Deliberation and Examination by the Expert Group

A paper containing Iew suggestions to amend the SEBI Act was prepared as a base material Ior
discussion and deliberation by the Group. The said paper was sent to the representatives oI all
stakeholders and market participants inviting their comments thereon and Iurther suggestions
regarding amendments in the SEBI Act.
The names oI the stakeholders Irom whom the comments were sought are given in the annexure
A` hereto. The Group received detailed comments to the proposals Irom certain stakeholders
whose names are given in the annexure B` hereto. The Group deliberated on the proposals made
regarding amendments to SEBI Act in the light oI comments thereon received Irom the
stakeholders in its various meetings held on October 27, 2004, December 20, 2004, February 4,
2005, March 10, 2005, April 11, 2005, May 3, 2005, June 14, 2005 and on June 15, 2005 . AIter
deliberating on the said proposals and comments oI stakeholders, the Group seeks to make
recommendations in respect oI the Iollowing proposals:- I Proposed Amendments Ior
incorporating new provisions in the SEBI Act. II Proposed Amendments Ior changes in the
existing provisions III Consequential and related amendments in other Acts.
'''PAR1 OAE'''
edit] Proposed Amendments for incorporating new provisions in the SEBI Act
edit] 1.1 Investor Protection Fund
SEBI has been created inter alia Ior the purpose oI protecting the interests oI investors in
securities. The investor education is more relevant in the context oI complexities involved in
various options and instruments oI investments available in the securities market. Retail
investors are not in a position to identiIy and /or appreciate the risk Iactors associated with
certain scrips or schemes. With the result they are not able to make inIormed investment
decisions. Since development oI securities market largely depends upon proper education oI
investors, SEBI is committed to spread awareness amongst them.
The Joint Parliamentary Report (JPC) on securities scam oI 2001 had recommended that in order
to enable SEBI to undertake investor education and awareness campaign eIIectively, the investor
education and protection Iund established under section 205C oI the Companies Act and investor
education resources oI RBI should be shiIted to SEBI and a joint campaign Ior investor
education and awareness under the leadership oI SEBI must be undertaken.
The Group noted that majority oI the stakeholders have agreed Ior the setting up oI a separate
investor protection Iund under the SEBI Act. It is also suggested by the stakeholders that the said
Iund should be utilized exclusively Ior the purpose oI investor education, conducting awareness
programme and Ior protecting the interest oI investors.
The Group also noted that the proposed Investor Protection Fund is Ior the purpose oI achieving
the objective oI Investor Education and awareness.
In terms oI section 55A oI the Companies Act, SEBI is required to administer the provisions oI
sections speciIied in section 55A in respect oI issue oI capital, transIer oI securities and non
payment oI dividend in case oI listed companies and the companies which intend to get their
securities listed on the stock exchange. Further, SEBI is required to protect the interest oI
investors and enIorce redressal oI grievances oI investors by listed companies.
In the light oI the above provisions, the Group also discussed the proposition regarding payment
oI compensation to investors Ior the purpose oI investor protection. In this regard, the Group also
deliberated on the suggestion Ior setting up oI a Fund on the lines oI Fair Fund established under
the Sarbanes Oxley Act, 2002 oI United States which is used Ior compensating the investors out
oI the penalties received. Another view was expressed during deliberations that the investors in
the equity market invest in risk capital and no assured return or compensation Ior non IulIilment
oI every expectation may be provided in the statute. However, compensation in respect oI Iraud
or misrepresentations or misstatements by companies or intermediaries may be considered.
Further the Group noted that the Pension Fund Regulatory and Development Authority,
Ordinance, 2004 which mandated the Pension Fund Regulatory and Development Authority
(PFRDA) to protect the interest oI subscribers to the schemes oI pension Iunds has permitted
PFRDA to set up the Subscriber Education and Protection Fund. The said Ordinance also
speciIies the monies which should be credited to the said Subscriber Education and Protection
Fund. The said Ordinance also provides that all sums realised by way oI penalties by PFRDA
under the Ordinance shall be credited to the Subscriber Education and Protection Fund.
The Group Ielt that to achieve the objective oI investor protection by investor education and
investor awareness, a separate Iund under the SEBI Act on the lines oI Subscriber Education and
Protection Fund under PFRDA Ordinance 2004 to be administered by SEBI may be set up and
administered by SEBI Ior investor education and awareness. Further, the compensation to small
investors in respect oI Iraud or misrepresentations or misstatements by companies or
intermediaries may be considered as a matter oI investor protection out oI the said Investor
Protection Fund. In this regard it is Ielt desirable that SEBI may speciIy guidelines and
parameters Ior administration oI the Investor Protection Fund the Ior the purpose oI Investor
Education and Awareness and payment oI compensation to small investors. In this regard, the
guidelines issued by SEBI in respect oI Investor Protection Fund oI stock exchanges may be
adopted with necessary changes.
As regards the monies to be credited to the said Investor Protection Fund, the Group took into
consideration the representation oI the National Stock Exchange that the big stock exchanges are
utilising the monies Ior the purpose suitably. The Group also noted that the monies lying with the
IPF oI small stock exchanges are not being utilised to the Iull satisIaction. It is considered that
the monies lying unutilized Ior substantial period in the Investor Protection Fund oI the stock
exchanges should be transIerred to the proposed Investor Protection Fund.
The unclaimed dividend and interest lying with the mutual Iund and Collective Investment
Schemes or venture capital Iunds and the unclaimed monies or securities oI the clients lying with
the intermediaries Ior a period oI 7 years should be used in a purposeIul manner.
Further, all sums realised by way oI penalties imposed by the Adjudicating OIIicer under
Chapter VIA oI the SEBI Act, should be credited to the proposed Investor Protection Fund.
edit] 1.2 Recommendation of the Group
The Group recommends that a separate Investor Protection Fund under the SEBI Act, on the
lines oI Subscriber Education and Protection Fund under PFRDA Ordinance 2004 may be
established Ior the purpose oI investor education and awareness and Ior compensation to the
small investors in respect oI Iraud or misrepresentations or misstatements by companies or
intermediaries.
The said Iund be administered by SEBI to protect the investors and take measures Ior investor
education and awareness and Ior compensation to the small investors in accordance with the
established guidelines or parameters speciIied by SEBI on the lines oI the guidelines in respect
oI stock exchanges.
There shall be credited to the said Iund the Iollowing amounts, namely a)unclaimed dividend or
interest under any mutual Iund or Collective Investment Scheme (CIS) or venture capital Iund
scheme Ior more than 7 years; b) any unclaimed money or securities oI a client lying with an
intermediary in securities market Ior more than 7 years; c) monies lying unutilised in the Investor
Protection Funds oI the stock exchanges; d) all sums realised by way oI monetary penalty under
Chapter VIA oI SEBI Act.
edit] 1.3 Nomination Facility
The concept oI nomination has been recognized under section 109 oI the Companies Act, 1956,
Section 45ZA oI the Banking Regulation Act, 1949 and Section 39A oI the UTI Act, 1963 (since
repealed). Under the aIoresaid provisions, nominee oI a shareholder or debenture holder,
depositor or unit holder is entitled to the rights in securities or money held by the deceased to the
exclusion oI all other persons, notwithstanding anything contained in any other law Ior the time
being in Iorce including the testamentary laws. However, SEBI Act does not contain any such
provision oI nomination Iacility Ior the unit holders oI mutual Iunds and collective investment
schemes.
The Group noted that SEBI (Mutual Funds) Regulations, 1996 provide Ior nomination Iacility to
the unit holders. The Group Ielt that the provision Ior nomination Iacility is investor Iriendly but
such provision should exist in the parent Act and not in the Regulations.
However, the Group is not in Iavour oI giving any overriding eIIect as provided under section
109 oI the Companies Act, 1956 wherein the nominee`s rights can deIeat the claim oI a legal
heir.
edit] 1.4 Recommendation of the Group
In view oI the above, the Group recommends Ior a suitable amendment in the SEBI Act Ior the
incorporation oI a provision to provide nomination Iacility to the unit holders oI Mutual Funds
and Collective Investment Schemes.
edit] 1.5 Advance Ruling
The Group was inIormed that SEBI receives a number oI requests Irom various market
participants Ior advance guidance on the interpretation oI the provisions oI SEBI Act and
Regulations. As SEBI Act does not contain speciIic provisions like section 245B to section 245N
oI the Income Tax Act, 1961 authorising SEBI to give advance ruling, SEBI has evolved a
system oI giving interpretive letters/no action letters under the provisions oI SEBI (InIormal
Guidance) Scheme, 2003. However, the guidance given under the scheme does not equate with
the advance ruling under the Income Tax Act as it is not binding on SEBI Board.
The advance ruling system Ior the securities market would have the advantage oI a market
participant being able to obtain a binding ruling on the applicability oI a particular provision oI
Securities Laws to a proposed transaction, beIore actually undertaking such transaction.
The Group Ielt that the system oI advance ruling is certainly better than that oI inIormal guidance
given under the said scheme as the advance ruling given by SEBI would be binding on its Board.
The binding eIIect provides, not only more comIort Ior the market participants, it also provides
better legal status to the whole mechanism.
However, in view oI the smooth and satisIactory Iunctioning oI the InIormal Guidance Scheme
in vogue, the Group Ielt that SEBI should analyse the option very careIully as the move oI
shiIting Irom the scheme to advance ruling would require setting up oI a separate department and
inIrastructure on the lines oI Income Tax Act.
edit] 1.6 Recommendations of the Group
The Group recommends that as legally the advance ruling is preIerable the adoption oI the same
may be considered and the InIormal Guidance Scheme may also continue.
edit] 1.7 Self Regulatory Organisation (SRO)
The Group noted that section 11(2) (d) oI the SEBI Act provides Ior promoting and regulating
SRO. SEBI Act, however does not have speciIic provision Ior empowering SRO to make bye-
laws having statutory Iorce Ior admission oI members. Further, SEBI Act does not have
provisions relating to supersession oI governing boards oI SROs by SEBI or restricting the
voting right oI members oI SROs, notwithstanding anything contained in the Companies Act,
1956. Proposed amendments seek to conIer such powers on SEBI.
The Group noted that SEBI has already Iramed regulations, namely, SEBI (SelI Regulatory
Organisations) Regulations, 2004 under section 30 read with section 11(2)(d) oI the SEBI Act
Ior regulating the SROs, which require inter alia SROs to seek recognition Irom SEBI. The
Regulations also empower the SRO`s to make rules and bye laws with the approval oI SEBI.
Regulation 23 oI the Regulation governing SRO`s, provides Ior the power oI SEBI to withdraw
the recognition. In view oI the said power, the Group Ielt that SEBI is already having the
requisite power to require the SROs to regulate their activities in accordance with the
Regulations. Consequently, there may not be any need Ior the amendment oI the SEBI Act.
edit] 1.8 Recommendation of the Group
The Group recommends that there is no necessity oI amending the SEBI Act as proposed. The
Regulations Iramed by SEBI should suIIice to address the concern oI SEBI, as a regulator oI
SROs.
edit] 1.9 Rectification of errors in orders
The Group noted that there is no provision in the SEBI Act, which empowers SEBI to rectiIy the
clerical or typographical errors apparent in its own orders. A view was also expressed that SEBI
does not have powers to review its own orders even in cases when orders are passed ex parte.
The Group observed that 'Review oI orders appears to give substantive powers which are
usually not available with Authorities having original jurisdiction. However, the Group Ielt that
enabling SEBI to rectiIy clerical or typographical errors apparent on the Iace oI its order on the
lines oI section 26 (2) oI the Recovery oI Debts Due to Banks and Financial Institutions Act,
1993 is desirabl ans Ids
edit] 1.10 Recommendation of the Group
An amendment should be made in the SEBI Act to enable SEBI to rectiIy clerical or
typographical errors apparent on the Iace oI its order, on the lines oI section 26 (2) oI the
Recovery oI Debts Due to Banks and Financial Institutions Act, 1993.
edit] 1.11 Retrospective effect
The Group noted that the existing provisions oI SEBI Act do not empower SEBI to Irame the
regulations with retrospective eIIect even Ior the limited purpose oI giving relieI to the market
participants.
The Group Ielt that SEBI may be empowered to make regulations with retrospective eIIect in
respect oI matters relating to charging oI Iees or procedural matters on the lines oI the Income
Tax Act Ior the limited purpose oI giving relieI and not Ior imposing new liabilities and
obligations. According to the Group such a benevolent provision may remove undue hardship to
market participants in certain cases and hence should be viewed with Iavour.
edit] 1.12 Recommendation of the Group
The Group recommends that the SEBI Act may be amended on the lines oI section 295(4) oI the
Income Tax Act, 1961 to empower SEBI to make regulations with retrospective eIIect in respect
oI matters relating to charging oI Iees or procedural matters Ior the limited purpose oI giving
relieI and beneIit and not Ior imposing new liabilities and obligations.
edit] 1.13 Overriding Effect
The Group discussed the suggestion to amend SEBI Act in order to provide overriding eIIect to
SEBI Act over other laws in the matter oI securities. In order to assess the need Ior such an
amendment, the Group tried to identiIy those substantive provisions oI the SEBI Act that deserve
to be given an overriding eIIect. AIter due consideration, the Group Ielt that SEBI Act does not
contain any such substantive provisions which deserve to be given an overriding eIIect. It also
noted that where ever the substantive provisions deserved to be given an overriding eIIect, the
SEBI Act has already done by non obstante clause.
edit] 1.14 Recommendation of the Group
The Group recommends that SEBI Act may not be amended Ior giving an overriding eIIect to the
SEBI Act over other laws.
edit] 1.15 Power to issue circulars
The Group examined the proposal to amend the provisions oI SEBI Act Ior giving statutory
power to SEBI to issue circulars and guidelines.
The Group noted that SEBI has been issuing circulars and guidelines under section 11 oI the
SEBI Act. The Group Ielt that there is no legal inIirmity in issuing circulars or guidelines under
the existing provisions oI section 11 which is the source oI inherent powers oI SEBI.
edit] 1.16 Recommendation of the Group
The Group recommends that SEBI Act may not be amended Ior inserting a speciIic provision Ior
the issuance oI circular and guidelines as SEBI has inherent powers to do so under Section 11 oI
the SEBI Act.
edit] 1.17 Transaction / Issue of securities to be treated void in certain circumstances
The Group was inIormed that in cases oI Iraudulent issue oI securities, excess dematerialisation
oI securities etc. SEBI should be empowered to declare such transactions as void. For this
purpose suitable provisions in the SEBI Act on the lines oI section 9(3) & section 14 oI the
SCRA may be made to provide that such transaction, iI they are in violation oI any speciIied
regulation, shall be void.
The Group Ielt that such power should be perIormed by an independent body, preIerably by the
civil courts. Administrative bodies may not be conIerred with such jurisdiction.
edit] 1.18 Recommendation of the Group
SEBI Act should not be amended as proposed. Such power should preIerably be leIt to be
exercised by a civil court.
edit] 1.19 Winding up of intermediaries
The Group was inIormed that one oI the principles oI Securities Regulations as speciIied by
IOSCO/FSAP is that there should be procedures Ior dealing with the Iailure oI a market
intermediary in order to minimize damage and loss to investors and to contain systemic risk. The
Group noted that there is no speciIic power conIerred upon SEBI under SEBI Act Ior taking
steps Ior winding up oI an intermediary in case such intermediary goes bankrupt or the
continuance oI such intermediary is considered to be detrimental to the interest oI investors or
clients oI such intermediary.
The Group noted that Reserve Bank oI India (RBI) has power to Iile winding up petitions against
a Non Banking Finance Company under section 45 MC oI RBI Act. The Group Ielt that SEBI
should have similar power to Iile winding up petition under SEBI Act.
The Group Iurther observed that in case oI winding up oI such intermediary company, the claim
oI the clients oI such intermediary should have priority over other claims or debts i.e. even over
secured creditors and sovereigns authorities such as Income Tax. The Group in this regard noted
that under Section 43A oI Banking Regulation Act, 1949 there is a provision Ior the preIerential
payment to depositors in priority to all other debts Irom out oI assets oI the Banking Company.
The Group Ielt that similar provisions should also be made in respect oI claims oI clients oI
intermediary companies while empowering SEBI to Iile a winding up petition against an
intermediary in case such intermediary goes bankrupt or the continuance oI such intermediary is
considered to be detrimental to the interest oI investors or clients oI such intermediary.
edit] 1.20 Recommendation of the Group
The Group recommends that suitable provision in the SEBI Act may be made to enable SEBI to
Iile winding up petition in respect oI the intermediary companies on the lines oI section 45MC oI
the Reserve Bank oI India Act and section 43A oI Banking Regulation Act.
edit] 1.21 Non attachment of assets of clients with intermediaries
The Group noted that one oI the IOSCO principles Ior securities market regulations is that the
regulatory system should enable the pool oI investors` Iunds to be distinguished and segregated
Irom the assets oI other entities. Further, the investors should be protected Irom misleading,
manipulative or Iraudulent practices, including insider trading, Iront running or trading ahead oI
customers and the misuse oI client assets.
It was brought to the notice oI the Group that by the Securities Laws (Amendment) Bill, 2003, a
section 27B was proposed to be inserted in the Securities Contracts (Regulation) Act, to provide
that an investor may entrust his money or securities to any intermediary who shall hold such
money or securities in trust and shall deal with them as directed by the investors. Such monies
and securities shall not be part oI the assets oI the intermediaries and no authority shall attach or
seize such assets oI investors. However, in the Securities Laws (Amendment) Act, 2005 this
provision was omitted.
The Group observed that the money or securities entrusted by an investor to an intermediary
should be held by such intermediary in trust oI such investors. Such money or securities oI
investors should not Iorm part oI asset oI intermediary and no authority shall attach or seize such
assets oI investors which are in custody or possession oI such intermediary.
edit] 1.22 Recommendation of the Group
The Group recommends that there should be a speciIic provision in the SEBI Act to the eIIect
that the monies or securities oI the clients should be held in the Iorm oI a trust by intermediaries
and no authority shall attach or seize such assets oI investors which are in possession oI the
intermediary. For this purpose the provisions as proposed in the Securities Laws (Amendment)
Bill, 2003 may be made.


SEBI Guidelines for IPOs
1. IPOs of small companies
Public issue of less than five crores has to be through OTCEI and separate guidelines
apply for floating and
listing of these issues.
(Public Offer By Small Unlisted Companies)
2. Size of the Public Issue
Issue of shares to general public cannot be less than 25% of the total issue, incase of
information technology,
media and telecommunication sectors this stipulation is reduced subject to the conditions
that:

O Offer to the public is not less than 10% of the securities issued.
O minimum number of 20 lakh securities is offered to the public and
O $ize of the net offer to the public is not less than Rs. 30 crores.
. Promoter Contribution
O Promoters should bring in their contribution including premium fully before the issue
O inimum Promoters contribution is 20-25% of the public issue.
O inimum Lock in period for promoters contribution is five years
O inimum lock in period for firm allotments is three years.
. Collection centers for receiving applications
O There should be at least 30 mandatory collection centers, which should include
invariably the places where stock exchanges have been established.
O or issues not exceeding Rs.10 crores (including premium, if any), the collection
centres shall be situated at:-
o the four metropolitan centres viz. Bombay, Delhi, Calcutta, adras; and
o at all such centres where stock exchanges are located in the region in which the
registered office of
the company is situated.
5. Regarding allotment of shares
O et Offer to the General Public has to be at least 25% of the Total Issue $ize for
listing on a $tock exchange.
O It is mandatory for a company to get its shares listed at the regional stock exchange
where the registered office of the issuer is located.
O In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue
by book-building
O inimum of 50% of the et offer to the Public has to be reserved for Investors
applying for less than 1000 shares.
O There should be atleast 5 investors for every 1 lakh of equity offered (not applicable
to infrastructure companies).
O "uoting of Permanent ccount umber or GIR o. in application for allotment of
securities is compulsory where monetary value of Investment is Rs.50,000/- or
above.
O Indian development financial institutions and utual und can be allotted securities
upto 75% of the Issue mount.
O Venture Capital und shall not be entitled to get its securities listed on any stock
exchange till the expiry of 3 years from the date of issuance of securities.
O llotment to categories of IIs and RIs/OCBs is upto a maximum of 24%, which can
be further extended to 30% by an application to the RBI - supported by a resolution
passed in the General eeting.
6. Timeframes for the Issue and Post- Issue formalities
O The minimum period for which a public issue has to be kept open is 3 working days
and the maximum for which it can be kept open is 10 working days. The minimum
period for a rights issue is 15 working days and the maximum is 60 working days.
O public issue is effected if the issue is able to procure 90% of the Total issue size
within 60 days from the date of earliest closure of the Public Issue. In case of over-
subscription the company may have the right to retain the excess application money
and allot shares more than the proposed issue, which is referred to as the `green-
shoe option.
O rights issue has to procure 90% subscription in 60 days of the opening of the
issue.
O llotment has to be made within 30 days of the closure of the Public Issue and 42
days in case of a Rights issue.
O ll the listing formalities for a public Issue has to be completed within 70 days from
the date of closure of the subscription list.
7. Despatch of Refund Orders
O Refund orders have to be dispatched within 30 days of the closure of the Public
Issue.
O Refunds of excess application money i.e. for un-allotted shares have to be made
within 30 days of the closure of the Public Issue.
8. Other regulations pertaining to IPO
O &nderwriting is not mandatory but 90% subscription is mandatory for each issue of
capital to public unless it is disinvestment in which case it is not applicable.
O If the issue is undersubscribed then the collected amount should be returned back
(not valid for disinvestment issues).
O If the issue size is more than Rs. 500 crores voluntary disclosures should be made
regarding the deployment of the funds and an adequate monitoring mechanism to be
put in place to ensure compliance.
O There should not be any outstanding warrants or financial instruments of any other
nature, at the time of initial public offer.
O In the event of the initial public offer being at a premium, and if the rights under
warrants or other instruments have been exercised within the twelve months prior to
such offer, the resultant shares will not be taken into account for reckoning the
minimum promoter's contribution and further, the same will also be subject to lock-
in.
O Code of advertisement specified by $EBI should be adhered to.
O Draft prospectus submitted to $EBI should also be submitted simultaneously to all
stock exchanges where it is proposed to be listed.
9. Restrictions on other allotments
O irm allotments to mutual funds, IIs and employees not subject to any lock-in
period.
O ithin twelve months of the public/rights issue no bonus issue should be made.
O aximum percentage of shares, which can be distributed to employees cannot be
more than 5% and maximum shares to be allotted to each employee cannot be more
than 200.
10. Relaxations to public issues by infrastructure companies.
These relaxations would be applicable to Infrastructure Companies as defined under
$ection 10(23G)
of the Income Tax ct, 1961, provided their projects are appraised by any Developmental
inancial
Institution (DI) or IDC or IL&$. The projects must also have a participation of at least
5% of the
project cost (in debt and/or equity) by the appraising institution.

O The infrastructure companies will be exempted from the requirement of making a
minimum public offer of 25 per cent of its securities.
O The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of
offerings by infrastructure companies.
O or public issues by infrastructure companies, minimum subscription of 90% would
no longer be mandatory provided disclosure is made about the alternate source of
funding which the company has considered, in the event of under subscription in the
public issue.
O Infrastructure companies are permitted to freely price the offerings in the domestic
market provided that the promoter companies along with Equipment $uppliers and
other strategic investors subscribe to 50% of the equity at the same or a higher price
than what is being offered to the public. dequate disclosures about the justification
for the pricing will be required to be made in the offer documents.
O The Infrastructure Companies would be allowed to keep their issues open for 21
days. The relaxation would give infrastructure companies sufficient time to mobilise
funds for their issues.
O Infrastructure Companies would not be required to create and maintain a Debenture
Redemption Reserve (DRR) in case of Debenture Issues.



|ntroduct|on
In 1988 the Securities and Exchange Board oI India (SEBI) was established by the Government
oI India through an executive resolution, and was subsequently upgraded as a Iully autonomous
body (a statutory Board) in the year 1992 with the passing oI the Securities and Exchange Board
oI India Act (SEBI Act) on 30th January 1992. In place oI Government Control, a statutory and
autonomous regulatory board with deIined responsibilities, to cover both development &
regulation oI the market, and independent powers have been set up. Paradoxically this is a
positive outcome oI the Securities Scam oI 1990-91.

The basic objectives of the Board were identified as:
O to protect the interests oI investors in securities;
O to promote the development oI Securities Market;
O to regulate the securities market and
O Ior matters connected therewith or incidental thereto.

Since its inception SEBI has been working targetting the securities and is attending to the
IulIillment oI its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment oI clearing
corporations etc. reduced the risk oI credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the
eligibility criteria, the code oI obligations and the code oI conduct Ior diIIerent intermediaries
like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portIolio managers,
credit rating agencies, underwriters and others. It has Iramed bye-laws, risk identiIication and
risk management systems Ior Clearing houses oI stock exchanges, surveillance system etc. which
has made dealing in securities both saIe and transparent to the end investor.

Another signiIicant event is the approval oI trading in stock indices (like S&P CNX NiIty &
Sensex) in 2000. A market Index is a convenient and eIIective product because oI the Iollowing
reasons:
O It acts as a barometer Ior market behavior;
O It is used to benchmark portIolio perIormance;
O It is used in derivative instruments like index Iutures and index options;
O It can be used Ior passive Iund management as in case oI Index Funds.

Two broad approaches oI SEBI is to integrate the securities market at the national level, and also
to diversiIy the trading products, so that there is an increase in number oI traders including
banks, Iinancial institutions, insurance companies, mutual Iunds, primary dealers etc. to transact
through the Exchanges. In this context the introduction oI derivatives trading through Indian
Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

SEBI appointed the . C. Gupta Committee in 1998 to recommend the regulatory Iramework
Ior derivatives trading and suggest bye-laws Ior Regulation and Control oI Trading and
Settlement oI Derivatives Contracts. The Board oI SEBI in its meeting held on May 11, 1998
accepted the recommendations oI the committee and approved the phased introduction oI
derivatives trading in India beginning with Stock Index Futures. The Board also approved the
"Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee Ior Regulation and
Control oI Trading and Settlement oI Derivatives Contracts.

SEBI then appointed the 1. R. Verma Committee to recommend Risk Containment Measures
(RCM) in the Indian Stock Index Futures Market. The report was submitted in november 1998.

However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to
include "derivatives" in the deIinition oI securities to enable SEBI to introduce trading in
derivatives. The necessary amendment was then carried out by the Government in 1999. The
Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new Iramework
was approved.

Derivatives have been accorded the status oI `Securities'. The ban imposed on trading in
derivatives in 1969 under a notiIication issued by the Central Government was revoked.
ThereaIter SEBI Iormulated the necessary regulations/bye-laws and intimated the Stock
Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE
started trading in the year 2001.



MUTUAL FUND GUIDE LINES
1) First, Ior New Fund OIIers (NFOs): They will only be open for 15 days. (ELSS Iunds though will continue to
stay open Ior up to 90 days) It will save investors Irom a prolonged NFO period and being harangued by advisors
and advertisements. The motivation behind the rule seems to be simple iI you can invest anytime, why keep NFO
period long?

2) NFOs can only be invested at the close of the NFO period. Earlier, Mutual Iunds would keep an NFO open Ior
30 days, and the minute they received their Iirst cheque, the money would be directly invested in the market;
creating a skewed accounting Ior those that entered later since they get a Iixed NFO price.

The market regulator has corrected this by extending Application Supported by Blocked Amount (ASBA) to mutual
Iunds. This will become eIIective starting July 1
st
this year.

By the ASBA process (Application Supported by Blocked Amount) one can continue to earn interest in the bank
account until the NFO closes (remember there is usually no rejection or 'oversubscription in a mutual Iund NFO)
which means that the cheque goes Ior clearing aIter the NFO has closed irrespective oI when it was sent. The Iund
manager will be able to invest once the NFO closes.

3) Dividends can now only be paid out of actually realized gains. Impact: it will reduce both the quantum oI
dividends announced, and the measures used by MFs to garner investor money using dividend as a carrot to entice
new investors.

4) Equity Mutual Iunds have been asked to play a more active role in corporate governance oI the companies they
invest in. This will help mutual Iunds become more active and not just that, they must reveal, in their annual reports
Irom next year, what they did in each 'vote. SEBI has now made it mandatory Ior Iunds to disclose whether they
voted Ior or against moves (suggested by companies in which they have invested) such as mergers, demergers,
corporate governance issues, appointment and removal oI directors. MFs have to disclose it on their website as well
as annual reports.

5) Equity Funds were allowed to charge 1 more as management Iees iI the Iunds were 'no-load; but since SEBI
has banned entry loads, this extra 1 has also been removed.

6) SEBI has also asked Mutual Funds to reveal all commission paid to it`s sponsor or associate companies,
employees and their relatives.

7) Regarding the Fund-of-Fund (FOF) The market regulator has stated that inIormation documents that Asset
Management Companies (AMCs) have been entering into revenue sharing arrangements with oIIshore Iunds in
respect oI investments made on behalI oI Fund oI Fund schemes create conIlict oI interest. HenceIorth, AMCs shall
not enter into any revenue sharing arrangement with the underlying Iunds in any manner and shall not receive any
revenue by whatever means/head Irom the underlying Iund.

These guidelines set by the SEBI will lead to greater transparency Ior the common investor. SEBI Iormulates
policies and regulates the mutual Iunds to protect the interest oI the investors. With these guidelines Ialling in place
it would create better trust and transparency and an investable environment that would attract investors with greater
Iaith and conIidence. A welcome & reIreshing move!

SEBI ADMINISTRATION
1he SecurlLles and Lxchange 8oard of lndla AcL 1992 ls havlng reLrospecLlve effecL and ls deemed Lo
have come lnLo force on !anuary 30 1992 8elaLlvely a brlef acL conLalnlng 33 secLlons Lhe SL8l AcL
governs all Lhe SLock Lxchanges and Lhe SecurlLles 1ransacLlons ln lndla

A 8oard by Lhe name of Lhe SecurlLles and Lxchange 8oard of lndla (SL8l) was consLlLuLed under Lhe
SL8l AcL Lo ammlnlsLer lLs provlslons lL conslsLs of one Chalrman and flve members

Cne each from Lhe deparLmenL of llnance and Law of Lhe CenLral CovernmenL one from Lhe 8eserve
8ank of lndla and Lwo oLher persons and havlng lLs head offlce ln 8ombay and reglonal offlces ln uelhl
CalcuLLa and Madras

1he CenLral CovernmenL reserves Lhe rlghL Lo LermlnaLe Lhe servlces of Lhe Chalrman or any member of
Lhe 8oard 1he 8oard decldes quesLlons ln Lhe meeLlng by ma[orlLy voLe wlLh Lhe Chalrman havlng a
second or casLlng voLe

SecLlon 11 of Lhe SL8l AcL provldes LhaL Lo proLecL Lhe lnLeresL of lnvesLors ln securlLles and Lo promoLe
Lhe developmenL of and Lo regulaLe Lhe securlLles markeL by such measures lL ls Lhe duLy of Lhe 8oard
lL has glven power Lo Lhe 8oard Lo regulaLe Lhe buslness ln SLock Lxchanges reglsLer and regulaLe Lhe
worklng of sLock brokers subbrokers share Lransfer agenLs bankers Lo an lssue LrusLees of LrusL
deeds reglsLrars Lo an lssue merchanL bankers underwrlLers porLfollo managers lnvesLmenL advlsers
eLc also Lo reglsLer and regulaLe Lhe worklng of collecLlve lnvesLmenL schemes lncludlng muLual funds
Lo prohlblL fraudulenL and unfalr Lrade pracLlces and lnslder Lradlng Lo regulaLe Lakeovers Lo conducL
enqulrles and audlLs of Lhe sLock exchanges eLc

All Lhe sLock brokers subbrokers share Lransfer agenLs bankers Lo an lssue LrusLees of LrusL deed
reglsLrars Lo an lssue merchanL bankers underwrlLers porLfollo managers lnvesLmenL advlsers and
such oLher lnLermedlary who may be assoclaLed wlLh Lhe SecurlLles MarkeLs are Lo reglsLer wlLh Lhe
8oard under Lhe provlslons of Lhe AcL under SecLlon 12 of Lhe Sebl AcL 1he 8oard has Lhe power Lo
suspend or cancel such reglsLraLlon 1he 8oard ls bound by Lhe dlrecLlons vesLed by Lhe CenLral
CovernmenL from Llme Lo Llme on quesLlons of pollcy and Lhe CenLral CovernmenL reserves Lhe rlghL Lo
supersede Lhe 8oard 1he 8oard ls also obllged Lo submlL a reporL Lo Lhe CenLral CovernmenL each year
glvlng Lrue and full accounL of lLs acLlvlLles pollcles and programmes Any one of Lhe aggrleved by Lhe
8oards declslon ls enLlLled Lo appeal Lo Lhe CenLral CovernmenL