PRESENT GOVERNING SECURITIES LAWS IN INDIA

PRESENT GOVERNING SECURITIES LAWS IN INDIA:

11.01 (a): The Securities Transactions in India at present are mainly governed by two Acts.
1. The Securities Contracts (Regulation) Act, 1956, and
2. The Securities & Exchange Board of India Act, 1992.

11.01 (b): THE DEPOSITORIES ACT, 1996:

The paper based ownership and transfer of securities has been a major drawback of the Indian Securities Markets since it often resulted in delay in settlement and transfer of securities and also lead to "bad delivery", theft, forgery etc. The Depositories Act, 1996 was therefore enacted to pave the way for smooth and free transfer of securities.

11.01 (c): The other relevant laws which affect the capital market are :-

1. The Foreign Exchange Regulations Act, 1973;
2. Arbitration and Conciliation Act, 1996;
3. Companies Act, 1956;
4. Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993);
5. Banking Regulation Act;
6.     Benami Prohibition Act;
7.     Indian Penal Code;
8.     Indian Evidence Act, 1872 and;
9.     Indian Telegraph Act, 1885.

11.02: THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

11.02 (a): The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the "Act"), containing a mere 31 sections, keeps a tight vigil over all the Stock Exchanges of India since 20th February, 1957. The provisions of the Act were formally administered by the Central Government. However, since the enactment of The Securities and Exchange Board of India Act, 1992 the Board established under it (SEBI) is concurrently having powers to administer almost all the provisions of the Act.

11.02 (b): By virtue of the provisions of the Act, carrying on the business of dealing in securities without a license from SEBI is prohibited. Any Stock Exchange which is desirous of being recognized has to make an application under Section 3 of the Act to SEBI who is empowered to grant recognition and prescribe conditions including that of having SEBI'S representation (maximum three persons) on the Stock Exchange and prohibiting the Stock Exchange from amending its rules without the SEBI's prior approval. The recognition can be withdrawn in the interest of trade or public. SEBI is authorized to call for periodical returns from the recognized Stock Exchanges and to make enquiries in relation to their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Stock Exchanges are allowed to make rules only with the prior approval of SEBI. The Central Government and SEBI can direct Stock Exchanges to frame rules. Recognized stock exchanges are allowed to make bye-laws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend these bye-laws. The Central Government and SEBI have the power to supersede the governing body of any recognized stock exchange and to suspend its business.

11.02 (c): A public limited company in India, has no obligation to have its shares listed on a recognized Stock Exchange. But if a company intends to offer its shares or debentures to the public for subscription by issue of a prospectus, it must, before issuing such prospectus apply to one or more of the recognized stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with in each of such stock exchange in terms of Section 73 of the Companies Act, 1956. SEBI can however under the provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the listing of securities by public companies if it is of an opinion that it is necessary or expedient in the interest of trade or public. In the event of the Stock Exchange refusing to list the securities of any public company an appeal to SEBI is provided under the Act.

11.02 (d): A company on the grounds specified in Section 22A of the Act is entitled to refuse to register transfer of any of its securities, notwithstanding anything contained in its articles or Section 82 or Section 111 of the Companies Act, 1956.

11.03: The Securities and Exchange Board of India Act, 1992.

11.03 (a): The Securities and Exchange Board of India Act, 1992 (hereinafter referred as "The SEBI Act") is deemed to have come into force on January 30, 1992. Relatively a brief act containing only 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India.

11.03 (b): A Board by the name of the Securities and Exchange Board of India (SEBI) consisting of one Chairman and five members, two from the department of the Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras has been constituted under the SEBI Act to administer its provisions. The Central Government has the right to terminate the services of the Chairman or any member of the Board. The Board decides all questions in its meeting by majority vote with the Chairman having a second or casting vote.

11.03 (c): Section 11 of the SEBI Act provides that it shall the duty of the Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit. It empowers the Board to regulate the business in Stock Exchanges, to register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc.

11.03 (d): As all Stock Exchanges are required to be registered with SEBI under the provisions of the Act, under Section 12 of the SEBI Act all the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are obliged to register with the Board and the Board has the power to suspend or cancel such registration. The Board is bound by the directions given by the Central Government from time to time on questions of policy and the Central Government has the right to supersede the Board. The Board is also obliged to submit a report to the Central Government every year, giving true and full account of its activities, policies and programmes. Any one aggrieved by the Board's decision is entitled to appeal to the Central Government.

11.03 (e): The Central Government up till now has framed ten Rules by virtue of Section 29 of the SEBI Act.

11.03 (f): The Board empowered by Section 30 of the SEBI Act has till now with the previous approval of the Central Government made twelve regulations.

11.04: THE DEPOSITORIES ACT, 1996 AND REGULATIONS.

11.04 (a): With effect from 20th September 1995 an Act, to provide regulation of Depositories in securities and for matters connected therewith and/or incidental thereto has been enacted in India which is titled as "The Depositories Act, 1996". It extends to the whole of India. As per the definition provided in Section 2(e) of the said Act, a "Depository" means a company formed and registered under the Companies Act, 1956 and which has been granted certificate of registration under sub-Section (1A) of Section 12 of the Securities & Exchange Board of India Act, 1992.

11.04 (b): The Securities & Exchange Board of India have in exercise of the powers conferred upon it made Regulations which are called "The Securities & Exchange Board of India (Depositories & Participants) Regulations, 1996".

11.04 (c): Regulation 3 of the said Regulations provides as follows:

3. (1) An application for the grant of a certificate of registration as a Depository shall be made to the Board by the sponsor in Form A, shall be accompanied by the fee specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof.

(2) The application shall be accompanied by draft bye-laws of the Depository that is proposed to be set up.

11.04 (d): Regulation 6 provides that the Board shall not consider an application under Regulation 3 for grant of a certificate for registration as a Depository unless the sponsor belongs to one of the categories mentioned in Regulation 6. Regulation 7 provides that after considering the application under Section 3 with regard to the clarification specified in Regulation 6 if the Board is satisfied with the company established by the sponsor being eligible to act as Depository, it may grant a certificate of registration subject to the conditions mentioned in Regulation 7. A Depository which has been granted a certificate of registration under Regulation 7 is obliged to make an application to the Board within one year from the date of issue of the certificate of registration for commencement of business in a prescribed form. Regulation 12 empowers the Board to ask the Depository to furnish further information and/or clarification regarding the matters relevant for the grant of certificate of commencement of business and Regulation 13 lays down the matters which are relevant for considering grant of certificate for commencement of business.

11.04 (e): The rights and obligations of Depository are provided in Chapter V of the said Regulations. They inter alia provide for securities eligible for dematerialization, Agreement between Depository and Issuer, internal and external monitoring, review and evaluation of systems and controls, insurance against risks, manner of keeping records, records to be maintained, prohibition of assignment, agreement by participant, opening of separate accounts, transfer or withdrawal by beneficial owner, reconciliation, manner of surrender of certificate of security, manner of creating pledge or hypothecation, etc.

11.05: Take Over Code:

11.05 (a): SEBI under the provisions of Section 11 of the Securities Exchange Board of India Act 1992 is inter alia empowered to regulate the securities market by such measures as it may deem fit. One of the matters specified under that Section is "regulating substantial acquisition of shares and take over of companies". Section 30 of the same Act empowers SEBI to make regulations to carry out the purposes of this Act. Empowered by these provisions of the Act SEBI enacted "The Securities & Exchange Board of India (Substantial Acquisition of Shares and Take Overs) Regulations, 1997. They came into effect on 20th February 1997. and comprised of 47 Regulations.

11.05 (b): The Regulations, after defining, inter alia, as to what the terms "acquirer" means, who could be called as "person acting in consort", what is meant by "offer period", who is a "promoter", which is a "target company", etc. go to provide:

(i) provisions of disclosures of shareholding and control in a listed company,

(ii) provisions for substantial acquisition of shares or voting rights in an acquisition of control over a listed company,

(iii) provisions for bail out takeovers applicable to substantial acquisition of shares in a financially weak company, not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a public financial institution or a scheduled bank.

11.05 (c): The Regulations also provide for SEBI's right to investigate into the complaints on matters having a bearing on the substantial acquisition of shares and take overs and provide for penalties for violation of any of the provisions of the regulations. Adequate provisions have been made in the 1997 Regulations for:

a) Equality of treatment and opportunity to all shareholders

b) Protection of shareholders interest

c) Fair & truthful disclosure of all material information by the acquirer in all public announcements and offer documents

d) Prohibiting the acquirer and other parties for furnishing information concerning offer exclusively to one group of shareholders

e) Allowing sufficient time to shareholders for making uniform decisions

f) Announcing the offer only after most careful and responsible consideration

g) Highest standard of care and accuracy to be utilized in preparing offer documents by the acquirer and all other intermediaries professionally involved in the offer

h) Refraining from creating a false market in securities by all parties to an offer

i) Target company not to take any action to frustrate an offer without the approval of the shareholders, etc.

The 1997 regulations repeal the earlier regulations.

11.06: FOREIGN EXCHANGE MANAGEMENT BILL 1998 (FEMA):

11.06 (a): As a part of the on going process of economic liberalization relating to foreign investments and foreign trade in India and as a measure for closer interaction with the world economy the Foreign Exchange Regulation Act, 1973 (FERA) was reviewed in the year 1993 and several amendments were made therein. Further review of the FERA was undertaken by the Central Government of India in the light of subsequent developments and on account of the experience in relation to foreign trade and investment in India, the Central Government felt that instead of further amending the FERA, the better course would be to repeal the existing Act and to enact a new legislation in its place. In view of the same, the RBI was asked to suggest a new legislation based on the report submitted by a task force constituted for this purpose by the RBI recommending substantial changes in FERA.

11.06 (b): There has been a substantial increase in the Foreign Exchange Reserves of India. Since the year 1993, Foreign trade has grown up. Development has taken place such as current account convertibility, liberalization in investments abroad, increased access to external commercial borrowings by Indian Companies and participation by foreign institutional investors in securities markets in India. Keeping in view these changes the Central Government of India has introduced the FEMA to repeal FERA.

11.06 (c): A marked digression from the general rule that the Accused is presumed to be innocent until proved guilty beyond reasonable doubt, is found in the FEMA. A presumption regarding documents, contained in this Bill is contrary to the general rules of evidence. For example, when documents pertaining to a crime under FEMA are discovered the Court will presume that the contents of the documents are true and correct and will not go into the question whether the incriminating documents may have been forged. Thus, it becomes the responsibility of the Accused to prove, in case that the documents are fabricated. The main change between FERA and FEMA is in the approach. FERA seeks to regulate almost all the transactions involving foreign exchange and inbound/outbound investments. In FERA every provision is restrictive and starts with a negative proposition stating that whatever is mentioned in that section is prohibited unless the prior permission either general or special, as may be required in the specific case, of RBI is obtained. FERA provides that nothing can be done without RBI's permission. In comparison to this existing negative piece of legislation, the provisions of the proposed Bill has a positive approach. This can be found from the provisions of FEMA dealing with capital account transactions which are to be regulated. Unlike FERA which provides that these transactions cannot be entered into without prior permission of RBI, FEMA provides that any person may sell or draw foreign exchange for such transactions and then specifies the powers of the RBI to regulate the class or limits of such capital account transactions. Thus the basic proposition in the proposed FEMA Bill is positive. FEMA classifies foreign exchange transactions into capital account transactions and current account transactions and amongst the two regulates the former more closely. Under FEMA residential status will not depend upon the intent of the person to reside in India but would depend upon the exact period of his stay in India.

11.06 (d): The provisions of the FEMA Bill aims at consolidating and amending the law relating to foreign exchange with the object of facilitating external trade and payments and for promoting the orderly payment and amendments in foreign exchange markets in India. The FEMA Bill empowers the RBI to authorize persons to deal in foreign securities specifying the conditions for the same. It also provides for a person resident in India in holding, owning, transferring or investing in foreign security and for a person resident out side India in holding, owning, transferring or investing in Indian Securities.

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