FINANCIAL MARKET REGULATION

The financial system is the cornerstone of economic development and stability, playing a
pivotal role in channeling funds from savers to borrowers and facilitating efficient allocation of
resources. Comprising various institutions, markets, and instruments, the financial system
serves as a multifaceted mechanism that not only fosters economic growth but also demands a
robust regulatory framework to ensure transparency, stability, and fair practices. This essay
explores the constituents of the financial system and delves into its significance, particularly in
the context of financial market regulation.

Constituents of the Financial System:

The financial system is a complex network of entities that collectively contribute to the flow of
funds and financial activities. Its key constituents include:

1. Financial Institutions:
o Banks: Commercial banks, central banks, and cooperative banks are fundamental
components that mobilize deposits and provide various financial services.
o Non-Banking Financial Companies (NBFCs): These entities, while not traditional
banks, play a crucial role in providing credit and financial services.
2. Financial Markets:
o Capital Markets: Comprising stock and bond markets, capital markets facilitate
the trading of long-term financial instruments.
o Money Markets: Focused on short-term debt instruments, money markets
provide liquidity and short-term funding.
o Derivatives Markets: Here, financial instruments derived from an underlying
asset are traded, helping manage risk.
3. Financial Instruments:
o Equities: Representing ownership in a company, stocks are traded on stock
exchanges.
o Bonds: Debt instruments issued by governments and corporations to raise
capital.
o Derivatives: Options and futures contracts that derive their value from an
underlying asset.
4. Regulatory Authorities:
o Central Banks: Responsible for monetary policy, currency issuance, and
maintaining financial stability.
o Securities and Exchange Boards: Regulatory bodies overseeing securities
markets, ensuring fair practices and protecting investor interests.
5. Payment and Settlement Systems:
o Mechanisms that facilitate the transfer of funds and settlement of financial
transactions, ensuring efficiency and security.
Significance of the Financial System:

1. Capital Allocation:
o The financial system efficiently allocates capital by connecting those with excess
funds (savers) to those in need of funds (borrowers), fostering investment and
economic growth.
2. Risk Management:
o Financial instruments, such as derivatives, enable market participants to manage
and hedge various types of risks, contributing to financial stability.
3. Economic Growth:
o By providing the necessary infrastructure for investments and entrepreneurship,
the financial system catalyzes economic growth and development.
4. Price Discovery:
o Financial markets facilitate the discovery of prices for financial instruments,
reflecting information and expectations about the future.
5. Liquidity and Efficiency:
o Efficient financial markets and institutions enhance liquidity, allowing for the
smooth trading of assets and fostering overall market efficiency.
6. Investor Protection:
o Regulatory authorities ensure fair and transparent practices, safeguarding the
interests of investors and maintaining market integrity.

Significance in the Context of Financial Market Regulation:

The regulatory framework is essential for maintaining the integrity and stability of the financial
system. The significance of financial system regulation includes:

1. Market Integrity:
o Regulations prevent market abuse, insider trading, and other malpractices,
preserving the integrity of financial markets.
2. Investor Confidence:
o Regulatory oversight instills confidence in investors, encouraging their
participation and fostering a fair and transparent market environment.
3. Systemic Stability:
o Regulations aim to prevent systemic risks and financial crises by imposing
prudential norms and ensuring the soundness of financial institutions.
4. Consumer Protection:
o Regulations protect consumers by ensuring fair lending practices, disclosure
norms, and ethical conduct within the financial system.
5. Innovation and Adaptation:
o Regulations provide a framework that encourages innovation while mitigating
potential risks, allowing the financial system to adapt to changing market
dynamics.
Development of Financial Market in India:
India's financial markets have not only witnessed sustained growth but have also experienced
transformative milestones that have shaped their structure and functioning.

1. Establishment of the Bombay Stock Exchange (BSE) in 1875:

 The birth of the BSE marked the initiation of organized stock trading in India. Initially an
informal group of stockbrokers, the BSE evolved into Asia's first stock exchange,
providing a platform for companies to raise capital through equity.

2. Economic Liberalization in 1991:

 The watershed moment of economic liberalization in 1991 dismantled the license-

permit raj, paving the way for comprehensive economic reforms. This period marked a
turning point, opening the Indian economy to globalization, privatization, and increased
foreign direct investment (FDI).

3. Establishment of the Securities and Exchange Board of India (SEBI) in 1988:

 The creation of SEBI was a pivotal step toward strengthening regulatory oversight in the
securities markets. SEBI's role in regulating and promoting the development of the
capital markets has been instrumental in ensuring transparency and protecting
investors' interests.

4. Introduction of Electronic Trading Platforms - National Stock Exchange (NSE):

 The NSE, established in 1992, brought revolutionary changes to the Indian stock market.
With electronic trading and a screen-based system, the NSE enhanced transparency,
efficiency, and accessibility, transforming stock trading practices.

5. Liberalization of Foreign Direct Investment (FDI) Policies:

 Reforms in FDI policies, including sectoral liberalization, removal of caps, and

simplification of procedures, attracted foreign investors. This influx of foreign capital has
significantly contributed to the growth and development of India's financial markets.

6. Introduction of Derivatives Trading:

 The commencement of derivatives trading in 2000 allowed market participants to hedge

risks and speculate on future price movements. The derivatives market added depth to
the financial ecosystem and attracted a broader range of investors.
7. Banking Sector Reforms - Private Banks and Technology Integration:

 The entry of new private banks in the 1990s injected competition, leading to innovations
in banking services. The adoption of technology, including internet banking and mobile
banking, transformed the landscape of banking in India, enhancing customer experience
and financial inclusion.

8. Mutual Fund Industry Expansion:

 The mutual fund industry underwent significant expansion, offering diverse investment
options to retail and institutional investors. The introduction of systematic investment
plans (SIPs) democratized investing, making it accessible to a broader segment of the
population.

9. Implementation of Goods and Services Tax (GST) in 2017:

 The introduction of GST marked a unified tax regime, replacing a complex web of
indirect taxes. This structural reform contributed to a more transparent and efficient
taxation system, positively impacting investor sentiment.

10. Inclusion in Global Indices and Recognition:

 India's inclusion in global indices, such as MSCI and FTSE, increased its visibility and
attractiveness for international investors. This recognition positioned India as a
significant player in the global financial markets.

11. Digital India Initiative:

 The Digital India initiative, launched in 2015, has spurred digital transformation in
financial services. From digital payments to online trading platforms, technological
advancements have increased accessibility and efficiency in financial transactions.

12. Pradhan Mantri Jan Dhan Yojana (PMJDY):

 Launched in 2014, PMJDY aimed at financial inclusion by providing access to banking

services for the unbanked population. The success of this initiative has expanded the
reach of formal financial services across the country.

13. Implementation of Insolvency and Bankruptcy Code (IBC):

 The introduction of the IBC in 2016 marked a crucial step in enhancing the resolution
framework for distressed assets. This reform has strengthened the financial system by
promoting timely resolution and reducing non-performing assets (NPAs).
Regulatory Authorities governing Financial Market:

The financial system plays a crucial role in the economic development and stability of any
country, and India is no exception. With a rapidly growing economy and a diverse range of
financial institutions, ensuring effective regulation and supervision of the financial system
becomes paramount. In India, the responsibility of overseeing and regulating the financial
system is divided among several regulatory authorities, each entrusted with specific sectors of
the financial market. These regulatory bodies work in tandem to promote stability,
transparency, and investor protection while also fostering innovation and growth within the
Indian financial system.

The primary financial regulator bodies in India include the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development
Authority of India (IRDAI), the Small Industries Development Bank of India (SIDBI), Ministry of
Corporate Affairs, etc. Here is the list of regulatory bodies in detail:

Reserve Bank of India (RBI)

Reserve Bank of India (RBI) is the central bank of India and manages credit supply, regulates
operations of banks, and helps maintain a healthy financial system. RBI is an autonomous
governing body that ensures price stability in the country. In addition, it stabilizes the value of
the Indian currency and ensures that the Indian financial market is stable and robust.

Apart from monetary policy, the RBI performs various other crucial functions. It regulates and
supervises banks, non-banking financial institutions, and other financial intermediaries to
maintain the stability and integrity of the financial system. It also acts as the banker to the
government, managing the government’s banking transactions, issuing government securities,
and maintaining the government’s accounts.

Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority responsible for
overseeing the securities market in India. Established in 1988, SEBI plays a crucial role in
maintaining fair practices, ensuring investor protection, and promoting the development of a
robust and transparent financial ecosystem in the country. With its regulatory powers and
proactive approach, SEBI has become a vital institution in India’s economic landscape.

SEBI operates under the Securities and Exchange Board of India Act, 1992, and has been given
extensive powers to regulate various market participants, including issuers, intermediaries, and
investors.

Insurance Regulatory and Development Authority of India (IRDAI)

The Insurance Regulatory and Development Authority of India is another financial regulator of
the money market in India. It mainly secures the insurance sector in India. Insurance policies
help people to protect their health, assets, and loved ones. If different insurance companies set
different policy rules and rates, it would put the credibility of general as well as life insurance
plans at stake. This is where IRDAI comes into play. IRDAI is a statutory body that promotes the
orderly growth and proper functioning of the insurance industry in India. It helps protect the
policyholder’s interest and ensures fairness in the insurance sector.

The primary objective of the IRDAI is to regulate, promote, and develop the insurance industry
in India. It operates under the purview of the Insurance Regulatory and Development Authority
Act 1999 and has the authority to issue guidelines, regulations, and directives to insurance
companies, intermediaries, and other stakeholders.

The key function of the IRDAI is to grant licenses to insurance companies, both life and non-life,
enabling them to operate in the Indian market. These licenses are issued based on stringent
criteria and ensure that only financially sound and ethical entities enter the insurance sector.
The IRDAI also regulates the entry of foreign direct investment (FDI) into the insurance industry,
safeguarding the interests of domestic players while encouraging healthy competition.

Ministry of Corporate Affairs (MCA)

The Ministry of Corporate Affairs is one of the financial regulators in India that regulates the
functioning of industrial and services sectors. It plays a significant role in the preparation and
analysis of corporate business information. In addition, it administers the Competition Act of
2002, preventing malpractices in the market and safeguarding the interests of participants.

Its primary objective is to facilitate corporate growth while safeguarding the interests of various
stakeholders, including shareholders, employees, and consumers. The MCA’s role extends
beyond mere regulation to encompass the promotion, development, and enforcement of
corporate governance norms. It acts as a custodian of corporate data and plays a crucial role in
ensuring transparency, accountability, and ethical conduct in business operations.

Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA is the governing body for regulating and promoting pension-related activities in India.
Established in 2003, the PFRDA is responsible for overseeing the National Pension System
(NPS). PFRDA regulates pension funds, custodians, and other entities involved in the NPS and
aims to develop and regulate the pension industry in India.

The Pension Fund Regulatory and Development Authority (PFRDA) plays a pivotal role in
promoting and regulating the pension sector in India. Through its regulatory and developmental
functions, the PFRDA strives to expand pension coverage, enhance the management of pension
funds, and empower subscribers. The authority’s efforts have helped create a robust pension
ecosystem in the country, offering individuals a secure and reliable source of income during
their retirement years. As India’s population continues to age, the PFRDA’s role becomes
increasingly critical in ensuring a financially secure future for its citizens.

National Housing Bank (NHB)

NHB is the apex regulatory body for the housing finance sector in India. It was established in
1988 and operates as a subsidiary of the Reserve Bank of India. NHB regulates and supervises
housing finance companies, provides financial assistance to institutions engaged in housing
finance, and promotes the development of the housing finance market.

The primary mandate of the National Housing Bank is to promote and facilitate the growth of
housing finance institutions (HFIs) and ensure their stability. It plays a pivotal role in shaping
policies, regulations, and strategies to strengthen the housing finance sector and promote the
availability of affordable housing options across India.

Forward Markets Commission (FMC)

FMC was the regulatory authority for the commodity futures market in India. However, in 2015,
FMC merged with SEBI to consolidate the regulation of securities and commodity derivatives
markets under one authority. Since then, SEBI has been responsible for regulating both the
securities and commodity derivatives markets.

The Forward Markets Commission (FMC) served as a vital regulatory body in India’s commodity
futures markets. Its functions encompassed overseeing exchanges, promoting investor
protection, managing risks, and fostering market development. The FMC’s regulatory
framework ensured fair trade practices, transparency, and market integrity. It is advised to
consult up-to-date sources for the latest information on the regulatory landscape governing
commodity futures trading in India.

Insolvency and Bankruptcy Board of India (IBBI)

IBBI is the governing body responsible for the implementation and regulation of the Insolvency
and Bankruptcy Code (IBC) in India. It was established in 2016 and aims to promote and
facilitate the resolution of insolvency and bankruptcy cases in a time-bound manner. IBBI is in
charge of regulating insolvency practitioners, insolvency professional agencies, and information
utilities.

The Insolvency and Bankruptcy Board of India (IBBI) has been instrumental in transforming
India’s insolvency landscape. Its proactive approach to implementing the Insolvency and
Bankruptcy Code (IBC) and its focus on transparency, timeliness, and professionalism have had
a positive impact on the corporate sector. While challenges remain, the IBBI’s commitment to
capacity building and continuous improvement is crucial for sustaining and further
strengthening the insolvency framework in India.
Association of Mutual Funds in India (AMFI)

AMFI is an industry association of mutual funds in India. It represents the interests of asset
management companies (AMCs) and promotes the development of the mutual fund industry.
AMFI plays a crucial role in educating investors, standardizing practices, and maintaining high
ethical and professional standards among AMCs. It works closely with SEBI to ensure
compliance with regulatory requirements.

AMFI’s primary objective is to create an environment that is conducive to the growth of the
mutual fund industry in India. To achieve this goal, it engages in various activities such as
investor education, industry research, and advocacy with regulatory authorities. AMFI also acts
as a forum for its members to discuss and resolve industry issues.

MODULE 2 – SEBI REGULATIONS

Securities and Exchange Board of India (Stockbrokers and Sub-Brokers) Regulations, 1992

Meaning of Stockbrokers
While dealing with the Stock exchange, one cannot buy or sell shares directly, that’s is why a
broker is required. A stockbroker is an agent who is engaged in the buying and selling of shares
in the stock exchange on behalf of the client. A stockbroker is a participant in the stock
exchange, which is licensed by SEBI, whose main work is to help in the dealings of the shares. In
simple words, A stockbroker is very important for online trading. A stockbroker works on client’s
demat trading account and for such services the stockbroker charges service fess called
Brokerage. Only dealings are not the role of a stockbroker, but it has other main roles as well.
SEBI provides a guideline for the regulation of stockbrokers, and they must comply by such
regulations.
Registration of stockbrokers
1) Any person who wants to be a registered stockbroker shall apply to the board of SEBI
through an application form. In order to work as a stockbroker, every person shall be
required to obtain a certificate of registration by SEBI. For the purpose of becoming a
clearing member, no separate certificate of registration is required if at all any person
has registered himself as a stockbroker (section 3).
2) After the submission of the application form, the board of SEBI mat call upon the
applicants for furnishing any such information as required by SEBI. For this, an applicant
can also be called in person for interaction (Section 4).
3) The members of the board will consider the application after getting the necessary
information (section 5).
4) The board may after consideration of the application, grant a certificate of registration to
the applicant (section 6).
 5) If according to the board, the necessary requirements are not fulfilled by an applicant
then the grant of certificate shall be rejected. If a certificate of registration is not granted
to the applicant, then SEBI should intimate such rejection to the applicant within 30 days
of the rejection of the application. After knowing the rejection of the application, the
applicant can reapply with the board within 30 days. SEBI shall consider such
reapplications (Section 7).
6) After the applicant receives the certificate of registration, he shall pay the fees as
prescribed by the regulations (section 8).
7) When a certificate of registration is granted to any stockbroker, it is subjected to several
conditions. A) the stockbroker shall hold the membership of any stock exchange. In
order to change the stock exchange within the country by any broker, a new separate
application and registration process is not required. B) after the registration, the broker
shall comply with the rules and regulations of this act. C) he should pay the fees (Section
9).
8) Any stockbroker who wants to change his working in any other stock exchange of the
country, shall apply directly to that stock exchange and not to the board. (Section 10).
Registration of Clearing Member (Same as that of registration of a stockbroker).
General Obligations and Responsibilities
1) Every stockbroker is required to maintain a book of accounts which has all the details
relating to the clients they are dealing with along with their particulars and the number
of shares they are holding through that stockbroker. It is important and duty of the
stockbroker to maintain the ledger, journals, client ledger, cash book etc.,
2) The stockbroker should also appoint any person to be a compliance officer who would
take a charge and abide by the rules of this regulations. Such compliance offer shall
directly report to the Board in cases of non-compliance of rules.
Procedure for inspection by the board
1) It is the right of the Board to inspect that the stockbroker is doing his work properly or
not. For this, the board can appoint an inspecting officer to inspect the books of
accounts, records or documents maintained by the broker.
2) It is important for the board to provide a notice before conducting any inspection in the
office of the stockbroker. But a prior notice is not required in case board thinks that
stockbroker is doing any act which is against the public interest or against the interest of
the investors.
3) The stockbroker is required to support the inspecting officer and does not create any
hinderances while the procedure of inspection of going on. The stockbroker shall also
not stop the inspection officer to access the premises of his office. It shall also be the
duty of the director, employee or partner of broker to assist during investigation
procedure.
 4) After the inspection is completed, it is the duty of the inspecting authority submit the
report to the board.
5) After the report, the board can take necessary actions.
6) If at all it is required by the board, then along with the inspecting officer, an auditor can
also be appointed. The auditor shall have the same rights as of the inspecting officer.
Procedure in case of the default
1) If during the inspection process and after the report has been submitted to the board,
SEBI is of the opinion that a stockbroker is at fault then, he shall be liable for monetary
penalties, or for prosecution. The board is also empowered to cancel and suspend the
registration certificate of the broker in case of default.

SEBI (Prohibition of Fraudulent and Unfair trade practices relating to securities market)
Regulations, 2003
SEBI provides regulations for the smooth functioning of the securities market which is free from
any sort of fraudulent activities and any unfair trade or manipulative practices that may cause
hinderance in the effective functioning of the stock market. The regulation came into force on
17 July 2003. There are 3 chapters and 13 sections in the regulation. Before the year 2003, SEBI
encountered a lot of fraud and unfair trade practices that affected the securities market.
Therefore, this special regulation was passed.
There are majorly some acts that are completely unaccepted in securities market. These are
categorised unto three parts-
a) Indulgence in fraud.
b) Using deceptive means which violates the act.
c) Making any such schemes that defrauds the dealings.
Any breach of the above-mentioned points is unlawful. If done, then SEBI has a right to
investigate and take actions against such party.

Meaning of fraud as defined under Section 2 (c):

a) While dealing in securities market, fraud can be any act, an expression (intention to
deceive), an omission (failure to fulfil a legal obligation) or a concealment (hiding proper
facts).
b) All of these acts should be done in a deceitful manner in order to mislead the other
party by lying or by hiding truth.
c) In case of a fraud, it does not matter whether such acts have led to a wrongful gain or a
wrongful loss.
 d) Who can commit fraud- any person, individual, a company or any agent of securities
market.
e) A fraud as defined under section 2 (c) also constitutes the following activities-
1) Any fact that has been misrepresented by any person, who knew that such
misrepresentation is hiding the material fact. But still the person chooses to
knowingly misrepresent the material fact.
2) Giving any suggestion to other person, which the person who is giving the
suggestion himself knows that it is not true.
3) Any person who makes the promise to another person, with an intention that he will
never perform it.
4) Any suggestion or representation made by the agent, in a very careless manner. For
the purpose of this, it is not essential that the suggestion was true or false. But if any
agent is entitled to provide correct suggestion to his client, then he shall not behave
in a reckless manner.
f) Section 2(c) also mentions certain acts that does not come under the preview of fraud.
These are-
1) Any general comments made in good faith regarding the economy of the country,
the economic growth of the country, economic policy of the country, trends in the
securities market, by any person is not fraud. These comments can be made in public
or private places.
Section 3: Prohibition of certain dealings-
In a securities market, there are certain activities will be not at all entertained by SEBI. These
are as follows:
a) Any person should not engage themselves either in a direct manner or indirect manner
in any fraudulent activity.
b) Neither should a person be engaged in any deceptive activities.
c) Neither should a person be engaged in any schemes of securities market which are
deceptive in nature and are launched for the purpose of manipulating the consumers.
d) No shares shall be listed on the securities market with the help of fraud and deceitful
means.
Investigation procedure-
SEBI has a power to start the investigation process in case of any person found out to be
involved in fraud. For this purpose, if any one in the SEBI has a reasonable ground to believe
that a person is involved in fraudulent activity or any intermediary is using any deceitful tactics,
then SEBI should appoint an investigating authority who will be responsible for conducting the
investigation.
The investigating authority will have the following powers to perform-
 A) He can call upon any person to give him information and books of records, documents
etc., whenever he requires to do so.
B) He can undertake the books of accounts, documents and records of any person
suspicious of committing fraud.
C) He can also keep such books under his custody for a time period which he requires.
D) He can call any intermediary or any person involved in the securities market to provide
necessary information.
E) Apart from this, the investigating authority can also call upon people involved in the
securities market for oral examination.
F) Any manager of bank can also be called upon to furnish important information relating
to any transactions of securities market.
G) The investigating authority also has a power of seizure. Such a power can only be
exercised after making an application to the judge of the designated court in Mumbai.
It is important for the others to cooperate with the investigating authority while he is
performing his duties. After the investigation process of the authority is over, the investigating
officer can submit a report to the board. Such officer can also prepare an interim report during
investigation and submit it to the board, if required.
After considering the report of the investigating authority, if the SEBI board is of the opinion
that such person is involved in any fraudulent acts, then the board can take the following
measures:
a) Suspend the trading account of the person engaged in fraud.
b) Restrict such people to use the securities market.
c) If the person of the securities market is at fault, then such a person shall be suspended
from his office.
In case of this regulation, the way the board initiates the proceeding, is that of a criminal court.
Therefore, any person engaged in fraud and manipulative activities is tried as per the criminal
courts. Therefore, a summon is also served to such person. The board has the power to suspend
and cancel the registration as well in case of any default.

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015

 SEBI has notified and issued SEBI(Prohibition of Insider Trading) Regulations, 2015 on
January 15, 2015. These regulations are notified to replace the earlier framework of SEBI
(Prohibition of Insider Trading) Regulations, 1992 which are in place for the past two-
decades.
 In addition to broadening the definitions of unpublished price-sensitive information,
insider and connected persons in SEBI Regulations, 2015 the legal perspective also
 imposes graver consequences for company officials involved in selective exchange of
price-sensitive information.
 Under the new regulations, simple correspondence of UPSI would be culpable, anyway
in prior, SEBI Regulations, 1992 simple correspondence of UPSI (without any trade)
would not be continued against. Corporates are presently needed to raise their eye
temples on uncovering the UPSI specifically.

Meaning of Insider Trading

 Securities and exchange board of India (prohibition of insider trading) regulations, 1992
does not give direct define the term �Insider Trading�, but it defines the term:
a. Insider or who is Insider?
b. Who is connected person?
c. What is price sensitive information?

 Insider:
Under regulation 2(e)[5] any person who is or was �connected� with the company or
�deemed� to have connected with the company and is expected to have access to
�unpublished price sensitive information.�

Sanction Act defines �Insider� as a company�s officers, directors, or someone in

control of at least 10% of a company�s equity securities. The nexus of criminalizing an
insider is for using non-public information that violates the fiduciary duty with which the
company has entrusted the person. The definition for determining an insider provided
by the Sanction Act is quantitative, whereas definition provided by the decisions of the
court is subjective in nature and holds all the people who are in possession of price-
sensitive information responsible under Sanction Act.

 Connected Person:
Regulation 2(c) of the Insider Trading Regulations defines �connected person� as any
person who-
Is a director[6] of a company, or is deemed to be a director of that company by virtue of
section 307(10) of the Companies Act, 1956?
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
whether temporary or permanent and who may reasonably be expected to have an
access to UPSI in relation to that company.

 The Regulation 2(c) of the Insider Trading Regulations states that the words
�connected person� shall mean any person who is a connected person six months
prior to an act of insider trading.

 Price Sensitive Information:

 o Regulation 2(ha) of the Insider Trading Regulations defines �price sensitive
information�, 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 the company.

o Following are some examples of Price Sensitive Information:

a. Financial results of the company.
b. Intended declaration of Dividends.
c. Issue of shares by way of public rights, bonus, etc.
d. Any major expansion plans or execution of new projects.
e. Amalgamation, mergers and takeovers.
f. Disposal of the whole or substantial of the undertaking.
g. significant changes in policies, plans or operations of the company.

Prohibition on Insider Trading

In India, the trial of whether an individual person is guilty of insider trading is determined on
whether that person has breached Regulations 3 or 3A of the Insider Trading Regulation the
Regulation 3 of the Insider Trading Regulations prohibits insider trading in the following
manner:

1. Communication or procurement of unpublished price sensitive information:

o Insider cannot communicate to outsider; no person shall procure from or cause
the communication by Insider of any UPSI relating to a company or its securities
listed or proposed to be listed to any other person except where such
communication is in furtherance to legitimate purpose or performance of duty
or discharge of legal obligation.

o EXAMPLE: �A�, is the CEO of the company ABS ltd. and have all the access of
every information, and there was new upcoming plan in market, �A� has
taken into consideration and sale his own share this will be consider as insider
trading.

Exceptions:
Need an obligation to make an open offer under the takeover regulations, Insider can
communicate if needed under or by the law.
In case, where board are in opinion, and need to inform outsider for the benefit of company,
Board approval, if the information is disseminated two days prior to effecting the proposed
transaction.

Trading when in possession of unpublished price sensitive information: No insider shall be able
to trade in securities that are listed or propose to be listed on a stock exchange when in
possession of unpublished price sensitive information.
 a. Off market inter-se transfers between promoters
b. Existence of Chinese wall if insider is a company
c. The trade pursuant to a trading plan

In case of connected person, the burden of proving innocence shifted on connected person for
other persons, it continuous to lie with SEBI.

 Trading, while in possession of USPI is presumed to be violative of the regulations.

 The reason of trade or application of proceeds irrelevant.

Significant Penalties:

1. SEBI may impose a penalty of not more than Rs. 25 Crores or three times the amount of
profit made out of Insider Trading; whichever is higher.
2. SEBI may initiate criminal prosecution,
3. SEBI may issue order declaring transactions in Securities based on unpublished price
sensitive information,
4. SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the
securities of the company.

Case Laws:

1. Reliance Industries:
The Securities and Exchange Board of India banned RIL from the derivatives sector for a
year and levied a fine on the company. The exchange regulator charged the company
with the intention of making profits by skirting regulations on its legally permissible
trading limits and lowering the price of its stock in the cash market.

2. Amazon Insider Trading Case:

In September 2017, former Amazon.com Inc. (AMZN) financial analyst Brett Kennedy
was charged with insider trading. Authorities said Kennedy gave fellow University of
Washington alumni Maziar Rezakhani information on Amazon's 2015 first quarter
earnings before the release. Rezakhani paid Kennedy $10,000 for the information. In a
related case, the SEC said Rezakhani made $115,997 trading Amazon shares based on
the tip from Kennedy.

3. Rakesh Agrawal vs. SEBI:

In this case Rakesh Agrawal, was MD of ABS industries ltd. was involved in negotiations
with Bayer A.G.(which is a company registered in Germany), regarding their intentions
to takeover ABS. the insider trading transaction here, Rakesh Agrawal through his
brother in law, Mr. I. P. Kedia had purchased shares of ABS from the market and
tendered the said shares in the open after made by Bayer thereby making a substantial
 profit and thus was held for acting in violation of regulation 3 and 4 of the insider
trading regulation.
o Hon’ble SAT held that: dealing in securities while possessing the unpublishes
price sensitive information is not sufficient to hold appellant guilty, the dealing
should result in an advantage to him, the law prohibits the gaining of the unfair
advantage by the insider, and the appellant has acted in the interest of the
company and was not held guilty.

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

Regulatory Rules:

1. Registration of Mutual Funds:

o The regulations provide the process and criteria for the registration of mutual
funds with SEBI. This includes submission of necessary documents, compliance
with eligibility criteria, and adherence to disclosure requirements.
2. Asset Management Company (AMC) Regulations:
o Regulations govern the functioning and responsibilities of the Asset
Management Company, which manages the mutual fund. This includes
requirements related to the appointment of key personnel, disclosures, and
compliance standards.
3. Fund Structure and Constituents:
o The regulations stipulate the permissible structures of mutual funds, such as
open-ended and close-ended funds. It also outlines the role and responsibilities
of trustees, custodians, and other key constituents.
4. Investment Norms:
o SEBI Mutual Funds Regulations specify the investment norms and restrictions
that mutual funds must adhere to. This includes guidelines on the types of
securities in which funds can invest, exposure limits, and risk management
practices.
5. Valuation of Assets:
o Procedures for the valuation of mutual fund assets are outlined to ensure
transparency and fairness. Valuation principles are crucial for determining the
Net Asset Value (NAV) of units.
6. Disclosure and Reporting Requirements:
o Comprehensive disclosure norms are mandated, ensuring that investors receive
accurate and timely information. This includes periodic reporting, fund fact
sheets, and disclosure of portfolio details.
7. Code of Ethics:
o Regulations include a code of ethics that AMC personnel and key employees
must adhere to. This is to ensure fair and ethical practices in the functioning of
mutual funds.
As per SEBI (Mutual Fund) Regulations, 1996, a mutual fund is a fund established in the form of
a trust to raise money-

 By offering the units to the public or;

 A section of the public under 1 or more schemes for investing in securities.

Investing in securities includes money market instruments or gold or gold-related instruments

or real estate assets.

It is a process for pooling the resources by issuing units to the investors and investing funds in
securities.

Comparison of Pre and Post Amendment SEBI (Mutual Funds) Regulations,1996 with
implications-

Prior Amendment: As per Regulation 26(1)- As per the regulation, to carry out the custodial
service for the scheme of the mutual fund shall appoint a Custodian and shall intimate the same
to the board within 15 days from the date of appointment of the custodian.

Provided, in case of the Gold Exchange Standard scheme, the gold or gold-related instrument
shall be kept in the custody of the bank which shall be registered with the board as a custodian.

Post Amendment: As per the SEBI (Mutual Fund) Amendment Regulations, 2020, In case of a
gold exchange-traded fund scheme, the assets of the scheme being gold or gold-related
instruments shall be kept in the custody of a custodian, who shall be registered with the board.

Prior Amendment : As per Regulation 28(4)- As per the regulation,the sponsor or asset
management company in case of new mutual funds were supposed to invest a minimum
specified percentage. It was applicable only in the growth option scheme.

Note: However, these restrictions did not apply to close-ended schemes.

Post Amendment : There was no such restrictions post amendment. The sponsor or asset
management shall invest not-

1. less than 1% of the amount which would be raised in the new fund offer or
2. Fifty lakh rupees,

Whichever is less

Provided that as per the new amendment, the investment made by the sponsor or asset
management company shall be made as specified by the board.

Also, the investment shall not be redeemed unless the scheme is wound up.
 SEBI (Venture Capital Fund) Regulations, 1996

 Meaning of a Venture Capital Fund:

A venture capital is a kind of joint venture that takes place between the companies, trusts or
body corporates with an objective of investing in startups. The venture capital does not only
invest in startups but can also be interested in the small companies that lack recognition.
The Sebi regulations relating to the venture capital allows three types of applicants who can
com together and form a venture capital fund. A venture capital fund is defined under the
regulation under section 2 (m) as “means a fund established in the form of a trust or a company
including a body corporate and registered under this regulation which—
(i) has a dedicated pool of capital.
(ii) raised in a manner specified in the regulations, and
(iii) invests in accordance with the regulation.
The applicants can be either a company, any trusts or any body corporate (set up either by state
or central government). Two or more companies can join hands and set a venture capital which
is required to be registered as per the regulations. This venture capital invests in the starts up
which are known as venture capital undertakings.

 Registration process of a venture capital-

1) For a valid venture capital to exist, it is important that they shall obtain a certificate of
registration.
2) The certificate of registration is provided by the board of SEBI.
3) If there is any venture capital that has been established before the introduction of these
regulations, then in that case, if they do not have a registration then, they must apply for
the registration of their venture capital within three months of the commencement of
this act. These three months can be extended up to 6 months in extra ordinary
circumstances. (Section 3)
4) It is important for any venture capital to be eligible for starting up a venture capital fund
(Section 4). For this purpose, there are different eligibility criteria for three distinct
applicants.
5) In case of a company, the memorandum of association of the company shall include a
clause relating to the company being a part of a venture capital. If it is prohibited by the
MOA then, the company cannot enter into a joint venture. Moreover, the company’s
director shall also not be included with any sort of litigation relating to securities market.
Also, the company’s director shall not be convicted before for any moral infringement. In
addition to this, the company shall be a “fit and proper person”. (Section 4(a)).
6) In case of a trust, the trust shall be a registered trust as per the Indian Registration act.
The main purpose of the trust shall be that it has been made only for the sole purpose of
carrying out the activities of a venture capital funds. In addition, the trust is a fit and
proper person as per the SEBI guidelines. (Section 4(b)).
7) In case of a body corporate, the corporate shall be established either by the state
government or the central government and is a fit and proper person. (Section 4©).
(Section 4A) The term “Fit and proper person” is defined under Schedule II of the SEBI
(Intermediaries) Regulations, 2008. In order to determine a fit and proper person, any of
the following criteria can be used-
a) Integrity, honesty, fairness, reputation, character of the person.
b) No criminal complaint or FIR has been lodged.
c) No charge sheet against such company or person.
d) No prohibition has been put by any authority in relation with financial markets.
e) No insolvent person.
f) Should be of a sound mind.
g) A person should not be a wilful defaulter.
h) No economic offender.
8) After the eligibility criteria is met, the applicant can apply to the board through
submitting a registration form and a registration fees.
9) Upon receiving the application, the board may call for producing additional information
if required (Section 5).
10) After considering the application, the board may either reject the application or accept
the registration. If the application is accepted, then a certificate of registration is
provided to the applicant. If the application is rejected, then the board will provide the
reasons in writing to the applicant regarding the rejection of the application. (Section 6).
11) There are certain conditions that are required to be satisfied by the applicant, otherwise
SEBI can reject the application, if necessary, requirements are not complied with.
(Section 8). One of the conditions is that the venture capital fund will not utilise such
fund amount for any other purpose. Second condition which is required to be fulfilled is
that the Venture capital while filling up the application form shall not make any
misrepresentation or any false statements regarding their venture.
12) If the application of venture capital fund is rejected by SEBI, then the applicant cannot
proceed any work related to the venture capital.
 Provisions relating to minimum investment in a Venture capital fund (Section 11).
1) Anyone can be an investor in a venture capital fund- a) An Indian b) A foreign Company
c) A NRI Company.
2) The investors must invest at least 5 lakh rupees each to start a venture capital fund.
3) A venture capital fund can be started by fulfilling the following conditions- Investment
strategy shall be disclosed to SEBI at the time of the registration, more than25% of the
total fund cannot be invested in one Venture undertaking, a venture capital fund should
not invest in an associated company.
4) The Venture capital are not allowed to list their shares on the stock exchange for atleast
3 years from the date of the start of the VCF.

 General Obligations and responsibilities

1) Invitation to subscribe from the public is prohibited.
2) The investment money is to be kept only for the purpose of VCF.
3) It is important for a venture capital to maintain a placement memorandum. It is like a
memorandum of association of a company that states the terms and conditions of the
venture. Content of Placement Memorandum- Details of trustees, directors etc. of VC,
the minimum amount given by each company of VC, Procedure for refund of the amount
of the companies when the amount is not utilized, the investment strategy of the VCF.
4) The agreement between the investors and the VCF is called the subscription agreement
or contribution agreement. It is important to give effect to this agreement.
5) The copy of these documents is required to be submitted to the board.
6) The books of accounts, records and documents to be maintained properly for at least 8
years.
7) Venture capital fund should provide the details of these books to the board regarding
where the registered office of the VCF is.
8) The board can call upon to provide information relating to the affairs of VCF and VCF will
have to provide such information. No time period is mentioned in this regulation for the
furnishing of such information by VCF. Before the amendment, it was 15 days.

 Winding up of a Venture capital Fund (Section 23 & 24)

1) Conditions of winding up of a venture capital
a) A trust provides capital to the startup in the form of schemes. When the time period of
these schemes is over, A venture capital formed absolutely for such schemes can be
wound up. This must be mentioned in the placement memorandum.
b) If the trustees of VCF agree mutually, then the VCF cab be wound up.
c) If 75% of the investors (companies) agree in the meeting to wind up the VCF.
d) If the board asks the VCF to wind up.
e) Lastly, All shall inform the board regarding such winding up of a venture capital fund.
 2) Effects of Winding up
a) The operations of VCF shall be stopped from the date such information is given to the
board.
b) The company shall not make any more investments after the notice of winding up is
submitted with the board.
c) Assets of VCF should be liquidated, the money invested by the investors shall be
returned after the settlement of all liabilities, within 3 months of information of winding
up to the board.
d) The assets can also be transferred to the investors if it is given in the placement of
memorandum (after 75% of the approval of the investors).

 In case of any default, the board has the right to inspect or investigate the activities of
any VCF in three circumstances-
a) Where the books, documents, records relating to the VCF is not maintained properly.
b) On the complaint of any of the company of VC or the investors.
c) Suo motu (on its own).
A notice is important to be given in case of such investigation.
The venture capital shall not interfere in the investigation process of the board.
As the process is completed, the investigating officer shall submit a report to the board
stating the findings of the investigation.
An interim report shall also be sent to the board, if required before the completion of the
investigation.
In case of default- Punishment is prescribed under SEBI (Intermediaries) Regulations, 2008
(Chapter V).
As a punishment, the certificate of registration of such venture capital can be suspended or
cancelled.

Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995
Registration of Foreign Institutional Investor: (3-13A)

1. Application for Certificate:

 No person can engage in buying, selling, or dealing with securities as a Foreign

Institutional Investor (FII) without a certificate from the Board under these regulations.
 Application for the certificate (Form A) must be submitted to the Board.
  Transitional provisions apply to applications made before the regulations'
commencement or those registered under previous guidelines.

2. Furnishing of Information and Clarification:

 The Board may request additional information or clarification relevant to the applicant's
activities.
 The applicant or authorized representative may be required to appear before the Board
for personal representation.

3. Application Conformity:

 Incomplete, non-conforming, false, or misleading applications will be rejected unless the

applicant addresses objections within a specified time.

4. Consideration of Application:

 The Board considers various factors for granting a certificate, including the applicant's
track record, regulatory status, financial soundness, and adherence to foreign exchange
regulations.
 Different criteria apply to specific entities like institutions, asset management
companies, trustees, and university funds.
 The broad-based fund definition is provided for clarity.

5. Procedure and Grant of Certificate:

 The Board must decide on the application within three months if the provided
information is complete.
 The certificate (Form B) is granted if the application is deemed complete and eligible,
subject to fee payment.
 Foreign Institutional Investors must abide by the specified Code of Conduct.

6. Validity of Certificate:

 Registration granted by the Board is permanent unless suspended or canceled, subject

to compliance with regulations.
 The validity of the certificate is subject to compliance with regulations, circulars, and
payment of fees.
 Requirements for renewal and surrender of the certificate are outlined.

7. Conditions for Grant of Certificate:

  Various conditions for the grant of the certificate are listed, including adherence to
regulations, informing the Board of changes, appointing a domestic custodian, and
maintaining designated bank accounts.
 Special conditions apply to managing funds for sub-accounts.

8. Procedure where Certificate is not Granted:

 If an application does not meet requirements, the Board may reject it after providing
the applicant with a chance to be heard.
 Rejected applicants can apply for reconsideration, and the Board will communicate its
decision in writing.

9. Application for Registration of Sub-Accounts:

 FIIs must seek registration for each sub-account intending to invest in India.
 Existing sub-accounts approved before the regulations' commencement are deemed
registered.

10. Procedure and Grant of Registration of Sub-Accounts:

 The Board considers various factors for granting sub-account registration, including the
nature of the applicant, fit and proper criteria, and joint undertakings.
 Sub-accounts are registered for the limited purpose of availing benefits under the
Income Tax Act.

11. Responsibility of Foreign Institutional Investors:

 FIIs are responsible and liable for all actions of their sub-accounts.
 This responsibility does not diminish the sub-account's individual liability under these
regulations or other applicable laws.

Investment Conditions and Restrictions: (14-15A)

1. Commencement of Investment:

 A Foreign Institutional Investor (FII) cannot make investments in Indian securities

without complying with Chapter II regulations.

2. Investment Restrictions:

 FIIs may invest in:

 o Securities in the primary and secondary markets, including shares, debentures,
and warrants of listed or to be listed companies.
o Units of Collective Investment Schemes.
o Dated Government Securities.
o Derivatives, commercial paper, and security receipts (subject to conditions).
 Total investments in equity and equity-related instruments must be at least seventy
percent.
 Specific conditions apply to investments in the secondary market, including delivery-
based transactions and restrictions on short selling.

3. Securities Registration:

 Securities must be registered in the name of the FII or on behalf of its sub-account.
 The purchase of equity shares in a single company by an FII should not exceed ten
percent of the total issued capital.
 For sub-accounts, each sub-account's investment in a company should not exceed ten
percent of the total issued capital.

4. Offshore Derivative Instruments:

 Conditions for issuance and dealing with offshore derivative instruments:

o Issued only to persons regulated by an appropriate foreign regulatory authority.
o Issued after compliance with 'know your client' norms.
o Provisions for cancellation or redemption of existing instruments.
o Limits on further issuance based on the total value of outstanding instruments.
o Prohibition on issuance against derivatives tradable on Indian stock exchanges.
o Sub-accounts are not allowed to issue offshore derivative instruments.

5. Responsibility and Liability:

 FIIs are responsible and liable for all acts of commission and omission of their sub-
accounts.
 Sub-accounts maintain individual liability under the regulations and other applicable
laws.

6. Conditions for Security Lending and Borrowing:

 FIIs may lend or borrow securities following the framework specified by the Board.

7. Explanation:

 Definitions for terms such as 'offshore derivative instrument,' 'assets under custody,'
and 'person regulated by an appropriate foreign regulatory authority' are provided.
8. Additional Provisions:

 Various provisos, including exceptions for specific types of transactions and entities, are
detailed.
 The overall investment conditions are subject to compliance with Government of India
Guidelines.

9. Conditions for Issuance of Offshore Derivative Instruments:

 Specific conditions for the issuance of offshore derivative instruments are outlined,
including eligibility criteria for recipients and limits on further issuance.

10. Explanation for Terms:

 Clarifications for terms such as 'offshore derivative instrument' and 'assets under
custody' are provided.

General Rules: (16-20A)

1. Appointment of Domestic Custodian:

 A Foreign Institutional Investor (FII) or its global custodian must have an agreement with
a domestic custodian for safekeeping securities.
 Obligations of the domestic custodian include monitoring FII investments, daily
reporting to the Board, record preservation for five years, and furnishing relevant
information to the Board.

2. Appointment of Designated Bank:

 An FII needs to appoint a branch of a Reserve Bank of India-approved bank for foreign
currency denominated and special non-resident rupee accounts.

3. Maintenance of Books of Accounts:

 Every FII must maintain accurate books of accounts, including records related to
remittances, bank statements, contract notes for securities transactions, and
communications with the domestic custodian.
 The FII must inform the Board about the location where these records are kept.

4. Preservation of Records:
  FIIs are required to preserve books of accounts, records, and documents specified in the
regulations for a minimum of five years, subject to other prevailing laws.

5. Information Submission to the Board:

 FIIs must, when requested by the Board or the Reserve Bank of India, submit any
information, record, or document related to their activities as an FII.

6. Disclosure of Offshore Derivative Instruments:

 FIIs are obligated to fully disclose information about offshore derivative instruments,
such as Participatory Notes or Equity Linked Notes, concerning securities listed or
proposed to be listed in any Indian stock exchange.
 Disclosure must be made as required by the Board, including the terms and parties
involved.

SEBI (Buy-Back of shares) Regulations, 2018

Introduction
Buy-back of shares are also known as Share-repurchase. The company buys its own shares back
because of the number of outstanding shares, in order to reduce the number of shares available
on the open market. It means a company buys its own shares in the stock market. For example,
A company issued 500 shares in the stock market. After sometimes, the company, if the shares
are not sold for a long time, can buy its own shares or can ask the shareholders to provide their
shares for purchasing. The investors can purchase such shares issued in the market. So, if the
company decides to issue 150 shares in the market for repurchasing, then the company can
issue it at a price which is premium to the existing price of that share. The company has a liberty
to increase the purchase price of such shares. This is done in order to provide profit to the
investors. The shareholders of the company also get a greater rate of incentives. The main
reason for the buy-back of the shares is that if the company feels that their shares are
undervalued, in that case, they can by increasing the value of these shares, they can invite more
investors.
Therefore, SEBI provides a systematic regulation that aims to regulate the buy back of shares in
the stock market. The regulation is called SEBI (Buy-back of shares) Regulations, 2018 and it
came into force on 11 September 2018.
According to the regulation, the company can buy back its own shares through two methods: -
 a) Shareholders can present their shares through tender offer.
b) Companies can buy their own shares that they have provided in the open market.
Shareholders and Tender offer
In a company, there are many shareholders who hold their shares. In the event when the
company is not attracting investors and have listed their shares on the stock market for a long
time, the company can ask their shareholders to give their shares in the tender offer.
A tender offer is a kind of a biding that a company starts in order to invite the shareholders to
provide some or whole of their shares, to the investors for purchasing. The shareholders sell
their shares at a specific price for a limited period. The investors purchase their shares for a
higher price.
Buy-back of shares through tender offers are done based on proportionate ratio. This means
that the company will invite such shareholders who have surplus shares. For example, there are
100 shareholders in a company who are holding their individual shares and for repurchase of
shares, the company in the tender offer states that “the shareholders having 5 shares have to
provide 1 share each for repurchasing.” This means that the ratio of buy-back shares is 5:1. This
means that the shareholders who have a total of 5 shares will give their 1 share for the buy-
back. Now, this is done on a premium price. This is the reason why the shareholders also let go
of their shares. If the market value of the share is 15rs each but through the tender offer, the
price of the shares is increased to 18rs each, then more shareholders will avail such offer to get
more incentives. This increase of price is done so that more and more shareholders provide
their shares for repurchase.
Companies on the open market
The companies themselves can buy their shares that are available at the open market. For this
purpose, the companies have a outlined buy-back program that works at a specific time or at
regular intervals. This can be done through two ways-
a) Buy-back through book building- In this method, the company will say that we will buy
several shares, now it is left upon the shareholders to provide for a price. The
shareholder will start biding a price for selling out its shares to the company that asked
for the shares. All the shareholders will provide their suitable prices at which they are
ready to sell their shares. The company accordingly is going to decide whether they are
ready with the price or not. Usually, a company goes for a price which is less. This is so
because the goal of the company is to buy the shares back from the shareholders. Based
on the price, the company fixes a cut off price and the buy-back of shares will be done
on that price.
b) Buy-back through stock exchange- This is the easiest method of buy-back of shares used
by the company. In this method, the company itself employs certain agents to sit back
and observe the stock exchange and purchase its own stock. It takes approximately a
 process of 6 months after which the company will be able to buy back all its shares. Till
the period of six months, the company can slowly purchase its some shares.

Section 4 of the Regulation- Conditions for the buyback of shares

a) In case of buy-back through tender offer, the maximum shares that can be brought back
is capped up to 25%.
b) In case of buy-back through open market, the maximum shares that can be brought back
is capped up to 15%.
c) The company should not buy back its shares for the purpose of delisting itself from stock
exchange.
d) A company should directly buy-back its shares and not through any agent or negotiated
deals.
e) The company cannot make another offer for buy-back of shares till 1 year.
f) The company should not affect the share capital of a company only outstanding shares
are purchase back.
g) The company will not purchase its shares, directly or indirectly, from any investment
company or subsidiary company.
h) The company will not buy back its shares until or unless it has been specified in its article
of association.
i) The company shall disclose all the necessary facts to the shareholders and the investors
relating to the buy back of shares, the reason for the buy-back and the time completion
limit of such repurchase.
j) The company must call upon a general meeting for the buy-back of shares.
k) Where the buy-back of shares is through open market then the company should notify
the maximum amount that is fixed by the company during book building.

Procedure for buy-back of shares through tender offer.

1) The company can repurchase its shares through the method of tender offer but only up
to 25% of the shares can be brought back. The remaining shares that are offered in the
open market are to be kept for the small shareholders. (Section 6)
2) The company, after deciding to go through a tender offer, shall announce about such
offer within two working days. The public announcement shall be made in one national
English newspaper, one Hindi national newspaper and one regional or local newspaper.
A copy of this public announcement is to be submitted to the board. (Section 7).
3) After, the public announcement is made, then the company within 5 working days, will
submit to the board, the draft of the offer along with a soft copy and the prescribed fees.
The company shall also submit the proof of their solvency. (Section 8).
 4) Offer Procedure (Section 9)- (a) The company in its public announcement, shall provide
a record date. In the case of a tender offer, the existing shareholders as on a record date
can opt to accept the offer and tender their shares in exchange for cash offered by the
company as per the prescribed buyback ratio. The record date is a kind of a time limit set
for the shareholders within which they can accept the tender offer.
(b) When the proposal of tender offer has been approved by the SEBI board, then the
company shall send such tender offer to the shareholders who are eligible for such offer.
The company can send this through electronic mode or physical mode but within 5 days
of the approval from the board.
I If an offer letter has not been sent to any shareholder but he is eligible to participate,
then he can do so without any issue.
(d) In case of tender offer, the company shall make the offer for buy back of shares by
the shareholders, for a time period of ten working days only.
I The company will buy the shares according to the entitlement of the shareholders.
(f) The company is also required to maintain an escrow account. An escrow account is a
legal arrangement in which a third party holds the cash till the conditions of the contract
are not fulfilled. Therefore, in case of buy back of shares, the company opens an escrow
account in a bank wherein the amount of the shareholder’s will be kept as a security and
after the shares have been repurchased such amount shall be returned to the
shareholders. This is done for the performance of guarantee that none of the party
backs out.
(g)Amount to be kept in an Escrow account- There are two provisions for this under the
regulations. 1) if the consideration amount is 100 crores or below then 25% of the
consideration amount will be kept in the escrow account. 2) If the consideration amount
is more than 100 crores then 25% up to 100 crores and 10% thereafter. An escrow
account can be in the form of Cash deposit in a commercial bank or bank guarantee
through a merchant bank. (Section 9)
5) Immediately after the expiry of the time period of tender offer, the company will transfer the
remaining amount from the escrow account to the shareholders or securities holders.
6) The company will destroy the securities certificate of the shareholders whose shares have
been brought back, in the presence of a registrar.
7) The company shall maintain a register of all the shares brought back.
8) There is another method through which company buys its own share back i.e., odd lot shares.
In this method, the company whose shares have been listed on the stock exchange which are
less than 100 shares, can be brought back by the company. The procedure for such shares is also
the same as that of the tender offer. (Section 12).
Buy-Back from the open market.
 1) A company can buy its own shares back through open market in two ways- a) stock
exchange b) book-building. Only 15% oof the shares listed on the stock exchange will be
brought up through this method. (Section 14 & 15).
2) Buy-back of shares through stock exchange will take place only by national trading
terminals.
3) In case pf stock exchange, no promoter of the company shall participate. The company
will employ agents for the same.
4) In this case, again the public announcement shall be made in the same manner as in
case of tender offer. The public announcement shall include the name of the brokers and
stock exchange through which buy-back of shares will happen.
5) In case of open market, no draft offer is required to be filed with the SEBI.
6) When the company will make the public announcement in case of buy-back through
stock exchange, the company will be reflected as a purchaser on the screen. This is for a
time period of 6 months.
7) The company will upload the information of the buy-back daily, on its website.
8) The company in case of buy-back of shares through stock exchange, will deposit an initial
consideration amount which will be utilised only for buying back the shares of the
company. This amount is decided by the directors of the company through a special
resolution. This amount is to be deposited before the public announcement. When the
company will make an announcement for the buy-back of shares, then again 25% of the
shares is to be kept in the escrow account.
9) The buy-back of shares through the book building method, will have the same procedure
as in case of tender offer.

MODULE 3 CAPITAL MARKET & MONEY MARKET

Meaning of Capital Market-

Capital market is a market which has a maturity period of more than 1 year. These are for
medium- and long-term funds. Where a person knows that the business that he/she wants to
start is going to take time to make the initial profits, then such a person engages in the capital
market instruments. It includes all organisations, institutions and instruments that provides
funds for long term investments such as bonds, mutual funds, public deposits etc.
Capital market is a medium through which the investors and the suppliers come together and
work with investments. The investors are the people who are in the need of the money to start
any business such as individuals or companies. The suppliers are the ones who give their capital
to these investors as a method of lending. Therefore, in order to get investment for more than 1
year it is best to go through capital market. This investment can be either in the form of a debt
or in equity.
Functions of Capital Market-
1) It mobilises the financial resources by acting as a link between savers and investors.
2) It promotes industrial development by taking the capital of the people and invest it into
various developmental projects.
3) Promotes balanced economic growth.
4) The investors always invest in such companies who has a good capital. Therefore, Capital
market help the investors to invest in such companies and in this way an effective and
optimum utilization of financial resources take place.

Types of Capital Market-

a) Primary market- Whenever any company is issuing its securities for the first time in the
market to attract the investors, then the company can go to the primary market. When
the company issues its securities for the first time, it is called an Initial Public offering. If
the fund for the development is still not collect through the IPO, then, in that case the
company can also give a follow up public offering (FPO). The funds collected through IPO
and FPO is utilized by the company for the development projects. In this way, in a
country, capital formation takes place.
b) Secondary Market- In case of Primary market, the investors purchase the shares of the
supplier company. But in case where the investor wants to sell his shares. Then in that
case, the company will not eventually take back the shares. For this purpose, secondary
market comes into place which helps the investors to sell its shares. This provides
liquidity to the shares of the investors. Therefore, secondary market is a place where the
shares that are purchased from the primary market are sold. The best example of a
Secondary market is stock market, wherein the investors sell its shares to other
investors. In secondary market there is no relevance of the company. The supplier
company doesn’t have any additional capital. Secondary market is only a place wherein
the investors buy and sell among themselves. There is no fresh capital formation. It is
only a medium to provide liquidity to the securities or shares.

Instruments of Capital Market-

When people want to decide to invest in the capital market, they choose the ways of
instruments through which they can invest. Usually there are two forms of instruments of a
capital market-
a) Shares- Shares or stocks are the ownership of any company. A company’s capital is
divided into several parts which are called the shares. Any person can buy these shares
 of the company, in this way, they acquire a percentage in the ownership of the company
and become a shareholder. The price of a share is always less between 10 -100rs.
b) Debentures- Debentures or bond s are a kind of debt instruments. The companies issue
debentures to take a debt from the market so that their business can be extended. It is
issued in the form of a certificate wherein it is already mentioned that when the money
is going to be returned and on what interest it will be returned. Generally, in case of
debentures, there is a fixed rate of interest that is payable on a half yearly or yearly
basis. The company is required to pay the interest on the debentures even if the
company is in loss. The debenture holders do not have ownership rights of the company.
They are more like a lender.
In India Capital market is regulated by SEBI.

Difference between Capital Market and Money Market-

Basis Capital Market Money Market

Participants The participants in capital market
The participants in money market
are the financial institutions,are the financial institutions,
banks, public and private banks, private and public
companies, foreign investors. companies but not the foreign
investors.
Duration Capital Market deals in securities 1 year or less
having a maturity time period of
More than 1 year.
Instruments The common instruments of Treasury bills, trade bills, CD and
capital market are shares, CP.
equities, debentures, bonds and
securities.
Initial Does not require huge Requires good investments and is
investments investments. The value of comparatively expensive than
securities is generally low in capital market.
capital market.
Degree of Risk Capital market has greater risk in Less risk due to short duration,
and expected terms of returns but has huge expected return is small.
returns returns also.
Flexibility The instruments of capital market These are less flexible in nature.
are flexible because of the stock
exchange.

Formation and Regulation of NBFCs:

NBFC- Meaning & definition:
Financial sector in addition to banking system is huge sector. Like all over the word, NBFC plays
significantly important role to complement the banking system in India. Non-banking financial
company (NBFC) means a company registered under the Companies Act 2013 or under earlier
one other than banking companies, engaged in the business of conducting financial activities as
a principally business activities. Emphasis to be given on the word “Company”, meaning hereby
that LLP, foreign body corporate, other form of entities are not eligible to be registered as NBFC.
The definition of financial activities may be taken from section 45 I (c) of the RBI Act, 1934.
Accordingly, all such entities (other than banking) that offer financial services may be called as
non-banking financial institutions.
As per Section 45 I (f) of the RBI Act 1934, non-banking financial company (NBFC) means-
Section 45 I (f) of the RBI Act 1934 Non-Banking Financial Company means- → a financial
institution which is a company; → a non- banking financial institution (NBI) which is a company
and which has as its principal business the receiving of deposits; → such other non-banking
institution or class of such institutions, as the Bank may, with the previous approval of the CG as
specified. Registration of NBFC- License: Non-Banking Financial Companies (NBFCs) are
regulated and governed by Reserve bank of India (RBI). As per section 45-IA of the Reserve Bank
of India Act, 1934, an NBFC cannot carry on non-banking financial activities unless it has
certificate of registration and net owned fund of 2 crore.

Registration of NBFC-
License: Non-Banking Financial Companies (NBFCs) are regulated and governed by Reserve bank
of India (RBI). As per section 45-IA of the Reserve Bank of India Act, 1934, an NBFC cannot carry
on non-banking financial activities unless it has certificate of registration and net owned fund of
2 crore.
Other financial companies are not regulated by RBI such as Housing Finance Companies are
regulated by National Housing Bank, Nidhi companies are regulated by Ministry of Corporate
Affairs, Insurance companies are regulated by IRDA and Stock exchanges, Brokers / sub-brokers,
Mutual funds, Merchant Bankers, AIFs are regulated by SEBI.
Types of Non-Banking Financial Company (NBFC) in India:
NBFCs can be categorized
(a) Based on the ability to accept deposits as Deposit taking NBFCs and Non-deposit taking
NBFC and
(b) Based on the kind of activity they conduct. Non-deposit taking NBFC can be systemically
important NBFC (those with asset size of Rs. 500 crores or above) and non-systemically
important NBFC (those with asset size of less than Rs. 500 crores).
It is to be noted that while determining these limits total assets of all NBFCs in a group must be
aggregated. Now, we are going to discuss within this broad categorization different types of
NBFCs as follows:
> Investment Companies: A Company having its principal business activities as making
investments in securities of other companies. Here, at least 50% of the total assets should be
investments in shares/ securities of other companies; and at least 50% of the gross income
should come from such investments.
> Systemically Important Core Investment Company (CIC-ND-SI): Not less than 90% of its Total
Assets in the form of investment in equity shares, preference shares, debt or loans in group
companies. Its investment in equity or equity like instruments of group companies must not
exceed 60% of the total assets. It does not trade in investments, except through block sale for
the purpose of dilution. It does not carry on any financial activity other than the above. The
remaining 10% can be used for self-use assets. Its asset size is Rs. 100 crores or above. It accepts
public funds.
> NBFC- Non-Operative Financial Holding Company (NOFHC): financial institution through
which promoter / promoter groups will be permitted to set up a new bank. It’s a wholly-owned
Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other
financial services companies regulated by RBI or other financial sector regulators, to the extent
permissible under the applicable regulatory prescriptions.
> Loan Company (LC): A company other than asset finance company whose principal business
activity is providing of finance whether by making loans or advances or otherwise for any
activity other than its own. It means at least 50% of its total assets must be loan assets; and at
least 50% of the gross income should come from such loan assets.
> Asset Finance Company (AFC): Company which is a financial institution carrying on as its
principal business the financing of physical assets supporting productive/economic activity.
Principal business for this purpose is defined as aggregate of financing real/physical assets
supporting economic activity and income arising therefrom is not less than 60% of its total
assets and total income respectively.
> Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-
deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets
which satisfy the following criteria:
Borrower’s profile: rural household annual income not exceeding Rs 1,00,000 or urban and
semi-urban household income not exceeding Rs 1,60,000;
Ticket size of loan not more than Rs 50,000 in the first cycle and Rs 1,00,000 in subsequent
cycles; Total indebtedness of the borrower does not exceed Rs 1,00,000;
Tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with
prepayment without penalty; Loans extended must be without collateral;
Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total
loans given by the MFIs;
Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower;
Infrastructure Finance Company (IFC): IFC is a non-banking finance company which- deploys at
least 75% of its total assets in infrastructure loans;
has a minimum Net Owned Funds of Rs 300 crore; has a minimum credit rating of ‘A ‘or
equivalent; a CRAR of 15%.
> Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a
company which- registered as NBFC to facilitate the flow of long term debt into infrastructure
projects; raise resources through issue of Rupee or Dollar denominated bonds of minimum 5
year maturity; Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs; The
intention of this type of NBFC is to raised funds from domestic/ offshore institutional investors
and refinance existing debt of infrastructure companies, thereby creating fresh headroom for
banks to lend to fresh infrastructure projects.
> Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking
NBFC engaged in the principal business of factoring. The financial assets in the factoring
business should constitute at least 50 percent of its total assets and its income derived from
factoring business should not be less than 50 percent of its gross income.
> Mortgage Guarantee Companies (MGC): MGC are financial institutions for which at least 90%
of the business turnover is mortgage guarantee business or at least 90% of the gross income is
from mortgage guarantee business and net owned fund is Rs 100 crore.

Regulations governing NBFCs in India

While NBFCs have been providing several financial services to the needy ones, discrepancies in
their system also have been identified. Presently, all NBFCs expect Housing finance company
works under the canopy of the Reserve Bank of India. After the advent of the RBI (Amendment)
act 1997, all NFBCs with net owned funds of Rs 2 Cr. and above have to avail statutory approval
from the RBI. Housing finance companies in India are regulated by the National Housing Bank.

Regulations governing NBFCs in India are as follow:-

 The minimum net worth funds (NOF) of two crore is required to be maintain by
companies who are willing to registered NBFC in India
 NBFCs ought to maintain ten percent of their deposit as liquid assets.
 NBFCs are not permitted to accept deposits which are repayable on demand.
  They are not allowed to cap the interest rate higher than ceiling rate mentioned by the
Reserve bank of India.
 Offering gift or additional benefits to the depositors is not allowed.
 Reserve Bank of India shall not provide any assurance to the repayment of deposit made
by the NBFC.
 They have to build a reservoir of the fund and transfer up to extend not less than 20% of
their net deposit.
 RBI rules their functionalities regarding issues of disclosures, credit, prudential norms
investments, etc.
 NBFCs depositors are eligible to avail of the nomination facility.
 NBFCs, particularly the unincorporated ones, are not eligible to accept deposits from the
public.
 NBFC has to maintain a minimum capital adequacy norm of eight percent.
 NBFCs are liable to avail minimum credit rating from credit rating agencies.
 NBFCs are bound to maintain a certain threshold of liquidity buffers related to the liquid
asset to address the short-term liabilities. This will empower them to counteract the
liquidity crisis with a minimum of hassle.
 The Reserve Bank of India as per RBI Act 1934[1], reserve the right to register, issue
directions, lay down policy, inspect, and conduct scrutiny over NBFCs.
 The Reserve Bank of India has the authority to penalize the NBFCs for infringing the
compliances of RBI Act or the directions issues by RBI under the RBI Act.
 The penal action could lead the RBI to cancel the Certificate of Registration granted to
the NBFC.
 It is illegal to pursue business without the approval from the Reserve Bank of India.
Failing to this provision can endanger the existence of the concerned entities as RBI can
enforce them to confront severe penalties.
 Every NBFC holding an asset value of Rs. 50 crore or more shall be entitled to constitute
an audit committee in accordance with the last audited balance sheet. The committee
must comprise of at least three members from the BOD.
 All the NBFCs are entitled to prepare their balance sheet along with P&L account on 31 st
March of every year.
 The board of directors of every NBFC that is willing to confer call loans must frame the
policy for the same in the first place.
 NBFC must prepare Suspicious Transaction Report (STRs) in case if they have reason to
believe that the specific transaction adheres to criminal activity regardless of the
transaction amount.

Liquidity Coverage Ratio

Liquidity Coverage Ratio, aka LCR, is the proportion of liquid assets held by the NBFCs to
address short-term liabilities. RBI also laid down certain conditions for non-deposit taking and
deposit-taking NBFCs regarding the Liquidity Coverage Ratio which will come into effect from
December 2020. These conditions are as follows.
  If the asset size of non-deposit taking NBFCs falls in the bandwidth of Rs 5,000 crore to
Rs 10,000 crore then, in that case, they have to maintain 30% of liquid assets as LCR.
 RBI requires deposit-taking NBFCs to maintain a certain level of liquidity as a buffer asset
to overcome the liquidity crisis

Reasons why RBI and other Regulatory Authorities allow NBFC to perform Financial Services

 NBFC can contribute to the growth of sectors like infrastructures and transport.
 These institutions could help in escalating employment across India.
 NBFI can trigger economic development.
 NBFI could render easy financial credit to the economically weaker sections of society.

MODULE 4 COMPETITION & FEMA LAWS

SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

These regulations came into force on 23 September 2011. SEBI provides a guideline through the
way of these regulations in relation with the acquisition of shares. Acquisition of shares refers to
a situation where a company takes all the shares of another company in order to have a hold
over the other company. The former company buys most of the shares of the target company.
The company purchasing the shares is known as the ‘Acquirer’ and the company whose shares
are purchased is called the ‘Target firm’. When the company acquires 50% of the shares of the
target company, then, in that case, the Acquirer company have the power to make all the
decisions related to the acquired shares or stocks. For this, the acquirer does not need the
approval from the shareholders of the target firm. Acquisition of a substantial percentage of
shares of a target firm leads to acquisition of control and finally takeover of the target company.
These regulations of SEBI apply to direct or indirect acquisition of shares and voting rights or
control over the target company. The regulations lay down the procedure followed by the
acquirer for acquiring majority of shares in a target company.
Section 3- Substantial Acquisition of shares or voting rights.
A general rule relating to acquisition of shares is that any acquirer company cannot make a
control over a target company until or unless they make a public announcement of an open
offer for acquiring shares of such target company. This means that if any company wants to
acquire more than 25% of shares and voting rights of any other company, then they shall make
an open offer through a notification. An Open Offer is a like an exit opportunity for the
shareholders of the target company. If an open offer has been made by the acquirer, then, the
existing shareholders of the target company can sell their stocks or shares, at a price fixed by a
person appointed by SEBI, and then exit the target company. In this way, the existing
shareholders will get an opportunity to decide if they want to continue to the shareholder of
target firm. Also, the open offer shall disclose all the developments that the acquirer will bring
into target firm after acquisition.
Apart from section 3, there are other events as well wherein a public announcement is to be
made but not an open offer. These are covered by Section 10, 11(1). Section 10 of the regulation
states that the acquirer is not required to make an open offer where the company acquires 15%
of the target company. Section 11(1) states that an acquirer whose current shareholding by him
and by PAC (public accounts committee), together, is between 15%-55%, is not required to make
an open offer. For the above stated sections only, a public announcement is required.
Exception to section 11(1)- Section 11(2), is an exception to the above stated rule. Section 11(2)
states that an acquirer acquiring more than 55% of shares but less than 75% of shares will get
5% of the voting rights in a target company. For 5% of voting rights, the company is not required
to make a public announcement. This can be done only through a purchase of shares from open
market in a segment of stock exchange.
Disclosures of shareholdings by the acquirer- Such disclosure is important so that the target
company is not taken by surprise regarding the acquisition of shares. Also, it is done in order to
ensure that the price recovery for the shares of the target company is done in an informed
manner. If the acquirer is increasing his holding in any company, this provides the acquirer to
increase the price of the shares at which people will be willing to sell their shares. It is
important for the acquirer to disclose their shareholdings from time to time in the following
manner-

When to What to Whom to Who will Time-limit of

disclose? disclose? disclose? disclose? such
disclosure.
On Shareholding To the The Every time
acquiring s target Acquirer upon reaching
shares and company the said
voting rights and the percentage of
more than Stock shareholdings,
5%, 10%, exchange within 2 days
14%, 54%, where the a receipt to be
74%. shares of made that
the target intimate
company is about the
listed. acquisition of
shares.
Purchase or The To the Acquirer Within two
 sale of 2% aggregate target days of such
of the share shareholding company sale or
capital of after such and the purchase.
the target purchase or Stock
company sale. exchange
where the
shares of
the target
company is
listed.
Shares or The The Stock Target Within 7
voting rights aggregate exchange company days.
acquired in number of where the
case 1 & 2. shares held shares of
by each the acquirer
person of the company is
target listed.
company.

In case of non-disclosure of the shareholdings, the SEBI has the right to impose penalties-
a) Direct the target company, not to give effect to any of the transfer of shares.
b) Direct the acquirer to not exercise any voting rights or other right attached with the
shares acquired.
c) Direct the divestment of shares acquired.
d) Direct the consideration of the acquisition to be transferred to the investor’s protection
funds.
e) Debar the person from using the securities market.

Procedure for making an Open offer (Chapter III of Regulation)

 Before making any public announcement, the acquirer shall appoint a manager for the
open offer. This manager is a merchant banker who is registered with SEBI. The banker
shall not be an associate of the acquirer company. The open offer is made through such
merchant banker only. (Section 12)
 Public announcement will be made on the date when the acquirer agrees to purchase
the shares and voting right in target company.
 After the public announcement, the same shall be sent to all the stock exchanges
wherein all the shares of the target company are listed.
 A copy of public announcement shall be made available to the board and at the
registered office of the target company, within 1 working day of the public
announcement. (Section 14)
  After the public announcement is made, then the acquirer shall file a draft of proposal
with the SEBI along with a non-refundable fee. The non-refundable fees are determined
through the amount of the consideration.
 An open offer once made, cannot be withdrawn except for the following circumstances-
1) If the open offer made by the acquirer is refused by the SEBI, when it was sent for
the approval.
2) The acquirer being a natural person, has died.
3) If the conditions made in the open offer are not satisfied by the acquirer because the
conditions were such which were outside the reasonable control of the acquirer.
4) If SEBI thinks that such withdraw is important.
 On the withdrawal of the open offer, a public announcement shall be made in the same
newspaper when such open offer was published, to intimate the public.
 After this, the acquirer shall give the withdrawal in writing to the SEBI, target company
and the Stock exchange where the shares are listed of a target company so that Stock
exchange can tell the public about such withdrawal.

CCI (Manner of Recovery of Monetary Penalty), 2011

 The regulations came into force on 8 February 2011.
 The Competition Commission of India (CCI) can impose penalties for violations of the
Competition Act, 2002. The penalties include:

 Up to 10% of the average turnover for the past three preceding financial years under
section 27 (b) of the Act.
 Up to three times the profits or 10% of average turnover, for each year the cartel has
existed, whichever is higher, in the case of a cartel.
 Up to 1% of the worldwide turnover or value of assets of the parties to the proposed
Combination, whichever is higher, for gun-jumping and/or failure to notify.
 Penalties between ₹ 50 lakhs to ₹ 1 crore for material omission by
enterprises/individuals.
 Punishment and a fine of up to Rs. 1,00,000 for each instance of non-compliance. The
fine can go up to Rs. 100 million.
For the recovery of such monetary penalties, it is important for CCI to provide for a regulation
that will ensure smooth functioning of the same.

Provisions where CCI will issue a demand notice for recovery of money.
  If any penalty has been imposed upon the company, then the secretary of CCI will issue a
demand notice through its recovery officer at the last residing address of the company.
In case of joint account, all the accounts shall be given such notice at their last residing
addresses.
 After the delivery of the demand notice, the company is given a time period of 30 days
to pay the penalties. CCI can also decrease the number of days in circumstances where
they believe that such time period of 30 days should not be allowed.
 The company or enterprise can pay the penalty through a challan, a copy of which is
required to be submitted to the recovery officer immediately. Such copy is required to
be submitted not after 7 days of the receipt of payment of penalty. (Section 3)
 The enterprise may file an application with the CCI to extend the time period of 30 days
or to make payment by instalments. CCI can approve the same if it thinks fit to do so.
 If the enterprise fails to make the payment after the extension of the time period, then,
such an enterprise is deemed to be an “Enterprise in default”.
 In case where the payment is to be done through instalments and then also the
enterprise fails to pay any one of the instalments, the enterprise will be deemed to be
an ‘enterprise in default”.

Interest on penalty not paid.

 Where the enterprise does not pay after the demand notice, then an interest of 1½ % is
to be levied on the penalty for every month. CCI can remove or reduce the interest over
the penalty if it is shown that the non-payment of the penalty was due to such
circumstances which were beyond the control of the enterprise. CCI will also the interest
upon the enterprise in case such an order has come from Competition Appellate
tribunal, HC or SC.
Issuance of Recovery Certificate
 The commission will issue a recovery certificate to the enterprise in default and ask tth
enterprise to pay the penalty along with interest within 15 days of the issue of recovery
certificate.
Functions of Recovery Officer
 To recover the monetary penalties.
 To make sure that the demand notice has been served properly to the enterprise and in
case, where the demand notice has not been served, the recovery officer shall
immediately inform this to the secretary of CCI.
 Where the enterprise has paid the penalty amount, the recovery officer shall inform
about this to the secretary.
 To execute the recovery certificate.
  To maintain the recovery register.
Modes of Recovery after issue of recovery certificate
 If the enterprise in default does not pay the penalty within the time stipulated in the
recovery certificate or if any other person is authorised to pay the penalty on behalf of
the enterprise in default, then such other person will also be an ‘enterprise in default’
and will be treated in the manner as per the regulations.
 If the enterprise in default holds shares with any other enterprise in a joint account,
then it will deem as if the shares of both the enterprise is equal, unless a contrary is
proved.
 Every enterprise to whom any recovery certificate is issued should comply with the
regulations.
 If any enterprise submits through an oath that he has paid the penalty and such
recovery certificate shall not be issued to him, then in that case, the recovery certificate
should be withdrawn. CCI will consider such request and accordingly give the decision.
 If the enterprise in default has a property situated outside India, then CCI shall tell that
country to take appropriate measures and ask the enterprise to pay the sum of the
penalty. This is only possible in case where India is in agreement with the country
relating to such penalty provisions.
 In case the enterprise in default, during the continuation of the case, sells out his
property or uses any other modes of transfer (gift, exchange), then such a transfer will
be deemed to be void. Such transfer will only be valid if prior permission of CCI has been
taken or the enterprise did not have sufficient knowledge of the pendency of suit.
 The penalty amount can also be recovered through the sale of immovable and movable
properties of the enterprise in default.
 The commission can also take the help of the Income Tax department to pay the penalty
if required.
 If any penalty amount is deposited by the enterprise and Competition Appellate Tribunal
and HC and Sc are of the opinion that such amount of penalty should be less, then the
extra amount recovered shall be refunded.
 Lastly, section 16 states that, in the case of any difficulty in the implementation of these
regulations, then the matter shall be referred to the CCI and decision of CCI shall be
binding.

CCI (Procedure regarding the transactions relating to Combinations) Regulations, 2011

The above regulation addresses in detail the procedure to be followed in case of combinations.
It tells the procedure in which a notice regarding combination is issued to the CCI. The
regulations came into force on 1 June 2011. “Combination” is defined in Section 5 of the
Competition Act, 2002 (the “Act”) which states any acquisition, merger or amalgamation would
be referred to as a Combination if such acquisition, merger or amalgamation exceeds the
threshold limits specified in the section.
 Any company proposes to enter a combination shall give a prior notice to CCI. Even if the
notice is not given to CCI, then also CCI has the power to investigate after such
combination has been formed, if such combination is not adversely affecting the
competition in the market. In such case, CCI can require the parties to provide for
documents which are necessary for the examination by CCI.
 After the notice has been issued by the companies, CCI shall mandatorily form an
opinion that whether such combination will affect the competition market or not. Such a
prima facie opinion shall be made within 30 days of the receiving of notice by CCI. If the
combination affects the market, the parties should be informed about it within 4
working days.
 In case, the parties do not receive any information from CCI within 210 days, then such
combination is valid, and the parties can go on with the combination.
 There are two circumstances where such notice is not required by the companies- A) If
acquisition has taken place before 1 June 2011, then for such acquisition notice is not
required. B) In case of Merger and acquisition, if the proposal is approved by the board
of directors, then notice is not required.
 When a notice is issued to CCI, then it can start its inquiry relating to the combinations, if
according to CCI, any combination is going affect the market, then such combination can
be restricted. If the combination is approved by CCI, then CCI can pass an order
regarding the same. Also, if any combination is required to be implemented through
some conditions, then CCI can appoint an authority to check if the combination has
implemented the conditions or not.
 An appeal against the decision of CCI lies with Competition Appellate Tribunal and must
be made within 60 days of order.

Foreign Exchange Management Act (FEMA) laws

Aims & Objectives of FEMA
 To facilitate exchange currencies for trade.
 To allow speculations as per the currency rates.
 To transfer purchasing power between countries.
 Simplifying and easing the external trade and payments.
 Promoting the orderly development of foreign exchange market in India.
 Defines formalities and procedures in all foreign transactions in India.
Foreign exchange management act in India, tells the procedures and provisions to be followed
in case of any foreign currency being imported from India and exported outside India. Before,
FEMA laws, India’s foreign exchange was managed by the FERA (Foreign exchange regulations
Act) laws that was introduced in 1947 and was amended in 1973. During 1991, due to
liberation, India’s export and import was increased because of which FERA lost its essence and
therefore, FEMA laws were introduced on 1 June 2000.

Features of FEMA
1) Regulation of transactions between Resident of India and Non resident of India: One of
the features of FEMA laws is that it enables transactions between Resident and Non
resident through the way of Forex.
2) Transactions involving Investments overseas: FEMA laws provides provisions for cases
where a resident of India makes and Investment in any oversea Company or vice versa.
Such exchange of investment is also not possible without Forex.
3) FEMA tells about the transactions that are freely permissible.
4) FEMA talks about the current and capital account transactions.
5) FEMA introduces appellate authorities and penalties in case of offences in Forex
transactions.

Applicability of the Act- Section 1

a) FEMA applies to the whole of India.
b) In addition, it also applies to all branches, offices, agencies that are situated outside
India but is controlled and owned by the person in India.
c) Lastly, if any person does an offence in any office which is situated outside India, then
also FEMA laws shall be applied provided that such office is owned and controlled by a
person in India.
d) FEMA laws does not apply to those citizens of India who are working outside the
country. But only applies to the residents of India.

Important Definitions
a) Capital Account Transactions (CAT): Capital transactions means such transactions that
affects the capital. And capital includes assets and liabilities. This implies that those
transactions that affects the assets and liabilities are known as the capital account
transactions. For example: Purchasing an immovable property in a foreign land, or taking
loan from outside country, doing investments outside the country are all CAT. The
transactions that affect the balance sheet of a person is called Capital account
transactions. Section 2(d) of FEMA defines the term “capital account transactions” as a
transaction which alters the assets and liabilities including contingent accounts, outside
India, of persons resident in India of assets and liabilities in India of persons resident
 outside India. This means that any person can invest in assets that are outside India and
any person who is not a resident of India can invest in assets that are in India. Both the
transactions, involving Resident of India and Non-resident of India are called CAT.
b) Current Account Transactions (CRAT): Section 2(f) of FEMA- It defines CRAT as
transactions that are not capital account transactions. In additions, CRAT also take into
consideration of such transactions that are not going to affect the assets and liabilities of
a person. Such transactions are done in a day-to-day functioning. Also, CRAT includes the
following transactions:
a) Such transactions that take place in the ordinary course of business between a
company situation outside India but has services or business in India. Such company
if they are dealing daily with the accounts, then are compelled to open a current
account by which they can carry out the daily functions of the business.
b) Such expenses that are incurred over the education of a child, parent or spouse are
called current account transactions. Also, expenses in foreign travel, medical care of
parents etc.
c) The payment of interest in case of loan and investment done outside the country are
also part of the CRAT.
c)Person resident in India Section 2(n): Any person who resides in India for 182 days during
any financial year, is known as a Person resident in India. But under these 182 days these people
are not included- a) Any person who has gone for business or employment outside India for an
uncertain time period b) any person who has come to India and stays for more than 182 days
for the purpose of carrying on a business or employment will not be considered as a person
resident of India.
Apart from this, any company or body corporate registered in India, any office or agency in India
owned and controlled by person not residing in India and vice versa, is termed to be known as
Person resident in India.
d) Person not resident of India (Section 2(o): Any person who does not fall under
section 2(n).
Section 3: Any dealings that involves foreign exchange should only be done according to the
rules and regulations of this act and with the special permission of the Reserve bank of India,
only through an authorised person. An authorised person is defined under section 2(cc) of the
act as “an authorised person is the one who is an officer of the Directorate of Enforcement who
is authorised by the central Government”. Following are the list of such dealings-
a) Such transactions that involve payment to any person not resident in India.
b) Receiving of any payment by resident of India.
c) Financial transactions.
Examples- a) An NRI Brother has an insurance policy in India. He requests his brother to pay his
insurance premium. This will amount to payment for the credit of Non-resident Indian. This is
not permitted until such a payment is made through an authorised person.
Section 4: No Indian Resident shall be allowed to own, acquire, possess any foreign exchange,
foreign security or an immovable property abroad. This section restricts the acquisition of
immovable property abroad by an Indian resident, but this is possible if at all certain conditions
and terms are complied with.
Section 5: Current account transactions
Through the way of section 5 of FEMA, the government allows current account transactions
through the help of an authorised person. The authorised person can freely help in forex
transactions. But there are certain restrictions that have been put in this regard. There are some
transactions that are strictly prohibited in case of current account transactions. Also, there are
some transactions that are not prohibited but are required permission from either Central
government or RBI. This implies that the central government in consultation with the RBI has
put some reasonable restrictions in the interest of general public. These rules have been
prescribed under FEMA (current account transactions) Rules, 2000.