Module 1: Structure of Capital Markets

Historical Context

 The concept of raising capital through public offerings dates back centuries. In the
17th century, joint-stock companies such as the East India Company used public
funds to finance voyages and trade expansion.
 In India, the roots of the primary market can be traced to the Bombay Stock Exchange
(BSE), established in 1875. Early issuances were limited to a few industrial
companies.
 Post-independence, the Indian primary market gained structure and direction with the
establishment of the Controller of Capital Issues in 1947. However, reforms in the
1990s following economic liberalization marked a significant transformation.
 SEBI’s creation in 1992 as a regulatory authority brought enhanced transparency and
investor protection.
 Landmark IPOs such as Infosys in 1993 set the stage for the robust market we see
today, reflecting growing investor confidence and market sophistication.

1. Primary Market

Definition

The primary market, also known as the new issue market, is where securities are created and
sold for the first time directly to investors by issuers (e.g., companies and governments). It
facilitates capital formation for issuers and serves as a critical source of funding for corporate
expansion and infrastructural development.

Features

 New Securities: Securities are sold for the first time.

  Direct Issuance: Issuers sell directly to investors, bypassing secondary market
complexities.
 Fundraising: Helps entities raise capital for expansion, operations, or other needs.
 Regulation: Governed by regulations like SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018.
 Investor Participation: Investors, including retail and institutional, have access to
innovative financial instruments in this market.

Key Instruments

 Equity Shares: Ownership in the company, providing voting rights and potential for
capital appreciation.
o Example: When a startup like Flipkart decided to list, its equity shares allowed
public investors to own a stake in the company and benefit from its growth.
 Preference Shares: Shares with fixed dividends and priority over equity shares in
dividends and repayment.
o Example: Tata Steel issued preference shares to investors promising fixed
returns irrespective of company profits.
 Debentures and Bonds: Debt instruments to raise funds with fixed interest payments.
o Example: A company like NTPC issues bonds to finance its energy projects,
offering periodic interest payments to bondholders.
 Indian Depository Receipts (IDRs): For foreign companies to raise capital in India,
enabling international diversification for Indian investors.
o Example: Standard Chartered Bank issued IDRs, allowing Indian investors to
indirectly own a stake in the foreign entity.

Mechanisms for Issuance

1. Public Issue
o Initial Public Offering (IPO): First-time sale of equity shares to the public,
representing a pivotal milestone for a company’s growth.
 Example: Zomato’s IPO in 2021 allowed the company to raise
substantial capital for its operations.
o Follow-on Public Offering (FPO): Additional shares issued by already-listed
companies to raise supplementary capital.
  Example: State Bank of India (SBI) conducted an FPO to strengthen its
capital base.
2. Rights Issue
o Offered to existing shareholders in proportion to their holdings, often at a
discounted price, encouraging loyalty and investment continuity.
 Example: Reliance Industries’ rights issue in 2020 allowed existing
shareholders to invest further at a favourable price.
3. Private Placement
o Sale of securities to a select group of investors (e.g., institutional investors),
which involves less regulatory compliance and faster execution.
 Example: Tata Motors raised funds through private placement of debt
instruments.
4. Preferential Allotment
o Issuance to a specific group, often promoters or strategic investors,
strengthening strategic partnerships or alliances.

Need for Primary Market

 Capital Formation: Provides a platform for businesses to raise funds for growth,
modernization, and diversification.
o Example: Startups like Paytm used the primary market to secure funds
necessary for scaling operations and launching new products.
 Economic Development: Mobilizes savings into productive investments, fostering
industrial and infrastructural growth.
o Example: Infrastructure companies like IRCTC raise capital to build national
projects.
 Facilitates Innovation: Helps companies fund research and development initiatives.
o Example: Pharmaceutical companies like Biocon leverage primary markets to
finance drug discovery projects.
 Encourages Entrepreneurship: Provides an avenue for startups and emerging
companies to secure capital.

Key Processes
  Draft Offer Document (DOD): This document is a comprehensive disclosure by the
issuer detailing the company's financials, business model, risk factors, and purpose of
fundraising. The objective is to ensure transparency, help investors make informed
decisions, and meet regulatory requirements.
o Example: During the Zomato IPO, the DOD outlined the company’s growth
strategy, revenue model, and associated risks, enabling investors to evaluate
the opportunity comprehensively.
 Book Building: A price discovery mechanism where potential investors bid within a
price range set by the issuer. The objective is to achieve an optimal price based on
market demand.
o Example: The LIC IPO utilized book building to gauge demand and set the
final price for shares, attracting diverse investors.
 Green Shoe Option: A provision allowing the issuer to sell additional shares (up to a
certain percentage) in case of over-subscription. The objective is to stabilize share
prices post-issue and enhance investor confidence.
o Example: In the case of IRCTC’s IPO, the green shoe option helped manage
oversubscription and maintain price stability after listing.

Importance of Primary Market

 Provides issuers with necessary funds for growth and diversification.

o Example: Infosys used its IPO funds to establish itself as a global IT leader,
driving technological innovation.
 Offers investors opportunities to invest in promising ventures at the ground level.
o Example: Retail investors in Zomato’s IPO gained early access to a high-
growth company in the food delivery space.
 Encourages economic development by mobilizing savings into productive
investments.
o Example: Government infrastructure projects funded by bond issuances
contribute to national economic growth.
2. Secondary Market

Definition

The secondary market, or stock market, is where existing securities are traded among
investors. It provides liquidity to investors and reflects the current valuation of securities,
serving as a barometer of economic health.

Features

 Continuous Trading: Securities can be traded any time during market hours,
ensuring flexibility.
o Example: Shares of Infosys are actively traded during NSE trading hours,
allowing investors to buy or sell throughout the session.
 Price Discovery: Based on demand and supply dynamics, reflecting market sentiment
and intrinsic value.
o Example: The rising demand for Tata Motors shares due to new product
launches leads to an increase in its market price.
 Liquidity: Investors can convert securities into cash, increasing the attractiveness of
investments.
o Example: An investor selling HDFC Bank shares quickly to fund personal
needs demonstrates the high liquidity of such stocks.
 Transparency: Regulated to ensure fairness, with mechanisms to prevent fraud.
o Example: SEBI regulations mandate companies to disclose material
information promptly, ensuring transparency.
 Market Depth: Offers a wide range of securities, catering to diverse investment
needs.
o Example: Investors can choose from equities, bonds, ETFs, or derivatives
depending on their risk appetite and financial goals.

Key Instruments

 Equities: Shares representing ownership in a company.

o Example: Reliance Industries' shares are traded on the NSE and BSE, allowing
investors to own a stake in the company.
  Debt Instruments: Corporate and government bonds providing fixed returns.
o Example: Government of India bonds are available for trade in the secondary
market, offering fixed interest income to investors.
 Derivatives: Instruments like futures and options for hedging and speculation.
o Example: An investor hedging a portfolio with NIFTY futures contracts on the
NSE.
 Exchange-Traded Funds (ETFs): Baskets of securities traded like stocks, offering
diversification and liquidity.
o Example: SBI ETF Nifty 50 tracks the performance of the Nifty 50 index and
is actively traded on stock exchanges.

Difference between Primary Market and Secondary Market

Aspect Primary Market Secondary Market

Market for new securities issued Market for trading already-issued

Definition
for the first time. securities.

Facilitates capital raising by Enables liquidity and price discovery

Function
companies. for securities.

Participants Issuers and investors. Buyers and sellers (investors).

Direct between the company and Between investors through stock

Transactions
investors. exchanges.

IPOs, FPOs, and private

Examples NSE, BSE, and NYSE.
placements.

Determined by market forces

Pricing Fixed or determined at issuance.
(demand and supply).

Governed by SEBI for issuing Regulated for trading practices and

Regulation
norms. transparency.

Ownership Transfers ownership among

Creates new ownership.
Transfer investors.
Trading Mechanism

1. What is Trading Mechanism?

o The trading mechanism refers to the process through which securities are
bought and sold in the secondary market. It ensures smooth transaction flow
and includes placing orders, matching them, and settling the trade.
2. Order Placement
o What is it?: The initial step where buy or sell instructions are provided
through brokers or online platforms.
o Use: Enables investors to specify the quantity, price, and type of security they
wish to trade.
o Importance: Facilitates efficient execution of trades, connecting buyers and
sellers.
o Example: An investor placing a limit order to buy Infosys shares at ₹1,500
ensures they do not pay more than their specified price.
3. Settlement Process
o What is it?: The completion of a trade where securities are delivered to the
buyer, and funds are transferred to the seller.
o Use: Ensures ownership transfer and payment within stipulated timelines (T+1
or T+2 cycles).
o Importance: Maintains trust and smooth functioning in the market by
minimizing default risks.
o Example: An investor buying TCS shares on Monday receives ownership in
their demat account by Tuesday (T+1 cycle).
4. Market Surveillance
o To prevent fraud, insider trading, and market manipulation, safeguarding
investor interests.
o Example: SEBI imposing penalties on companies involved in insider trading
activities.

Role of Stock Exchanges

 Facilitates trade in securities, acting as a marketplace.

o Example: NSE facilitates the trading of securities like Infosys and HDFC
Bank shares.
  Ensures compliance with listing norms to maintain market integrity.
 Provides price information and market analytics for informed decision-making.

Importance of Secondary Market

 Offers investors the ability to exit investments, improving market efficiency.

o Example: An investor selling shares of Wipro to rebalance their portfolio.
 Enhances market confidence through regulated and transparent operations.
 Reflects economic trends, aiding policymakers in economic planning.

3. Securities Market Intermediaries

Overview

Intermediaries are entities that facilitate transactions in the securities market by acting as a
bridge between issuers and investors. They ensure efficient functioning and compliance with
regulatory frameworks.

Types of Intermediaries

1. Merchant Bankers
o What is it?: Merchant bankers are financial institutions or entities that provide
specialized services in fundraising, corporate restructuring, and advisory.
o Role: They act as intermediaries during IPOs, help in drafting offer
documents, and ensure regulatory compliance.

Functions of Merchant Bankers:

1. Capital Raising:
o Assist companies in raising funds through equity, debt, or hybrid instruments.
o Manage initial public offerings (IPOs), follow-on public offerings (FPOs), and
private placements.
Example: Kotak Investment Banking was the lead merchant banker for the
Zomato IPO in 2021.
2. Underwriting:
 o Guarantee the subscription of securities in case of insufficient demand in the
market.
o Reduce risk for issuing companies during public offerings.
Example: Reliance Jio IPO (Hypothetical):
If Reliance Jio launches an IPO worth ₹10,000 crore and appoints SBI Capital
Markets as the underwriter, SBI will guarantee that any portion of the issue
not bought by investors will be purchased by them or their associates.
3. Advisory Services:
o Provide strategic advice for mergers, acquisitions, takeovers, and
restructuring.
o Conduct feasibility studies and financial due diligence.
Example: JM Financial advised Larsen & Toubro (L&T) on its acquisition of
Mindtree.
4. Project Finance:
o Help structure and raise funds for large-scale infrastructure and industrial
projects.
o Advise on the optimal financial mix and sourcing of funds.
Example: ICICI Securities played a significant role in raising capital for
major renewable energy projects in India.
5. Portfolio Management:
o Offer investment advice and manage portfolios for institutional and high-net-
worth clients.
Example: Edelweiss Financial Services provides customized portfolio
management services for high-net-worth individuals.
6. Corporate Restructuring:
o Assist companies in reorganizing their financial or operational structure to
improve efficiency and profitability.
Example: Kotak Investment Banking assisted Tata Group in restructuring its
group companies under one holding structure.
7. Risk Management:
o Help identify and mitigate financial risks through structured financial
products.
Example: Axis Capital provided risk management solutions for companies
dealing with foreign exchange risks.
 8. Compliance and Regulatory Advisory:
o Guide companies in adhering to regulatory requirements like SEBI guidelines,
Companies Act, FEMA, etc.
Example: JM Financial guided startups in compliance with SEBI's regulatory
framework for IPOs.

Importance: Facilitates corporate fundraising and ensures that all regulatory norms are met
during public and private offerings.

o Examples: ICICI Securities, Kotak Mahindra Capital, and SBI Capital

Markets.
o Example: ICICI Securities managed the IPO for LIC, streamlining the process
and ensuring compliance.
2. Stock Brokers
o What is it? Registered intermediaries who execute buy/sell orders on behalf
of investors on stock exchanges.
o Role: Acts as a link between investors and stock exchanges.
o Function: Helps investors trade securities, provides market insights, and
offers research reports.
o Importance: Ensures smooth trade execution and provides access to the stock
market for retail and institutional investors.
o Examples: Zerodha, Angel Broking, and Sharekhan.
o Example: Zerodha facilitates retail investors in trading stocks through its user-
friendly online platform.
3. Syndicate Members
o What is it?: A group of financial institutions or banks that market and
underwrite IPOs.
o Role: They help issuers reach investors and ensure that shares are sold during
public issues.
o Function: Marketing IPOs, collecting bids, and underwriting unsold shares.
o Importance: Ensures successful subscription of IPOs and helps issuers raise
desired funds.
 o Examples: LIC IPO (2022):
Syndicate members included SBI Capital Markets, Kotak Mahindra Capital,
and ICICI Securities.
4. Registrars and Transfer Agents (RTAs)
o What is it?: Entities that maintain records of shareholders and facilitate
securities transfer processes.
o Role: Ensures smooth record-keeping and communication with shareholders.
o Function: Managing IPO subscriptions, issuing allotment letters, and handling
share transfers.
o Importance: Provides backend support to issuers and ensures timely
completion of transactions.
o Examples: KFintech, Link Intime.
o Example: KFintech managed the registrar functions for the Zomato IPO.
5. Underwriters
o What is it?: Institutions or individuals guaranteeing the purchase of unsold
shares in a public issue.
o Role: They provide assurance to issuers that the entire issue will be
subscribed.
o Function: Underwriting shares, assessing market risks, and offering pricing
advice.
o Importance: Reduces risk for issuers by ensuring the success of public
offerings.
o Examples: SBI Capital Markets, ICICI Securities.
o Example: SBI Capital underwrote shares for an infrastructure company IPO.
6. Credit Rating Agencies
o What is it?: Agencies that assess the creditworthiness of issuers and financial
instruments.
o Role: Provide ratings for bonds, debentures, and other instruments.
o Function: Evaluate financial risks and ensure transparency for investors.
o Importance: Helps investors make informed decisions by assessing the risk
profile of issuers.
o Examples: CRISIL, ICRA, and CARE Ratings.
o Example: CRISIL rated Tata Steel bonds as AAA, indicating high
creditworthiness.
 7. Depository Participants (DPs)
o What is it?: Agents of depositories like NSDL and CDSL, providing services
for dematerialized securities.
o Role: Facilitates the opening of demat accounts and holds securities in
electronic form.
o Function: Dematerialization, rematerialization, and handling securities
transactions.
o Importance: Enhances security and efficiency in holding and transferring
securities.
o Examples: HDFC Bank, Axis Bank, and Zerodha.
o Example: HDFC Bank acts as a DP, allowing investors to open and manage
demat accounts seamlessly.
8. Portfolio Managers
o What is it?: Professionals managing investment portfolios for individuals or
institutions.
o Role: Align investments with financial goals and risk appetite.
o Function: Portfolio analysis, asset allocation, and performance monitoring.
o Importance: Ensures optimal returns while mitigating risks for investors.
o Examples: Motilal Oswal, ASK Wealth Advisors.
o Example: Motilal Oswal managed a high-net-worth individual’s (HNI)
portfolio, achieving above-market returns.

Regulatory Framework

 Governed by SEBI (Intermediaries) Regulations, 2008.

 SEBI ensures compliance, regular audits, and imposes penalties for violations.

Internal Audit

 Conducted to ensure adherence to regulatory norms.

 Roles often performed by Company Secretaries, emphasizing professional expertise.

Importance of Intermediaries

 Enhance market efficiency by connecting issuers and investors.

 Reduce information asymmetry through accurate and timely disclosures.
 Contribute to market stability by adhering to regulatory requirements.
 Module-2: Introduction to Securities Law

1. Introduction to the Subject

 What is Securities Law?

o Securities law governs the issuance, trading, and regulation of securities such
as shares, bonds, and derivatives.
o It aims to ensure transparency, fairness, and efficiency in the capital markets
while protecting investors.
o Examples of securities law include the Securities Contracts (Regulation) Act,
1956, and various SEBI regulations.
 Why Study Securities Law?
o To understand the framework that governs financial markets.
o To explore career opportunities in corporate law, compliance, and investment
advisory.
o To comprehend the mechanisms to protect investor interests and maintain
market integrity.
 Importance of Securities:
o Facilitation of Capital Formation: Securities provide a mechanism for
companies to raise funds for expansion and innovation.
 Example: Companies like Tata Steel issue bonds or shares to fund
projects.
o Investor Opportunity: Offers individuals and institutions a chance to invest
and grow wealth.
 Example: Investments in blue-chip stocks like Infosys.
o Economic Growth: Efficient securities markets mobilize resources and
allocate capital to productive sectors.
 Example: Growth in sectors like IT and infrastructure through capital
market funding.
 Connection with Other Laws:
o Indian Contract Act, 1872: Governs the agreements underpinning securities
transactions.
 Example: Every securities trade involves a contract, such as the
agreement between a buyer and a seller of shares.
o Companies Act, 2013: Regulates corporate governance and securities
issuance.
 Example: Provisions for issuing shares, debentures, and managing
shareholders’ rights.
o Competition Act, 2002: Prevents anti-competitive practices in securities
markets.
 Key Provisions:
 Prohibits agreements that restrict competition, such as price-
fixing among brokers or collusion among exchanges.
 Addresses abuse of dominant position, ensuring large entities
do not unfairly dominate securities markets.
 Example: SEBI works alongside the Competition Commission of
India (CCI) to investigate collusion among financial intermediaries.
 Case: Investigation into NSE's dominance in algorithmic
trading highlighted the interface of securities law with
competition law.
o Prevention of Money Laundering Act, 2002: Addresses illegal activities
related to securities.
 Example: Mandates KYC compliance to prevent misuse of securities
for laundering money.
o Insolvency and Bankruptcy Code, 2016: Protects the rights of creditors and
investors in cases of financial distress.
 Example: Resolution of companies like Jet Airways through IBC,
ensuring fair treatment of securities holders.
o Income Tax Act, 1961: Impacts securities transactions through taxation
provisions.
 Example: Taxation on short-term and long-term capital gains from
securities investments.
Introduction to the Concept of Securities

Securities refer to financial instruments that hold monetary value and can be traded in
financial markets. These include:

 Equity shares
 Preference shares
 Debentures
 Government securities
 Mutual fund units
 Derivatives
o Examples: Equity shares of Infosys, corporate bonds issued by Reliance
Industries, and government securities like Treasury Bills.

Securities are regulated in India by various laws, including:

 Securities Contracts (Regulation) Act, 1956 (SCRA)

 Securities and Exchange Board of India Act, 1992
 Depositories Act, 1996
 Companies Act, 2013
 SEBI regulations for different securities transactions

The Role of SEBI in Regulating Securities

Regulatory Body:

SEBI (Securities and Exchange Board of India) was established in 1992 to regulate the
securities market.

Need and Importance:

 Protects investors from unfair trading and fraudulent activities.

o Example: If a stockbroker falsely promises guaranteed profits, SEBI can take
action.
  Ensures transparent and efficient market functioning.
o Example: Just like traffic signals ensure smooth road movement, SEBI ensures
that market transactions follow rules.
 Regulates market intermediaries, ensuring ethical business practices.
o Example: SEBI ensures that banks handling IPOs don’t mislead investors
about company valuations.

 2. Powers of SEBI (Section 11 & 11B)

SEBI has the following powers:

✅ Quasi-legislative Powers – Can frame regulations for securities markets.
✅ Quasi-judicial Powers – Can pass orders on fraudulent and unfair trade practices.
✅ Quasi-executive Powers – Can investigate, inspect, and impose penalties.
✅ Power to regulate stock exchanges – Directs stock exchanges to ensure
transparency.
✅ Power to impose penalties – Imposes fines for insider trading, fraud, and non-
compliance.
✅ Power to regulate IPOs – Controls the issue and listing of securities.

Functions of SEBI:

 Regulating stock exchanges and securities intermediaries.

o Example 1: SEBI monitors brokers like Zerodha or Angel Broking to ensure
fair trading.
o Example 2: SEBI ensures that stock exchanges like NSE and BSE follow
proper market regulations.
 Preventing insider trading and market manipulation.
o Example 1: If a CEO secretly buys shares before announcing a major merger,
SEBI can penalize them.
o Example 2: A group of investors artificially inflating share prices before
selling them off at a profit can be banned by SEBI.
 Regulating mutual funds and alternative investment funds.
 o Example 1: SEBI ensures that mutual fund schemes from HDFC or SBI follow
fair investment practices.
o Example 2: If a mutual fund misrepresents its expected returns, SEBI can
impose fines.
 Overseeing substantial acquisition of shares and takeovers.
o Example 1: If Tata Group wants to acquire 30% of another company, SEBI
ensures fair disclosures and investor protection.
o Example 2: If a foreign investor buys a large stake in an Indian company,
SEBI ensures compliance with disclosure norms.

 5. Importance of SEBI

🔹 Protects Investor Interests: Prevents fraud and unfair practices.

🔹 Ensures Market Stability: Regulates stock exchanges and intermediaries.
🔹 Encourages Capital Market Growth: Facilitates easy and fair fundraising.
🔹 Enhances Corporate Governance: Ensures transparency in listed companies.

An Overview of the Securities Contracts (Regulation) Act, 1956 (SCRA)

Purpose:

To regulate stock exchanges and contracts in securities to prevent undesirable transactions.

Need and Importance:

• Ensures fair trading practices by regulating stock exchanges.

 Example: Just as schools must follow board guidelines for exams, stock exchanges
must follow SEBI regulations to prevent unfair trading.
 Real-life example: SEBI suspended Karvy Stock Broking Ltd. in 2019 for misusing
client securities without authorization.

• Prevents fraudulent contracts and market manipulation.

  Example: If a fake stock exchange allows trading in non-existent companies, SEBI
can shut it down under SCRA.
 Real-life example: SEBI banned the Sahara Group from raising funds through
Optionally Fully Convertible Debentures (OFCDs) for violating disclosure norms in
2011.

• Provides a structured framework for securities trading, ensuring investor protection.

 Example: If an investor buys shares in Reliance, they can trust that the contract is
legally valid.
 Real-life example: SEBI penalized Satyam Computers in 2009 for accounting fraud
that misled investors.

Key Provisions:

• Recognition of Stock Exchanges: Stock exchanges must be recognized by SEBI.

 Example 1: Just as a school needs recognition from the education board to conduct
exams, stock exchanges need SEBI’s recognition to operate.
 Example 2: The Bombay Stock Exchange (BSE) is recognized by SEBI, while an
unauthorized stock trading platform would not be.

• Regulation of Contracts in Securities (Section 19A): SEBI has the authority to regulate
contracts related to securities.

 Example 1: If a company issues shares without proper documentation, SEBI can

nullify those contracts.
 Example 2: If a stockbroker offers a contract that guarantees fixed returns on shares
(which is illegal), SEBI can take action.
 Real-life example: SEBI imposed a fine on HDFC Bank in 2022 for non-compliance
with disclosure requirements related to perpetual debt instruments.

• Control over Unfair Trade Practices: Prohibits fraudulent transactions and ensures fair
trading.
  Example 1: If a company spreads false information about profits to boost share prices,
SEBI can impose penalties.
 Real-life example: In 2020, SEBI fined Reliance Industries for manipulating stock
prices in the Future & Options segment.

Listing of Securities: Defines the conditions under which securities can be listed and
delisted.

o Example 1: Just as a product needs to meet quality standards before being sold
in a supermarket, companies must meet SEBI’s requirements before listing
shares.

Example 2: If a company fails to meet SEBI’s financial disclosure norms, it can be prevented
from listing its shares.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Purpose:

Governs the public issue, rights issue, and preferential allotments.

Need and Importance:

• Ensures fair pricing and transparency in IPOs and public issues.

 Example: When LIC launched its IPO, SEBI ensured proper valuation and investor
disclosure.
 Real-life example: SEBI fined Bharti Infratel for incorrect disclosures in its IPO
filings.

• Protects investors from misleading and incomplete disclosures.

 Example: If a company hides losses in its IPO prospectus, SEBI can penalize it.
 Real-life example: SEBI banned the IPO of Ruchi Soya in 2022 after misleading
statements in advertisements.

• Regulates fundraising methods to ensure market stability.

  Example: Just as banks must verify a borrower’s income before granting a loan, SEBI
ensures that companies meet financial criteria before raising public money.

Key Provisions:

• Public Issues: Regulations for IPOs and Further Public Offerings (FPOs).

 Example 1: When Zomato launched its IPO, it had to follow SEBI’s guidelines on
disclosures.
 Example 2: SEBI ensures that Paytm follows proper pricing mechanisms in its IPO to
prevent investor losses.
 Real-life example: SEBI imposed restrictions on Yes Bank’s FPO in 2020 for non-
compliance with disclosure norms.

• Rights Issues: Process for existing shareholders to buy additional shares.

 Example 1: If Reliance issues shares only for its existing investors, SEBI ensures fair
pricing.
 Example 2: SEBI ensures that Tata Steel’s rights issue pricing does not unfairly
disadvantage small investors.

• Bonus Issues: Issuance of free shares to existing shareholders.

 Example 1: TCS offering 1 free share for every 2 held.

 Example 2: Infosys announces a 1:1 bonus issue, doubling shareholder holdings at no
extra cost.

These regulations were later amended and replaced by SEBI (ICDR) Regulations, 2018.

• Listing of Securities: Defines the conditions under which securities can be listed and
delisted.

 Example 1: Just as a product needs to meet quality standards before being sold in a
supermarket, companies must meet SEBI’s requirements before listing shares.
 Example 2: If a company fails to meet SEBI’s financial disclosure norms, it can be
prevented from listing its shares.
  Real-life example: SEBI delisted 200 companies from stock exchanges in 2018 for
failing to comply with listing regulations.

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

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (also
known as the Takeover Code) govern mergers, acquisitions, and takeovers of listed
companies in India. These regulations aim to ensure transparency, protect minority
shareholders, and provide a structured framework for substantial acquisitions.

 Issued by: Securities and Exchange Board of India (SEBI)

 Effective from: October 22, 2011
 Replaced: SEBI (SAST) Regulations, 1997
 Purpose:
o Regulate the acquisition of shares beyond a certain threshold.
o Ensure equal treatment for all shareholders.
o Prevent unfair takeovers and protect minority investors.

✅ Example:
Suppose Company A wants to acquire a significant stake in Company B (a listed company).
If Company A's shareholding reaches 25% or more, it must make an open offer to the
existing shareholders of Company B, offering them a chance to sell their shares at a fair
price.

Need and Importance:

 Prevents hostile takeovers that may harm minority shareholders.

o Example: If a company like Tata Sons acquires a large stake in another
company, minority shareholders should have fair rights.
 Ensures fair valuation and compensation during acquisitions.
o Example: When Adani acquired NDTV shares, SEBI ensured that
shareholders were given a proper exit price.
 Provides clear disclosure norms for acquirers and target companies.
 o Example: Just as a person selling land must disclose all ownership details,
companies must publicly disclose takeover plans.

Key Provisions:

 Threshold Limits for Open Offers (Regulation 3 & 4): If an acquirer crosses a
specific shareholding threshold, they must make an open offer to existing
shareholders.
o Example 1: When Adani acquired NDTV shares beyond a certain percentage,
it had to offer to buy shares from public shareholders as per SEBI rules.
o Example 2: If Reliance acquires a 30% stake in a telecom company, it must
make an offer to existing shareholders to buy their shares at a fair price.
 Disclosure Requirements (Regulation 6 & 7): Mandatory disclosures by acquirers
and target companies.
o Example: If Infosys’ CEO buys additional shares in the company, SEBI
requires public disclosure.
 Exemptions (Regulation 10 & 11): Certain acquisitions are exempted from open
offer requirements.
o Example: A father transferring shares to his son in a family-run business.
 Mandatory Open Offer Requirement (Regulation 3): If an acquirer crosses 25%
shareholding in a listed company, they must make an offer to buy an additional 26%
of shares from public shareholders.
o Example: If Tata Group increases its stake in a listed company from 24% to
26%, they must announce an open offer for additional shares.

2. Key Definitions

Term Meaning Example

Any person or entity acquiring

If Tata Sons buys shares of TCS, Tata
Acquirer shares or control over a
Sons is the acquirer.
company.
 Term Meaning Example

A listed company whose If Tata Sons is acquiring TCS, then TCS

Target Company
shares are being acquired. is the target company.

Right to appoint a majority of

If a company owns 51% of voting shares
Control directors or control
in another company, it has control.
management decisions.

Reliance Industries holding 40% in a

Creeping Incremental acquisition of company can acquire up to 5% more
Acquisition shares (up to 5% per year). per year without triggering an open
offer.

Public If HDFC Bank acquires ICICI Bank’s

A formal announcement of an
Announcement shares beyond the threshold, it must
open offer by the acquirer.
(PA) issue a public announcement.

A mandatory offer made by the If Adani Group acquires a 25% stake in

Open Offer acquirer to buy shares from NDTV, it must make an open offer to
existing shareholders. other NDTV shareholders.

3. Trigger Points for Open Offer

An open offer is mandatory if an acquirer breaches specific shareholding thresholds.

Trigger
Threshold Obligation Example
Event

If Reliance acquires 25% of

Acquirer must make
Initial Acquiring 25% or more Zomato, it must make an
an open offer for at
Acquisition voting rights open offer for another
least 26% of shares.
26%.

Creeping Acquiring more than No open offer If Infosys already holds

 Trigger
Threshold Obligation Example
Event

Acquisition 5% per financial year if required unless 30% in Wipro, it can

already holding 25% to shareholding crosses acquire up to 35%
75% 75%. gradually without an open
offer.

If Facebook gets voting

If control over Open offer must be
Change in control over a company
management or policy made, even without
Control without buying shares, it
decisions is acquired share acquisition.
must make an open offer.

5. Exemptions from Open Offer

An open offer is not required in the following cases:

Exemption Example

Inter-se transfer between If Mukesh Ambani transfers shares of Reliance Jio to another
promoters Reliance Group company, no open offer is needed.

Acquisition through If Ratan Tata passes Tata Sons shares to his successor, no open
inheritance or gift offer is needed.

If the Indian Government acquires shares in SBI, no open

Government acquisition
offer is required.

6. Disclosures & Reporting Requirements

Event Obligation Example

Acquirer must disclose to stock

Acquisition of 5% or If LIC buys 5% of HDFC, it
exchanges within 2 working
 Event Obligation Example

more shares days. must inform SEBI.

If TCS increases its stake in

Every 5% increase or Further disclosure required to
Infosys by 5%, disclosure is
decrease in shareholding the stock exchange.
mandatory.

7. Indirect Takeovers

 If an entity acquires control over a company indirectly, it is treated as an indirect

takeover.

✅ Example:
If Google acquires a UK-based company, which owns 30% of Infosys, it would be
considered an indirect takeover of Infosys.

8. Penalties for Non-Compliance

If an acquirer fails to comply with the SEBI Takeover Code, SEBI may:

1. Impose fines.
2. Restrict trading in the stock market.
3. Void the open offer.
4. Initiate civil or criminal action.

✅ Example:
If XYZ Ltd. acquires 25% of a company without making an open offer, SEBI may impose
a penalty and suspend trading.
9. Case Studies

Case Details

Mindtree-L&T L&T acquired 60% of Mindtree through an open offer, leading

Takeover (2019) to a hostile takeover.

Adani-NDTV Takeover Adani acquired indirect control over NDTV, triggering an open
(2022) offer requirement.

SEBI examined whether Zee’s promoters lost control, which

Zee-Sony Merger (2023)
could trigger an open offer.

Example: 📌 Real-Life Case Study: Adani Group's Takeover of NDTV

A classic example of SEBI’s 25% Rule and Creeping Acquisition Rule in action is the
Adani Group's acquisition of NDTV in 2022.

🛑 Background of NDTV Takeover

 NDTV (New Delhi Television Ltd.) was founded by Prannoy Roy and Radhika
Roy.
 They owned shares through their company RRPR Holding Pvt. Ltd.
 Adani Group, led by Gautam Adani, planned to take control of NDTV.

🛑 Step 1: Indirect Acquisition (Triggering 25% Rule)

1⃣ Adani Group acquired 29.18% shares of NDTV by indirectly purchasing RRPR Holding
Pvt. Ltd.
2⃣ Since this stake was more than 25%, SEBI’s 25% Rule was triggered.
3️⃣ As per SEBI rules, Adani Group had to make an "open offer" to buy at least 26%
more shares from public shareholders.
4️⃣ Price Offer: Adani Group offered ₹294 per share, which was the minimum fair price set
under SEBI regulations.
🛑 Step 2: Open Offer to Public Shareholders

 As required by SEBI, Adani Group offered to buy 26% more shares from public
shareholders.
 However, public shareholders were not obligated to sell their shares.
 Many shareholders did not sell at ₹294️, as NDTV’s market price had risen.
 Eventually, Adani Group acquired only 8.26% through the open offer, taking their
total holding to 37.44%.

🛑 Step 3: Creeping Acquisition (5% Rule)

 After the open offer, Adani Group continued acquiring shares slowly through the
creeping acquisition route.
 Since they already had more than 25%, they could buy up to 5% per year without
triggering another open offer.
 Over time, Adani Group increased their stake to over 64% and gained full control
of NDTV.

🛑 Key Takeaways from the NDTV Takeover

✔The 25% Rule was triggered when Adani acquired a 29.18% stake, forcing them to

make an open offer.

✔The open offer allowed minority shareholders to exit at a fair price, as per SEBI’s

regulations.

✔The 5% Creeping Acquisition Rule allowed Adani Group to slowly increase its stake

without triggering another open offer.

This case shows how SEBI’s takeover rules protect minority shareholders while allowing
fair acquisitions in the stock market.

Example 2: Vodafone-Idea Merger (2018)

What Happened?
  Vodafone India and Idea Cellular merged in 2018 to become Vodafone Idea Ltd.
 Vodafone became the majority shareholder (42%), while Idea’s promoters held a
smaller stake.

Why is this a Change in Control?

✅ Vodafone, which was earlier just a competitor, gained control over the combined
company.
✅ Idea’s original promoters lost control, and the management structure changed.
✅ SEBI required Vodafone-Idea to make an open offer to public shareholders.