting the emergency the Central Government considers it expedient so to do, it
may, by notification in the Official Gazette, for reasons to be set out therein, direct a
recognised stock exchange to suspend such of its business for such period not
exceeding seven days and subject to such conditions as may be specified in the
notification, and if, in the opinion of the Central Government, the interest of the trade
or the public interest requires that the period should be extended may, by like
notification extend the said period from time to time.
Provided that where the period of suspension is to be extended beyond the first period,
no notification extending the period of suspension shall be issued unless the governing
body of the recognised stock exchange has been given an opportunity of being heard
in the matter.

40

CHAPTER III : CONTRACTS AND OPTIONS IN

SECURITIES

Regulation

Contracts in notified areas illegal in certain circumstances 13: If the Central Government is
satisfied, having regard to the nature or the volume of transactions in securities in any State or
area, that it is necessary so to do, it may, by notification in the Official Gazette, declare this
section to apply to such State or area, and thereupon every contract in such State or area which
is entered into after date of the notification otherwise than between members of a recognised
stock exchange in such State or area or through or with such member shall be illegal.
[Additional trading floor 13A. A stock exchange may establish additional trading floor
with the prior approval of the Securities and Exchange Board of India in accordance
with the terms and conditions stipulated by the said Board.]
Explanation: For the purposes of this section `additional trading floor' means a trading
ring or trading facility offered by a recognised stock exchange outside its area of operation
to enable the investors to buy and sell securities through such trading floor under the
regulatory framework of the stock exchange.]29 Contracts in notified areas to be void in
certain circumstances 14. (1) Any contract entered into in any State or area specified in the
notification under section 13 which is in contravention of any of the bye- laws specified in that
behalf under clause (a) of sub-section (3) of section 9 shall be void:

(2)

(i)

as respects the rights of any member of the recognised stock exchange who has
entered into such contract in contravention of any such bye-laws, and also

(ii)

as respects the rights of any other person who has knowingly participated in the
transaction entailing such contravention.

Nothing in sub-section (1) shall be construed to affect the right of any person other than
a member of the recognised stock exchange to enforce any such contract or to recover
any sum under or in respect of such contract if such person had no knowledge that the
transaction was in contravention of any of the bye-laws specified in clause (a) of subsection (3) of section 9. Members may not act as principals in certain circumstances 15.
No member of a recognised stock exchange shall in respect of any securities enter into
any contract as a principal with any person other than a member of a recognised stock
exchange, unless he has secured the consent or authority of such person and discloses in
the note, memorandum or agreement of sale or purchase that he is acting as a principal:

Provided that where the member has secured the consent or authority of such person otherwise
than in writing he shall secure written confirmation by such person of such consent or
authority within three days from the date of the contract:
Provided further that no such written consent or authority of such person shall be necessary for
closing out any outstanding contract entered into by such person in accordance with the byelaws, if the member discloses in the note, memorandum or agreement of sale or purchase in
respect of such closing out that he is acting as a principal. Power to prohibit contracts in
certain cases 16.
(1)

If the Central Government is of opinion that it is necessary to prevent undesirable

speculation in specified securities in any State or area, it may, by notification in the
Official Gazette, declare that no person in the State or area specified in the notification
shall, save with the permission of the Central Government, enter into any contract for
the sale or purchase of any security specified in the notification except to the extent and
in the manner, if any, specified therein.

(2)

All contracts in contravention of the provisions of sub-section (1) entered into after the
date of the notification issued thereunder shall be illegal. Licensing of dealers in
securities in certain eases 17. (1) Subject to the provision of sub-section (3) and to the
other provisions contained in this Act, no person shall carry, on or purport to carry on,
whether on his own behalf or on behalf of any other person, the business of dealing in
securities in any State or area to which section 13 has not been declared to apply and to
which the Central Government may, by notification in the Official Gazette declare this
section to apply, except under the authority of a licence granted by the [Securities and
Exchange Board of lndia]30 in this behalf.

(3)

No notification under sub-section (1) shall be issued with respect to any State or area
unless the Central Government is satisfied, having regard to the manner in which
securities are being dealt with in such State or area, that it is desirable or expedient in
the interest of the trade or in the public interest that such dealings should be regulated
by a system of licensing.

29
30

Inserted by the Securities Laws (Amendment) Act, 1995, w.e.f. 25-1-1995.

supra n. 9.

41

Securities market in
India

(3)

The restrictions imposed by sub-section (1) in relation to dealings in securities

shall not apply to the doing of any thing by or on behalf of a member of any
recognised stock exchange. Exclusion of spot delivery contracts from sections
13, 14, 15 and 17 18. (1) Nothing contained in sections 13, 14, 15 and 17 shall
apply to spot delivery contracts.

(2)

Notwithstanding anything contained in sub-section (1), if the Central

Government is of opinion that in the interest of the trade or in the public interest
it is expedient to regulate and control the business of dealing in spot delivery
contracts also in any State or are (whether section 13 has been declared to apply
to that State or area or not), it may. by notification in the Official Gazette,
declare that the provisions of section 17 shall also apply to such State or area in
respect of spot delivery contracts generally or in respect of spot delivery
contract for the sale or purchase of such securities as may be specified in the
notification, and may also specify the manner in which, and the extent to which,
the provision of that section shall so apply.
18A. Notwithstanding anything contained in any other law for the time being in
force, contracts area.

traded on a recognised stock exchange:

b.

settled on the clearing house of the recognised stock exchange, in

accordance with the rules and bye-laws of such stock exchange.31

Stock exchanges other than recognised stock exchanges prohibited

19. (1) No person shall, except with the permission of the Central Government,
organise or assist in organising or be a member of any stock exchange
(other than a recognised stock exchange) for the purpose of assisting in,
entering into or performing any contracts in securities.
(2) This section shall come into force in any State or area on such date, as the
Central Government may, by notification in the Official Gazette, appoint.
[Prohibition of options in securities
20. Omitted by the Securities Laws (Amendment) Act, 1995, w.e.f. 25-1-1995]32
31

supra n. 3

32

Prior to omission it read as under: Prohibition of options in securities1. Notwithstanding anything contained in this Act or in any other law for die
time being in force, all options in securities entered into after the
commencement of this Act shall be illegal.
2. Any option in securities which has been entered into before such
commencement and which remains to be performed whether wholly or in part,
after such commencement, shall to that extent, become void.

42

CHAPTER

Regulation

IV : LISTING OF SECURITIES [****]33

[Conditions for listing

21.

Where securities are listed on the application of any person in any recognized stock exchange,
such person shall comply with the conditions off the listing agreement with that stock exchange.]34
Right of appeal against refusal of stock exchanges to list securities of public companies

22.

Where a recognised stock exchange acting in pursuance of any power given to it by its bye- laws,
refuses to list the securities of any public company or collective investment scheme,35 the company
or scheme 36shall be entitled to be furnished with reasons for such refusal, any may(a)

within fifteen days from the date on which the reasons for such refusal are furnished to it, or

(b)

where the stock exchange has omitted or failed to dispose of, within the time specified in
sub-section (1) of section 73 of the Companies Act, 1956 (1 of 1956) (hereafter in this
section referred to as the "specified time"), the application for permission for the shares or
debentures to be dealt with on the stock exchange, within fifteen days from the date of
expiry of the specified time or within such further period, not exceeding one month, as the
Central Government may, on sufficient cause being shown, allow, appeal to the Central
Government against such refusal, omission or failure, as the case may be, and thereupon the
Central Government may, after giving the Stock Exchange an opportunity of being heard(i)

vary or set aside the decision of the stock exchange; or

(ii)

where the stock exchange has omitted or failed to dispose of the application within
the specified time, grant or refuse the permission, and where the Central Government
sets aside the decision of the recognised stock exchange or grants the permission, the
stock exchange shall act in conformity with the orders of the Central Government.

Provided that no appeal shall be preferred against refusal, omission or failure, as the case may be,
under. this section on and after the commencement of the Securities Laws (Second Amendment) Act,
1999.37
Right of Appeal to Securities Appellate Tribunal against refusal of stock exchange to list securities
of public companies
22A. (1)

Where a recognised stock exchange, acting in pursuance of any power given to it by its byelaws, refuses to list the securities of any public company, the company shall be entitled to be
furnished with reasons for such refusal, and maya.

within fifteen days from the date on which the reasons for such refusal are furnished to
it, or

b.

where the stock exchange has omitted or failed to dispose of, within the time specified
in sub-section (1) of section 73 of the Companies Act, 1956 (hereafter in this section
referred to as the "specified time"), the application for permission for the ,shares or
debentures to be dealt with on the stock exchange, within fifteen days from the date of
expiry of the specified time or within such further period, not exceeding one month, as
the Securities Appellate Tribunal may, on sufficient cause being shown, allow, appeal
to the Securities Appellate Tribunal having jurisdiction in the matter against such
refusal, omission or failure, as the case may be, and thereupon the Securities Appellate
Tribunal may, after giving the stock exchange, an opportunity of being heard-

33

"By public companies" omitted by Securities Laws (Second Amendment) Act, 1999
16.12.1999.

34

Substituted by the Securities Laws (Amendment) Act, 1995, w.e.f. 25-1-1995 for the following:

w.e.f

21. Power to compel listing of securities by public companies- Notwithstanding anything

contained in any other law for the time being in force, if the Securities and Exchange Board of
India is of opinion, having regard to the nature of the securities issued by any public company as
defined in the Companies Act, 1956 (1 of 1956), or to the dealings in them, that it is necessary or
expedient in the interest of the trade or in the public interest so to do, it may require the company,
after giving it an opportunity of being heard in the matter, to comply with such requirements as
may be prescribed with respect to the listing of its securities on any recognised stock exchange."
35

Supra n. 3.

36

Ibid.

37

Inserted by Securities Laws (Second Amendment) Act, 1999 vide Gazette Notification dated
December 16, 1999.

43

i. vary or set aside the decision of the stock exchange; or

Securities market in
India

ii. where the stock exchange has omitted or failed to dispose of the application within
the specified time, grant or refuse the permission, and where the Securities Appellate
Tribunal sets aside the decision of the recognised stock exchange or grants the
permission, the stock exchange shall act in conformity with the orders of the
Securities Appellate Tribunal.
(2)

Every appeal under sub-section (1) shall be in such form and be accompanied by such
fee as may be prescribed.

(3)

The Securities Appellate Tribunal shall send copy of every order made by it to the
Board and parties to the appeal.

(4)

The appeal filed before the Securities Appellate Tribunal under sub-section (I) shall
be dealt with by it as expeditiously as possible and endeavour shall be made by it to,
dispose of the appeal finally within six months from the date of receipt of the
appeal.38

Procedure and powers of Securities Appellate Tribunal

22B. (1)

The Securities Appellate Tribunal shall not be guided by the principles of natural
justice and, subject to the other provisions of this Act and' of any rules, the
Securities Appellate Tribunal shall have powers to regulate their own procedure
including the places at which they shall have their sittings.

(2)

The Securities Appellate Tribunal shall have for the purpose of discharging their
functions under this Act, the same powers as are vested in a civil court under the
Code of Civil Procedure, 1908, while trying a suit, in respect of the following
matters, namely:
a.

summoning and enforcing the attendance of any person and examining him
on oath;

b.

requiring the discovery and production of documents;

c.

receiving evidence on affidavits;

d.

issuing commissions for the examination of witnesses or documents;

e.

reviewing its decisions;

f. dismissing an application for default or deciding it ex-parte;

g. setting aside any order of dismissal of any application for default or any order
passed by it ex-parte; and
h. any other matter which may be prescribed.
(3)

Every proceeding before Securities Appellate Tribunal shall be deemed to be a

judicial proceeding, within the meaning of sections 193 and 228, and for the
purposes of section 196 of the Indian Penal Code and the Securities Appellate
Tribunal shall be deemed to be a civil court for all the purposes of section 195 and
Chapter XXVI of the Code of Criminal Procedure, 1973.39

Right to legal representations

22C. The appellant may either appear in person or authorise one or more chartered
accountants or company secretaries or cost accountants or legal practitioners or any of
its officers or present his or its case before the Securities Appellate Tribunal.
Explanation. - For the purposes of this section, -

44

a.

"chartered accountant" means a chartered accountant as defined in clause (b) of

sub-section (1) of section 2 of the Chartered Accountants Act, 1949 and who has
obtained a certificate of practice under sub-section (1) of section 6 of that Act;

b.

"company secretary" means a company secretary as defined in clause (c) of subsection (1) of section 2 of the Company Secretaries Act, 1980 and who has
obtained a certificate of practice under sub-section (1) of section 6 of that Act;

c.

"cost accountant" means a cost accountant as defined in clause (b) of sub-section

(1) of section 2 of the Cost and Works Accountants Act, 1959 and who has
obtained a certificate of practice under sub-section (1) of section 6 of that Act;

38

Inserted by Securities Laws (Second Amendment) Act, 1999 vide Gazette Notification
dated December 16, 1999. Earlier provision read as under was omitted by the
Depositories Act, 1996,

39

Inserted by Securities Laws (Second Amendment ) Act, 1999 vide Gazette Notification
dated December 16, 1999.
d.

"legal practitioner" means an advocate, vakil or an attorney of any High Court. and

includes a pleader in practice,

Regulation

Limitation
22D. The provisions of the Limitation 'Act, 1963 shall as far as may be apply to an appeal
made to a Securities Appellate Tribunal.41
Civil court not to have jurisdiction
22E.

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of
any matter which a Securities Appellate Tribunal is empowered by or under this Act
to determine and no injunction shall be granted by any court or other authority in
respect of any action taken or to be taken in pursuance of any power conferred by or
under this Act.42

Appeal to High Court

22F.

Any person aggrieved by any decision or order of the Securities Appellate Tribunal
may file an appeal to the High Court within sixty days from the date of
communication of the decision or order of the Securities Appellate Tribunal on any
question of fact or law arising out of such order;
Provided that the High Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed
within a further period not exceeding sixty days.43
22A. Free transferability and registration of transfers of listed securities of companies-

(1)

In this section, unless the context otherwise requires(a)

"company" means a company whose securities are listed on a recognised stock

exchange;

(b)

"security" means security of a company, being a security listed on a recognised

stock exchange but not being a security which is not fully paid-up or on which
the company has a lien;

(c)

all other words and expressions used in this section and not defined in this Act
but defined in the Companies Act, 1956 (1 of 1956), shall have the same
meanings as are assigned to them in that Act.

(2)

Subject to the provisions of this section, securities of companies shall be freely

transferable.

(3)

Notwithstanding anything contained in its articles or in section 82 or section 111 of the

Companies Act, 1956 (1 of 1956), but subject to the other provisions of this section, a
company may refuse to register the transfer of any of its securities in the name of the
transferee on any one or more the following grounds and on no other ground, namely:
(a)

that the instrument of transfer is not proper or has not been duly stamped and
executed or that the certificate relating to the security has not been delivered to
the cone any or that any other requirement under the law relating to registration
of such transfer has not been complied with;

(b)

that the transfer of the securities is in contravention of any law or rules made
thereunder or any administrative instructions or conditions of listing agreement
laid down in pursuance of such laws or rules;

(c)

that the. transfer of the security is likely to result in such change in the
composition of the board of directors as would be prejudicial to the interests of
the company or to the public . interest; and

(d)

that the transfer of the security is prohibited by any order of any court, tribunal
or other authority under any law for the time being in force.

(4)

A company shall, before the expiry of two months from the date on which the instrument
of transfer of any of its securities is lodged with it for the purposes of registration of
such transfer, not only form, in good faith, its opinion as to whether such registration
ought not or ought to be refused on any of the grounds mentioned in sub-section (3) but
also-

40

Ibid

41

Ibid

42

Ibid

43

Ibid

45

(a) if it has formed the opinion that such registration ought not to be so refused,
effect such registration;

Securities market in
India

(b) if it has formed the opinion that such registration ought to be refused on the
ground mentioned in clause (a) of sub-section (3),intimate the transferor
and the transferee by notice in the prescribed form about the requirements
under the law which has or which have to be complied with for securing
such registration; and
(c) in any other case make a reference to the Company Law Board and forward
copies of such reference to the transferor and the transferee.
(5)

Every reference under clause of sub-section (4) shall be in the prescribed

form and contain the prescribed particulars and shall be accompanied by the
instrument of transfer of the securities to which it relates, the documentary
evidence, if any, furnished to the company along with the instrument of transfer,
and evidence of such other nature and such fees as may be prescribed.

(6)

on receipt of a reference under sub-section(4), the Company Law Board shall,

after causing reasonable notice to be given to the company and also to the
transferor and the transferee concerned and giving them a reasonable
opportunity to make their representations, if any, in writing by order; direct
either that the transfer shall be registered by the company or that it need not be
registered by it.

(7)

Where on a reference under sub-section (4), the Company Law Board directs
that the transfer of the securities to which it relates(a) shall be registered by the company, the company shall give effect to the
direction within ten days of the receipt of the order as if it were an order
made on appeal by the Company Law Board in exercise of the powers
under section III of the Companies Act, 1956 (I of 1956);
(b)

need not be registered by the company, the company shall, within ten days
from the date of such direction, intimate the transferor and the transferee
accordingly.

(8)

If default is made in complying with the provisions of this section, the company
and every officer of the company who is in default shall be punishable with fine
which may extend to five thousand rupees.

(9)

If in any reference made under clause (c) of sub- section (4) of this section, any
person makes any statement(a)

which is false in any material particular, knowing it to be false; or

(b)

which omits any material fact knowing it to be material, he shall be

punishable with imprisonment for a term which may extend to three years
and shall also be liable to fine.

(10) For the removal of doubts, it is hereby provided that nothing in this section
shall apply in relation to any securities the instrument of transfer in respect
whereof has been lodged with the company before the commencement of the
Securities Contracts (Regulation) Amendment Act, 1995."

46

CHAPTER V

: PENALTIES AND PROCEDURES

Regulation

Penalties 23. (l) Any person who(a) without reasonable excuse (the burden of proving which shall be on him) fails to
comply with any requisition made under sub-section (4) of section 6; or
(b) enters into any contract in contravention of any of the provisions contained in section
13 or section 16; or
(c) contravenes the provisions contained in section 17 or section 19; or
(d) enters into any contract in derivative in contravention of section 18A or the rules
made under section 30.44
(e) owns or keeps a place other than that of a recognised stock exchange which is used
for the purpose of entering into or performing any contracts in contravention of any of
the provisions of this Act and knowingly permits such place to be used for such
purposes; or
(f) manages, controls, or assists in keeping any place other than that of a recognised
stock exchange which is used for the purpose of entering into or performing any
contracts in contravention of any of the provisions of this Act or at which contracts
are recorded or adjusted or rights or liabilities arising out of contracts are adjusted,
regulated or enforced in any manner whatsoever; or
(g) not being a member of a recognised stock exchange or his agent authorised as such
under the rules or bye- laws of such stock exchange or not being a dealer in securities
licensed under section 17.
(h) not being a member of a recognised stock exchange or his agent authorised as such
under the rules or bye- laws of such stock exchange or not being a dealer in securities
licensed under section 17, canvasses, advertises or touts in any manner either for
himself or on behalf of any other person for any business connected with contracts in
contravention of any of the provisions of this Act; or
(i) joins, gathers or assists in gathering at any place other than the place of business
specified in the bye-laws of a recognised stock exchange any person or persons for
making bids or offers or for entering into or performing any contracts in contravention
of any of the provisions of this Act; shall, on conviction, be punishable with
imprisonment for a term which may extend to one year, or with fine, or with both.
(2)

Any person who enters into any contract in contravention of the provisions contained in
section 15 [or who fails to comply with the provisions of section 21 or with the orders
off s the Central Government under section 22 or with the orders of the Securities
Appellate Tribunal shall,46 on conviction, be punishable with fine which may extend to
one thousand rupees. Offences by companies 24. (1) Where an offence has been
committed by a company, every person who, at the time when the offence was
committed, was incharge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be guilty of the
offence, and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to
any punishment provided in this Act, if he proves that the offence was committed
without his knowledge or that he exercised all due diligence to prevent the commission
of such offence.

44

Inserted by Securities Laws (Second Amendment) Act, 1999 vide Gazette Notification dated
December 16, 1999. Clause (d) was earlier omitted by the Securities Laws (Amendment)
Act, 1995, w.e.f. 25-1-1995. Prior to omission it read as under: "(d) enters into any option in
securities in contravention of the provisions contained in section 20; or" wilfully represents
to or induces any person to believe that contracts can be entered into or performed under this
Act through him; or

45

Substituted for "or who fails to comply with the orders of the Securities and Exchange Board
of India under section 21" by the Securities Laws (Amendment) Act, 1995, w.e.f. 25-1-1995.

46

Inserted by the Securities Laws ( Second Amendment) Act,1999 vide Gazette Notification
dated December 16, 1999.

47

Securities market in
India

2)

Notwithstanding anything contained in sub-section (1), where an offence under

this Act has been committed by a company and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to any
gross negligence on the part of any director, manager, secretary or other officer
of the company, such director, manager, secretary or other officer of the
company, shall also be deemed to be guilty of that offence and shall be liable to
be proceeded against and punished accordingly.

Explanation:
For the purpose of this section(a)

"company" means any body corporate and includes a firm or other association
of individuals. and

(b)

"director", in relation to(i)

a firm, means a partner in the firm;

(ii)

any association of persons or a body of individuals, means any member

controlling the affairs thereof. 47

[(3) The provisions of this section shall be in addition to, and not in derogation
of, the provisions of section 22A].48
Certain offences to be cognizable 25. Notwithstanding anything contained in the
[Code of Criminal Procedure, 1898 (5 of 1898)],49 any offence punishable under subsection (1) of section 23, shall be deemed to be a cognizable offence within the
meaning of that Code. Jurisdiction to try offences under this Act 26. No court
inferior to that of a presidency magistrate or a magistrate of the first class shall take
cognizance of or try any offence punishable under this Act.

48

47

Substituted by the Securities Laws ( Second Amendment) Act,1999 vide Gazette

Notification dated December 16, 1999 for " (b) director , in relation to a firm, means
a partner in the firm".

48

Inserted by the Securities Contracts (Regulation) Amendment Act, 1985.

49

Now Code of Criminal Procedure, 1973.

CHAPTER VI : MISCELLANEOUS

Regulation

Title to dividends 27. (1) It shall be lawful for the holder of any security whose name
appears on the books of the company issuing the said security to receive and retain any
dividend declared by the company in respect thereof for any year, notwithstanding that the
said security has already been transferred by him for consideration, unless the transferee
who claims the dividend from the transferor has lodged the security and all other
documents relating to the transfer which may be required by the company with the
company for being registered in his name within fifteen days of the date on which the
dividend became due.
Explanation
The period specified in this section shall be extended(i)
in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the dividend;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the
control of the transferee, by the actual period taken for the replacement
thereof; and
(iii) in case of delay in the lodging of any security and other documents relating
to the transfer due to causes connected with the post, by the actual period of
the delay.
(2)
Nothing contained in sub- section (1) shall affecta. the right of a company to pay any dividend which has become due to any
person whose name is for the time being registered in the books of the
company as the holder of the security in respect of which the dividend has
become due; or
b. the right of the transferee of any security to enforce against the transferor or
any other person his rights. if any, in relation to the transfer in any case where
the company has refused to register the transfer of the security in the name of
the transferee.
Right to receive income from collective investment scheme27A (1) It shall be lawful for the holder of any securities, being units or other
instruments issued by collective investment scheme, whose name appears on
the books of the collective investment scheme issuing the said security to
receive and retain any income in respect of units or other instruments issued by
the collective investment scheme declared by the collective investment scheme
in respect thereof for any year notwithstanding that the said security, being
units or other instruments issued by collective investment scheme, has already
been transferred by him for consideration, unless the transferee who claims the
income in respect of units or other instruments issued by collective investment
scheme from the transfer or has lodged the security and all other documents
relating to the transfer which may be required by the collective investment
scheme with the collective investment scheme for being registered in his name
within fifteen days of the date on which the income in respect of units or other
instruments issued by the collective investment scheme became due.
Explanation
The period specified in this section shall be extended(i) in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the income in respect of units or
other instrument issued by collective investment scheme;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the
control of the transferee, by the actual period taken for the replacement
thereof; and

(2)

(iii) in case of delay in the lodging of any security, being units or other
instruments issued by collective investment scheme, and other documents
relating to the transfer due to causes connected with the post. by the actual
period of the delay.
Nothing contained in sub-section (1) shall affecta. the right of a collective investment scheme to pay any income from units or
other instruments issued by collective investment scheme which has
become due to any person whose name is for the time being registered in
the books of the collective investment scheme as the holder of the security
being units or other instruments issued by collective

49

investment scheme in respect of which the income in respect of units or other

instruments issued by collective scheme has become due; or

Securities market in
India

b.

the right of transferee of any security, being units or other instruments issued by
collective investment scheme, to enforce against the transferor or any other
person his rights, if any, in relation to the transfer in any case where the company
has refused to register the transfer of the security being units or other instruments
issued by collective investment scheme in the name of the transferee.50

Act not to apply in certain cases 28. (1) The provisions of this Act shall not apply to-

(2)

50

(a)

the Government, the Reserve Bank of Indio any local authority or any
corporation set up by a special law or any person who has effected any
transaction with or through the agency of any such authority as is referred to in
this clause;

(b)

any convertible bond or share warrant or any option or right in relation thereto, in
so far as it entitles the person in whose favour any of the foregoing has been
issued to obtain at his option from the company or other body corporate, issuing
the same or from any of its shareholders or duly appointed agents, shares of the
company or other body corporate, whether by conversion of the bond or warrant
or otherwise, on the basis of the price agreed upon when the same was issued.

(2)

Without prejudice to the provisions contained in sub-section (1), if the Central

Government is satisfied that in the interests of trade and commerce or the
economic development of the country it is necessary or expedient so to do, it
may, by notification in the Official Gazette, specify any class of contracts as
contracts to which this Act or any provision contained therein shall not apply, and
also the conditions, limitations or restrictions, if any, subject to which it shall not
so apply. Protection of action taken in good faith 29. No suit, prosecution or
other legal proceeding whatsoever shall lie in any court against the governing
body or any member, office bearer or servant of any recognised stock exchange
or against any person or persons appointed under sub-section (1) of section 11 for
anything which is in good faith done or intended to be done in pursuance of this
Act or of any rules or bye-laws made there under. Power to delegate 29A. The
Central Government may, by order published in the Official Gazette, direct that
the powers (except the power under section 30) exercisable by such conditions, if
any, as may be specified in the order, be exercisable also by the Securities and
Exchange Board of India or the Reserve Bank of India constituted under section 3
of the Reserve Bank of India Act, 1934.51 Power to make rules 30. (1) The
Central Government may, by notification in the Official Gazette, make rules for
the purpose of carrying into effect the objects of this Act.

In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for,
(a)

the manner in which applications may be made, the particulars which they should
contain and the levy of a fee in respect of such applications;

(b)

the manner in which any inquiry for the purpose of recognizing any stock exchange
may be made, the conditions which may be imposed for the grant of such
recognition, including conditions as to the admission of members if the stock
exchange concerned is to be the only recognised stock exchange in the area; and the
form in which such recognition shall be granted;

(c)

the particulars which should be contained in the periodical returns and annual
reports to be furnished to the Central Government;

(d)

the documents which should be maintained and preserved under section 6 and the
periods for which they should be preserved;

(e)

the manner in which any inquiry by the governing body of a stock exchange shall
be made under section 6;

(f)

the manner in which the bye-laws to be made or amended under this Act shall
before being so made or amended be published for criticism;

50

supra n. 3

51

Substituted by Securities Laws (Second Amendment) Act, 1999 vide Gazette Notification
dated December 16, 1999 for "The Central Government may, by order published in the
Official Gazette, direct that the powers exercisable by it under any provision of this Act
shall, in relation to such matters and subject to such conditions, if any, as may be specified in
the order, be exercisable also by the Securities and Exchange Board of India]" which was
inserted by Securities and Exchange Board of India Act, 1992, w.e.f 30.1.92.

(g) the manner in which applications may be made by dealers in securities for
licences under Regulation section 17, the fee payable in respect thereof and the
period of such licences, the conditions subject to which licences may be granted,
including conditions relating to the forms which may be used in making contracts,
the documents to be maintained by licensed dealers and the furnishing of
periodical information to such authority as may be specified and the revocation of
licences for breach of conditions-

Regulation

(h) the requirements which shall be complied with(A)

by public companies for the purpose of getting their securities listed on any
stock exchange;

(B)

by collective investment scheme for the purpose of getting their units listed
on any stock exchange".52

(ha) the form in which an appeal may be tiled before the Securities Appellate
Tribunal under section 22A and the fees payable in respect of such appeal."
(i)
(3)

any other matter which is to be or may be prescribed.

Any rules made under this section [***]54 shall, as soon as may be, after their
publication in the Official Gazette, be laid before both Houses of Parliament.
Repeal 31. Repealed by the Repealing and Amending Act, 1960 (58 of 1960),
section 2 and Schedule 1.

52

Substituted by Securities Laws (Second Amendment) Act, 1999 vide Gazette

Notification dated December 16. 1999 for "the requirements which shall be
complied with by public companies for the purpose of getting their securities
listed on any stock exchange; [***]

53

Substituted by Securities Laws ( Second Amendment ) Act, 1999 vide Gazette

Notification dated December 16, 1999 for
[(ha) the form in which a notice referred to in sub-clause (b) of sub-section (4) of
section 22A shall be the particulars which such notice shall contain, the form in
which a reference under clause (c) of the said sub-section (d) shall be the
particulars which such reference shall contain, and the evidence and the, fees
which shall accompany such reference: and] which was inserted by Securities
Contracts (Regulation) Amendment Act,1985.

54

The words "shall be subject to the condition of previous publication and" deleted
by the Securities Laws.

51

Securities market in
India

APPENDIX 5.2 (i)

SECURITIES AND EXCHANGE BOARD OF INDIA
(STOCK-BROKERS AND SUB-BROKERS) REGULATIONS, 1992

CHAPTER I : PRELIMINARY
Short title and commencement
1.
(1) These regulations may be called the Securities and Exchange Board of
India (Stock- brokers and Sub-brokers) Regulations, 1992.
(2)

These regulations shall come into force on the date of their publication in
the Official Gazette.

Definitions
2.

In these regulations, unless the context otherwise requires1*[(a) 'clearing corporation or clearing house' means the clearing corporation
or clearing house of a recognised stock exchange to clear and settle trades
in securities."
(aa) `clearing member' means a member of a clearing corporation or
clearing house of the derivatives exchange or derivatives segment of
an exchange, who may clear and settle transactions in securities.]
2*[(aaa)] "enquiry officer" means any officer of the Board, or any other
person, having experience in dealing with the problems relating to the
securities market, who is appointed by the Board under Chapter VI];
(b) "form" means a form specified in Schedule I;
(c) "inspecting authority" means one or more persons appointed by the Board
to exercise powers conferred under Chapter V of these regulations;
(d) "regulations" means Securities and Exchange Board of India (Stockbrokers and Sub-brokers) Regulations, 1992;
(e) "rules" means Securities and Exchange Board of India (Stock- brokers and
Sub-brokers) Rules, 1992;
(f)

"Securities Contracts (Regulation) Act" means the Securities Contracts

(Regulation) Act. 1956 (42 of 1956);.
3*[( fa)"self clearing member" means a member of a clearing corporation]

(g) "small investor" means any investor buying or selling securities on a cash
transaction for a market value not exceeding rupees fifty thousand in
aggregate on any day as shown in a contract note issued by the stockbroker.
4*[(ga) 'trading member' means a member of the derivatives exchange or
derivatives segment of a stock exchange and who settles the trade in the
clearing corporation or clearing house through a clearing member];
(h) All other words and expressions occurring in these regulations shall bear
the same meaning as in the Act and the rules.
1. "Clauses a & aa" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2000 published in the Official Gazette of India
dated 14.03.2000.
2. Clause (a) renumbered as (aaa) by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2000 published in the Official Gazette of India
dated 14.03.2000.
3. "Clause fa" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001 published in the Official Gazette of India
dated 15.11.2001..

52

4. "Clause (ga)" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2000 published in the Official Gazette of India
dated 14.03.2000.
Source: SEBIs Website

CHAPTER II : REGISTRATION OF STOCK BROKERS

Regulation

Application for registration of stock broker

3. (1) An application by a stock-broker for grant of a certificate shall be made in
Form A through the stock exchange or stock exchanges, as the case may be,
of which he is admitted as a member.
(2) The stock exchange shall forward the application form to the Board as early
as possible but not later than thirty days from the date of its receipt.
(3) Notwithstanding anything contained in sub-regulation (I), any application
made by a stock- broker prior to coming into force of these regulations
containing such particulars or as near thereto as mentioned in the Form A
shall be treated as an application if made in pursuance of sub-regulation (I)
and dealt with accordingly:
Provided that the requirement of the payment of fees shall be the same as is
referred to in sub-regulation (I) of regulation 10.
Furnishing information, clarification, etc.
4. (1) The Board may require the applicant to furnish such further information or
clarifications, regarding the dealings in securities and matters connected
thereto to consider the application for grant of a certificate.
(2) The applicant or, its principal officer shall, if so required, appear before the
Board for personal representation.
Consideration application
5. The Board shall take 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 broker(a) is eligible to be admitted as a member of a stock exchange;
(b) has the necessary infrastructure like adequate office space, equipments 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 byelaws of a stock exchange with respect to his business as a stock-broker
involving either himself or any of his partners, directors or employees;
5*["(e) is a fit and proper person"]
Procedure for registration
6. The Board on being satisfied that the stock-broker is eligible, shall grant a
certificate in Form D to the stock-broker and send an intimation to that effect to the
stock exchange or stock exchanges as the case may be.
Stock-Brokers to abide. by Code of Conduct, etc.
7. The stock-broker holding a certificate shall at all times abide by the Code of
Conduct as specified at Schedule II.
Procedure where registration is not granted
8. (1) Where an application for grant of a certificate under regulation 3, does not
fulfil the requirements mentioned in. regulation 5, the Board may reject the
application after giving a reasonable opportunity of being heard.
(2) The refusal to grant the registration certificate shall be communicated by the
Board within thirty days of such refusal to the concerned stock exchange and
to the applicant stating therein the grounds on which the application has been
rejected.
5. "Clause e" inserted by the Securities and Exchange Board of India (Stock Brokers
& Sub Brokers) (Amendment) Regulations, 1998 published in the Official Gazette
of India dated 05.01.1998.

53

Securities market in
India

(3)

An applicant may, being aggrieved by the decision of the Board under

sub- regulation (2) apply within a period of thirty days from the date of
receipt of such intimation, to the Board for reconsideration of its decision.

(4)

The Board shall reconsider an application made under sub- regulation (3)
and communicate its decision as soon as possible in writing to the
applicant and to the concerned stock-exchange.

Effect of refusal of certificate of registration

9.

A stock-broker, whose application for grant of a certificate has been refused by

the Board, shall not, on and from the date of the receipt of the communication
under the sub-regulation (2) of regulation 8, buy, sell, or deal in securities as a
stock-broker.

Payment of fees and the consequences of failure to pay fees

10. (1) Every applicant eligible for grant of a certificate shall pay such fees and in
such manner as specified in Schedule Ill:
Provided that the Board may on sufficient cause being shown permit the
stock-broker to pay such fees at any time before the expiry of six months
front the date for which such fees become due.
(2) Where a stock-broker fails to pay the fees as provided in regulation 10, the
Board may suspend the registration certificate, whereupon the stock- broker
shall cease to buy, sell or deal in securities as a stock- broker].

54

CHAPTER III : REGISTRATION OF SUB-BROKERS

Regulation

Application for registration of sub-broker

11. (1) An application by a sub- broker for the grant of a certificate shall be made
in Form B.
(2) The application for registration under sub-regulation (1) above, shall be
accompanied by a recommendation letter from a stock-broker of a
recognised stock exchange with whom he is to be affiliated along with two
references including one from his banker.
(3) The application form shall be submitted to the stock exchange of which the
stock- broker with whom he is to be affiliated is a member.
(4) The stock exchange on receipt of an application under sub-regulation (3)
shall verify the information contained therein and shall also certify that the
applicant is eligible for registration as per criteria specified in subregulation (5).
(5) The eligibility criteria for registration as a sub-broker shall be as follows,
namely:
(i)
in the case of an individual;
(a) the applicant is not less than 21 years of age;
(b) the applicant has not been convicted of any offence involving
fraud or dishonesty;
(c) the-applicant has at least passed 12th standard equivalent
examination from an institution recognised by the Government;
6*["(d) the applicant is a fit and proper person"].
Provided that the Board may relax the educational qualifications on
merits having regard to the applicant's experience.
(ii) In the case of partnership firm or a body corporate the partners or
directors, as the case may be, shall comply with the requirements
contained in clauses (a) to (c) of sub-regulation (i).
(6) The stock exchange shall forward the application form of such applicants
who comply with all the requirements specified in sub-regulations (1) to (5)
to the Board as early as possible, but not later than thirty days from the date
of its receipt.
Procedure for registration
12. (1) The Board on being satisfied that the sub-broker is eligible, shall grant a
certificate in Form E to the sub-broker and send an intimation to that effect
to the stock exchange or stock exchanges as the case may be.
(2) The Board may grant a certificate of registration to the appellant subject to
the terms and conditions as stated in rule 5.
Procedure where registration is not granted
13. (1) Where an application for grant of a certificate under regulation l1, does not
fulfil the requirements mentioned in regulation 11, the Board may reject the
application after giving a reasonable opportunity of being heard.
(2) The refusal to grant the certificate shall be communicated by the Board
within thirty days of such refusal to the concerned stock exchange and to
the applicant stating therein the grounds on which the application has been
rejected.
(3) An applicant being aggrieved by the decision of the Board under subregulation (2) may within a period of thirty days from the date of receipt of
such intimation, apply to the Board for reconsideration of its decision.

6.
"Clause" inserted by the SEBI (Stock Brokers & Sub Brokers) (Amendment)
Regulations, 1998 published in the Official Gazette of India dated 05.01.1998.

55

(4) The Board shall reconsider an application made under sub-regulation (3)
and communicate its decision as soon as possible in writing to the applicant
and to the concerned stock exchange.

Securities market in
India

Effect of refusal
14.

A person whose application for grant of a certificate has been refused by the
Board shall, on and from the date of the communication of refusal under
regulation 13 cease to carry on any activities as a sub-broker.

General Obligations and Inspection

15.

(1)

(2)

The sub-broker shall(a)

pay the fees as specified in Schedule III;

(b)

abide by the Code of Conduct specified in Schedule 11;

(c)

enter into an agreement with the stock broker for specifying the
scope of his authority and responsibilities.

The sub-broker shall keep and maintain the books and documents,
specified in regulation 17 except for the books and documents referred to
in clauses (h), (i), (j), (k), (1) and (m) of sub regulation (1) of regulation
17.

Application of Chapter IV, V & VI

16.

56

The provisions of Chapters IY V and VI of these regulations shall apply to a subbroker as they apply in case of a stock broker.

7*[CHAPTER III A : REGISTRATION OF TRADING

AND CLEARING MEMBERS

Regulation

Application for registration of Trading member or Clearing member

16A (1) An application for grant of certificate of registration by a trading member of a
derivatives exchange or derivatives segment of a stock exchange shall be made in
Form AA of Schedule I, through the concerned derivatives exchange or derivative
segment of a stock exchange of which he is a member.
(2) An application for grant of certificate of registration by a clearing member 8*[or self
clearing member] of the clearing corporation or clearing house of a derivatives
exchange or derivatives segment of a stock exchange, shall be made in Form AA of
Schedule I, through the concerned clearing corporation or clearing house of which
he is a member.
Provided that a trading member who also seeks to act as a clearing member 9*[or
self clearing member] shall make separate applications for each activity in Form AA
of Schedule I.
(3) The derivatives exchange or segment or clearing house or corporation as the case
may be shall forward the application to the Board as early as possible but not later
than thirty days from the date of its receipt.
Furnishing of Information, Clarification, etc.
16B (1) The Board may require the applicant or the concerned stock exchange or segment
or clearing house or corporation to furnish such other information or clarifications,
regarding the trading and settlement in derivatives and matters connected thereto, to
consider the application for grant of a certificate.
(2) The applicant or its principal officer shall, if so required, appear before the Board
for personal representation.
Consideration of Application
16C (1) The Board shall take into account for considering the grant of a certificate all
matters relating to dealing and settlement in derivatives and in particular the
following, namely, whether the applicant(a) is eligible to be admitted as a trading member of a derivative exchange and /
or a clearing member of a derivatives exchange or derivatives segment of a
stock exchange or clearing corporation or house;
(b) has the necessary infrastructure like adequate office place, equipments and
manpower to effectively undertake his activities;
(c) is 'subjected to disciplinary proceedings under the rules, regulations and byelaws of any stock exchange with respect to his business as a stock broker or
member of derivatives exchange or segment or member of clearing house or
corporation involving either himself or any of his partners, directors or
employees.
10*[(d) has any financial liability which is due and payable to the Board under
these regulations].
(2)
An applicant who desires to act as a trading member, in addition to complying
with the requirements of sub-regulation (I), shall have a net-worth as may be
specified by the derivative exchange or segment from time to time and the
approved user and sales personnel of the .trading member have passed a
certification programme approved by the Board;
(3)
An applicant who desires to act as a clearing member, in addition to complying
with the requirements of sub-regulation (1), shall have a minimum net worth of
Rs. 300 lacs and
7.
8.

9.

10.

"Chapter III A" inserted by the SEBI (Stock Brokers & Sub Brokers)(Amendment )
Regulations, 2000 published in the Official Gazette of India dated 14.3.2000.
"or self clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.
"or self clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.
"Clause d" inserted by the SEBI (Stock Brokers & Sub Brokers) (Amendment)
Regulations, 2002 published in the Official Gazette of India dated 20.02.2002.

57

shall deposit at least a sum of Rs. 50 lacs or higher amount with the clearing corporation
or clearing house of the derivatives exchange or derivatives segment in the form
specified from time to time.

Securities market in
India

11*[(4) An applicant who desires to act as a clearing member, in addition to complying

with the requirements of sub-regulation (1), shall have a minimum net worth of
Rs.100 lacs and shall deposit at least a sum of Rs. 50 lacs or higher amount with the
clearing corporation or clearing house of the derivatives exchange or derivatives
segment in the form specified from time to time].
Explanation
For the purpose of 12*[sub-regulations (2), (3) and (4)] the expression `net worth' shall mean
paid up capital and free reserves and other securities approved by the Board from time to time
(but does not include fixed assets, pledged securities, value of member's card, non-allowable
securities (unlisted securities), bad deliveries, doubtful debts and advances (debts or advances
overdue for more than three months or debts or advances given to the associate persons of the
member), prepaid expenses, losses, intangible assets and 30% value of marketable securities).
Procedure for registration :
16D. The Board on being satisfied that the applicant is eligible, shall grant a certificate in
Form DA of Schedule I, to the applicant and send an intimation to that effect to the
derivatives segment of the stock exchange or derivatives exchange or clearing
corporation or clearing house, as the case may be.
Procedure where registration is not granted
16E

(1) Where an application for the grant of a certificate under regulation 16A does not
fulfil the requirements specified in 16C of the regulations, the Board may reject the
application of the applicant after giving a reasonable opportunity of being heard.
(2) The refusal to grant the certificate of registration shall be communicated by the
Board within 30 days of such refusal to the concerned segment of the stock
exchange, or clearing house or corporation and to the applicant stating therein the
grounds on which the application has been rejected.
(3) An applicant may, if aggrieved by the decision of the Board under sub-regulation
(2) apply within a period of thirty days from the date of receipt of such information
to the Board for reconsideration of its decision.
(4) The Board shall reconsider an application made under sub-regulation (3) and
communicate its decision as soon as possible in writing to the applicant and to the
concerned segment of the stock exchange or clearing house or corporation.

Effect of refusal of certificate of registration

16F. An applicant, whose application for the grant of a certificate of registration has been
refused by the Board, shall not, on and from the date of receipt of the communication
under sub-regulation (2) or sub-regulation (4) of regulation 16E, deal in or settle the
derivatives contracts as a member of the derivatives exchange or derivatives segment or
clearing corporation or clearing house.
Payment of fees and consequences of failure to pay fees
16 G (1)

Every applicant eligible for grant of a certificate as a trading or clearing member

""[or self-clearing member] shall pay such fee and in such manner as specified in
Schedule IV

(2)

Where a trading or clearing member ""[or self clearing member] fails to pay the
fees as provided in sub-regulation (I), the Board may suspend or cancel the
registration certificate after giving an opportunity of being heard, whereupon the
trading and clearing member 14'[or self clearing member] shall cease to deal in or
settle the derivatives contract as a member of the derivatives segment of the
exchange or derivatives exchange or clearing corporation or clearinghouse'.

11. "sub-regulation 4" inserted by the SEBI (Stock Brokers & Sub Brokers) (Amendment)
Regulations, 2001, published in the Official Gazette of India dated 15.11.2001.
12. Substituted for "(2) and (3)" by the SEBI (Stock Brokers & Sub Brokers) (Amendment)
Regulations, 2001, published in the Official Gazette of India dated 15.11.2001.
13. "or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

58

14. or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in' the Official Gazette of India dated
15.11.2001.

Trading member / Clearing member15*[or self clearing member] to abide by the

Code of Conduct, etc.

Regulation

16H (1) The code of conduct specified for the stock brokers as stipulated in Schedule II,
shall be applicable mutatis mutandis to the trading member, clearing member
and such members shall at all times abide by the same.
(2) The trading member and clearing member shall abide by the code of conduct as
specified in the rules, bye-laws and regulations of the derivatives exchange or
derivatives segment of the exchange.
(3) The trading members shall obtain details of the prospective clients in Know
Your Client format as specified by the Board before executing an order on
behalf of such client.
(4) The trading member shall mandatorily furnish 'Risk Disclosure Document'
disclosing the risk inherent in trading in derivatives to the prospective clients in
the form specified by the derivatives exchange or derivatives segment.
(5) The trading or clearing member shall deposit margin or any other deposit and
shall maintain position or exposure limit as specified by the Board or the
concerned exchange or segment or clearing corporation or clearing house from
time to time.
16*[(6) The provisions of sub regulations (1) to (5) shall be applicable mutatis
mutandis to a self clearing member].
Chapter IV, V and VI applicable
16 I (1) The provision of Chapter IV, V and VI shall be applicable mutatis mutandis to a
trading member and a clearing member 17*[or self clearing member] and such
members shall abide by the provisions of the said Chapters.
(2) In the chapters referred to in sub-regulation (1), the word `stock broker' shall
refer to trading member or clearing member18*[or self clearing member] and
the word 'stock exchange' shall refer to 'derivatives exchange or derivatives
segment of an exchange or clearing corporation or clearing house.'
(3) The Board may issue such directions under section 11B of the Act to the
trading member or clearing member 19*[or self clearing member] as may be
deemed appropriate and such member shall abide by such directions.
(4) In case of violation of any regulation, the trading or the clearing member 20*[or
self-clearing member] shall be liable to penalty as specified in regulation 26.)
15.

"or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001. published in the Official Gazette of India dated
15.11.2001.

16.

"Sub-regulation 6" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

17.

"or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

18.

"or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

19.

"or self-clearing member" inserted by the SEBI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

20.

"or self-clearing member" inserted by the SERI (Stock Brokers & Sub Brokers)
(Amendment) Regulations, 2001, published in the Official Gazette of India dated
15.11.2001.

59

Securities market in
India

CHAPTER IV : GENERAL OBLIGATIONS AND

RESPONSIBILITIES
To maintain proper books of accounts, records etc.
17. (1)

Every stock-broker shall keep and maintain the following books of

accounts, records and documents namely:
(a) Register of transactions (Sauda Book);
(b) Clients ledger;
(c) General ledger;
(d) Journals;
(e) Cash book;
(f)

Bank pass book:

(g) Documents register should include particulars of shares and securities

received and delivered;
(h) Members' contract books showing details of all contracts entered into
by him with other members of the same exchange or counterfoils or
duplicates of memos of confirmation issued to such other member:
(i)

Counterfoils or duplicates of contract notes issued to clients;

(j)

Written consent of clients in respect of contracts entered into as

principals;

(k) Margin deposit book:

(l)

Registers of accounts of sub-brokers;

(m) An agreement with a sub-broker specifying the scope of authority and

responsibilities of the Stock-Broker and such sub- broker.
(2) Every stock-broker shall intimate to the Board the place where the books of
accounts. records and documents are maintained.
(3) Without prejudice to sub-regulation (I), every stock- broker shall, after the
close of each accounting period furnish to the Board if so required as soon as
possible but not later than six months from the close of the said period a copy
of the audited balance sheet and profit and loss account, as at the end of the
said accounting period:
Provided that, if it is not possible to furnish the above documents within the
time specified, the stock-broker shall keep the Board informed of the same
together with the reasons for the delay and the period of time by which such
documents would be furnished.
Maintenance of books of accounts and records
18.

Every stock broker shall preserve the books of account and other records
maintained under regulation 17 for a minimum period of live years.

21

*[Appointment of compliance officer

18A (1) Every stock broker shall appoint a compliance officer who shall be
responsible for monitoring the compliance of the Act, rules and
regulations, notifications, guidelines instructions, etc, issued by the Board
or the Central Government and for redressal of investors grievances.
(2) The compliance officer shall immediately and independently report the
Board any non-compliance observed by him].
21.

60

Regulation i8x inserted by the SEB/ (Investment Advice by Intermediaries)

(Amendment) Regulations 2001, published in the Official Gazette of India dated
29.05.2001.

CHAPTER V : PROCEDURE FOR INSPECTION

Regulation

Board's right to inspect

19

(1)

Where it appears to the Board so to do, it may appoint one or more persons as inspecting
authority to undertake inspection of the books of accounts, other records and documents of
the stock-brokers for any of the purposes specified in sub-regulation (2).

(2)

The purposes referred to in sub-regulation (1) shall be as follows, namely:

(a)

to ensure that the books of accounts and other books are being maintained in the
manner required;

(b)

that the provisions of the Act, rules, regulations and the provisions of the Securities
Contracts (Regulation) Act and the rules made thereunder are being complied with;

(c)

to investigate into the complaints received from investors, other stock brokers, subbrokers or any other person on any matter having a bearing on the activities of the
stock- brokers; and

(d)

to investigate suo-moto, in the interest of securities business or investors' interest, into

the affairs of the stock-broker.

Procedure for inspection

20.

(1)

Before undertaking any inspection under regulation 19, the Board shall give a reasonable
notice to the stock- broker for that purpose.

(2)

Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that
in the interest of the investors or in public interest no such notice should be given, it may by
an order in writing direct that the inspection of the affairs of the stock broker be taken up
without such notice.

(3)

On being empowered by the Board, the inspecting authority shall undertake the inspection
and the stock-broker against whom an inspection is being carried out shall be bound to
discharge his obligations as provided under regulation 21.

Obligations of stock-broker on inspection by the Board

21.

(1)

It shall be the duty of broker on inspection by the Board every director, proprietor, partner,
officer and employee of the stock-broker, who is being inspected, to produce to the
inspecting authority such books, accounts and other documents in his custody or control and
furnish him with the statements and information relating to the transactions in securities
market within such time as the said officer may require.

(2)

The stock-broker shall allow the inspecting authority to have reasonable access to the
premises occupied by such stock- broker or by any other person on his behalf and also
extend reasonable facility for examining any books, records, documents and computer data
in the possession of the stock- broker or any other person and also provide copies of
documents or other materials which, in the opinion of the inspecting authority arc relevant.

(3)

The inspecting authority, in the course of inspection, shall be entitled to examine or record
statements of any member, director, partner, proprietor and employee of the stock- broker.

(4)

It shall be the duty of every director proprietor, partner, officer and employee of the stock
broker to give to the inspecting authority all assistance in connection with the inspection,
which the stock broker may be reasonably expected to give.

Submission of Report to the Board

22.

The inspecting authority shall, as soon as may be possible submit an inspection report to the
Board.

Communication of Findings etc.

23.

(1)

The Board shall after consideration off the inspection report communicate the findings to
the stock-broker to give him an opportunity of being heard before any action is taken by
the Board on the findings of the inspecting authority.

(2)

On receipt of the explanation, if any, from the stock-broker, the Board may call upon the
stock-broker to take such measures as the Board may deem fit in the interest of the
securities market and for due compliance with the provisions of the Act, rules and
regulations.

Appointment of Auditor
24.

Notwithstanding anything contained above, the Board may appoint a qualified auditor to
investigate into the books of account or the affairs of the stock-broker:
Provided that, the auditor so appointed shall have the same powers of the inspecting authority as
mentioned in regulation 19 and the obligations of the stock- broker in regulation 21 shall be
applicable to the investigation under this regulation.

61

Securities market in
India

CHAPTER VI : PROCEDURE FOR ACTION IN

CASE OF DEFAULT
Liability for action in case of default
25. (1)

(2)

A stock-broker who
(a)

fails to comply with any conditions subject to which registration has been
granted;

(b)

contravenes any of the provisions of the Act, rules or regulations;

(c)

contravenes the provisions of the Securities Contracts (Regulation) Act or the

rules made thereunder;

(d)

contravenes the rules, regulations or bye-laws of the stock exchange; shall be

liable to any of the penalties specified in sub- regulation (2).

The penalties referred to in sub-regulation (1) may be either (a) suspension of registration, after the inquiry, for a specified period; or
(b) cancellation of registration.

Suspension, cancellation of registration, etc.

26. (1)

A penalty of suspension of registration of a stock-broker may be imposed if(i) the stock-broker violates the provisions of the Act, rules and regulations;
(ii) the stock-broker does not follow the code of conduct annexed at Schedule IL
(iii) the stock-broker-

(a)

fails to furnish any information related to his transactions in securities as required by the
Board;

(b)

furnishes wrong or false information,

(c)

does not submit periodical returns as required by the Board;

(d)

does not co-operate in any enquiry conducted by the Board;

(iv)

the stock-broker fails to resolve the complaints of the investors or fails to give a
satisfactory reply to the Board in this behalf:

(v)

the stock-broker indulges in manipulating or price rigging or cornering activities in the

market;

(vi)

the stock-broker is guilty of misconduct or improper or unbusinesslike or unprofessional

conduct;

(vii) the financial position of the stock broker deteriorates to such an extent that the Boar( is
of the opinion that his continuance in securities business is not in the interest of
investors and other stock-brokers;
(viii) the stock-broker fails to pay the fees;
(ix)

the stock-broker violates the conditions of registration:

(x)

the membership of the stock-broker is suspended by the stock exchange:

Provided that the Board for reasons to he recorded in writing may in case of repeated defaults
of the type mentioned above impose a penalty of cancellation of registration of the stockbroker.
(2)

62

A penalty of cancellation of registration of a stock-broker may be imposed if-

(i)

the stock-broker violates any provisions of insider trading regulations or take-over

regulations;

(ii)

the stock-broker is guilty of fraud, or is convicted of a criminal offence; and

(iii) cancellation of membership of the stock-broker by the stock exchange.

Manner of order of suspension or cancellation

Regulation

27. No order of penalty of suspension and cancellation shall be imposed except

after holding an enquiry in accordance with the procedure specified in regulation 28.
22

*[Provided that the holding of such an enquiry shall not be necessary in cases where
the stock broker:
(a) ceases to be a member of a recognised stock exchange; or
(b) is declared defaulter by the stock exchange and is not readmitted to the
membership of the exchange within a period of six months from such declaration
;or
(c) surrenders the membership of the stock exchange; or
(d) is declared insolvent by a Court; or
(e) fails to pay the registration or annual fees to the Board in the manner specified in
the regulations; or
(f)

voluntarily surrenders certificate to the Board; or

(g) is wound up by an order passed by the Court.

"Provided further that no action shall be taken against the stock broker without giving
an opportunity of hearing to the stock broker].
Manner of holding enquiry
28. (1) For the purpose of holding an enquiry under regulation 27, the Board may
appoint an enquiry officer.
(2) The enquiry officer shall issue to the stock-broker a notice at the registered
office or the principal place of business of the stock-broker.
(3) The stock-broker may, within thirty days from the date of receipt of such
notice, furnish to the enquiry officer a reply together with copies of
documentary or other evidence relied on by him or sought by the Board from
him.
(4) The enquiry officer shall, give a reasonable opportunity of hearing to the
stock-broker to enable him to make submissions in support of his reply made
under sub-regulation (3).
(5) Before the enquiry officer, the stock-broker may either appear in person or
through any person duly authorised on his behalf:
Provided that no lawyer or advocate shall be permitted to represent the stock-broker at
the enquiry:
Provided further that where a lawyer or an advocate has been appointed by the Board
as a presenting officer under sub-regulation (6), it shall be lawful for the stock-broker
to present his case through a lawyer or advocate.
(6)

If it is considered necessary, the enquiry officer may request the Board to

appoint a presenting officer to present its case.

(7)

The enquiry officer shall, after taking into account all relevant facts and
submissions made by the stock-broker, submit a report to the Board and
recommend the penalty to be awarded as also on the, justification of the penalty
proposed in the notice.

Show-cause notice and order

29. (1) On receipt of the report from the enquiry officer, the Board shall consider the
same and issue a show-cause notice as to why the penalty as it considers
appropriate should not be imposed.
(2) The stock-broker shall within twenty-one days of the date of the receipt of the
show-cause send a reply to the Board.
22 Proviso inserted by the SEBI (Stock Brokers and Sub-Brokers) (Amendment)
Regulations, 1999 published in the Official Gazette of India dated 06.07.1999.

63

(3) The Board after considering the reply to the show-cause notice, if received,
shall as soon as possible but not later than thirty days from the receipt of
the reply, if any, pass such order as it deems fit.

Securities market in
India

(4) Every order passed under sub-regulation (3) shall be self-contained and
give reasons for the conclusions stated therein including justification of the
penalty imposed by that order.
(5) The Board shall send a copy of the order under sub-regulation (3) to the
stock- broker, stock exchange of which the stock-broker is the member,
23
*[***].
Effect of suspension and cancellation of registration of stock-the stock-broker
30. (1) On and from the date of the suspension of broker he shall cease to buy, sell
or deal in securities as a stock-broker during the period of suspension.
(2) On and from the date of cancellation, the stock-broker shall with immediate
effect cease to buy sell or deal in securities as a stock-broker.
Publication of order of suspension
31. The order of suspension or cancellation of certificate passed in sub-regulation (3)
of regulation 29 shall be published in at least two daily newspapers by the Board
be published in at least two daily newspapers by the Board.
Appeal to the Securities Appellate Tribunal
24

*32. [Any person aggrieved by an order of the Board made, on and after the
commencement of the Securities Laws (Second Amendment) Act, 1999, (i.e.,
after 16th December 1999), under these regulations may prefer an appeal to a
Securities Appellate Tribunal having jurisdiction in the matter].

23. and to the Central Government" omitted by the Securities and Exchange Board
of India (Stock Brokers and Sub-brokers) Amendment Regulations, 1999 published in
the Official Gazette of India dated 06.07.1999.

64

24. Substituted for the following provision by the SEBI (Appeal to the Securities
Appellate Tribunal) (Amendments) Regulations, 2000 published in the Official
Gazette of India dated 28.03.2000.
APPENDIX 5.2 (ii)

SECURITIES AND EXCHANGE BOARD OF INDIA

(1*[PROHIBITION OF] INSIDER TRADING) REGULATIONS, 1992 *

Regulation

No. LE/6308/92 In exercise of the powers conferred by section 30 of The Securities and
Exchange Board of India, Act 1992 (15 of 1992), the Board with the previous approval of the
Central Government hereby makes the following regulations, namely:

CHAPTER I :

PRELIMINARY

Short title and commencement

1. (1) These regulations may be called the Securities and Exchange Board of India
("[Prohibition of] Insider Trading) Regulations, 1992.
(2) These regulations shall come into force on the date of the publication in the Official
Gazette.
Definitions
2. In these regulations, unless the context otherwise requires(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(b) "body corporate" means a body corporate as defined under section 2 of the
Companies Act, 1956 (1 of 1956);
(c) "connected person" means any person who(i)
is a director, as defined in clause (13) of' section 2 of the Companies Act,
1956 (1 of 1956) of a company, or is deemed to be a director of that company
by virtue of sub-clause (10) of section 307 of that Act or
(ii) occupies the position as an officer or an employee of the company or holds a
position involving a professional or business relationship between himself and
the company 3*[whether temporary of permanent] and who may reasonably be
expected to have an access to unpublished price sensitive information in
relation to that company;
4
*[Explanation: For the purpose of clause (c), the words "connected person"
shall 5*[mean] any person who is a connected person six months prior to an
act of insider trading.
(d)
"dealing in securities" means an act of 6*[subscribing] buying, selling or agreeing
"[subscribe] to buy, sell or deal in any securities by any person either as principal or
agent;
(e)
"insider" means any person who, is or was connected with the company or is
deemed to have been connected with the company, and who is reasonably expected
to have access, 8*[***] connection, to unpublished price sensitive information in
respect of securities of"[a] company, or who has received or has had access to such
unpublished - price sensitive information;
1.
2.
3.

4.
5.

6.
7.
8.
9.

"Prohibition of" inserted by the SEBI (insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.
"Prohibition of" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.
"Whether temporary of permanent" inserted by the SEBI (Insider Trading)
(Amendment) Regulations, 2002 published in the Official Gazette of India dated
20.02.2002.
Explanation inserted by the SEBI (insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.
Substituted for "include" by the SEBI (Prohibition of Insider Trading) (Second
Amendment) Regulations, 2002 in the Official Gazette of India dated 29.11.2002 vide
S.O. 1245(E).
"Subscribing" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.
"subscribe" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.
by virtue of such connection omitted by the SEBI (Insider Trading) (Amendment)
Regulations, 2002 published in the Official Gazette of India dated 20.02.2002.
Substituted for the by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.

*As amended upto 16-12-2002.

Source: SEBI's Website.

65

Securities market in
India

(f)

"investigating authority" means any officer of the Board or any other person. not being a
firm. body corporate or an association of persons, having experience in dealing with the
problems relating to the securities market and who is authorised by the Board under Chapter
III;

(g)

"officer of a company" means any person as defined in clause (30) of section 2 of the ,
Companies Act, 1956 (1 of 1956) including an auditor of the company;

(h)

"person is deemed to be a connected person" if such person(i)

is a company under the same management or group or any subsidiary company

thereof within the meaning of section (113) of section 370, or sub-section (11) of
section 372, of the Companies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of
the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case
may be; or
10

*[(ii) is an intermediary as specified in section 12 of the Act, Investment company,

Trustee Company, Asset Management Company or an employee or director
thereof or an official of a stock exchange or of clearing house or corporation].

(iii)

is a merchant banker, share transfer agent, registrar to an issue, debenture trustee,

broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or
an employee thereof, or, is a member of the Board of Trustees of a mutual fund or a
member of the Board of Directors of the Asset Management Company of a mutual
fund or is an employee thereof who have a fiduciary relationship with the company:

(iv)

is a member of the Board of Directors, or an employee, of a public financial

institution as defined in Section 4A of the Companies Act, 1956; or

(v)

is an official or an employee of a self Regulatory Organisation recognised or

authorised by the Board of a regulatory body; or

(vi)

is a relative of any of the aforementioned persons:

(vii)

is a banker of the company.

11

relatives of the connected person;

12

is a concern, firm, trust, Hindu Undivided family, company or association of

persons wherein any of the connected persons mentioned in sub-clause (1) of
clause (c), of this regulation or any of the persons mentioned in sub-clauses (vi),
(vii) or (viii) of this clause have more than 10% of the holding or interest].

13

`price sensitive information' means any information which relates directly or

indirectly to a company and which if published is likely to materially affect the
price of securities of company;

*(viii)
*[(ix)

*[(ha)

Explanation: The following shall be deemed to be price sensitive information(i)

periodical financial results of the company;

(ii)

intended declaration of dividends (both interim and final);

10.

Substituted for the following clause by the SEBI (insider Trading) (Amendment) Regulations,
2002 published in the Official Gazette of India dated 20.02.2002
"is an official or a member of a stock exchange or of a clearing house of that stock
exchange, or a dealer in securities within the meaning of clause (c) of section 2, and
section 17 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
respectively or any employee of such member or dealer of a stock-exchange;"

66

11.

Clauses "viii and ix" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.

12.

Substituted for the following clause by the SEBI (Prohibition of Insider Trading) (Second
Amendment) Regulations,2002 published in the Official Gazette of India dated 29.11.2002
vide S.O. 1245(E).
"a concern, firm, trust, Hindu Undivided Family, Company, Association of Persons
wherein the relatives of persons mentioned in sub-clauses (vi), (vii) or (viii) has
more than 10% of the holding or interest."

13.

Clause "ha" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20.02.2002.

(iii) issue of securities or buy-back of securities;

Regulation

(iv) any major expansion plans or execution of new projects:

(v) amalgamation, mergers or takeovers:
(vi) disposal of the whole or substantial part of the undertaking;
(vii) any significant changes in policies, plans or operations of the company].
(i)

"relative" means a person, as defined in section 6 of the Companies Act, 1956 (1

of 1956);

(j)

"stock exchange" means a stock exchange which is recognised by the Central

Government 14*[or Securities and Exchange Board of India] under section 4 of
Securities Contracts (Regulation) Act, 1956 (42 of 1956);

15

*[(k) Unpublished means information which is not published by the company or its
agents and is not specific in nature.
Explanation: Speculative reports in print or electronic media shall not be considered
as published information:(i)

periodical financial results of the company;

(ii)

intended declaration of dividends (both interim and final);

(iii)

issue of securities or buy-back of securities;

(iv)

any major expansion plans or execution of new projects;

(v)

amalgamation, mergers or takeovers;

(vi)

disposal of the whole or substantial part of the undertaking;

(vii)

any significant changes in policies, plans or operations of the company.]

(i)

relative means a person, as defined in section 6 of the Companies Act,

1956(1 of 1956);

(j)

stock exchange means a stock exchange which is recognized by the Central

Government 14*[or Securities and Exchange Board of India] under section 4 of
Securities Contracts (Regulation) Act, 1956 (42 of 1956);

14

*[(k) Unpublished means information which is not published by the company or its
agents and is not specific in nature.
Explanation : Speculative reports in print or electronic media shall not be considered
as published information.]

14.

or Securities and Exchange Board of India" inserted by the SEBI (Insider

Trading) (Amendment) Regulations, 2002 published in the Official Gazette of
India dated 20.02.2002.

15.

Substituted for the following sub-regulation (k) by the SEBI (Insider Trading)
(Amendment) Regulations, 2002 published in the Official Gazette of India dated
20,02.2002
"unpublished price sensitive information" means any information which relates
to the following matters or is of concern, directly or indirectly, to a company,
and is not generally known or published by such company for general
information, but which if published or known, is likely to materially affect the
price of securities of that company in the market
(i)

financial results (both half-yearly and annual) of the company:

(ii) intended declaration of dividends (both interim and final);

(iii) issue of shares by way of public rights, bonus, etc.;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers and takeovers;
(vi) disposal of the whole or substantially the whole of the undertaking;
(vii) such other information as may affect the earnings of the company.
(viii) Any changes in policies, plans or operations of the company.

CHAPTER II : PROHIBITION ON DEALING,

67

COMMUNICATING OR COUNSELLING

Securities market in
India

Prohibition on dealing communication or counselling on matters relating to inside

trading
3.

No insider shall (i) either on his own behalf or on behalf of any other person, deal in securities of a
company; listed on any stock exchange 16* [when in possession on any unpublished
price sensitive information; or
17

*[(ii) Communicate, counsel or procure, directly or indirectly, any unpublished price

18
*[sensitive] information to any person who while in possession of such unpublished
price sensitive information shall not deal in securities.

Provided that nothing contained above shall be applicable to any communication required in
the ordinary course of business 19*[or profession or employment] or under any law]
20

*[***]

21

*[3A. No company shall deal in the securities of another company or associate of that other
company while in possession of any unpublished price sensitive information].

22

*[Regulation 3A not to apply in certain cases:

3B(1)-In a proceeding against a company in respect of regulation 3A, it shall be a defence to

prove that it entered into a transaction in the securities of a listed company when the
unpublished price sensitive information was in the possession of an officer or employee
of the company, if;
(a)

the decision to enter into the transaction or agreement was taken on its behalf by a person
or persons other than that officer or employee; and

(b)

such company has put in place such systems and procedures which demarcate the
activities of the company in such a way that the person who enters into transaction in
securities on behalf of the company cannot have access to information which is in
possession of other officer or employee of the company; and

(c)

it had in operation at that time, arrangements that could reasonably be expected to

ensure that the information was not communicated to the person or persons who made
the decision and that no advice with respect to the transactions or agreement was given
to that person or any of those persons by that officer or employee; and

(d)

the information was not so communicated and no such advice was so given.

16.

Substituted "on the basis of' by the SEBI (Insider Trading) (Amendment) Regulations,
2002 published in the Official Gazette of India dated 20.02.2002.

17.

Substituted for the following clause (ii) by the SEBI (Insider Trading) (Amendment)
Regulations, 2002 published in the Official Gazette of India dated 20.02.2002
"(ii) communicate any unpublished price sensitive information to any person, with or
without his request for such information, except as required in the ordinary course of
business or under any law or"

18.

Substituted for 'sinsitive" by the SEBI (Prohibition of Insider Trading) (Second

Amendment) Regulations, 2002 published in the Official Gazette of India dated
29.11.2002 vide S.O. 1245(E).

19.

"or profession or employment" inserted by the SEBI (Prohibition of Insider Trading)

(Second Amendment) Regulations, 2002 published in the Official Gazette of India dated
29.11.2002 vide S.O. 1245(E).

20.

Following clause (iii) deleted by the SEBI (Insider Trading) (Amendment) Regulations,
2002 published in the Official Gazette of India dated 20.02.2002.
"(iii) counsel or procure any other person to deal in securities of any company on the
basis of unpublished price sensitive information."

68

21.

"Regulations 3A" inserted by the SEBI (Insider Trading) (Amendment) Regulations,

2002 published in the Official Gazette of India dated 20.02.2002.

22.

Regulation 3B Inserted. by the SEBI (Prohibition of Insider Trading) (Second

Amendment) Regulations, 2002 published in the Official Gazette of India dated
29.11.2002 vide S.O. 1245(E)..

(2)

In a proceeding against a company in respect of regulations 3A which is in

possession of unpublished price sensitive information, it shall be defence to
prove that acquisition of shares of a listed company was as per the Securities
and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997"].

Regulation

Violation of provisions relating to insider trading

5. Any insider, who deals in securities 23[***] in contravention of the provisions of
regulation 3 24*[or 3A] shall be guilty of Insider trading.

23. "or communicate any information or counsels any person dealing in securities"
deleted by the SEBI (Insider Trading) (Amendment) Regulations, 2002 published
in the Official Gazette of India dated 20.02.2002.
24. "or 3A" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India dated 20 02.2002.

69

Securities market in
India

CHAPTER III : INVESTIGATION

25

*[Power to make inquiries and inspection

4A(1)

If the Board suspects that any person has violated any provision of 26* [these]
regulations, it may make inquiries with such persons or any other person as
mentioned in clause (i) of sub-section (2) of Section 11 as deemed fit, to form a prima
facie opinion as to whether there is any violation of these regulations.

(2)

The Board may appoint one or more officers to inspect the books and records of
insider(s) or any other persons as mentioned in clause (i) of sub-section (2) of Section
11 for the purpose of sub-regulation (1).

Board's right to investigate

5. (1)

(2)

Where the Board, 27*[is of prima facie opinion,] that it is necessary to investigate and
inspect the books of account, other records and documents of an insider 28* [or any
other person mentioned in clause (i) of sub-section (1) of section II of the Act] for any
of the purposes specified in sub-regulation (2), it may appoint an investigating
authority for the said purpose.
The purposes referred to in sub-regulation (1) may be as follows:
(a) To investigate into the complaints received from investors, intermediaries or any
other person on any matter having a bearing on the allegations of insider trading;
and
(b) To investigate suo-moto upon its own knowledge or information in its possession
to protect the interest of investors in securities against breach of these regulations.

Procedure for investigation

6. (1)

Before undertaking an investigation under regulation 5 the Board shall give a

reasonable notice to insider for that purpose.

(2)

Notwithstanding anything contained in sub-regulation (1), where the Board is

satisfied that in the interest of investors or in public interest no such notice should be
given, it may by an order in writing direct that the investigation be taken up without
such notice.

(3)

On being empowered by the Board, the investigating authority shall undertake the
investigation and inspection of books of accounts and insider 29*[an insider or any
other person mentioned in clause (i) of sub-section (1) of section 11 of the Act]
against whom an investigation is being carried out shall be bound to discharge his
obligations as provided in regulation 7.

Obligations of insider on investigation by the Board

7.

(1) It shall be the duty of every insider, who is being investigated, "''[or any other person
mentioned in clause (i) of sub-section (1) of section 11 of the Act] to produce to the
investigating authority such books, accounts and other documents in his custody or
control and furnish the authority with the statements and information relating to the
transactions in securities market within such time as the said authority may require.

25. "Regulation 4A" inserted by the SEDI (Insider Trading) (Amendment) Regulations. 2002
published in the Official Gazette of India. dated 20.02.2002:
26. Substituted for "thede" by the SEBI (Prohibition of Insider Trading) (Second Amendment)
Regulations, 2002 published in the Official Gazette of India dated 29.11.2002 vide S.O.
1245(E).
27. Substituted for "on the basis of written information in its possession is of the opinion" by
the SEBI (Insider Trading) (Amendment) Regulations, 2002 published in the Official
Gazette of India, dated 20.02.2002.
28. "an insider or any other person mentioned in clause (i) of sub-section (ii) of section 11 of
the Act" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India, dated 20.02.2002.
29. "an insider or any other person mentioned in clause (i) of sub-section (ii) of section 11 of
the Act" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India, dated 20.02.2002.

70

30. "or any other person mentioned in clause (i) of sub-section (i) of section 11 of the Act"
inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002 published in the
Official Gazette at India, dated 20.02.2002.

(2)

The insider 31*[or any other person mentioned 32*[in] clause (i) of sub-section (1) of section 11 of
the Act] shall allow the investigating authority to have reasonable access to the premises occupied
by such insider and also extend reasonable facility for examining any books, records, documents
and computer data in his possession of the stock- broker or any other person and also provide
copies of documents or other materials which, in the opinion of the investigating authority are
relevant.

(3)

The investigating authority, in the course of investigation, shall be entitled to examine or record
statements of any member, director, partner proprietor and employee of the insider 33*[or any
other person mentioned in clause (i) of sub-section (1) of section 11 of the Act.]

(4)

It shall be the duty of every director, proprietor, partner, officer and employee of the insider to
give to the investigating authority all assistance in connection with the investigation, which the
insider 34*[or any other person mentioned in clause (1) of sub-section 1 of section 11 of the Act]
may be reasonably expected to give.

Regulation

Submission of Report to the Board

8.

The investigating authority shall, within 35* [reasonable time] of the conclusion of the investigation
submit an investigation report to the Board.

Communication of Findings, etc.

36

*[9

(1)

The Board shall, after consideration of the investigation report communicate the findings
to the person suspected to be involved in insider trading or violation of these regulations.

(2)

The person to whom such findings has been communicated shall reply to the same within
21 days; and

(3)

On receipt of such a reply or explanation, if any, from such person, the Board may take
such measures as it deems fit to protect the interests of the investors and in the interests of
the securities market and for the due compliance of the 37* [provisions] of the Act, the
Regulations made thereunder including the issue of directions under regulation 11.

Appointment of Auditor
10.

Notwithstanding anything contained in 38*[regulation 4A and] regulation 5, the Board may

appoint a qualified auditor to investigate into the books of account or the affairs of the insider
39
*[or any other person mentioned in clause (1) of sub-section 1 of section 11 of the Act];

31.

"or any other person mentioned in clause (1) of sub-section 11 of section ii of the Act" by the SEBI
(Insider Trading) (Amendment) Regulations, 2002 published in the Official Gazette of India, dated
20.02.2002.

32.

`in' inserted by the SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002
published in the Official Gazette of India dated 29.11.2002 vide S.O. I 245(E).

33.

"or any other person mentioned in clause (1) of sub-section 11 of section ii of the Act" inserted by
the SEBI (Insider Trading) (Amendment) Regulations, 2002 published in the Official Gazette of
India, dated 20.02.2002.

34.

"or any other person mentioned in clause (1) of sub-section 1 of section 11 of the Act" inserted by
the SEBI (Insider Trading) (Amendment) Regulations, 2002 published in the Official Gazette of
India, dated 20.02.2002.

35.

Substituted for "One month" by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India, dated 20.02.2002

36.

Substituted for the following regulation 9 by the SEBI (Insider Trading) (Amendment) Regulations,
2002 published in the Official Gazette of India, dated 20.02.2002
"(1) The Board shall after consideration of the investigation report communicate the findings to
the insider and he shall be given an opportunity of being heard before any action is taken by
the Board on the findings of the investigating authority.
(2)

On receipt of the explanation; if any, from the insider, the Board may call upon the insider to
take such measures as the Board may deem fit to protect the interest of investors and in the
interest of the securities, market and for due compliance with the provisions of the Act, rules
made thereunder and these regulations."

37.

Substituted for "province" by the SEBI (Prohibition of Insider Trading) (Second Amendment)
Regulations, 2002 published in the Official Gazette of India dated 29.11.2002 vide S.O.1245(E).

38.

"regulation 4A and" inserted by the SEBI (Insider Trading) (Amendment) Regulations, 2002
published in the Official Gazette of India, dated 20.02.2002.

39.

"or any other person mentioned in clause (1) of sub-section 1 of section 11 of the Act" inserted by
the SEBI (Insider Trading) (Amendment) Regulations, 2002 published in the Official Gazette of
India, dated 20.02.2002.

71

Securities market in
India

Provided that, the auditor so appointed shall have the same powers of the inspecting
authority as stated in regulation 5 and the insider shall have the obligations specified
in regulation 7.
Directions by the Board
40

*[11 - The Board may without prejudice to its right to initiate criminal prosecution
under section 24 or any action under Chapter VIA of the Act, to protect the interests
of investors and in the interests of the securities market and for due compliance with
the provisions of the Act, Regulations made thereunder issue any or all of the
following order, namely:(a)

directing the insider or such person as mentioned in clause (i) of sub-section (2)
of section 11 of the Act not to deal in securities in any particular manner;

(b)

prohibiting the insider or such person as mentioned in clause (i) of sub-section

(2) of section 11 of the Act from disposing of any of the securities acquired in
violation of these Regulations;

(c)

restraining the insider to communicate or counsel any person to deal n

securities;

(d)

declaring the transaction(s) in securities as null and void;

(e)

directing the person who acquired the securities in violation of these regulations
to deliver the securities back to the seller;
Provided that in case the buyer is not in a position to deliver such securities.
the market price prevailing at the time of issuing of such directions or at the
time of transactions which ever is higher, shall be paid to the seller.

(f)

directing the person who has dealt in securities in violation of these regulations
to transfer an amount or proceeds equivalent to the cost price or market price of
securities, whichever is higher to the investor protection fund of a Recognised
Stock Exchange.]

11. On receipt of the explanation, if any, from the insider under sub-regulation (2)
of regulation 9, the Board may without prejudice to its right to initiate criminal
prosecution under section 24 of the Act, give such directions to protect the
interest of investors and in the interest of the securities market and for due
compliance with the provisions of the Act, rules made thereunder and these
regulations, as it deems fit for all or any of the following purposes, namely:-

72

(a)

directing the insider not to deal in securities in any particular manner;

(b)

prohibiting the insider from disposing of any of the securities acquired in

violation of these regulations;

(c)

restraining the insider to communicate or counsel any person to deal in

securities."

40. Substituted for the following regulation 11 by the SEBI (Insider Trading)
(Amendment) Regulations, 2002 published in the Official Gazette of India, dated
20.02.2002.

41

*CHAPTER

IV : POLICY ON DISCLOSURES AND

INTERNAL PROCEDURE FOR
PREVENTION OF INSIDER TRADING

Regulation

Code of internal procedures and conduct for listed companies and other entities
12. (1) All listed companies and organisations associated with securities markets
including:
(a)

the intermediaries as mentioned in section 12 of the Act, asset

management company and trustees of mutual funds;

(b)

the self regulatory organisations recognised or authorised by the Board;

(c)

the recognised stock exchanges and clearing house or corporations;

(d)

the public financial institutions as defined in Section 4A of the

Companies Act, 1956; and

(e)

the professional fines such as auditors, accountancy firms, law firms,

analysts, consultants, etc., assisting or advising listed companies, shall
frame a code of internal procedures and conduct as near there to the
Model Code specified in Schedule 1 of these Regulations.

(2) The entities mentioned in sub-regulation (1), shall abide by the Code of
Corporate Disclosure Practices as specified in Schedule 11 of' these
Regulations.
(3) All entities mentioned in sub-regulation (1), shall adopt appropriate
mechanisms and procedures to enforce the codes specified under sub regulations (1) and (2).
(4) Action taken by the entities mentioned in sub-regulation (I) against any
person for violation of the code under sub-regulation (3) shall not preclude the
Board from initiating proceedings for violation of these Regulations.
Disclosure of interest or holding by directors and officers and substantial
shareholders in a listed companies13. Initial Disclosure:
(1)

Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company, the number of shares or voting rights
held by such person, on becoming such holder, within 4 working days of:(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights, as the case may be.

(2)

Any person who is a director or officer of a listed company, shall disclose to the
company, the number of shares or voting rights held by such person, within 4
working days of becoming a director or officer of the company.

Continual Disclosure
(3)

Any person who holds more than 5% shares or voting rights in any listed
company shall disclose to the company the number of shares or voting rights
held and change in shareholding or voting rights, even if such change results in
shareholding falling below 5%, if there has been change in such holdings from
the last disclosure made under sub-regulation (1) or under this sub-regulation;
and such change exceeds 2% of total shareholding or voting rights in the
company.

(4)

Any person who is a director or officer of a listed company, shall disclose to the
company, the total number of shares or voting rights held and change in
shareholding

41. "Chapter IV" inserted by the SERI (Insider Trading) (Amendment) Regulations,
2002 published in the Official Gazette of India, dated 20.02.2002.

73

or voting rights, if there has been a change in such holdings from the last
disclosure made under sub-regulation (2) or under this sub-regulation, and the
change exceeds Rupees 5 lac in value or42* [25000] shares or 43*[1 %] of total
shareholding or voting rights, whichever is lower.

Securities market in
India

(5) The disclosure mentioned in sub-regulations (3) and (4) shall be made within 4
working days of;
a)

the receipt of intimation of allotment of shares, or

b)

the acquisition or sale of shares or voting rights, as the case may be.

Disclosure by company to stock exchanges

(6) Every listed company, within five days of receipt, shall disclose to all stock
exchanges on which the company is listed, the information received under subregulations (1), (2), (3) and (4).
Violation of provision relating to disclosure
14. (1) A person who violates provisions of regulation 12 shall be liable for action
under Section 11 or 11 B and/or Section 24 of the Act.
(2) A person who violates provisions of regulation 13 shall be liable for action as
specified in regulation 11 or Sections II, 11 B or action under Chapter VIA or
section 24 of the Act.)
Appeal to the Securities Appellate Tribunal
44

*[45* (15) Any person aggrieved by an order of the Board made, on and after the
commencement of the Securities Laws (Second Amendment) Act, 1999, (i.e.,
after 16th December 1999), under these regulations may prefer an appeal to a
Securities Appellate Tribunal having jurisdiction in the matter].

42.

Substituted for 5000by the SEBI (Prohibition of Insider Trading) (Second

Amendment) Regulations, 2002 published in the Official Gazette of India dated
29.11.2002 vide S.0.1245(E).

43.

Substituted for "1%" by the SEBI (Prohibition of Insider Trading) (Second

Amendment) Regulations, 2002 published in the Official Gazette of India dated
29.11.2002 vide S.0.1245(E).

44.

Substituted for the following by the SEBI (Appeal to the Securities Appellate
Tribunal) (Amendment) Regulations, 2000 published in the Official Gazette of
India, dated 28.03.2000.
"Any person aggrieved by an order of the Board under these regulations may
prefer an appeal to the Central Government."

74

45.

Regulation 12 renumbered as 15 by the SEBI (Insider Trading) (Amendment)

Regulations. 2002 published in the Official Gazette of India, dated 20.02.2002.

APPENDIX 5.2 (III)

Regulation

SECURITIES AND EXCHANGE BOARD OF INDIA

(SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 1997*
S. O. No 124(E) - In the exercise of the powers conferred by section 30 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following
Regulations namely: -

CHAPTER I

PRELIMINARY

Short title and commencement

1

(1)

These Regulations shall be called the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

(2)

These Regulations shall come into force on the date of their publication in the
Official Gazette.

Definitions
2

(1)

In these Regulations, unless the context otherwise requires:(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of
1992);
(b)"acquirer" means any person who, directly or indirectly, acquires or agrees to
acquire shares or voting rights in the target company, or acquires or agrees to
acquire control over the target company, either by himself or with any person
acting in concert with the acquirer;
(c)

"control" shall include the right to appoint majority of the directors or to

control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;
1

["Explanation: (i) Where there are two or more persons in control over
the target company, the cesser of any one of such persons from such
control shall not be deemed to be a change in control of management
nor shall any change in the nature and quantum of control amongst
them constitute change in control of management.
Provided that the transfer from joint control to sole control is effected in
accordance with clause (e) of sub - regulation (1) of regulation 3.
(ii) If consequent upon change in control of the target company in
accordance with regulation 3, the control acquired is equal to or less
than the control exercised by person (s) prior to such acquisition of
control, such control shall not be deemed to be a change in control".

*[(cc) "disinvestment" means the sale by the Central Government 3[or by

the State Government as the case may be] of its shares or voting rights and
/ or control in a listed Public Sector Undertaking;]
(d)

"investigating officer" means any person appointed by the Board under

Regulation 38;

(e) "person acting in concert" comprises, (1)

persons who, for a common objective or purpose of substantial acquisition of shares or

voting rights or gaining control over the target company, pursuant to an agreement or
understanding (formal or informal), directly or indirectly co-operate by acquiring or
agreeing to acquire shares or voting rights in the target company or control over the
target company.

Explanation Inserted vide SERI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.
2

Sub-regulation (cc) inserted by SEBI (Substantial Acquisition of Shares and Takeovers)

(Amendment) Regulations, 2001 published in the official Gazette of India dated 17.8.2001.
* As amended upto 1/10/2002.
Source: SEBIs Website

75

(2) Without prejudice to the generality of this definition, the following persons will be in India

Securities market in
India

deemed to be persons acting in concert with other persons in the same category, unless the
contrary is established :
(i)

a company, its holding company, or subsidiary of such company or company under

the same management either individually or together with each other;

(ii)

a company with any of its directors, or any person entrusted with the management of
the funds of the company;

(iii)

directors of companies referred to in sub-clause (i) of clause (2) and their associates

(iv)

mutual fund with sponsor or trustee or asset management company;

(v)

foreign institutional investors with sub account(s);

(vi)

merchant bankers with their client(s) as acquirer;

(vii)

portfolio managers with their client(s) as acquirer;

(viii) venture capital funds with sponsors;

(ix)

banks with financial advisers, stockbrokers of the acquirer, or any company which i a
holding company, subsidiary or relative of the acquirer.
Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with
the acquirer or with any company, which is a holding company or a subsidiary of the
acquirer or with a relative of the acquirer, is by way of providing normal commercial
banking services or such activities in connection with the offer such as confirming
availability of funds, handling acceptances and other registration work.

(x)

any investment company with any person who has an interest as director, fund
manager, trustee, or as a shareholder having not less than 2% of the paid-up capital of
that company or with any other investment company in which such person or hi
associate holds not less than 2% of the paid up capital of the latter company.

Note: For the purposes of this clause 'associate' means:

(a)

any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of
1956); and

(b)

family trusts and Hindu Undivided Families.

(f)

4[offer period' means the period between the date of entering into Memorandum of
Understanding or the public announcement, as the case may be and the date of completion
of offer formalities relating to the offer made under these regulations.];

(g)

"panel" means a panel constituted by the Board for the purpose of Regulation 4;

(h)

5[promoter" means (i)

the person or persons who are in control of the company, directly or indirectly
whether as a shareholder, director or otherwise; or

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.
4

Earlier Definition read as [(0 offer period" means the period between the date of public announcement of
the first offer and the date of closure of that offer] Substituted vide SEBI (Substantial Acquisition of
Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

[(h)

"promoter" means
(1)

(i)

the person or persons who are in control of the company, or

(ii) person or persons named in any offer document as promoters;

(2) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of
1956);and
(3)

(4)

76

in case of a corporate body,

(i)

a subsidiary or holding company of that body, or

(ii)

any company in which the `Promoter' holds 10% or more of the equity capital or which
holds 10% or more of the equity capital of the Promoter, or

(iii)

any corporate body in which a group of individuals or corporate bodies or combinations

thereof who hold 20% or more of the equity capital in that company also hold 20% or more
of the equity capital of the `Promoter'; and

in case of an individual,
(i)

any company in which 10% or more of the share capital is held by the 'Promoter' or a
relative of the `Promoter' or a firm or
Hindu undivided family in which the
'Promoter' or his relative is a partner or co-parcener or a combination thereof,

(ii)

any company in which a company specified in (i) above, holds 10% or more of the share
capital or

(iii)

any HUF or firm in which the aggregate share of the Promoter and his relatives is equal to
or more than 10% of the total.] Substituted vide SEBI (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

(ii) person or persons named as promoters in any document of offer of

securities to Regulation the public or existing shareholders,
and includes,
(a) where the promoter is an individual,(1) a relative of the promoter within the meaning of section 6 of the
Companies Act, 1956 (l of 1956);
(2) any firm or company, directly or indirectly, controlled by the
promoter or a relative of the promoter or a firm or Hindu undivided
family in which the promoter or his relative is a partner or a
coparcener or a combination thereof:
Provided that, in case of a partnership firm, the share of the promoter
or his relative, as the case may be, in such firm should not be less than
50%,";
(b) where the promoter is a body corporate, (1) a subsidiary or holding company of that body; or
(2) any firm or company, directly or indirectly, controlled by the
promoter of that body corporate or by his relative or a firm or Hindu
undivided family in which the promoter or his relative is a partner or
coparcener or a combination thereof:
Provided that, in case of a partnership firm, the share of such
promoter or his relative, as the case may be, in such firm should not be
less than 50%1.
(i)
"public financial institution- means a public financial institution as defined in
Section 4A of the Companies Act, 1956.
6
*[(ii) "Public Sector Undertaking" means a company in which the Central
Government 7[or a State Government] holds 50% or more of its equity capital
or is in control ()lithe company;]
(j)
"public shareholding "means shareholding in the hands of person(s) other than
the acquirer and persons acting in concert with him;
(k)
"shares" means shares in the share capital of a company carrying voting rights
and includes any security which would entitle the holder to receive shares with
voting rights 8[but shall not include preference shares].
(l)
"sick industrial company" shall have the same meaning assigned to it in clause
(o) of sub-section (1) of Section 3 of the Sick Industrial Companies (Special
Provisions) Act, 1985 ( I of 1986) or any statutory re-enactment thereof.
(m) "state level financial institution" means a state financial corporation established
under Section 3 of the State Financial Institutions Act, 1951 and includes
development corporation established as a company by a State Government with
the object of development of industries or agricultural activities in the state;
(n) "stock exchange" means a stock exchange which has been granted recognition
under Section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(o) "target company" means a listed company whose shares or voting rights
or control is directly or indirectly acquired or is being acquired;
9
[(p) "working days" shall mean the working days of the Board."]
(2) All other expressions unless defined herein shall have the same meaning as have
been assigned to them under the Act or the Securities Contracts (Regulation)
Act, 1956, or the Companies Act, 1956, or any statutory modification or
reenactment thereto, as the case may be.
6
Sub-regulation (ii) inserted by SERI (Substantial Acquisition of Shares and
Takeovers) (Amendment) Regulations, 2001 published in the official Gazette of
India dated 17.8.2001.
7
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.
8
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.
9
Clause (p) inserted vide SEBI (Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations. 2002 dated 9th September, 2002.
Applicability of the Regulation

Regulation

77

Securities market in
India

(1)

Nothing contained in Regulations 10, Regulation 11 and Regulation 12 of these regulations

shall apply to:
(a)

allotment in pursuance of an application made to a public issue.

Provided that if such an allotment is made pursuant to a firm allotment in the p issues,
such allotment shall be exempt only if full disclosures are made in the prospectus
about the identity of the acquirer who has agreed to acquire the shares the purpose of
acquisition, consequential changes in voting rights, shareholding pattern of the
company and in the Board of Directors of the Company, if any, whether such
allotment would result in change in control over the company.

(b)

allotment pursuant to an application made by the shareholder for rights issue,

(i) to the extent of his entitlement; and
(ii)

upto the percentage specified in Regulation 11:

Provided that the limit mentioned in sub-clause (ii) will not apply to the acquisition
by any person presently in control of the company and who hi the rights letter of offer
made disclosures that they intend to acquire additional, shares beyond their
entitlement if the issue is undersubscribed.
Provided further that this exemption shall not be available in case the acquisition of
securities results in the change of control of management;
10

*[(c)]
(d) allotment to the underwriters pursuant to any underwriting agreement;
(e)

inter se transfer of shares amongst :-

11

[(i) group coming within the definition of group as defined in the Monopolies Restrictive
Trade Practices Act, 1969 (54 of 1969) where persons constituter such group have
been shown as group in the last published Annual Report the target company I;

(ii)

relatives within the meaning of Section 6 of the Companies Act, 1956 (1 of 1956;

(iii)

(a) Indian promoters and foreign collaborators who are shareholders;

(b)

Promoters:

12

[ Provided that the transferor(s) as well as the transferee(s) have been holding shares in
the target company for a period of at least three years prior to the proposed acquisition.]

10

[(c) preferential allotment, made in pursuance of a resolution, passed under Section 81 (IA) of the
Companies Act, 1956 (1 of 1956).

Provided that,(i)

board Resolution in respect of the proposed preferential allotment is sent to all the steel
exchanges on which the shares of the company are listed for being notified on the notice
board;

(ii)

full disclosures of the identity of the class of the proposed allottee (s) is made, and if any
the proposed allottee (s) is to be allotted such number of shares as would increase his hold
to 5% or more of the post issued capital, then in such cases, the price at which the afloat is
proposed, the identity of such person(s), the purpose of and reason for such allotment,
consequential changes, if any, in the board of directors of the company and in voting right
the shareholding pattern of the company, and whether such allotment would result in chat
in control over the company are all disclosed in the notice of the General Meeting called
the purpose of consideration of the preferential allotment;]Omitted vide SEBI (Substanti1
Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th
September, 2002.

11

The earlier definition [(i) group companies, coming within the definition of group as defined in the
Monopolies and Restrictive Trade Practices Act, 1969 (25 of 1969) ;] Substituted vide SEBI
(Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9t
September, 2002.

12

78

The proviso read as [Provided that the transferor(s) as well as the transferees) in sub-clauses (a) and
have been holding individually or collectively not less than 5%shares in the target company for a
period of at least three years prior to the proposed acquisition;] Substituted vide SEBI (Substantial
Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September,
2002.

13

[(iv) the acquirer and persons acting in concert with him, where such transfer
of shares takes place three years after the date of closure of the public offer
made by them under these Regulations.]

Regulation

14

[Explanation .- (1) The exemption under sub-clauses (iii) and (iv) shall not be
available if inter se transfer of shares is at a price exceeding 25% of the price
as determined in terms of sub-regulations (4) and (5) of regulation 20.";

2.

The benefit of availing exemption under this clause, from applicability of the
Regulations for increasing shareholding or inter se transfer of shareholding shall be
subject to such transferor(s) and transferee(s) having complied with Regulation 6,
Regulation 7 and Regulation 8.1
(f)

acquisition of shares in the ordinary course of business by,(i)

a registered stock-broker of a stock exchange on behalf of clients;

(ii)

a registered market maker of a stock exchange in respect of shares for which he

is the market maker, during the course of market making;

(iii) by Public Financial Institutions on their own account;

(iv) by banks and public financial institutions as pledgees;
15

[(v) the International Finance Corporation, Asian Development Bank,

International Bank for Reconstruction and Development, Commonwealth
Development Corporation and such other international financial
institutions,

(vi) a merchant banker or a promoter of the target company pursuant to a

scheme of safety net under the provisions of the Securities and Exchange Board of
India (Disclosure and Investor Protection) Guidelines, 2000 in excess of limit
specified in sub-regulation (1) of Regulation 11.]
16

[(ff) acquisition of shares by a person in exchange of shares received under a

public offer made under these Regulations.]

(g)

acquisition of shares by way of transmission on succession or inheritance;

(h)

acquisition of shares by government companies within the meaning of Section 617 of the
Companies Act, 1956 (1 of 1956) and statutory corporations;
17

[Provided that this exemption shall not be applicable if a Government company acquires
shares or voting rights or control of a listed Public Sector Undertaking through the
competitive bidding process of the Central Government 18[or the State Government as
the case may be] for the purpose of disinvestment."]
(i)

transfer of shares from state level financial institutions, including their subsidiaries, to co-promoter(s) of the company 19[or their successors or assignee(s) or an acquirer who
has substituted an erstwhile promoter] pursuant to an agreement between such financial
institution and such co-promoter(s);

13

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.
14

[Explanation: The benefit of availing of exemption from applicability of Regulations for

increasing shareholding or inter se transfer of shareholding among group companies, relatives and
promoters shall be subject to such group companies or relatives or promoters filing statements
concerning group and individual shareholding as required under Regulations 6, Regulation 7 and
Regulation 8.] Substituted vide SEBI (Substantial Acquisition of' Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

15

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

16

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

17

Proviso inserted by SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment)

Regulations, 2002 published in the official .Gazette of India dated 29.1.2002.

18

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

19

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations. 2002 dated 9th September, 2002.

79

Securities market in
India

20

[(ia) transfer of shares from venture capital funds or foreign venture capital investors
registered with the Board to promoters of a venture capital undertaking or venture capital
undertaking pursuant to an agreement between such venture capital fund or foreign venture
capital investors with such promoters ea venture capital undertaking];
(j) pursuant to a scheme (i) framed under Section 18 of the Sick Industrial Companies (Special Provisions) Act,
l9R5;
(ii) of arrangement or reconstruction including amalgamation or merger or demerger
under any law or regulation, Indian or foreign.
(k) acquisition of shares in companies whose shares are not listed on any stock
exchange;
Explanation: The exemption under clause (k) above shall not be applicable if by
virtue of acquisition or change of control of any unlisted company, whether in India
or abroad, the acquirer acquires shares or voting rights or control over a listed
company.
21
(1)
[*] other cases as may be exempted from the applicability of Chapter III by the Board
under Regulation 4.
Nothing contained in Chapter III of the Regulations shall apply to the acquisition of
(2)
Global Depository Receipts or American Depository Receipts so long as they are not
converted into shares carrying voting rights.
in respect of acquisitions under clauses 22[*](e).(h) and (i) of sub-regulation (1), the
(3)
stock exchanges where the shares of the company are listed shall, for information of the
public, be notified of the details of the proposed transactions at least 4 working days in
advance of the date of the proposed acquisition, in case of acquisition exceeding 23[5%]
of the voting share capital of the company.
(4)
In respect of acquisitions under clauses (a),(b),24[*],(e) and (i) of sub-regulation (1), the
acquirer shall. within 21 days of the date of acquisition, submit a report along with
supporting documents to the Board giving all details in respect of acquisitions which
(taken together with shares or voting rights, if any, held by him or by persons acting in
concert with him) would entitle such person to exercise 25*[15%] or more of the voting
rights in a company.
26
[Explanation - For the purposes of sub-regulations (3) and (4), the relevant date in
case of securities which arc convertible into shares shall be the clate of conversion of
such securities].
(5)
The acquirer shall, along with the report referred to under sub-regulation (4), pay a fee
of Rs. 1 0, 000/- to the Board, either by a bankers cheque or demand draft in favour of
the Securities and Exchange Board of India, payable at Mumbai.
The Takeover Panel
4. (1) The Board shall for the purposes of this Regulation constitute a Panel of majority of
independent persons from within the categories mentioned in sub-section (5) of
Section 4 of the Act.
(2) For seeking exemption under clause (1) of sub-regulation (1) of Regulation (3), the
acquirer shall file an application 27[supported by a duly sworn affidavit] with the
Board, given: details of the proposed acquisition and the grounds on which the
exemption has been sought [Format of application].
20

80

Sub-regulation (la) inserted by SEBI (Substantial Acquisition of Shares and Takeovers)

(Amendment) Regulations, 2000 published in the official Gazette of India dated 30.12.2000.
2l
The word [such] Omitted vide SEBI (Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations, 2002 dated 9th September, 2002.
22
The brackets and the word c Omitted vide SEBI( (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
23
Substituted for 2% by the SEBI (Substantial Acquisition of Shares and Takeovers
(Amendment) Regulations, 1998 published in the official Gazette of India dated 28.10.1990.
24
The brackets and the word[(c)] Omitted vide SEBI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
25
Substituted for 10% by the SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 1998 published in the official Gazette of India dated 28.10.1998.
26
Explanation Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.
27
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

(3) The acquirer shall, along with the application referred to under sub-regulation
(2), pay a fee of Rs. 25, 000/- to the Board, either by a bankers cheque or
demand draft in favour of the Securities and Exchange Board of India,
payable at Mumbai.
(4) The Board shall within 5 days of the receipt of an application under subregulation (2) forward the application to the Panel.

Regulation

(5) The Panel shall within 15 days from the date of receipt of application make a
recommendation on the application to the Board.
(6) The Board shall after affording reasonable opportunity to the concerned
parties and after considering all the relevant facts including the
recommendations, if any, pass a reasoned order on the application under subregulation (2) within 30 days thereof.
(7) The order of the Board under sub-regulation (6) shall be published by the
Board.
Power of the Board to grant exemption
5.

In order to remove any difficulties in the interpretation or application of the

provisions of these Regulations, the Board shall have the power to issue
directions through guidance notes or circulars:
Provided that where any direction is issued by the Board in a specific case
relating to interpretation or application of any provision of these Regulations, it
shall be done only after affording a reasonable opportunity to the concerned
parties and after recording reasons for the direction.

81

Securities market in
India

CHAPTER II : DISCLOSURES OF SHAREHOLDING

AND CONTROL IN A LISTED
COMPANY
Transitional provision
6. (1)
Any person, who holds more than five percent shares or voting rights in any
company, shall within two months of notification of these Regulations disclose his
aggregate shareholding in that company, to the company.
(2) Every company whose shares are held by the persons referred to in sub-regulation
(1) shall, within three months from the date of notification of these Regulations,
disclose to all the stock exchanges on which the shares of the company are listed,
the aggregate number of shares held by each person.
(3) A promoter or any person having control over a company shall within two months
of notification of these Regulations disclose the number and percentage of shares or
voting rights held by him and by person(s) acting in concert with him in that
company, to the company.
(4) Every company, whose shares are listed on a stock exchange, shall within three
months of notification of these Regulations, disclose to all the stock exchanges on
which the shares of the company are listed, the names and addresses of promoters
and, or person(s) having control over the company, and number and percentage of
shares or voting rights held by each such person.
Acquisition of 5% and more shares of a company
28

[7. (1) Any acquirer, who acquires shares or voting rights which (taken together with shares
or voting rights, if any, held by him) would entitle him to more than five per cent or ten per
cent or fourteen per cent shares or voting rights in a company, in any manner whatsoever,
shall disclose at every stage the aggregate of his shareholding or voting rights in that
company to the company and to the stock exchanges where shares of the target company are
listed].

29

[(1A) Any acquirer who has acquired shares or voting rights of a company under subregulation (1) of regulation 11, shall disclose purchase or sale aggregating two per cent. or
more of the share capital of the target company to the target company, and the stock
exchanges where shares of the target company are listed within two days of such purchase or
sale alongwith the aggregate shareholding after such acquisition or sale].

30

[Explanation - for the purposes of sub-regulations (1) and (1A), the term 'acquirer' shall
include a pledgee, other than a bank or a financial institution and such pledgee shall make
disclosure to the target company and the stock exchange within two days of creation of
pledge.]

(2) The disclosures mentioned in 31*[sub-regulations(1) and (1A)] shall be made within 32[two
days], (a)

the receipt of intimation of allotment of shares; or

(b)

the acquisition of shares or voting rights, as the case may be.

28

The earlier sub-regulation read as [(1) Any acquirer, who acquires shares or voting rights
which (taken together with shares or voting rights, if any, held by him) would entitle him to
more than five percent shares or voting rights in a company, in any manner whatsoever, shall
disclose the aggregate of his shareholding or voting rights in that company, to the company.]
Substituted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

29

The earlier provision which read as follows [(1 A) Any acquirer who has acquired shares or
voting rights of a company under sub-regulation (1) of regulation 11, shall disclose purchase
or sale aggregating two per cent or more of the share capital of the target company to the
target company, and the stock exchanges where shares of the target company are listed
within two days of such purchase or sale along with the aggregate shareholding after such
acquisition or sale.] Substituted vide SEBI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

30

Explanation inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

31

82

Substituted for "sub-regulation (1)" by SEBI (Substantial Acquisition of Shares and

Takeovers) (Third Amendment) Regulations, 2001 published in the official Gazette of India
dated 24.10.2001

32

The words [four working days of] substituted vide SEBI (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

33

[(2A) The stock exchange shall immediately display the information received from
the acquirer under sub-regulations (1) and (1A) on the trading screen, the notice board
and also on its website].

Regulation

(3) Every company, whose shares are acquired in a manner referred to in 34*[subregulation(1)) and (1A)] shall disclose to all the stock exchanges on which the
shares of the said company are listed the aggregate number of shares held by
each of such persons referred above within seven days of receipt of information
under 35*[sub-regulations (1) and (1A)].
Continual disclosures
8.

(1)

Every person, including a person mentioned in Regulation 6 who holds

more than 36*[fifteen] per cent shares or voting rights in any company,
shall, within 21 days from the financial year ending March 31, make yearly
disclosures to the company, in respect of his holdings as on 31st March.
(2) A promoter or every person having control over a company shall, within 21
days from the financial year ending March 31, as well as the record date of
the company for the purposes of declaration of dividend, disclose the
number and percentage of shares or voting rights held by him and by
persons acting in concert with him, in that company to the company.
(3) Every company whose shares are listed on a stock exchange, shall within 30
days from the financial year ending March 31, as well as the record date of
the company for the purposes of declaration of dividend, make yearly
disclosures to all the stock exchanges on which the shares of the company
are listed, the changes, if any, in respect of the holdings of the persons
referred to under sub-regulation (1) and also holdings of promoters or
person(s) having control over the company as on 31st March.
(4) Every company whose shares are listed on a stock exchange shall maintain
a register in the specified format to record the information received under
sub-regulation (3) of Regulation 6, sub-regulation (1) of Regulation 7 and
sub-regulation (2) of Regulation 8.
Power to call for information
10. The stock exchanges and the company shall furnish to the Board
information with regard to the disclosures made under
Regulations 6, Regulation 7 and Regulation 8 as and when
required by the Board.

33

Sub Regulation (2A) inserted vide SEBI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
34
Substituted for "sub-regulation (1)" by SEBI (Substantial Acquisition of Shares and
Takeovers) (Third Amendment) Regulations, 2001 published in the official Gazette of
India dated 24.10.2001.
35
Substituted for "sub-regulation (1)" by SEBI (Substantial Acquisition of Shares and
Takeovers) (Third Amendment) Regulations, 2001 published in the official Gazette of
India dated 24.10.2001.
36
Substituted for "ten" by the SERI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 1998 published in the official Gazette of India dated
28.10.1998.

83

Securities market in
India

CHAPTER III :

SUBSTANTIAL ACQUISITION OF
SHARES VOTING RIGHTS IN AN OF
ACQUISITION CONTROL OVER A
LISTED COMPANY

Acquisition of 37*[fifteen] or more of the shares or voting rights of any company,

10. No acquirer shall acquire shares or voting rights which (taken together with shares or
voting rights if any, held by him or by persons acting in concert with him), entitle such
acquirer to exercise 37* [ fifteen ] percent or more of the voting rights in a company, unless
such acquirer makes a public announcement to acquire shares of such company in accordance
with the Regulations.
Consolidation of holdings
11. (1)

No acquirer who, together with persons acting in concert with him, has acquired, in
accordance with the provisions of law,38*[15 per cent or more but less than 75 per
cent the shares or voting rights in a company, shall acquire, either by himself or
through or 1 persons acting in concert with him, additional shares or voting rights
entitling him to exercise more than 39*[40[5%]] of the voting rights,41 [in any
financial year ending on 31 March], unless such acquirer makes a public
announcement to acquire shares in accords with the Regulations.

42*[(2) No acquirer, who together with persons acting in concert with him has acquired , in
accordance with the provisions of law, 75% of the shares or voting rights in a
company shall acquire either by himself or through persons acting in concert with
him any additional shares or voting rights, unless such acquirer makes a public
announcement to acquire shares in accordance with the regulations]
43*[(3)

Notwithstanding anything contained in Regulations 10, 11 and 12, in case of

disinvestment of a Public Sector Undertaking , an acquirer who together with
persons acting in concert with him, has made a public announcement, shall not be
required to make another public announcement at the subsequent stage of further
acquisition of shares or voting rights or control of the Public Sector Undertaking
provided:(i)

both the acquirer and the seller are the same at all the stages of acquisition, and

(ii) disclosures regarding all the stages of acquisition, if any, are made in the letter
of c issued in terms of Regulation 18 and in the first public announcement].
Explanation:- For the purposes of Regulation 10 and Regulation 11, acquisition shall mean and
include,37

Substituted for "10%" by the SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 1998 published in the official Gazette of India dated 28.10.1998.
38

Substituted for "[not less than 10% but not more than 51%]" by the SEBI (Substantial
Acquisition of Shares and Takeovers) (Amendment) Regulations, 1998 published in the
official Gazette of India dated 28.10.98.

39

Substituted for "5%" by the SEBI (Substantial Acquisition of Shares and Takeovers) (Third
Amendment Regulations, 2001, published in the official Gazette of India dated 24.10.2001.
Earlier it was substituted for "2" by the SEBI (Substantial Acquisition of Shares and
Takeovers) (Amendment) Regulations, 1 published in the official Gazette of India dated
28.10.98.

40

The word and figures ["10% of the voting rights"] substituted vide SEBI (Substantial
Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th
September, 2002.

41

The word and figures ["in any period of 12 months with" in any financial year ending on 31st
Mar Substituted vide SEB1 (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

42

84

Substituted for "No acquirer shall acquire shares or voting rights which (taken together with
shares or voting rights, if any, held by him or by persons acting in concert with him), entitle
such acquirer to exercise more than 51% of the voting rights in a company, unless such
acquirer makes a public announcement to acquire share of such company in accordance with
the Regulations" by the SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 1998 published in the official Gazette of India dated 28.10.1998.

43

Sub-regulation (3) inserted by the SEB1 (Substantial Acquisition of Shares and Takeovers)
(Amendment Regulations, 2001 published in the official Gazette of India dated 17.08.2001.

(a) direct acquisition in a listed company to which the Regulations apply;

Regulation

(b) indirect acquisition by virtue of acquisition of 44[*] companies, whether listed or unlisted,
whether in India or abroad.
Acquisition of control over a company
12.

Irrespective of whether or not there has been any acquisition of shares or voting rights in a
company, no acquirer shall acquire control over the target company, unless such person
makes a public announcement to acquire shares and acquires such shares in accordance with
the Regulations.
Provided that nothing contained herein shall apply to any change in control which takes
place in pursuance to a 45[special resolution] passed by the shareholders in a general meeting.

46

[Provided further that for passing of the special resolution facility of voting through postal ballot
as specified under the Companies (Passing of the Resolutions by Postal Ballot) Rules, 2001 shall
also be provided].

Explanation:
47

[For the purposes of this Regulation, acquisition shall include direct or indirect acquisition
of control of target company by virtue of acquisition of companies, whether listed or
unlisted and whether in India or abroad].

Appointment of a Merchant Banker

13.

Before making any public announcement of offer referred to in Regulation 10 or Regulation

11 or Regulation 12, the acquirer shall appoint a merchant banker in Category-I holding a
certificate of registration granted by the Board, who is not associate of or group of the
acquirer or the target company.

Timing of the Public Announcement of Offer

14. (1)

The public announcement referred to in Regulation 10 or Regulation 11 shall be made by

the merchant banker not later than four working days of entering into an agreement for
acquisition of shares or voting rights or deciding to acquire shares or voting rights
exceeding the respective percentage specified therein:
48

*[Provided that in case of disinvestment of a Public Sector Undertaking, the public

announcement shall be made by the merchant banker not later than 4 working days of the
acquirer executing the Share Purchase Agreement or Shareholders Agreement with the

44

The word [holding] Omitted vide SEBI (Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations, 2002 dated 9th September, 2002.

45

Substituted for the word [resolution] vide SEBI (Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations, 2002 dated 9th September, 2002.

46

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

47

[Explanation:
(i)
For the purposes of this Regulation where there are two or more persons in control
over the target company, the cessor of any one such person from such control shall
not be deemed to be a change in control of management nor shall any change in the
nature and quantum of -control amongst them constitute change in control of
management.
Provided however that if the transfer of joint control to sole control is through sale at
less than the market value of the shares, a shareholders meeting of the target company
shall be convened to determine mode of disposal of the shares of the outgoing
shareholder, by a letter of offer or by block-transfer to the existing shareholders in
control in accordance with the decision passed by a special resolution. Market value
in such cases shall be determined in accordance with Regulation 20.
(ii)
where any person or persons are given joint control, such control shall not be deemed
to be a change in control so long as the control given is equal to or less than the
control exercised by person(s) presently having control over the company.]
Substituted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.
48
Proviso inserted by the SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 2001 published in the official Gazette of India dated
17.08.2001.

85

Central Government 49[or the State Government as the case may be] for the
acquisition shares or voting rights exceeding the percentage of share holding referred
to in Regulation 10 or Regulation 11 or the transfer of control over a target Public
Sector Undertaking:

Securities market in
India

(2)

In case of an acquirer acquiring securities, including Global Depositories

Receipts or American Depository Receipts which, when taken together with the
voting right any already held by him or persons acting in concert with him,
would entitle hi voting rights, exceeding the percentage specified in Regulation
10 or Regulation the public announcement referred to in sub-regulation (1) shall
be made not late than four working days before he acquires voting rights on
such securities upon conversion, or exercise of option, as the case may be.
(3) The public announcement referred to in Regulation 12 shall be made by the
merchant banker not later than four working days after any such change or
changes are deg to be made as would result in the acquisition of control over the
target company by the acquirer.
50
[(4) In case of indirect acquisition or change in control, a public announcement
be made by the acquirer within three months of consummation of such
acquisition change in control or restructuring of the parent or the company
holding shares c control over the target company in India].
Public Announcement of Offer
15. (1) The public announcement to be made under Regulations 10 or Regulation 11 or
Regulation 12 shall be made in all editions of one English national daily with wide
circulation, on Hindi national daily with wide circulation and a regional language
daily with wide circulation at the place where the registered office of the target
company is situated al the place of the stock exchange where the shares of the target
company are most frequently traded.
51

[2) Simultaneously with publication of the public announcement in the newspaper in

terms of sub-regulation (1), a copy of the public announcement shall be,
(i)

submitted to the Board through the merchant banker,

(ii)

sent to all the stock exchanges on which the shares of the company are listed
for being notified on the notice board,

(iii)

sent to the target company at its registered office for being placed before the Be
of Directors of the company.]
52

[(3)]

(3) Simultaneous with the submission of the public announcement to the Board, the
public announcement shall also be sent to all the stock exchanges, on which the shares
of the company are listed for being notified on the notice board, and to the target
company a registered office for being placed before the board of directors of the
Company.
(4) The offer under these Regulations shall be deemed to have been made on the date on
is the public announcement has appeared in any of the newspapers referred to in subregulation (1).
49

[or the State Government as the case may be] inserted vide SEBI (Substantial Acquisition of
Shares Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
50

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regular 2002 dated 9th September, 2002.

51

[(2) A copy of the public announcement to be made under Regulations 10 or Regulation 11 or

Regulation 12 shall be submitted to the Board through the merchant banker at least two
working days before its issuance]Substituted vide SERI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment Regulations, 2002 dated 9th September, 2002.
52

86

The sub-regulation (3) which read as [(3) Simultaneous with the submission of the public
announcement to the Board, the public announcement shall also be sent to all the stock
exchanges on which the shay the company are listed for being notified on the notice board, and
to the target company at its registered office for being placed before the board of directors of
the Company]. Omitted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September,2002.

Contents of the Public Announcement of Offer

Regulation

16. The public announcement referred to in Regulations 10 or Regulation 11 or Regulation 12

shall contain the following particulars, namely : (i)

the paid up share capital of the target company, the number of fully paid up and
partly paid up shares;
(ii) the total number and percentage of shares proposed to be acquired from the public,
subject to a minimum as specified in sub-regulation (1) of Regulation 21;
(iii) the minimum offer price for each fully paid up or partly paid up share;
(iv) mode of payment of consideration;
(v) the identity of the acquirer(s) and in case the acquirer is a company or companies,
the identity of the promoters and, or the persons having control over such
company(ies) and the group, if any, to which the company(ies) belong:
(vi) the existing holding, if any, of the acquirer in the shares of the target company,
including holdings of persons acting in concert with him;
(vii) salient features of the agreement, if any, such as the date, the name of the seller, the
price at which the shares are being acquired, the manner of payment of the
consideration and the number and percentage of shares in respect of which he
acquirer has entered into the agreement to acquire the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target company, as the
case may be;
(viii) the highest and the average price paid by the acquirer or persons acting in concert
with him for acquisition, if any, of shares of the target company made by him during
the twelve month period prior to the date of public announcement;
(ix) object and purpose of the acquisition of the shares and future plans, if any, of the
acquirer for the target company, including disclosures whether the acquirer proposes
to dispose of or otherwise encumber any assets of the target company in the
succeeding two years, except in the ordinary course of business of the target
company.
Provided that where the future plans are set out , the public announcement shall
also set out how the acquirers propose to implement such future plans.
53
[Provided further that the acquirer shall not sell, dispose of or otherwise
encumber any substantial asset of the target company except with the prior approval
of the shareholders.
(ixa) an undertaking that the acquirer shall not sell, dispose of or otherwise encumber any
substantial asset of the target company except with the prior approval of the
shareholders].
(x) the 'specified date' as mentioned in Regulation 19;
(xi) the date by which individual letters of offer would be posted to each of the
shareholders;
(xii) the date of opening and closure of the offer and the manner in which and the date by
which the acceptance or rejection of the offer would be
communicated to the
shareholders;
(xiii) the date by which the payment of consideration would be made for the shares in
respect of which the offer has been accepted;
(xiv) disclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including details regarding the sources of
the funds whether domestic i.e from banks, financial institutions, or otherwise or
foreign i.e., from Non-Resident Indians or otherwise.
(xv) provision for acceptance of the offer by person(s) who own the shares but are not
the registered holders of such shares;
(xvi) statutory approvals, if any, required to be obtained for the purpose of acquiring the
shares under the Companies Act, 1956 (1 of 1956), the Monopolies and Restrictive
Trade Practices Act, 1969 (54 of 1969), The Foreign Exchange Regulation Act,
1973, (46 of 1973) and/or any other applicable laws;
(xvii) approvals of banks or financial institutions required, if any; whether the offer is
subject to a minimum level of acceptance from the shareholders; and
53

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second

Amendment). Regulations, 2002 dated 9th September, 2002.
(xviii)

such other information as is essential for the shareholders to make an informed

87

Securities market in
India

decision in regard to the offer.

Brochures, advertising material etc.
17. The public announcement of the offer or any other advertisement, circular, brochure,
publicity material or letter of offer issued in relation to the acquisition of shares shall not
contain any misleading information.
Submission of Letter of offer to the Board
18. (1) Within fourteen days from the date of public announcement made under Regulation 10,
Regulation 11 or Regulation 12 as the case may be, the acquirer shall, through its
merchant banker, file with the Board, the draft of the letter of offer, containing
disclosures as specified by the Board.
(2) The letter of offer shall be dispatched to the shareholders not earlier than 21 days
from its submission to the Board under sub-regulation (1).
Provided that if, within 21 days from the date of submission of the letter of offer, the
Board specifies changes, if any, in the letter of offer, (without being under any
obligation to do so) the merchant banker and the acquirer shall carry out such changes
before the letter of offer is dispatched to the shareholders.
54

[Provided further that if the disclosures in the draft letter of offer are inadequate or
the Board has received any complaint or has initiated any enquiry or investigation in
respect of the public offer, the Board may call for revised letter of offer with or
without rescheduling the date of opening or closing of the offer and may offer its
comments to the revised letter of offer within seven working days of filing of such
revised letter of offer.]

(3) The acquirer shall, along with the draft letter of offer referred to in sub-regulation (1),
pa: a fee of Rs. 50, 000/- to the Board, either by a banker's cheque or demand draft in
favour of the Securities and Exchange Board of India, payable at Mumbai.
Specified date
19. The public announcement shall specify a date, which shall be the 'specified date' for the
purpose of determining the names of the shareholders to whom the letter of offer should
be set
Provided that such specified date shall not be later than the thirtieth day from the date of
the public announcement.
55

[Offer price.

20. (1) The offer to acquire shares under regulations 10, 11 or 12 shall be made at a price not
low than the price determined as per sub-regulations (4) and (5).
(2) The offer price shall be payable (a)

in cash ;

(b)

by issue, exchange and, or transfer of shares (other than preference shares) of

acquirer company, if the person seeking to acquire the shares is a listed body
corporate; or

(c)

by issue, exchange and, or transfer of secured instruments of acquirer company

with a minimum `A' grade rating from a credit rating agency registered with
the Board;

(d)

a combination of clause (a), (b) or (c) :

Provided that where the payment has been made in cash to any class of
shareholders for acquiring their shares under any agreement or pursuant to any
acquisition in the open market or in any other manner during the immediately
preceding twelve months from the date of public announcement, the letter of
offer shall provide an option to the shareholders to accept payment either in
cash or by exchange of shares or other secured instruments referred to above:

54

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations 2002 dated 9th September, 2002.
55

[Minimum offer price

20.

88

(1) The offer to acquire the shares under Regulations 10, Regulation 11 or Regulation
12 shall be made at a minimum offer price which shall be payable (a)

in cash; or

(b)

by exchange and, or transfer of shares of acquirer company, if the person

seeking to acquire the shares is a listed body corporate; or
Provided further that the mode of payment of consideration may be altered in

case of revision in offer price or size subject to the condition that the amount to be
paid in cash as mentioned in any announcement or the letter of offer is not reduced.
(3)
In case the offer price consists of consideration payable in the form of securities issuance
of which requires approval of the shareholders, such approval shall be obtained by the
acquirer within twenty one days from the date of closure of the offer:
Provided that in case the requisite approval is not obtained, the acquirer shall pay the
entire consideration in cash.
(4)
For the purposes of sub-regulation (1), the offer price shall be the highest of(a) the negotiated price under the agreement referred to in sub-regulation (1) of
regulation 14;
(b) price paid by the acquirer or persons acting in concert with him for acquisition,
if any, including by way of allotment in a public or rights or preferential issue
during the twenty six week period prior to the date of public announcement,
whichever is higher:
(c) the average of the weekly high and low of the closing prices of the shares of
the target company as quoted on the stock exchange where the shares of the
company are most frequently traded during the twenty six weeks or the average
of the daily high and low of the closing prices of the shares as quoted on the
stock exchange where the shares of the company are most frequently traded
during the two weeks preceding the date of public announcement, whichever is
higher.
Explanation:
In case of disinvestment of a Public Sector Undertaking, the relevant date for the calculation of the

Regulation

55

[contd........... ]
(c)

by exchange and/or transfer of secured instruments with a minimum of grade rating

from a credit rating agency;
(d)
a combination of clauses (a), (b) or (c).
Provided that where payment has been made in cash to any class of shareholders for acquiring their
shares under any agreement or pursuant to any acquisition in the open market or in any other manner
during the preceding 12 months from the date of public announcement, the offer document shall provide
that the shareholders have the option to accept payment either in cash or by exchange of shares or other
secured instruments referred to above.
(2) For the purposes of sub-regulation (I), the minimum offer price shall be the highest of
(a)
the negotiated price under the agreement referred to in sub-regulation (1) of Regulation
I4;
(b)
highest price paid by the acquirer or persons acting in concert with him for any
acquisitions, including by way of allotment in a public or rights issue, if any, during the
26 week period prior to the date of public announcement:
(c)
the price paid by the acquirer under a preferential allotment made to him or to persons
acting in concert with him, at any time during the twelve month period upto the date of
closure of the offer;
(d)
the average of the weekly high and low of the closing prices of the shares of the target
company as quoted on the stock exchange where the shares of the company are most
frequently traded during the 26 weeks preceding the date of public announcement.
[Explanation: In case of disinvestment of Public Sector Undertaking, the relevant date for the calculation
of the average of the weekly high and low of the closing prices of the shares of the Public Sector
Undertaking, as quoted on the stock exchange where its shares are most frequently traded, shall be the
date preceding the date when the Central Government (opens the financial bid)].
(3) Where the shares of the target company are infrequently traded, the offer price shall be
determined by the issuer and the merchant banker taking into account the following factors:
(a)
the negotiated price under the agreement referred to in sub-regulation (1) of
Regulation 14;
(b) highest price paid by the acquirer or persons acting in concert with him for acquisitions
including by way of allotment in a public or rights issue, if any, during the twenty six
week period prior to the date of public announcement;
(c)
the price paid by the acquirer under a preferential allotment made to him or to
persons acting in concert with him, at any time during the twelve month period upto
the date of closure of the offer; and
(d) other parameters including return on networth, book value of the shares of the target
company, earning per share, price earning multiple vis--vis the industry average.
Explanation:
(h) For the purpose of this clause, shares will be deemed to be infrequently traded if
on the stock exchange, the annualized trading turnover in that share during the
preceding 6 calendar months prior to the month in which the public
announcement is made is less than two percent (by number of shares) of the
listed shares. For this purpose, the weighted average number of shares listed
during the said six months period may he taken.

average of the weekly or daily high and low of the closing prices of the shares of the Public Sector

89

Securities market in
India

Undertaking, as quoted on the stock exchange where its shares are most frequently traded, shall be
the date preceding the date when the Central Government or the State Government opens the
financial bid.
(5)
Where the shares of the target company are infrequently traded, the offer price shall be
determined by the acquirer and the merchant banker taking into account the following
factors:
(a) the negotiated price under the agreement referred to in sub-regulation (1) of regulation
14;
(b) the highest price paid by the acquirer or persons acting in concert with him for
acquisitions, if any, including by way of allotment in a public or rights or preferential
issue during the twenty six week period prior to the date of public announcement;
(c) other parameters including return on networth, book value of the shares of the target
company, earning per share, price earning multiple vis--vis the industry average:
Provided that where considered necessary, the Board may require valuation of such
55

[cont]

90

[(ia) In case of, disinvestment of Public Sector Undertaking, the shares of such an
undertaking shall be deemed to be infrequently traded if on the stock
exchange the annualized trading turnover in the shares during the preceding
six calendar months prior to the month, in which the Central Government
(opens the financial bid) is less than two per cent (by the number of shares)
of the listed shares. For this purpose the weighted average number of shares
listed during the six months period may be taken].
(ii) In case of shares, which have been listed within six months proceeding the
public announcement, the trading turnover may be annualised with reference
to the actual number of days for which the share has been listed.
[(3A) Notwithstanding anything contained in sub-regulation (3), in case of disinvestment of
Public Sector Undertaking, whose shares are infrequently traded, the minimum offer
price shall be the price paid by the successful bidder to the Central Government,
arrived at after the process of competitive bidding of the Central Government for the
purpose of disinvestment'''.
(4) Notwithstanding the provisions of sub-regulations (1), (2) and (3) above, where the
acquirer has acquired shares in the open market or through negotiation or otherwise,
after the date of public announcement at a price higher than the minim um offer
price stated in the' letter of offer, then the highest price paid for such acquisition
shall be payable for all acceptances received under the offer.
[Provided that no such acquisition shall be made by the acquirer during the last
seven working days prior to the closure of the offer].
(5) In case where shares or secured instruments of the, acquirer company are offered in lieu
of cash payment, the value of such shares or secured instruments shall be determined
in the same manner as mentioned in sub-regulations (2) and (3) above to the extent
applicable, as duly certified by an independent Category I Merchant Banker (other
than the managers to the offer) or an independent Chartered Accountant of 10 years
standing.
(6) The letter of offer shall contain justification on the basis on which the price has been
determined.
Explanation (1)
The highest price under clause (h) or the average price under clause (d) of subregulation (2) may be adjusted for quotations, if any, on cum-rights or cumbonus (or cum-dividend) basis during the said period.
(2) Where the public announcement of offer is pursuant to acquisition by way of
firm allotment in a public issue or preferential allotment, the average price
under clause (d) of sub-regulation 2 shall be calculated with reference to the 26
week period preceding the date of the board resolution which authorised the
firm, preferential allotment.
(3) Where the shareholders have been provided with an option to accept payment
either in cash or by way of exchange of security then subject to the provisions
of Regulation 20, the pricing for the cash offer could be different from that of a
share exchange offer or offer for exchange with secured instruments, provided
that the disclosures in the offer document contains suitable justification for such
differential pricing.
(4)
Where the offer is subject to a minimum level of acceptances, the acquirer may
subject to the provision of Regulation 20, indicate a lower price for the minimum
acceptance of 20%, should the offer not receive full acceptance. ] Substituted
vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

infrequently traded shares by an independent merchant banker (other than

the manager to the offer) or an independent chartered accountant of
minimum ten years' standing or a public financial institution.

Regulation

Explanation
(i)

For the purpose of sub-regulation (5), shares shall be deemed to be

infrequently traded if on the stock exchange, the annualised trading turnover
in that share during the preceding six calendar months prior to the month in
which the public announcement is made is less than five per cent. (by
number of shares) of the listed shares. For this purpose, the weighted average
number of shares listed during the said six months period may be taken.

(ii)

In case of disinvestment of a Public Sector Undertaking, the shares of such

an undertaking shall be deemed to be infrequently traded, if on the stock
exchange, the annualised trading turnover in the shares during the preceding
six calendar months prior to the month, in which the Central Government or
the State Government as the case may be opens the financial bid, is less than
five per cent. (by the number of shares) of the listed shares. For this purpose,
the weighted average number of shares listed during the six months period
may be taken.

(iii)

In case of shares which have been listed within six months preceding the
public announcement, the trading turnover may be annualised with reference
to the actual number of days for which the shares have been listed.

(6)

Notwithstanding anything contained in sub-regulation (5), in case of disinvestment of a

Public Sector Undertaking, whose shares are infrequently traded, the minimum offer
price shall be the price paid by the successful bidder to the Central Government or the
State Government, arrived at after the process of competitive bidding of the Central
Government or the State Government for the purpose of disinvestment.

(7)

Notwithstanding anything contained in the provisions of sub-regulations (2), (4), (5)

and (6), where the acquirer has acquired shares in the open market or through
negotiation or otherwise, after the date of public announcement at a price higher than
the offer price stated in the letter of offer, then, the highest price paid for such
acquisition shall be payable for all acceptances received under the offer:
Provided that no such acquisition shall be made by the acquirer during the last seven
working days prior to the closure of the offer.

(8)

Any payment made to the persons other than the target company in respect of non
compete agreement in excess of twenty five per cent of the offer price arrived at under
sub-regulations (4) or (5) or (6) shall be added to the offer price.

(9)

In case where shares or secured instruments of the acquirer company are offered in lieu
of cash payment, the value of such shares or secured instruments shall be determined in
the same manner as specified in sub-regulation (4) or sub-regulation (5) to the extent
applicable, as duly certified by an independent merchant banker (other than the manager
to the offer) or an independent chartered accountant of a minimum ten years standing or
a public financial institution.

(10)

The offer price for partly paid up shares shall be calculated as the difference between
the offer price and the amount due towards calls-in-arrears or calls remaining unpaid
together with interest, if any, payable on the amount called up but remaining unpaid.

(11)

The letter of offer shall contain justification or the basis on which the price has been
determined.

Explanation:
(i)

The highest price under clause (b) or the average price under clause (c) of subregulation (4) may be adjusted for quotations, if any, on cum-rights or cum-bonus
or cum-dividend basis during the said period.

(ii)

Where the public announcement of offer is pursuant to acquisition by way of firm

allotment in a public issue or preferential allotment, the average price under
clause (c) of sub-regulation (4) shall be calculated with reference to twenty six
week period preceding the date of the board resolution which authorised the firm
allotment or preferential allotment.

91

(iii) Where the shareholders have been provided with an option to accept payment either
in cash or by way of exchange of security, the pricing for the cash offer could be
different from that of a share exchange offer or offer for exchange with secured
instruments provided that the disclosures in the letter of offer contains suitable
justification for such differential pricing and the pricing is subject to other provisions
of this regulation.

Securities market in
India

(iv) Where the offer is subject to a minimum level of acceptance, the acquirer may,
subject t the other provisions of this regulation, indicate a lower price for the
minimum acceptance upto twenty per cent should the offer not receive full
acceptance.
(12) The offer price for indirect acquisition or control shall be determined with reference to the date
of the public announcement for the parent company and the date of the public announcement
for acquisition of shares of the target company, whichever is higher, in accordance with subregulation (4) or sub-regulation (5)].
56

[Acquisition price under creeping acquisition.

20A. (1) An acquirer who has made a public offer and seeks to acquire further shares under subregulation (1) of regulation 11 shall not acquire such shares during the period of 6
month from the date of closure of the public offer at a price higher than the offer price.
(2) Sub-regulation (1) shall not apply where the acquisition is made through the stock
exchanges].
Minimum number of shares to be acquired
57

[21. (1) The public offer made by the acquirer to the shareholders of the target company shall I for
a minimum twenty per cent of the voting capital of the company].
58

[(2)].

(3) If the public offer results in the public shareholding being reduced to 10% or less of the
voting capital of the company, or if the public offer is in respect of a company which hi
public shareholding of less than 10% of the voting capital of the company, the acquirer
shall either,
59

make an offer to buy the outstanding shares remaining with the shareholders in
accordance with the Guidelines specified by the Board in respect of Delisting of
Securities; or]

(b)

undertake to disinvest through an offer for sale or by a fresh issue of capital to

the public, which shall open within a period of 6 months from the date of closure
of the public offer, such number of shares so as to satisfy the listing
requirements.

[(a)

(4)

The letter of offer shall state clearly the option available to the acquirer under sub-regulation
(.

(5)

For the purpose of computing the percentage referred to sub-regulation (1), (2) and (3) the
voting rights as at the expiration of 30 days after the closure of the public offer shall be
reckoned.

(6)

Where the number of shares offered for sale by the shareholders are more than the shares
ogre to be acquired by the person making the offer, such person shall, accept the offers
received from

56

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulation 2002 dated 9th September, 2002.

57

The sub-regulation (I) and proviso which read as [(1) The public offer shall be made to the
shareholder of the target company to acquire from them an aggregate minimum of 20% of the
voting capital of I company. Provided that where the open offer is made in pursuance to subregulation (2) of Regulation 11, the public offer shall be for such percentage of the voting capital
of the company as may be decided by the acquirer]. Substituted vide SEBI (Substantial
Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th
September, 2002.

58

The earlier sub-regulation [(2) Where the offer is conditional upon minimum level of acceptances
from the shareholders as provided for in clause (xviii) of Regulation 16, the provisions of subregulation (I this regulation shall not be applicable, if the acquirer has deposited in the escrow
account in cash a sum of 50% of the consideration payable under the public offer]. Omitted vide
SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002
dated 9th September, 2002.

59

92

The earlier clause [(a) within a period of 3 months from the date of closure of the public offer,
make an offer to buy out the outstanding shares remaining with the shareholders at the same offer
price, which may result in de-listing of the target company; or] Substituted vide SEBI
(Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated
9th September, 2002.

the shareholders on a proportional basis, in consultation with the merchant banker,

taking care to ensure that the basis of acceptance is decided in a fair and equitable
manner and does not result in non-marketable lots.
Provided that acquisition of shares from a shareholder shall not be less than the
minimum marketable lot or the entire holding if it is less than the marketable lot.
60
[Offer conditional upon level of acceptance.
2IA. (1) Subject to the provisions of sub-regulation (8) of regulation 22, an acquirer
or any person acting in concert with him may make an offer conditional as
to the level of acceptance which may be less than twenty per cent:
Provided that where the public offer is in pursuance of a Memorandum of
Understanding, the Memorandum of Understanding shall contain a
condition to the effect that in case the desired level of acceptance is not
received the acquirer shall not acquire any shares under the Memorandum
of Understanding and shall rescind the offer].
General Obligations of the acquirer
22. (1) The public announcement of offer to acquire the shares of the target company
shall be made only when the acquirer is able to implement the offer.
(2) Within 14 days of the public announcement of the offer, the acquirer shall
send a copy of the draft letter of offer to the target company at its registered
office address, for being placed before the board of directors and to all the
stock exchanges where the shares of the company are listed.
(3) The acquirer shall ensure that the letter of offer is sent to all the shareholders
(including non-resident Indians) of the target company, whose names appear
on the register of members of the company as on the specified date
mentioned in the public announcement. so as to reach them within 45 days
from the date of public announcement.
Provided that where the public announcement is made pursuant to an
agreement to acquire shares or control over the target company, the letter of
offer shall be sent to shareholders other than the parties to the agreement.
Explanation (i) A copy of the letter of offer shall also be sent to the
Custodians of Global Depository Receipts or American
Depository Receipts to enable such persons to participate in
the open offer, if they are entitled to do so.
(ii) A copy of the letter of offer shall also be sent to warrant
holders or convertible debenture holders, where the period of
exercise of option or conversion falls within the offer period.
(4) The date of opening of the offer shall be not later than the sixtieth day from the
date of public announcement.
(5) The offer to acquire shares from the shareholders shall remain open for a period
of 30 days.
61
[(5A) The shareholder shall have the option to withdraw acceptance tendered
by him upto three working days prior to the date of closure of the offer].
(6) In case the acquirer is a company, the public announcement of offer, brochure,
circular, letter of offer or any other advertisement or publicity material issued to
shareholders in connection with the offer must state that the directors accept the
responsibility for the information contained in such documents.
Provided that if any of the directors desires to exempt himself from responsibility
for the information in such document, such director shall issue a statement to that
effect, together with reasons thereof for such statement.
(7) During the offer period, the acquirer or persons acting in concert with him shall
not be entitled to be appointed on the board of directors of the target company.

Regulation

60

Inserted vide SEB1 (Substantial Acquisition of Shares and Takeovers) (Second

Amendment) Regulations, 2002 dated 9th September, 2002.
61
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

93

Securities market in
India

62

*[Provided that in case of acquisition of shares or voting rights or control of a Public

Sect( Undertaking pursuant to a public announcement made under the proviso to
sub-regulation Regulation 14, the provisions of sub-regulation (8) of Regulation 23
shall be applicable].
63
[Provided further that where the acquirer, other than the acquirer who has made an
offer under regulation 21 A, after assuming full acceptances, has deposited in the
escrow account hundred per cent of the consideration payable in cash where the
consideration payable is in cash am the form of securities where the consideration
payable is by way of issue, exchange or trans of securities or combination thereof,
he may be entitled to be appointed on the Board of Directors of the target company
after a period of twenty one days from the date of public announcement].
(8) Where an offer is made conditional upon minimum level of acceptances, the acquirer
or any person acting in concert with him (i) shall, irrespective of whether or not the offer received response to the minimum
level of acceptances, acquire shares from the public to the extent of the minimum
percentage specified in sub-regulation (1) of Regulation 21.
Provided that the provisions of this clause shall not be applicable in case the
acquirer has deposited in the escrow account, in cash, 50% of the consideration
payable under the public offer.
(ii) shall not acquire, during the offer period, any shares in the target company, except
by way of fresh issue of shares of the target company, as provided for under
Regulation 3:
(iii) shall be liable for penalty of forfeiture of entire escrow amount, for the nonfulfilment of obligations under the Regulations;
(9) If any of the persons representing or having interest in the acquirer is already a
director on the ( board of the target company or is an "insider" within the meaning of
Securities and Exchange Board of India (Insider Trading) Regulations, 1992, he shall
recluse himself and not participate in any matter(s) concerning or 'relating' to the
offer including any preparatory steps leading to the offer.
(10) On or before the date of issue of public announcement of offer, the acquirer shall
create an escrow account as provided under Regulation 28.
(11) The acquirer shall ensure that firm financial arrangements has been made for
fulfilling the obligations under the public offer and suitable disclosures in this regard
shall be made in the public announcement of offer.
(12) The acquirer shall, within a period of 30 days from the date of the closure of the
offer, complete procedures relating to the offer including payment of consideration to
the shareholders who ha accepted the offer and for the purpose open a special
account as provided under Regulation 2;
Provided that where the acquirer is unable to make the payment to the shareholders
who have accepted the offer before the said period of 30 days due to non-receipt of
requisite statutory approvals, the Board may, if satisfied that non-receipt of requisite
statutory approvals was not due to any wilful default or neglect of the acquirer or
failure of the acquirer to diligently purse( the applications for such approvals, grant
extension of time for the purpose, subject to the acquirer agreeing to pay interest to
the shareholders for delay beyond 30 days, as may be specified by the Board from
time to time.
(12) Where the acquirer fails to obtain the requisite statutory approvals in time on account
of wilful default or neglect or inaction or non-action on his part, the amount lying in
the escrow account shall be liable to be forfeited and dealt with in the manner
provided in clause (e) of sub regulation 12 of Regulation 28, apart from the acquirer
being liable for penalty as provided in t Regulations.
(14) In the event of withdrawal of offer in terms of the Regulations, the acquirer shall not
make any offer for acquisition of shares of the target company for a period of six
months from the date o public announcement of withdrawal of offer.
62

94

Proviso inserted by the SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2001 published in the official Gazette of India dated
12.09.2001.
63
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations 2002 dated 9th September, 2002.

(15) In the event of non-fulfilment of obligations under Chapter III or Chapter IV of the
Regulations, the acquirer shall not make any offer for acquisition of shares of any listed
company for a period of twelve months from the date of closure of offer.
(16) If the acquirer, in pursuance to an agreement, acquires shards which along with his
existing holding, if any, increases his share holding beyond 64*[15%], then such an
agreement for sale of shares shall contain a clause to the effect that in case of noncompliance of any provisions of this regulation, the agreement for such sale shall not be
acted upon by the seller or the acquirer.
65
*[Provided that in case of acquisition of shares of a Public Sector Undertaking pursuant
to a public announcement made under the Regulations, the provisions of sub-regulation
(8) of Regulation 23 shall be applicable].
66
[(17) Where the acquirer or persons acting in concert with him has acquired any shares in
terms of sub-regulation (7) of regulation 20 at a price equal to or less or more than the
offer price, he shall disclose the number, percentage, price and the mode of acquisition of
such shares to the stock exchanges on which the shares of the target company are listed
and to the merchant banker within 24 hours of such acquisition and the stock exchanges
shall forthwith disseminate such information to the public].
(18) Where the acquirer has not either, in the public announcement, and, or in the letter of
offer, stated his intention to dispose of or otherwise encumber any assets of the target
company except in the ordinary course of business of the target company, the acquirer,
where he has acquired control over the target company shall be debarred from disposing
of or otherwise encumbering the assets of the target company for a period of 2 years from
the date of closure of the public offer.
67
[(19) The acquirer and the persons acting in concert with him shall be jointly and severally
responsible for fulfilment of obligations under these Regulations].
General Obligations of the board of directors of the target company
23. (1) Unless the approval of the general body of shareholders is obtained after the date of
the public announcement of offer, the board of directors of the target company shall
not, during the offer period, (a) sell, transfer, encumber or otherwise dispose of or enter into an agreement for
sale, transfer, encumbrance or for disposal of assets otherwise, not being sale or
disposal of assets in the ordinary course of business, of the company or its
subsidiaries; or
(b) issue 68[or allot] any authorised but unissued securities carrying voting rights
during the offer period; or
(c) enter into any material contracts.
69
[Explanation : Restriction on issue of securities under clause (b) of subregulation (1) shall not affect
(i)
the right of the target company to issue or allot shares carrying voting
rights upon conversion of debentures already issued or upon exercise of
option
64
Substituted for "10" by SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 1998 published in the official Gazette of India dated 28.10.98.
65
Proviso inserted by the SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 2001 published in the official Gazette of India dated 17.08.2001.
66
Earlier sub-regulation 17 which read as [(17) Where the acquirer or persons acting in concert
with him has acquired any shares 27*[in terms of sub- regulation (4) of regulation 20] he,
shall disclose the number, percentage, price and the mode of acquisition of such shares to the
stock exchanges on which the shares of the target company are listed and to the merchant
banker, within 24 hours of such acquisition. Substituted vide SEBI (Substantial Acquisition
of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September,
2002.
67
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th. September, 2002.
68
Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.
69
The earlier Explanation read as [Explanation: Restriction on issue of securities under clause
(h) of sub-regulation (1) shall not affect the right of the target company to issue and allot
shares carrying voting rights upon conversion of debentures already issued or upon exercise
of option against warrants, as per pre-determined terms of conversion/ exercise of option].
Substituted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002.

Regulation

95

against warrants, as per pre-determined terms of conversion or exercise of in India

option.

Securities market in
India

(ii) issue or allotment of shares pursuant to public or rights issue in respect of

which the offer document has already been filed with the Registrar of
Companies or Stock Exchanges, as the case may be].
(2)

The target company shall furnish to the acquirer, within 7 days of the request of the
acquirer of within 7 days from the specified date, whichever is later, a list of
shareholders or warrant holders or convertible debenture holders as are eligible for
participation under Explanation (ii) to sub-regulation (3) of Regulation 22 containing
names, addresses, shareholding and folio number and of those persons whose
applications for registration of transfer of shares are pending with the company.

(3) Once the public announcement has been made, the board of directors of the target
company shall not,
(a)

appoint as additional director or fill in any casual vacancy on the board of directors,
by. an. person(s) representing or having interest in the acquirer, till the date of
certification by the merchant banker as provided under sub-regulation (6) below.
Provided that upon closure of the offer and the full amount of consideration payable
to the shareholders being deposited in the special account, changes as would give
the acquirer representation on the Board or control over the company, can be made
by the target company.

(b)

allow any person or persons representing or having interest in the acquirer, if he is

already a director on the board of the target company before the date of the public
announcement, to participate in any matter relating to the offer, including any
preparatory steps leading thereto.

(4) The board of directors of the target company may, if they so desire, send their unbiased
comments and recommendations on the offer(s) to the shareholders, keeping in mind the
fiduciary responsibility of the directors to the shareholders and for the purpose seek the
opinion of an independent merchant banker or a Committee of Independent Directors;
Provided that for any misstatement or for concealment of material information, the
directors shall be liable for action in terms of these Regulations and the Act.
(5) The board of directors of the target company shall facilitate the acquirer in verification of
securities tendered for acceptances.
(6) Upon fulfilment of all obligations by the acquirers under the Regulations as certified by
the merchant banker, the board of directors of the target company shall transfer the
securities acquired by the acquirer, whether under the agreement or from open market
purchases, in the name of the acquirer and, or allow such changes in the board of directors
as would give the acquirer representation on the board or control over the company.
(7) The obligations provided for in sub-regulation (16) of regulation 22 shall be complied
with by the company in the circumstances specified therein.
70

*[(8) The restrictions

(a)

for appointment of directors on :he Board of a target company by the acquirer under
sub-regulation (7) of Regulation 22.

(b)

for acting on agreement for under sub-regulation (16) of Regulation 22;

(c)

for appointment of directors by the target company under clause (a) of subregulation 3 of this Regulation; and

70

Sub-regulation 8 inserted by the SEBI (Substantial Acquisition of Shares and Takeovers)

(Second Amendment) Regulations, 2001 published in the official Gazette of India dated
12.09.2001.
(8) The obligations provided for in the proviso to clause (a) of sub-regulation (3) and
sub-regulation (6) of this regulation, shall not be applicable where the agreement to
sell shares of a Public Sector Undertaking contains a clause to the effect that in case
of non-compliance of any of the provisions of the Regulations, the shares or the
control of the Public Sector Undertaking shall revert back to the Central Government
and the acquirers shall be liable to such penalty as may be imposed by the Central
Government."

96

The above sub-regulation (8) was inserted by the SEBI (Substantial Acquisition of
Shares and Takeovers) (Amendment) Regulations, 2001 published in the official
Gazette of India dated 17.08.2001.

(d) for on transfer of securities or changes in the Board of Directors of the target
company under sub-regulation (6) of this Regulation, shall not be applicable, in case
of sale of shares of a Public Sector Undertaking by the Central Government 71[or the
State Government], and the agreement to sell contains a clause to the effect that in
case of non-compliance of any of the provisions of the Regulations by the acquirer,
transfer of shares or change of management or control of Public Sector Undertaking
shall vest back with the Central Government 71[or the State Government] and the
acquirer shall be liable to such penalty as may be imposed by the Central Government
71
[or the State Government]. ]
General obligations of the merchant banker
24. (1) Before the public announcement of offer is made, the merchant banker shall ensure
that(a) the acquirer is able to implement the offer;
(b) the provision relating to escrow account referred to in Regulation 28 has been
made;
(c) firm arrangements for funds and money for payment through verifiable means to
fulfil the obligations under the offer are in place;
(d) the public announcement of offer is made in terms of the Regulations.
(2) The merchant banker shall furnish to the Board a due diligence certificate which shall
accompany the draft letter of offer.
(3) The merchant banker shall ensure that the 72[*] public announcement and the letter of
offer is filed with the Board, target company and also sent to all the stock exchanges
on which the shares of the target company are listed in accordance with the
Regulations.
(4) The merchant banker shall ensure that the contents of the public announcement of
offer as well as the letter of offer are true, fair and adequate and based on reliable
sources, quoting the source wherever necessary.
(5) The merchant banker shall ensure compliance of the Regulations and any other laws
or rules as may be applicable in this regard.
(6) Upon fulfilment of all obligations by the acquirers under the Regulations, the
merchant banker shall cause the bank with whom the escrow amount has been
deposited to release the balance amount to the acquirers.
(7) The merchant banker shall send a final report to the Board within 45 days from the
date of closure of the offer
Competitive bid
25. (1) Any person, other than the acquirer who has made the first public announcement, who
is desirous of making any offer shall, within 21 days of the public announcement of
the first offer, make a public announcement of his offer for acquisition of the shares
of the same target company.
Explanation: An offer made under sub-regulation (1) shall be deemed to be a
competitive bid.
(2) No public announcement for an offer or competitive bid shall be made after
21 days from the date of public announcement of the first offer.
73
*[ (2A)No public announcement for a competitive bid shall be made after
an acquirer has already made the public announcement under the proviso to
sub-regulation (1) of

Regulation

71

The words [or the State Government] inserted vide SEBI (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
72
The word [draft] omitted vide SEBI (Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations, 2002 dated 9th September, 2002.
73
Substituted for the following by the SEBI Substantial Acquisition of Shares and Takeovers)
(Second Amendment) Regulations, 2001 published in the official Gazette of India dated
12.09.2001.
(2A) No public announcement for a competitive bid shall be made after an acquirer
has already made the public announcement under the proviso to sub-regulation (1) of
Regulation 14 pursuant to entering into a Share Purchase or Shareholders' Agreement
with the Central Government for acquisition of shares or voting rights or control of a
Public Sector Undertaking."
The above sub-regulation (2A) was inserted by the SEBI (Substantial Acquisition of Shares
and Takeovers) (Amendment) Regulations, 2001 published in the official Gazette of India
dated 17.08.2001.

97

Securities market in
India

Regulation 14 pursuant to entering into a Share Purchase or Shareholders Agreement with the
Central Government 74[or the State Government as the case may be], for acquisition shares or
voting rights or control of a Public Sector Undertaking].
(3)

Any competitive offer by an acquirer shall be for such number of shares which, when
taken together with shares held by him along with persons acting in concert with him,
shall be 75[at least equal to the holding of the first bidder including the number of shares
for which the present offer by the first bidder has been made].

(4)

Upon the public announcement of a competitive bid or bids, the acquirer(s) who had
made the public announcement(s) of the earlier offer(s), shall have the option to 76[make
an announcement revising the offer].
Provided that if no such announcement is made within fourteen days of the
announcement of the competitive bid(s), the earlier offer(s) on the original terms shall
continue to be valid and binding on the acquirer(s) who had made the offer(s) except
that the date of closing t the offer shall stand extended to the date of closure of the
public offer under the last subsisting competitive bid.

(5)

The provisions of these Regulations shall mutatis mutandis apply to the competitive
bid(s) made under sub-regulation (1).

(6)

The acquirers who have made the public announcement of offer(s) including the public
announcement of competitive bid(s) 77[*] shall have the option to make upward
revisions in his offer(s), in respect to the price and the number of shares to be acquired,
at any time upto seven working days prior to the date of closure of the offer:
Provided that the acquirer shall not have the option to change any other terms and
condition of their offer 78[except the mode of payment following an upward revision in
offer].
Provided further that any such upward revision shall be made only upon the acquirer,
-

(7)

(a)

making a public announcement in respect of such changes or amendments in

all the newspapers in which the original public announcement was made;

(b)

simultaneously with the issue of public announcement referred in clause (a),

informing the Board, all the stock exchanges on which the shares of the
company are listed, and the target company at its registered office;

(c)

increasing the value of the escrow account as provided under sub-regulation

(9) of Regulation 28.

Where there is a competitive bid, the date of closure of the original bid as also the
date of closure of all the subsequent competitive bids shall be the date of closure of
public offer under the last subsisting competitive bid and the public offers under all
the subsisting bids shall close on the same date.

Upward Revision of Offer

26.

Irrespective of whether or not there is a competitive bid, the acquirer who has made the
public announcement of offer, may make upward revisions in his offer in respect to the
price and the number of shares to be acquired, at anytime upto seven working days prior
to the date of the closure of the offer.
Provided that any such upward revision of offer shall be made only upon the acquirer -

74

The words [or the State Government as the case may be] inserted vide SEBI (Substantial
Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th
September, 2002.

75

Substituted for the words ["at least equal to the number of shares for which the first public
announcement has been made"] vide SEBI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

76

[make an announcement:(a)

revising the offer; or

(b)

withdrawing the offer, with the prior approval of the Board]. Substituted vide SEBI

(Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002

dated 9th September, 2002.
77

The words [but have not withdrawn the offer in terms of sub-regulation (4)] Omitted vide
SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations,
2002 dated 9th September, 2002.

98
78

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

(a)

making a public announcement in respect of such changes or amendments

in all the newspapers in which the original public announcement was made;

(b)

simultaneously with the issue of such public announcement, informing the

Board, all the stock exchanges on which the shares of the company are
listed, and the target company at its registered office.

Regulation

(c) increasing the value of the escrow account as provided under subregulation (9) of Regulation 28.
Withdrawal of Offer
27. (1) No public offer, once made, shall be withdrawn except under the following
circumstances:79

[(a)]

(b)

the statutory approval(s) required have been refused;

(c)

the sole acquirer, being a natural person, has died;

(d)

such circumstances as in the opinion of the Board merits withdrawal.

(2) In the event of withdrawal of the offer under any of the circumstances specified
under sub-regulation (1), the acquirer or the merchant banker shall:
(a)

make a public announcement in the same newspapers in which the

public announcement of offer was published, indicating reasons for
withdrawal of the offer.

(b)

simultaneously with the issue of such public announcement, inform (i)

the Board;

(ii)

all the stock exchanges on which the shares of the company are
listed; and

(iii) the target company at its registered office.

Provision of Escrow
28.

(1) The acquirer shall as and by way of security for performance of his
obligations under the Regulations, deposit in an escrow account such sum
as specified in sub-regulation (2).
(2) The escrow amount shall be calculated in the following manner, (a)

For consideration payable under the public offer, - upto and

including Rs.100 crores - 25%; exceeding Rs.100 crores - 25% upto
Rs.100 crores and 10% thereafter.

(b)

For offers which are subject to a minimum level of acceptance, and

the acquirer does not want to acquire a minimum of 20%, then 50%
of the consideration payable under the public offer in cash shall be
deposited in the escrow amount.

(3) The total consideration payable under the public offer shall be calculated
assuming full acceptances and at the highest price if the offer is subject to
differential pricing, irrespective of whether the consideration for the offer
is payable in cash or otherwise.
(4) The escrow account referred in sub-regulation (1) shall consist of, (a)

cash deposited with a scheduled commercial bank ; or

(b)

bank guarantee in favour of the merchant banker; or

(c)

deposit of acceptable securities with appropriate margin, with the

merchant banker; or

(d)

cash, deposited with a scheduled commercial bank in case of clause

(b) of sub-regulation (2) of this Regulation.

79

The earlier clause which read as [(a) the withdrawal is consequent upon any
competitive bid; Omitted vide SEBI (Substantial Acquisition of Shares and
Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

99

(5) Where the escrow account consists of deposit with a scheduled commercial bank, the
acquirer shall, while opening the account, empower the merchant banker appointed
for offer to instruct the bank to issue a banker's cheque or demand draft for the
amount lying to the credit of the escrow account, as provided in the Regulations.

Securities market in
India

(6) Where the escrow account consists of bank guarantee, such bank guarantee shall be
in favour of the merchant banker and shall be valid atleast for a period commencing
from date of public announcement until 30 days after the closure of the offer.
(7) The acquirer shall, in case the escrow account consists of securities empower the
mere banker to realise the value of such escrow account by sale or otherwise
provided that is there is any deficit on realisation of the value of the securities, the
merchant banker shall liable to make good any such deficit.
(8) In case the escrow account consists of bank guarantee or approved securities, these
shall not be returned by the merchant banker till after completion of all obligations
under the Regulations.
(9) In case there is any upward revision of offer, consequent upon a competitive bid or
otherwise, the value of the escrow account shall be increased to equal at least 10% of
the consideration payable upon such revision.
(10) Where the escrow account consist of bank guarantee or deposit of approved
securities, acquirer shall also deposit with the bank a sum of at least 1% of the total
consideration payable, as and by way of security for fulfilment of the obligations
under the Regulation by the acquirers.
(11) The Board shall in case of non-fulfilment of obligations under the Regulations by the
acquirer forfeit the escrow account either in full or in part.
80

[( 11A) In case of failure by the acquirer to obtain shareholders' approval required

under sub-regulation (3) of regulation 20, the amount in escrow account may be
forfeited].

(12) The escrow account deposited with the bank in cash shall be released only in the
follow( manner,
(a) the entire amount to the acquirer upon withdrawal of offer in terms of
Regulation upon certification by the merchant banker;
(b) for transfer to the special account opened in terms of sub-regulation (1) of
Regulation 29.
Provided the amount so transferred shall not exceed 90% of the cash deposit
made under clause (a) of sub-regulation (2) of this regulation.
(c)

to the acquirer, the balance of 10 per cent of the cash deposit made under
clause (a) of sub-Regulation (2) of this Regulation or the cash deposit made
under sub-Regulation 81[(10)] of this Regulation, on completion of all
obligations under the Regulations, and upon certification by the merchant
banker;

(d)

the entire amount to the acquirer upon completion of all obligations under the
Regulations, upon certification by the merchant banker, where the offer is for
exchange of shares or other secured instruments;

(e)

the entire amount to the merchant banker, in the event of forfeiture for nonfulfilment of any of the obligations under the Regulations, for distribution
among the target company, the regional stock exchange and to the
shareholders who had accepted the offer in the following manner, after
deduction of expenses, if any, of the merchant banker and the registrars to the
offer, (i)

one third of the amount to the target company;

(ii)

one third of the amount to the regional stock exchange for credit of the
investor protection fund or any other similar fund for investor education,
research, grievance redressal and similar such purposes as may be
specified by the Boat from time to time;

80

100

Inserted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulation 2002 date 9th September, 2002,

81

'The earlier bracket and figure [(8)] Substituted vide SE131 (Substantial Acquisition of
Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.

(iii)
(13)

residual one third to be distributed pro-rata among the shareholders who

have accepted the offer.

Regulation

In the event of non-fulfilment of obligations by the acquirer, the merchant

banker shall ensure realisation of escrow amount by way of foreclosure of
deposit, invocation of bank guarantee or sale of securities and credit proceeds
thereof to the regional stock exchange of the target company, for the credit of
the Investor Protection Fund or any other similar fund.

Payment of consideration
29. (1) For the amount of consideration payable in cash, the acquirer shall, within a
period of 21 days from the date of closure of the offer, open a special account
with a Bankers to an Issue registered with the Board and deposit therein, such
sum as would, together with 90% of the amount lying in the escrow account,
if any, make up the entire sum due and payable to the shareholders as
consideration for acceptances received and accepted in terms of these
Regulations and for this purpose, transfer the funds from the escrow account.
(2) The unclaimed balance lying to the credit of the account referred in subregulation (1) at the end of 3 years from the date of deposit thereof shall be
transferred to the investor protection fund of the regional stock exchange of
the target company.
(3) In respect of consideration payable by way of exchange of securities, the
acquirer shall ensure that the securities are actually issued and despatched to
the shareholders.

101

Securities market in
India

CHAPTER IV : BAIL OUT TAKEOVERS

Bail out takeovers
30. (1)

The provisions of this Chapter shall apply to a substantial acquisition of shares in a

financially weak company not being a sick industrial company, in pursuance to a
scheme of rehabilitation approved by a public financial institution or a scheduled
bank; (hereinafter referred to as lead institution).

(2)

The lead institution shall be responsible for ensuring compliance with the provisions
this Chapter.

(3)

The lead institution shall appraise the financially weak company taking into account
financial viability, and assess the requirement of funds for revival and draw up the
rehabilitation package on the principle of protection of interests of minority
shareholder good management, effective revival and transparency.

(4)

The rehabilitation scheme shall also specifically provide the details of any change in
management.

(5)

The scheme may provide for acquisition of shares in the financially weak company
in of the following manner:
(a)

outright purchase of shares, or

(b)

exchange of shares, or

(c)

combination of both.

Provided that the scheme as far as possible may ensure that after the proposed
acquisition the erstwhile promoters do not own any shares in case such acquisition is
made by the new promoters pursuant to such scheme.
Explanation: For the purpose of this chapter, the expression "financially weak
company means a company, which has at the end of the previous financial year
accumulated fosse which has resulted in erosion of more than 50% but less than
100% of its networth as at the beginning of the previous financial year, that is to say,
of the sum total of the paid-up capital and free reserves.
Manner of acquisition of shares
31. (1) Before giving effect to any scheme of rehabilitation the lead institution shall invite
offers for acquisition of shares from atleast three parties.
(2) After receipt of the offers under sub-regulation (1), the lead institution shall select
one o the parties having regard to the managerial competence, adequacy of financial
resources and technical capability of the person acquiring shares to rehabilitate the
financially weal company.
(3) The lead institution shall provide necessary information to any person intending to
make an offer to acquire shares about the financially weak company and particularly
in relation to its present management, technology, range of products manufactured,
shareholding pattern, financial holding and performance and assets and liabilities of
such company for period covering five years from the date of the offer as also the
minimum financial and other commitments expected of from the person acquiring
shares for such rehabilitation.
Manner of evaluation of bids
32. (1)

(2)

The lead institution shall evaluate the bids received with respect to the purchase
price or exchange of shares, track record, financial resources, reputation of the
management of the person acquiring shares and ensure fairness and transparency in
the process.
After making evaluation as provided in sub-regulation (1), the offers received shall
be listed in order of preference and after consultation with the persons in the affairs
of the management of the financially weak company accept one of the bids.

Person acquiring shares to make an offer

102

33. The person acquiring shares who has been identified by the lead institution under subregulation (2) of Regulation 32, shall on receipt of a communication in this behalf from
the lead institution make a formal offer to acquire shares from the promoters or persons in
charge of the affairs of the management of the financially weak company, financial
institutions and also other shareholders of the company at a price determined by mutual
negotiation between the person acquiring the shares and the lead institution.

Explanation: Nothing in this regulation shall prohibit the lead institution offering the
shareholdings held by it in the financially weak company as part of the scheme of
rehabilitation.
Person acquiring shares to make public announcement
34. (1) The person acquiring shares from the promoters or the persons in charge of the
management of the affairs of the financially weak company or the financial institution
shall make a public announcement of his intention for acquisition of shares from the
other shareholders of the company.
(2) Such public announcement shall contain relevant details about the offer including the
information about the identity and background of the person acquiring shares, number
and percentage of shares proposed to be acquired, offer price, the specified date, the
date of opening of the offer and the period for which the offer shall be kept open and
such other particulars as may be required by the board.
(3) The letter of offer shall be forwarded to each of the shareholders other than the
promoters or the persons in charge of management of the financially weak company
and the financial institutions.
(4) If the offer referred to in sub-regulation (1) results in the public shareholding being
reduced to 10% or less of the voting capital of the company, the acquirer shall either
(a)
within a period of three months from the date of closure of the public offer,
make an offer to buy out the outstanding shares remaining with the
shareholders at the same offer price, which may have the effect of delisting the
target company; OR
(b)
undertake to disinvest through an offer for sale or by a fresh issue of capital to
the public which shall open within a period of 6 months from the date of
closure of public offer, such number of shares so as to satisfy the listing
requirements.
(5) The letter of offer shall state clearly the option available to the acquirer under subregulation (4).
(6) For the purposes of computing the percentage referred to in the subregulation (4), the voting rights as at the expiration of thirty days after the
closure of the public offer shall be reckoned.
(7)
While accepting the offer from the shareholders other than the promoters or
persons in charge of the financially weak company or the financial
institutions, the person acquiring shares shall offer to acquire from the
individual shareholder his entire holdings if such holding is upto hundred
shares of the face value of rupees ten each or ten shares of the face value of
rupees hundred each.
Competitive Bid
35. No person shall make a competitive bid for acquisition of shares of the financially weak
company once ,the lead institution has evaluated the bid and accepted the bid of the
acquirer who has made the public announcement of offer for acquisition of shares from
the shareholders other than the promoters or the persons in charge of the management of
the financially weak company.
Exemption from the operations of Chapter III
36. (1) Every offer which has been made in pursuance of Regulation 30 shall be accompanied
with an application to the Board for exempting such acquisitions from the provisions
of Chapter III of these Regulations.
(2) For considering such request the Board may call for such information from the
company as also from the lead institution, in relation to the manner of vetting the
offers, evaluation of such offers and similar other matters.
(3) Notwithstanding grant of exemption by the board, the lead institution or the acquirer
as far as may be possible, shall adhere to the time limits specified for various
activities for public offer specified in Chapter III.
Acquisition of shares by a state level public financial institution
37. Where proposals for acquisition of shares in respect of a financially weak company is
made by a state level public financial institution, the provisions of these Regulations in so
far as they relate to scheme of rehabilitation prepared by a public financial institution,
shall apply except that in such a case the Industrial Development Bank of India, a
corporation established under the Industrial Development Bank of India Act, 1964 shall be
the agency for ensuring the compliance of these Regulations for acquisition of shares in
the financially weak company.

Regulation

103

Securities market in
India

CHAPTER V : INVESTIGATION AND ACTION BY THE

BOARD
Board's right to investigate
38. The Board may appoint one or more persons as investigating officer to undertake
investigation for any of the following purposes, namely:
(a)

to investigate into the complaints received from the investors, the

intermediaries or any other person on any matter having a bearing on the
allegations of substantial acquisition of shares and takeovers;

(b)

to investigate suo-moto upon its own knowledge or information, in the

interest of securities market or investors interests, for any breach of the
Regulations ;

(c)

to ascertain whether the provisions of the Act and the Regulations are
being compile, with.

Notice before investigation

39. (1) Before ordering an investigation under Regulation 38, the Board shall give
not less than 10 days notice to the acquirer, the seller, the target company, the
merchant banker, as. the case may be.
(2) Notwithstanding anything contained in sub-regulation (1), where the Board is
satisfied that in the interest of the investors no such notice should be given, it
may be an order in writing direct that such investigation be taken up without
such notice.
(3) During the course of an investigation, the acquirer, the seller, the target
company, the merchant banker, against whom the investigation is being
carried out shall be bound to discharge his obligation as provided in
Regulation 40.
Obligations on investigation by the Board
40. (1) It shall be the duty of the acquirer, the seller, the target company, the merchant
banker whose affairs are being investigated and of every director, officer and
employee thereof, to produce to the investigating officer such books,
securities, accounts, records and other documents in its custody or control and
furnish him with such statements and information relating to his activities as
the investigating officer may require, within such reasonable period as the
investigating officer may specify.
(2) The acquirer, the seller, the target company, the merchant banker and the
persons being investigated shall allow the investigating officer to have
reasonable access to the premises occupied by him or by any other person on
his behalf and also extend reasonable facility for examining any books,
records, documents and computer data the possession of the acquirer, the
seller, the target company, the merchant banker or such other person and also
provide copies of documents or other materials which, in the opinion of the
investigating officer are relevant for the purposes of the investigation.
(3) The investigating officer, in the course of investigation, shall be entitled to
examine or to record the statements of any director, officer or employee of the
acquirer, the seller the target company, the merchant banker.
(4) It shall be the duty of every director, officer or employee of the acquirer, the
seller, the target company, the merchant banker to give to the investigating
officer all assistance in connection with the investigation, which the
investigating officer may reasonably require.
Submission of Report to the Board

104

41. The investigating officer shall, as soon as possible, on completion of the

investigation, submit a report to the Board: Provided that if directed to do so by
the Board, he may submit interim reports.

Communication of findings

Regulation

42. (1) The Board shall, after consideration of the investigation report referred to in
Regulation 41, communicate the findings of the investigating officer to the
acquirer, the seller, the target company, the merchant banker, as the case may
be, and give him an opportunity of being heard.
(2) On receipt of the reply if any, from the acquirer, the seller, the target company,
the merchant banker, as the case may be, the Board may call upon him to take
such measures as the Board may deem fit in the interest of the securities
market and for due compliance with the provisions of the Act and the
Regulations.
Appointment of Auditor
43. Notwithstanding anything contained in this Regulation, the Board may appoint a
qualified auditor to investigate into the books of account or the affairs of the
person concerned: Provided that the auditor so appointed shall have the same
powers of the investigating authority as stated in Regulation 38 and the
obligations of the person concerned in Regulation 40 shall be applicable to the
investigation under this Regulation.
Directions by the Board
82

[ 44. Without prejudice to its right to initiate action under Chapter VIA and section
24 of the Act, the Board may, in the interest of securities market or for protection of
interest of investors, issue such directions as it deems fit including
(a) directing appointment of a merchant banker for the-purpose of causing
disinvestment of shares acquired in breach of regulations 10, 11 or 12
either through public auction or market mechanism, in its entirety or in
small lots or through offer for sale;
(b) directing transfer of any proceeds or securities to the investors protection
Fund of a recognised stock exchange;
(c) directing the target company or depository to cancel the shares where an
acquisition of shares pursuant to an allotment is in breach of regulations
10,11 or 12;
(d) directing the target company or the depository not to give effect to
transfer or further freeze the transfer of any such shares and not to permit
the acquirer or any nominee or any proxy of the acquirer to exercise any
voting or other rights attached to such shares acquired in violation of
regulations 10, 11 or 12;
(e) debarring any person concerned from accessing the capital market or
dealing in securities for such period as may be determined by the Board;
(f)

82

directing the person concerned to make public offer to the shareholders of

the target company to acquire such number of shares at such offer price as
determined by the Board;

The earlier regulation 44 which read as follows:

[Directions by the Board.

44.

The Board may, in the interests of the securities market, without prejudice to its
right to initiate action including criminal prosecution under section 24 of the
Act give such directions as it deems fit including:
(a)

directing the person concerned not to further deal in securities;

(b)

prohibiting the person concerned from disposing of any of the securities

acquired in violation of these Regulations;

(c)

directing the person concerned to sell the shares acquired in violation of

the provisions of these Regulations;

(d)

taking action against the person concerned.] Substituted vide SEBI

(Substantial Acquisition of Shares and Takeovers) (Second Amendment)
Regulations, 2002 dated 9th September, 2002.

105

Securities market in
India

(g)

directing disinvestment of such shares as are in excess of the percentage of

the shareholding or voting rights specified for disclosure requirement under
the regulation 6,7 or 8:

(h)

directing the person concerned not to dispose of assets of the target company
contra to the undertaking given in the letter of offer;

(i)

directing the person concerned, who has failed to make a public offer or
delayed the making of a public offer in terms of these Regulations, to pay to
the shareholders, whose shares have been accepted in the public offer made
after the delay, the consideration amount along with interest at the rate not
less than the applicable rate of interest payable by banks on fixed deposits].

Penalties for non-compliance

45. (1) Any person violating any provisions of the Regulations shall be liable for action
in terms of the Regulations and the Act.
(2) If the acquirer or any person acting in concert with him, fails to carry out the
obligation under the Regulations, the entire or part of the sum in the escrow
amount shall be liable to be forfeited and the acquirer or such a person shall also
be liable for action in terms the Regulations and the Act.
(3) The board of directors of the target company failing to carry out the obligations
under the Regulations shall be liable for action in terms of the Regulations and
Act.
(4) The Board may, for failure to carry out the requirements of the Regulations by an
intermediary, initiate action for suspension or cancellation of registration of an
intermediary holding a certificate of registration under section 12 of the Act.
Provided that no such certificate of registration shall be suspended or cancelled
unless the procedure specified in the Regulations applicable to such intermediary
is complied with.
(5) For any mis-statement to the shareholders or for concealment of material
information required to be disclosed to the shareholders, the acquirers or the
directors where he acquirer is a body corporate, the directors of the target
company. the merchant banker 1 the public offer and the merchant banker
engaged by the target company for independence advice would be liable for
action in terms of the Regulations and the Act.
(6) The penalties referred to in sub-regulation (1) to (5) may include (a)

criminal prosecution under section 24 of the Act;

(b) monetary penalties under section 15 II of the Act;

(c)

directions under the provisions of Section 11B of the Act.

Appeal to the Securities Appellate Tribunal

46.

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*[Any person aggrieved by an order of the Board made, on and after the
commencement of the Securities Laws (Second Amendment) Act, 1999, (i.e..
after 16th December 1999), under the regulations may prefer an appeal to a
Securities Appellate Tribunal having jurisdiction in the matter].

Repeal and Saving

47. (1) The Securities and Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 84*[1994] are hereby repealed.
83

Substituted for the following by SEBI (Appeal to the Securities Appellate Tribundal)
(Amendment) Regulations, 2000, published in the official Gazette of India dated
28.03.2000.

Appeal to Central Government

Any person being aggrieved by an order of the Board may prefer an appeal to the Central
Government

106

84

Substituted for "1993" by a corrigendum published in the Gazette of India, ExtraOridinary on 06.02.1998.

(2)

Notwithstanding such repeal :(a)

Anything done or any action taken or purported to have been done or

taken including approval of letter of offer, exemption granted, fees
collected any adjudication, enquiry or investigation commenced or show
cause notice issued under the said regulations shall be deemed to have
been done or taken under the corresponding provisions of these
regulations;

(b)

Any application made to the Board under the said regulations and pending
before it shall be deemed to have been made under the corresponding
provisions of these regulations.

(c)

Any appeals preferred to the Central Government under the said

regulations and pending before it shall be deemed to have been preferred
under the corresponding provisions of these regulations.

Regulation

107