Unit 3: Securities Markets Acts and Regulations

I. SEBI Act 1992

• Sections 11: Powers and Functions of the Board

1. General Duties

• Primary Duty: To protect investor interests, promote the securities market's

development, and regulate it through appropriate measures.

2. Specific Powers and Measures

• Regulate Stock Exchanges and Securities Markets: Ensures the proper functioning
of stock exchanges and securities markets.
• Register and Regulate Intermediaries:
o Includes stock brokers, sub-brokers, share transfer agents, merchant bankers,
portfolio managers, etc.
• Regulate Depositories and Other Entities: Covers depositories, custodians, credit
rating agencies, foreign institutional investors, and other market intermediaries.
• Regulate Venture Capital and Collective Investment Schemes: Oversees entities
like venture capital funds and mutual funds.
• Self-Regulatory Organizations: Promotes and regulates such organizations.
• Prevent Fraudulent Trade Practices: Prevents unfair and deceptive practices in the
market.
• Investor Education and Intermediary Training: Promotes awareness and education
for investors, as well as training for intermediaries.
• Prevent Insider Trading: Enforces regulations to stop insider trading.
• Regulate Takeovers and Substantial Share Acquisitions: Manages regulations
regarding the acquisition of shares and company takeovers.

3. Information and Inquiry Powers

• Inspection and Inquiry:

o Can inspect stock exchanges, mutual funds, and intermediaries.
o Can also inspect listed or intending-to-list companies if suspected of insider
trading or unfair practices.
• Gathering Information from Third Parties: May request information from banks,
government bodies, or other organizations.
• International Cooperation: Can exchange information with foreign authorities for
preventing or detecting securities violations, with Central Government's prior
approval.

4. Judicial Powers

• When exercising powers under certain clauses, the Board has civil court powers for:
o Discovery and production of documents.
o Summoning and examining witnesses.
o Inspecting records.
o Issuing commissions for examining witnesses or documents.
5. Enforcement Actions

• Suspending Trading: Can suspend trading of any security.

• Market Access Restrictions: Can prevent individuals from trading in the securities
market.
• Suspending Exchange Officials: Can suspend officials of stock exchanges or self-
regulatory bodies.
• Impounding Proceeds: Can impound proceeds or securities related to a transaction
under investigation.
• Freezing Bank Accounts: With judicial approval, can temporarily freeze bank
accounts if involved in rule violations.
• Restricting Asset Disposal: Can restrict entities or persons from disposing of assets
tied to investigations.

6. Disgorgement and Investor Protection Fund

• Any money recovered through disgorgement (compelled repayment of illegally

gained profits) will go into the Investor Protection and Education Fund, used per
Board regulations.

• Section 11AA: Collective Investment Scheme

Definition of a Collective Investment Scheme (CIS)

• General Definition: Any scheme or arrangement that meets certain criteria (listed in
point 2 below) will be classified as a Collective Investment Scheme.
• Threshold Clause: Any unregistered scheme pooling funds with a corpus of ₹100
crore or more will automatically be considered a CIS.

2. Conditions for a Scheme to be Classified as a CIS

• Pooling of Funds: The scheme pools contributions or payments from investors for a
common purpose.
• Expectation of Returns: Investors contribute with the expectation of profits, income,
or benefits in the form of produce or property.
• Managed on Behalf of Investors: The pooled funds or assets are managed by the
scheme on behalf of investors.
• Lack of Investor Control: Investors do not have daily control over how the scheme
is managed or operated.

3. Additional Conditions (as per Regulations)

• Schemes or arrangements that meet further specified conditions, as detailed in the

Act's regulations, may also be classified as CIS.

4. Exceptions: Schemes that are Not Classified as CIS

• Certain schemes or arrangements are excluded from being classified as CIS,

including:
 o Co-operative Societies: Schemes offered by co-operative societies registered
under the Co-operative Societies Act or similar state laws.
o Non-Banking Financial Companies (NBFCs): Schemes where deposits are
accepted by NBFCs regulated under the RBI Act.
o Insurance Contracts: Insurance contracts governed by the Insurance Act.
o Pension or Provident Schemes: Schemes under the Employees Provident
Fund and Miscellaneous Provisions Act.
o Company Deposits: Deposits accepted under Section 58A of the Companies
Act.
o Nidhi Companies or Mutual Benefit Societies: Deposits accepted by
companies recognized as Nidhis or mutual benefit societies.
o Chit Funds: Arrangements falling under the definition of chit business as per
the Chit Fund Act.
o Mutual Funds: Contributions made as subscriptions to mutual funds.
o Other Exclusions by Notification: Any other schemes that the Central
Government, in consultation with the Board, may specify are excluded.

Section 11B: Power to issue directions.

Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the
Board is satisfied that it is necessary,—
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12
being conducted in a manner detrimental to the interest of investors or securities
market; or
(iii) to secure the proper management of any such intermediary or person,
it may issue such directions,—
(a) to any person or class of persons referred to in section 12, or associated with the securities
market; or
(b) to any company in respect of matters specified in section 11A, as may be appropriate in the
interests of investors in securities and the securities market.

Section 11D: Cease and desist proceedings.

If the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to
violate, any provisions of this Act, or any rules or regulations made thereunder, it may pass an order
requiring such person to cease and desist from committing or causing such violation:
Provided that the Board shall not pass such order in respect of any listed public company or a public
company (other than the intermediaries specified under section 12) which intends to get its securities
listed on any recognised stock exchange unless the Board has reasonable grounds to believe that such
company has indulged in insider trading or market manipulation.

Section 12: Registration of stock brokers, sub-brokers, share transfer agents, etc.
(1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust
deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment
adviser and such other intermediary who may be associated with securities market shall buy,
sell or deal in securities except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the 43[regulations] made under this
Act:
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust
deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment
adviser and such other intermediary who may be associated with securities market immediately
before the establishment of the Board for which no registration certificate was necessary prior
to such establishment, may continue to do so for a period of three months from such
establishment or, if he has made an application for such registration within the said period of
three months, till the disposal of such application:

[Provided further that any certificate of registration, obtained immediately before the
commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been
obtained from the Board in accordance with the regulations providing for such registration.

(1A) No depository, [participant,] custodian of securities, foreign institutional investor, credit

rating agency, or any other intermediary associated with the securities market as the Board may
by notification in this behalf specify, shall buy or sell or deal in securities except under and in
accordance with the conditions of a certificate of registration obtained from the Board in
accordance with the regulations made under this Act:

Provided that a person buying or selling securities or otherwise dealing with the securities
market as a depository, 46[participant,] custodian of securities, foreign institutional investor
or credit rating agency immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of registration was required prior to such
commencement, may continue to buy or sell securities or otherwise deal with the securities
market until such time regulations are made under clause (d) of sub-section (2) of section 30.

(1B) No person shall sponsor or cause to be sponsored or carry on or caused to be carried on

any venture capital funds or collective investment schemes including mutual funds, unless he
obtains a certificate of registration from the Board in accordance with the regulations:

Provided that any person sponsoring or causing to be sponsored, carrying or causing to be

carried on any venture capital funds or collective investment schemes operating in the
securities market immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of registration was required prior to such
commencement, may continue to operate till such time regulations are made under clause (d)
of sub-section (2) of section 30.]

(2) Every application for registration shall be in such manner and on payment of such fees as
may be determined by regulations.
(3) The Board may, by order, suspend or cancel a certificate of registration in such manner as
may be determined by regulations:
Provided that no order under this sub-section shall be made unless the person concerned has
been given a reasonable opportunity of being heard.

Simplified:

• Requirement for Registration:

• No intermediaries like stock brokers, sub-brokers, share transfer agents, bankers to an

issue, trustees, registrars, merchant bankers, underwriters, portfolio managers,
investment advisers, or others involved with the securities market can buy, sell, or
deal in securities without:
o A certificate of registration from the Board (SEBI).
o Compliance with the conditions specified under this registration.
• Exemption for Existing Participants (Prior to Board Establishment):

• Those already functioning as securities intermediaries (such as stock brokers, sub-

brokers, etc.) before the Board was established, and who didn't need a registration
certificate back then, may continue their activities:
o For three months from the Board's establishment, or,
o Until their application for registration (filed within the three months) is
processed.

• Validity of Prior Registrations:

• Certificates of registration obtained before the Securities Laws (Amendment) Act,

1995, are considered valid as per the updated regulations under SEBI.

• Registration for Other Intermediaries:

• Entities like depositories, participants, custodians of securities, foreign institutional

investors, credit rating agencies, and others specified by the Board also need:
o A certificate of registration from SEBI.
o Compliance with the applicable conditions.
• Existing intermediaries before the Securities Laws (Amendment) Act, 1995, who
didn’t previously need registration, may continue operating until SEBI establishes
relevant regulations.

• Registration for Venture Capital Funds and Collective Investment Schemes:

• No one can operate venture capital funds or collective investment schemes (e.g.,
mutual funds) without a SEBI certificate of registration.
• Those operating such funds before the Securities Laws (Amendment) Act, 1995,
without requiring prior registration, may continue until SEBI issues relevant
regulations.

• Application Process for Registration:

• Applications for registration must follow the prescribed format and include applicable
fees as per SEBI regulations.

• Suspension or Cancellation of Registration:

• SEBI has the authority to suspend or cancel a registration certificate if regulations are
violated.
• SEBI must provide a reasonable opportunity for the affected party to present their
case before any suspension or cancellation.

Section 12A: Prohibition of manipulative and deceptive devices, insider trading and
substantial acquisition of securities or control.
No person shall directly or indirectly—
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or
proposed to be listed on a recognized stock exchange, any manipulative or deceptive
device or contrivance in contravention of the provisions of this Act or the rules or the
regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in
securities which are listed or proposed to be listed on a recognised stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as fraud
or deceit upon any person, in connection with the issue, dealing in securities which are
listed or proposed to be listed on a recognised stock exchange, in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or
communicate such material or non-public information to any other person, in a manner
which is in contravention of the provisions of this Act or the rules or the regulations
made thereunder;
(f) acquire control of any company or securities more than the percentage of equity share
capital of a company whose securities are listed or proposed to be listed on a recognised
stock exchange in contravention of the regulations made under this Act.]

Simplify:

• Prohibition Against Manipulative or Deceptive Practices:

• No person may use or employ any manipulative or deceptive method when issuing,
buying, or selling securities listed (or proposed to be listed) on a recognized stock
exchange, in violation of the Act or its regulations.

• Prohibition Against Fraudulent Schemes:

• No person may use any device, scheme, or artifice designed to defraud others in
relation to the issuance or dealing of securities listed (or proposed to be listed) on a
recognized stock exchange.

• Prohibition Against Fraudulent Acts:

• No person may engage in any act, practice, or business activity that could deceive or
defraud someone during the issuance or trading of securities listed (or proposed to be
listed) on a recognized stock exchange, if it violates the Act or regulations.

• Prohibition Against Insider Trading:

• Insider trading (trading based on material, non-public information) is not permitted.

• Restriction on Trading with Non-Public Information:

• No one is allowed to trade securities or share non-public, material information with

others in a way that violates the Act or regulations.

• Prohibition on Unlawful Acquisition of Control:

• No person may acquire control or purchase securities beyond a certain percentage of a

company’s equity share capital (for companies listed or proposed to be listed) if it
violates regulations under this Act.
Section 15A: Penalty for failure to furnish information, return, etc.

If any person, who is required under this Act or any rules or regulations made
Thereunder, —
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall
be liable to a penalty which shall not be less than one lakh rupees but which may
extend to one lakh rupees for each day during which such failure continues subject to a
maximum of one crore rupees.
(b) to file any return or furnish any information, books or other documents within the time
specified therefor in the regulations, fails to file return or furnish the same within the time
specified therefor in the regulations, he shall be liable to a penalty 55[which shall
not be less than one lakh rupees but which may extend to one lakh rupees for each day
during which such failure continues subject to a maximum of one crore rupees]];
(c) to maintain books of account or records, fails to maintain the same, he shall be liable to
a penalty which shall not be less than one lakh rupees but which may extend to one
lakh rupees for each day during which such failure continues subject to a maximum of
one crore rupees.

Establishment of Securities Appellate Tribunals.

15K. (1) The Central Government shall by notification, establish one or more Appellate
Tribunals to be known as the Securities Appellate Tribunal to exercise the jurisdiction,
powers and authority conferred on such Tribunal by or under this Act 91[or any other law for
the time being in force].
(2) The Central Government shall also specify in the notification referred to in sub-section (1)
the matters and places in relation to which the Securities Appellate Tribunal may exercise
jurisdiction.

Staff of the Securities Appellate Tribunal.

15S. (1) The Central Government shall provide the Securities Appellate Tribunal with such
officers and employees as that Government may think fit.
(2) The officers and employees of the Securities Appellate Tribunal shall discharge their
functions under general superintendence of the Presiding Officer.
(3) The salaries and allowances and other conditions of service of the officers and employees
of the Securities Appellate Tribunal shall be such as may be prescribed.

Appeal to Supreme Court.

15Z. Any person aggrieved by any decision or order of the Securities Appellate Tribunal
may file an appeal to the Supreme Court within sixty days from the date of communication
of the decision or order of the Securities Appellate Tribunal to him on any question of law
arising out of such order:
Provided that the Supreme Court may, if it is satisfied that the applicant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding sixty days
 Depositories Act 1996

4. Agreement between depository and participant.

(1) A depository shall enter into an agreement with one or more participants as its agent.
(2) Every agreement under sub-section (1) shall be in such form as may be specified by the bye-laws.

5. Services of depository.Any person, through a participant, may enter into an agreement, in such
form as may be specified by the bye-laws, with any depository for availing its services.

6. Surrender of certificate of security.—(1) Any person who has entered into an agreement under
section 5 shall surrender the certificate of security, for which he seeks to avail the services of a
depository, to the issuer in such manner as may be specified by the regulations.
(2) The issuer, on receipt of certificate of security under sub-section (1), shall cancel the certificate of
security and substitute in its records the name of the depository as a registered owner in respect of that
security and inform the depository accordingly.
(3) A depository shall, on receipt of information under sub-section (2), enter the name of the person
referred to in sub-section (1) in its records, as the beneficial owner.

7. Registration of transfer of securities with depository.

(1) Every depository shall, on receipt of intimation from a participant, register the transfer of
security in the name of the transferee.
(1A) Every depository on receipt of intimation from a participant register any transfer of security in
favour of an asset reconstruction company as defined in clause (ba) of sub-section (1) of section 2 of
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (54 of 2002) along with or consequent upon transfer or assignment of financial asset of any bank
or financial institution under sub-section (1) of section 5 of that Act.
(1B) Every depository, on receipt of intimation from a participant, register any issue of new shares in
favour of any bank or financial institution or asset reconstruction company or any other assignee of
such bank or financial institution or asset reconstruction company, as the case may be, by conversion
of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the
company and the bank or financial institution or asset reconstruction company.
(2) If a beneficial owner or a transferee of any security seeks to have custody of such security, the
depository shall inform the issuer accordingly.

8. Options to receive security certificate or hold securities with depository.

(1) Every person subscribing to securities offered by an issuer shall have the option either to receive
the security certificates or hold securities with a depository.

(2) Where a person opts to hold a security with a depository, the issuer shall intimate such depository
the details of allotment of the security, and on receipt of such information the depository shall enter in
its records the name of the allottee as the beneficial owner of that security.

9. Securities in depositories to be in fungible form.

(1) All securities held by a depository shall be dematerialised and shall be in a fungible form.
(2) Nothing contained in sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act,
1956 (1 of 1956) shall apply to a depository in respect of securities held by it on behalf of the
beneficial owners.]

10. Rights of depositories and beneficial owner.

(1) Notwithstanding anything contained in any other law for the time being in force, a depository
shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of
security on behalf of a beneficial owner.
(2) Save as otherwise provided in sub-section (1), the depository as a registered owner shall not have
any voting rights or any other rights in respect of securities held by it.
(3) The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the
liabilities in respect of his securities held by a depository.

11. Register of beneficial owner

Every depository shall maintain a register and an index of beneficial owners in the manner provided
in sections 150, 151 and 152 of the Companies Act, 1956 (1 of 1956).

12. Pledge or hypothecation of securities held in a depository.

(1) Subject to such regulations and bye-laws, as may be made in this behalf, a beneficial owner
may with the previous approval of the depository create a pledge or hypothecation in respect of a
security owned by him through a depository.
(2) Every beneficial owner shall give intimation of such pledge or hypothecation to the depository
and such depository shall thereupon make entries in its records accordingly.
(3) Any entry in the records of a depository under sub-section (2) shall be evidence of a pledge or
hypothecation.

16. Depositories to indemnify loss in certain cases.

(1) Without prejudice to the provisions of any other law for the time being in force, any loss caused to
the beneficial owner due to the negligence of the depository or the participant, the depository shall
indemnify such beneficial owner.
(2) Where the loss due to the negligence of the participant under sub-section (1) is indemnified by the
depository, the depository shall have the right to recover t