INVESTMENT AND SECURITIES NOTES

Module 5: Securities Regulation:

Stock Exchange: Stock Exchange constitutes the primary institution of the secondary market. Stock exchanges are the key institutions facilitating the issue and sale of various types of securities. It is a pivot around which every activity of the capital market revolves. They thus represent the market place for buying and selling of securities and ensuring liquidity to them in the interest of the investors. They are the nerve of the capital market of the country and reflect the health of the countrys economy as a whole.

Financial System: Every modern economic is based on a sound financial system which helps in production, capital and economic growth by encouraging savings habits, mobilizing savings from households and other segments and allocating savings into productive usage such as trade, commerce, manufacture, etc. Financial system covers both cash and credit transactions. All financial transactions are dealt with by cash payment or issue of negotiable instruments. Thus, a financial system is a set of institutional arrangements through which financial surpluses are mobilized from the units generating surplus income and transferring them to the others in need of them. Thus the functions of a good financial market are manifold, such as: 1. Regulation of currency, 2. Banking Function, 3. Performance of agency services and custody of cash reserves, 4. Management of National Reserves of International Currency, 5. Supply and deployment of funds for productive use, 6. Maintaining liquidity, 7. Education of the investors, 8. Giving autonomy to Financial Institutions to become efficient under competition, 9. Facilitating entry of new institutions to add depth to the market, 10. Minimising regulatory measures and market segmentation.

Organisational Structure of Financial System: Financial Markets

Money Market

Capital Market

Securities Market

Other forms of L & B

New Issues Market (Primary)

Secondary Market

Financial MarketEfficient transfer of resources from those who are having it idle to others who have need for them is achieved through financial markets. Stated formally, financial markets provide channels for allocation of saving to investment. These provides a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouples the acts of savings and investment. The financial Market has two major components, the money market and the capital market: Money MarketThe money market refers to the market where borrowers and lenders exchange short term funds to solve their liquidity needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability. Capital MarketThe Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the securities market and embraces all forms of lending and borrowing. The market comprises of the complex of institutions and mechanisms through which intermediate term funds and long term funds are pooled and made available to business, government and individuals. The Capital market and in particular the Stock exchange is called as the barometer of the economy. Governments policy is so moulded that creation of wealth through product and services is facilitated and surpluses and profits are channelized into productive users through capital market operations.

Securities MarketThe Securities Market, however, refers to the markets for those financial instruments/ claims/ obligations that are commonly and readily transferable by sale. The Securities Market has two inter dependent and inseparable segments: Primary MarketThe primary market provides the channel for sale of new securities. It is a market where resources are mobilized by companies through issue of new securities. These resources are required for new projects as well as for existing projects with a view of expansion, modernization, diversification and upgradation. The issue of securities by companies can take place in any of the following forms: 1. IPO, 2. Further issue of capital, 3. Rights issued to the existing shareholders, 4. Offer to public, 5. Bonus Issues, etc. The Primary Market is of great significance to the economy of a country. It is through the primary market that the funds flow for productive purposes from investors to entrepreneurs. The latter uses the funds for creating new products and rendering services to customers. The Primary Market creates merchandise for secondary or stock market.

Secondary (Stock) MarketThe Secondary Market enables those who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. Secondary Market essentially comprises of stock exchanges which provide platform for purchase and sale of investors. The trading platform of stock exchanges is accessible only through brokers and trading of securities is confined only to stock exchanges. The corporate securities market dates back to the 18th century when the securities of the East India Company were traded in Mumbai & Kolkatta. The 1860s witnessed beverish dealing in securities and securities speculations. This brought brokers to Bombay to boom the first organized stock exchange in the country, Bombay Stock Exchange. Stock exchanges are the exclusive centers for trading in securities and the trading platform of an exchange is accessible only to brokers. It ensures free marketability, negotiability and price discharge. For these reason it is called as the nerve of the capital market in India.

The secondary market has further two components. First, the spot market where securities are traded for immediate delivery and payment. The other is futures market where the securities are traded for future delivery and payment.

Functions of Securities Market: 1. It facilitates mobilization of savings from people having it in surplus to those who need them. 2. It provides a market place for purchase and sale of securities and thereby ensures transferability of securities, which is the basis for the joint stock enterprise system. 3. The existence of Securities Market makes it possible to satisfy simultaneously the needs of the enterprises for capital and the need of investors for liquidity. 4. It enables all individuals, no matter how limited their means, to share the increased wealth provided by competitive private enterprises. The securities market allows individuals who cannot carry an activity in its entirely within their resources to invest whatever is individually possible and preferred in that activity carried on by an enterprise. 5. The Securities Market, by allowing an individual to diversify risk among many ventures to offset gains and losses, increase the likelihood of long-term, overall success.

Regulatory Framework: The four main legislations governing the securities market are: a. The SEBI Act, 1992. (Powers of SEBI) This Act establishes SEBI with statutory powers for1. Protecting the interest of investors in securities, 2. Promoting the development of the Securities Market in India, 3. Regulating the Securities market. Its regulation jurisdiction extends over corporate in the issuance of capital and transfer in securities, in addition to all intermediaries and persons associated with securities market. 4. Registration and regulating the working of stock brokers, sub- brokers, and share transfer agents, bankers to an issue, etc. 5. Registration and regulating the working of the depositories participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf. 6. Promoting and regulating self- regulatory organisations. 7. Promoting investors education and training of intermediaries of securities markets. 8. Prohibiting fraudulent and unfair trade practices relating to securities markets.

9. It can conduct enquires; audits and inspection of all concerned and adjudicate offences under the Act. 10. It has the power to register and regulate all market intermediaries and also to penalize them in case of violations of the provisions of the Act.

b. The Companies Act, 1956. 1. It deals with issue, allotment and transfer of securities and various aspects relating to company management. 2. It provides for standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. 3. It also regulates underwriting, the use of premium and discounts in issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information.

c. The Securities (Regulation) Act, 1956. 1. It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchange and aims to prevent undesirable transactions in securities. 2. It gives Centre Government/ SEBI regulatory jurisdiction over, (a) stock exchanges through a process of recognition and continued supervision; (b) contract in securities, and (c) listing of securities on stock exchanges . d. The Depositories Act, 1996. 1. The Act provides for the establishment of Depositories in securities with the objective of ensuring the free transferability of securities with speed, accuracy and security by (a) Making securities of public limited companies freely transferable subject to certain exceptions; (b) Dematerialising the securities in the depository mode; and (c) Providing for maintenance of ownership records in a book entry form.

Securities Appellate Tribunal: In order to provide for appellate remedies, The SEBI Act provides for the establishment of the Securities Appellate Tribunal to consider appeals against SEBI orders or penalties. Section 15K It provides the Central Government is empowered to establish by notification one or more SAT. So far we have a SAT in Mumbai has been established by the Central Government. Section 15L SAT shall consist of a Presiding Officer and two other members to be appointed by the Central Government by notification. Section 15M It prescribes that a person shall not be qualified for appointment of the Presiding Officer of SAT unless he is a sitting or retired Justice of SC or sitting or retired CJ of HC. The appointment of such PO shall be made by the Central Government. Such person should be a person of ability, integrity and standing and must be having some experience relating to Securities Market. Section 15N It provides that the PO shall hold the office for a term of 5 years and is eligible of reappointment.

Requirements for Appeal to the Tribunal: (Jurisdiction) Section 15T lays down that any person aggrieved-

(1) A. By an order of SEBI made, under this Act, or the rules or regulations made there under, or B. By an order made by an adjudicating officer under this Act. May prefer an appeal to a SAT having jurisdiction in the matter. (2) No appeal shall lie to the SAT from an order made by SEBI or by an Adjudicating Officer, by the consent of the Parties. (3) Every appeal under (1) shall be filed within 45 days from the date on which a copy such order by SEBI or Adjudicating officer is received by him and should be such form along with the fees a may be prescribed.

(4) On receipt of an appeal and upon hearing both the parties, the SAT can pass such orders thereon as it thinks fit, confirming, modifying or setting aside the original order. (5) SAT shall then send a copy of the order made by it to SEBI and the parties to the appeal and to the adjudicating officer. (6) The appeals made before SAT shall be dealt with by it as expeditiously as possible and endeavors shall be made to dispose of the same within 6 months from the date of the receipt of such appeal.

Powers of Securities Appellate Tribunal: The SAT shall have for the purpose of discharging their functions in the Act, the same powers as are vested in the Civil Courts under CPC, these are: a. b. c. d. e. f. g. Summoning and enforcing the attendance of any person and examining him. Requiring the discovery and production of documents. Receiving evidence on affidavits. Issuing commissions for the examination of witnesses or documents. Reviewing its decisions. Dismissing an application for default or deciding it ex- parte. Setting aside any order of dismissal of any application for default or any order passed by it ex- parte h. Any other matter which may be prescribed.

Jurisdiction of Civil Court Section 15Y lays down that the civil court has no jurisdiction to entertain such matters which an Adjudicating Officer or SAT under this Act is empowered to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

Appeal to Supreme Court Section 15Z lays down that any person aggrieved by the decision of SAT can file appeal in SC within 60 days from the date of communication of the decision or order of the SAT.

Module 6: Collective Investment SEBI Regulations on Mutual Fund: SEBI regulates the Mutual Fund Market by virtue of SEBI (Mutual Fund) Regulations, 1996, which provides: 1. 2. 3. 4. 5. 6. 7. Registration and Recognition of Mutual Fund and grant of certificate of Registration. Eligibility criterion of Mutual Funds. Constitution and Management of Mutual Funds and their Trustees. Appointment of trustees and disqualification of the Trustees. Rights and Obligations of Trustees. Constitution and Management of Asset Management Companies and Custodians. Appointment of AMC, eligibility criterion for an AMC and restriction on the business carried on by AMCs. 8. Appointment of Custodians and agreement with them. 9. Procedure for Launching of Schemes under Mutual Funds. 10. Winding up of various schemes and penalties for violation of any norm so provided. 11. For restrictions on Investments and Borrowings. 12. Underwriting of securities. 13. Pricing of Units along with computation of NAV. 14. Conditions and permissible investment limits in Real estate Mutual Fund Schemes. 15. Inspection of Annual reports and Audit Reports of all Mutual Funds. 16. Procedure in case of default.

Module 7: Law Governing Depositories

What is a Depository? A depository is an organisation like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant. Section 2(e): Depository means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under Section 12(1A) of SEBI Act, 1992. There are two Depositories in India, namely the National Securities Depositories Limited (NSDL) and Central Depositories Services (India) Limited (CDSL). Under the provisions of the

Depositories Act, these Depositories provide various services to investors and other Participants in the capital market. These includes basic facilities like account opening, dematerialization, rematerialisation, settlement of trades and advanced facilities like pledging, distribution of non- cash corporate actions, distribution of securities to allottees in case of public issues, etc. All the securities held by a depository shall be dematerialized and shall be in fungible form.

Difference between Depositories and Custodian