1. Leveraged Buyout (LBO)

2. Characteristics of Bond

Ans.

(a) Leveraged Buyout (LBO)

This refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these type of transactions that are typically more mature and generate operating cash flows.

(b)

(c) Characteristics of Bond

1. Fixed Face Value - Bond has a Fixed face value, which is the amount to be returned to the investor upon maturity.

2. Maturity Period - Fixed maturity date, which can range from a few days to 20-30 years or even more.

3. Principal Repayment - All bonds repay the principal amount after the maturity date.

4. Interest Payments - Provides regular payment of interest, semi-annually or annually.

5. Coupon Rate - Interest is calculated as a certain percentage of the face value known as a ‘coupon payment’.

6. Lower Risk - Generally considered as less risky investment as compared to equity.

7. Diversification - It helps to diversify and grow investor’s money.

Ans. Venture Capital

• Definition of Venture Capital - Venture Capital is one of the innovative financing resource for a company in which the promoter has to give up some level of ownership and control of business in exchange for capital for a limited period, say, 3-5 years.

• Nature of Venture Capital Investment - Venture Capital is generally equity investments made by Venture Capital funds, at an early stage in privately held companies, having potential to provide a high rate of return on their investments.

• Purpose of Venture Capital - It is a resource for supporting innovation, knowledge based ideas and technology and human capital intensive enterprises.

• Definition of Venture Capital Fund - “Venture Capital Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund.

• Composition of Venture Capital Company - Essentially, a venture capital company is a group of investors who pool investments focused within certain parameters.

• Participants in Venture Capital Firms - The participants in venture capital firms can be institutional investors like pension funds, insurance companies, foundations, corporations or individuals but these are high risk investments which may give high returns or high loss.

Areas of Investment

Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion while others focus on exit financing. Biotechnology, medical services, communications, electronic components and software companies seem to be the most likely attraction of may venture firms and receiving the most financing. Venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability.

In India, software sector has been attracting a lot of venture finance. Besides media, health and pharmaceuticals, agri-business and retailing are the other areas that are favoured by a lot of venture companies.

1. Foreign Currency Convertible Bonds

2. Indian Depository Receipts

Ans. (a) Foreign Currency Convertible Bonds (FCCBs)

The FCCBs are unsecured instruments which carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company. Interest and redemption price (if conversion option is not exercised) is payable in dollars. FCCBs shall be denominated in any freely convertible Foreign Currency. However, it must be kept in mind that FCCB, issue proceeds need to conform to ECB end use requirements.

Foreign investors also prefer FCCBs because of the Dollar denominated servicing, the conversion option and, the arbitrage opportunities presented by conversion of the FCCBs into equity shares at a discount on prevailing Indian market price. In addition, 25% of the FCCB proceeds can be used for general corporate restructuring.

Answer 6(b)

Indian Depository Receipts

According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt” means any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India making an issue of such depository receipts.

An IDR is an instrument denominated in Indian Rupee in the form of a depository receipt created by a domestic depository (Custodian of securities registered with SEBI) against the underlying equity of issuing company to enable foreign companies to raise funds from Indian Securities Markets.

In an IDR, foreign companies would issue shares, to a domestic (Indian) depository, which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian depository to issue the IDRs. To that extent, IDRs are derivative instruments because they derive their value from the underlying shares

Ans.

1. Eligibility for Change in Category

As per SEBI Circular No. CIR/IMD/DF/12/2013 dated 7th August, 2013, only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make application for change in category.

2. Application Requirements

• Such AIFs are required to make an application in Form A along with necessary supporting documents.

• Application fees of ₹ 1, 00,000 must be paid along with the application to SEBI.

• AIFs are not required to pay registration fees for such applications.

3. Commitments Raised Prior to Application

• If the AIF has received commitments/ raised funds prior to application for change in category, the AIF shall be required to send letters/ emails to all its investors providing them the option to withdraw their commitments/ fund raised without any penalties/ charges.

• Any fees collected from investors seeking to withdraw commitments/ funds shall be returned to them.

• Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF regulations.

4. Investment Restriction Pending Approval

The AIF shall not make any investments till deployment of fund as per the scheme other than in liquid funds/ bank deposits until approval for change in category is granted by SEBI.

5. Post‑Approval Obligations

On approval of the request from SEBI, the AIF is required to send a copy of the revised placement memorandum and other relevant information to all its investors.

Ans.

1. Eligibility for Change in Category

As per SEBI Circular No. CIR/IMD/DF/12/2013 dated 7th August, 2013, only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make application for change in category.

2. Application Requirements

• Such AIFs are required to make an application in Form A along with necessary supporting documents.

• Application fees of ₹ 1, 00,000 must be paid along with the application to SEBI.

• AIFs are not required to pay registration fees for such applications.

3. Commitments Raised Prior to Application

• If the AIF has received commitments/ raised funds prior to application for change in category, the AIF shall be required to send letters/ emails to all its investors providing them the option to withdraw their commitments/ fund raised without any penalties/ charges.

• Any fees collected from investors seeking to withdraw commitments/ funds shall be returned to them.

• Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF regulations.

4. Investment Restriction Pending Approval

The AIF shall not make any investments till deployment of fund as per the scheme other than in liquid funds/ bank deposits until approval for change in category is granted by SEBI.

5. Post‑Approval Obligations

On approval of the request from SEBI, the AIF is required to send a copy of the revised placement memorandum and other relevant information to all its investors.

Interest of Sponsor/Management AIF

Regulation 10(d) of the SEBI (Alternative Investment Funds) Regulations, 2012, envisage that in order to ensure that the interest of the Manager/Sponsor is aligned with the interest of the investors in the AIF, the sponsor/manager shall have a certain continuing interest in the AIF which shall not be through the waiver of management fees. For Category I and II AIFs, such interest must be not less than two and half percent of the corpus or five crore rupees, whichever is lesser and for Category III AIFs, the continuing interest must be not less than five percent of the corpus or ten crore rupees, whichever is lesser.

For angel funds, such continuing interest shall be not less than two and half percent of the corpus or fifty lakh rupees, whichever is lesser.

1. Optionally Fully Convertible Debenture

2. Angel Fund (Dec, 19 - 3 marks each)

Ans. (a) Optionally Fully Convertible Debenture (OFCD)

1. Definition of Convertible Security under SEBI Regulations

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the “convertible security” means a security which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder of such security and includes convertible debt instrument and convertible preference shares.

2. Optionally Fully Convertible Debenture (OFCD)

The Optionally Fully Convertible Debenture is a kind of debenture which can be converted into shares at the expiry of a certain period at a predetermined price, if the debt holder (investor) wishes to do so.

3. Definition of Securities under Companies Act, 2013

The “securities” as defined u/s 2(81) of Companies Act, 2013 means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, and includes hybrids.

4. Classification of OFCD as Securities

Hence after analysing the above definitions of “OFCD”, “hybrid” and “securities” it could be rightly concluded that an OFCD being a hybrid security falls under the definition of “securities” as defined u/s 2 (h) of Securities Contract (Regulation) Act, 1956 and u/s 2(81) of Companies Act, 2013 as it inherits the characteristics of debentures initially and also that of the shares at a later stage if the option to convert the securities into shares being exercised by the security holder.

(b) Angel Fund

1. Definition of Angel Investor

An angel investor or angel (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a start-up business, usually in exchange for convertible debt or equity ownership.

2. Online and Group Investments

A small but increasing number of angel investors invest online through equity crowd funding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.

3. Stage and Nature of Investments

Angel investments are typically the earliest equity investments made in start-up companies. They commonly band together in investor networks.

4. Basis of Angel Investor Networks

Often these networks are based on regional, industry in investor or academic affiliation.

5. Background of Angel Investors

Angel Investors are often former entrepreneurs themselves, and typically enjoy working with companies at the earliest stages of business formation.

6. SEBI Regulations on Angel Funds

As per the SEBI (Alternative Investment Fund) Regulations, 2012, angel fund is a sub-category of venture capital. Procurement of funds from angel investors of their further investment has to be conducted as per these regulations.

7. Role of Effective Angels

The effective Angels help entrepreneurs to shape business models, create business plans and assist in arranging resources - but without stepping into a controlling or operating role.

8. Experience of Angel Investors

Often Angels are entrepreneurs who have successfully built companies, or have spent a part of their career in coaching young companies.

Ans - Pension Fund

1. Definition of Pension Fund

Pension Fund means a fund established by an employer to facilitate and organize the investment of employees’ retirement funds which is contributed by the employer and employees.

2. Purpose of Pension Fund

The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement.

3. Management of Pension Funds

Pension funds are commonly run by some sort of financial intermediary for the company and its employees like N.P.S. scheme is managed by UTIAMC (Retirement Solutions), although or some larger corporations operate their pension funds in-house.

4. Capital Control and Investment Role

Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations.

5. Role in Economic Development

Pension funds play a huge role in development of the economy and it play active role in the Indian equity market.

6. Impact on Investment and Economy

This pension fund ensures a change in their investment attitudes and in the regulatory climate, encouraging them to increase their investment levels in equities and would have a massive impact on capital market and on the economy as a whole.

Pensions broadly divided into two sectors:

1. Formal sector Pensions

2. Informal sector Pensions

Pensions in India can be divided into three categories such as pensions under an Act or Statute, Government pensions and voluntary pensions.

Government Pension

Government pensions in India are referred under the Directive Principles of State Policy and are therefore not covered under a Statute. The Government amended the regulations to put in place the new pension system. The old scheme continues for the existing employees (i.e. those who joined service prior to January 1, 2004). Pensions for government employees would include employees of the central as well as the state governments. (A) Central Government Pensions like Civil servants pensions, Defences, Railways and Posts (B) State Government Pensions, Bank pensions like Reserve Bank of India (RBI), Public Sector Banks, National Bank for Agriculture and Rural Development (NABARD) and other banks pensions.

Legislations governing pension in India

There are following three Acts for pensions in India.

1. Pensions under the Employees Provident Fund & Miscellaneous Provisions Act 1952 (EPF&MP) : These include the Employees Provident Fund, Employees Pension Scheme, and Employees Deposit Linked Insurance Scheme.

2. Pensions under the Coal mines Provident Fund & Miscellaneous Provisions Act 1948 : These include Coal mines provident fund, Coal mines pension scheme & Coal mines linked insurance scheme.

3. Gratuity under the Payment of Gratuity Act, 1972 : There are other provident funds in India like Assam Tea Plantations Provident Fund, J&K Provident Fund, and Seamens Provident Fund etc.

1. Private Equity

2. Venture capital

3. Pension Fund. (Dec, 18 - 3 marks each)

Ans. Ans (a)

Private equity is a type of equity (finance) and one of the asset classes who takes securities and debt in operating companies that are not publicly traded on stock exchange.

Private equity is essentially a way to invest in some assets that aren’t publicly traded, or to invest in a publicly traded asset with the intention of taking it private. Unlike stocks, mutual funds and bonds, private equity funds usually invest in more illiquid assets, i.e. companies. By purchasing companies, the firms gain access to those assets and revenue sources of the company, which can lead to a very high return on investments. Another feature of private equity transactions is their extensive use of debt in the form of high-yield bonds.

By using debt to finance acquisitions, private equity firms can substantially increase their financial returns.

Ans (b)

Venture Capital

• Definition of Venture Capital - Venture Capital is one of the innovative financing resource for a company in which the promoter has to give up some level of ownership and control of business in exchange for capital for a limited period, say, 3-5 years.

• Nature of Venture Capital Investment - Venture Capital is generally equity investments made by Venture Capital funds, at an early stage in privately held companies, having potential to provide a high rate of return on their investments.

• Purpose of Venture Capital - It is a resource for supporting innovation, knowledge based ideas and technology and human capital intensive enterprises.

• Definition of Venture Capital Fund - “Venture Capital Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund.

• Composition of Venture Capital Company - Essentially, a venture capital company is a group of investors who pool investments focused within certain parameters.

• Participants in Venture Capital Firms - The participants in venture capital firms can be institutional investors like pension funds, insurance companies, foundations, corporations or individuals but these are high risk investments which may give high returns or high loss.

Areas of Investment

Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion while others focus on exit financing. Biotechnology, medical services, communications, electronic components and software companies seem to be the most likely attraction of may venture firms and receiving the most financing. Venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability.

In India, software sector has been attracting a lot of venture finance. Besides media, health and pharmaceuticals, agri-business and retailing are the other areas that are favoured by a lot of venture companies.

Ans (c)

Pension Fund means a fund established by an employer to facilitate and organise the investment of employees' retirement funds which is contributed by the employer and employee. The Pension Fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working here and commence retirement. Pension funds are commonly run by some sort of financial intermediaries for the company and its employees like NPS scheme is managed by UTIAMC (Retirement Solutions), although some larger corporations operate their pension funds in-house. Pensions are broadly divided into two sectors:

1. Formal sector pensions

2. Informal sector pensions

By 2022, MNP’s leadership had an ambitious plan for further expanding into two new domestic plants with double of its existing capacity in the Northern part of the country, to make pan India presence. But they were also knowing that they have to look beyond their internal sources of funds and debt financing to achieve their goals. Because, in the recent past, the management had a bad experience for over- boarding bank financing. At the same time, the company never had an outside shareholder. Therefore, they are also hesitating to have someone unknown to them on the Board.

Considering the whole scenario, their Company Secretary, suggested the top management to engaged some renowned consulting firm to explore the possibilities for some good quantum of equity infusion, so that their proposed expansion program can be funded properly. This process was also suitable to the company’s founders, as they were accustomed with the private equity model as a viable alternative to an IPO, with much lower regulatory compliances. Therefore, they assigned their Company Secretary an assignment to explore and appoint some Private Equity firm interested in India’s textile sector. After couple of options being explored and evaluated by the Company Secretary, he finally sorted out M/s High Tide Capitals, a Mumbai based private equity firm, actively looking for a large investment in India’s textiles sector. In the meanwhile, one of the competing funds of M/s High Tide Capitals, after hearing this news offered a substantially high share purchase price offer to the top management of MNP Private Limited.

After considering various pros and cons, the top management decided to opt with M/s High Tide Capitals as their partner. Because, to capitalize firm’s significant expertise in the domestic textile industry as well as their links at the global textile trades through their Headquarters based at London. With this M/s High Tide Capitals joined as a minority shareholder, the relationship and mutual trust built with MNP gave a considerable sway over hiring, procurement, and other key aspects of the business. As a result, this gave a pace for setting transformations both in MNP’s culture and its stature amongst its peers. M/s High Tide Capitals also help in addressing gaps of MNP’s governance aspect that was one of the key hinderance in its ambitious expansion project.

At the time of M/s High Tide Capitals investment, MNP Private Limited had no formal business plans and also does not have effective budgeting process through which the costs of several inputs were to be properly tracked. However, M/s High Tide Capitals also helped MNP Private Limited to design a proper business plan and budgeting process from scratch. All these support from M/s High Tide Capitals, has help to become an integral part of MNP’s corporate culture and removed a bottleneck that had hampered plans for scaling operations. With passage of time, M/s High Tide Capitals is not considered as an outsider for MNP’s top management, rather they are an integral part of top management.

Based upon the case study, answer the following :

1. What is a private equity ?

2. What are the characteristics of private equity invested by High Tide Capitals ?

3. What are the different types of private equity investments ?

4. Who are the investors in a private equity firm, like the High Tide Capitals ?

5. What are the alternative sources of arranging funds besides private equity ? (June, 25 – 2 Marks each)

Ans.

Private equity is a type of equity (finance) and one of the asset classes who takes securities and debt in operating companies that are not publicly traded on a stock exchange. Private equity is essentially a way to invest in some assets that isn’t publicly traded, or to invest in a publicly traded asset with the intention of taking it private.

As per the definition of Private Equity as defined in SEBI (Alternative Investment Funds) Regulations, 2012, private equity fund means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.

(ii) Private equity has following three characteristics:

1. Leverage,

2. Participation in Equity or Ownership, and

3. High Risk oriented.

(iii) Private equity investments can be divided into following different categories:

1. Leveraged Buyout (LBO): This refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these types of transactions that are typically more mature and generate operating cash flows.

2. Venture Capital: It is a broad sub-category of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business.

3. Growth Capital: This refers to equity investments, mostly minority investments, in the companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

(iv) Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The major of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time.

As a source of investment capital, private equity comes from High Net-worth Individuals (HNI) and firms that purchase stakes in private companies or acquire control of public companies with plans to make them private & consequently delist from the stock exchange.

(v) The alternative sources of arranging funds besides private equity are as under:

1. Venture Capital Fund which means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund and migrated venture capital fund,

2. Angel fund refers to money pool created by high net worth individuals or companies (generally known as Angel Investor), for investing in start-up business. Angel fund is defined in SEBI (Alternative Investment Funds) Regulations, 2012 as a sub-category of Venture Capital Fund under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with regulations specified by SEBI.

Ans. Angel Fund

Definition of Angel Fund

Angel fund refers to money pool created by high net worth individuals or companies (generally known as Angel Investors), for investing in start-up business. It is defined in the SEBI (Alternative Investment Funds) Regulations 2012 which means a sub-category of Venture Capital Fund under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with regulations as specified by SEBI.

2. Capital Provided by Angel Investors

Angel Investors provide capital for a business start-up, usually in exchange for convertible debt or ownership equity.

3. Online and Group-Based Investment

A small but increasing number of angel investors invest online through equity / debt funding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.

4. Stage of Investment

Angel investments are typically the earliest equity investments made in start-up companies.

5. Formation of Investor Networks

They commonly band together in investor networks. Often these networks are based on regional, industry investor or academic affiliation.

6. Background of Angel Investors

Angel Investors are often former entrepreneurs themselves, and typically enjoy working with companies at the earliest stages of business formation.

7. Role of Effective Angel Investors

The effective Angels help entrepreneurs to shape business models, create business plans and connect to resources - but without stepping into a controlling or operating role.

8. Experience and Mentorship by Angels

Often Angels are entrepreneurs who have successfully built companies, or have spent a part of their career in coaching young companies.

Ans. Municipal Bonds

1. Definition of Municipal Bonds

Municipal bonds are also referred to as "muni bonds’. In terms of SEBI regulations, municipal bonds can be issued by any Municipality or any Statutory Body or Board or Corporation, Authority, Trust or Agency established or notified by any Central or State Act or any Special Purpose Vehicle notified by the State Government or Central Government subject to the condition that it undertakes one or more functions that may be entrusted under Article 243W of the Constitution of India.

2. Meaning of Municipality

A municipality means an institution of self-government constituted under Article 243Q of the Constitution of India.

3. Purpose of Issuing Municipal Bonds

Municipal bonds are issued when a government body wants to raise funds for projects such as infra-related, roads, airports, railway stations, schools and so on.

4. SEBI Regulations for Municipal Bonds

SEBI issued regulations in 2015 for the urban local bodies to raise funds by issuing municipal bonds.

5. History of Municipal Bonds in India

Municipal bonds exist in India since the year 1997. Bangalore Municipal Corporation was the first urban local body to issue municipal bonds in India. Ahmedabad followed Bangalore in the succeeding years.

6. Decline and Revival of Municipal Bonds

The municipal bonds lost the ground after the initial investors’ attraction it received and failed to raise the desired amount of funds. To revive the municipal bonds, SEBI came up with regulations for the issue of municipal bonds in 2015.

A Municipality should meet the following eligibility criteria to issue municipal bonds in India:

1. The issuer must not have a negative net worth in each of the three previous years.

2. The issuer must have no default in the repayment of debt securities and loans availed from the banks or non-banking financial companies in the last year.

The issuer, promoter and directors must not be in the list of the wilful defaulters.

Ans. A real estate investment trust (REIT) is a collective investment scheme that owns, operates or finances income-producing real estate. REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.

REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment without buying any finance property.

REITs are similar to mutual funds and shares and they provide income by way of dividend to its shareholders and capital appreciation as REIT stocks are listed in BSE and NSE.

Benefits of REITs include

1. Less Capital Intensive: Direct investment in real estate property is very capital intensive. But each shares of REITs will be comparatively more affordable. (it will not require large capital outflows)

2. Suitable for small Investors: Investing through REITs will eliminate dealing with builders, thereby avoiding potential exposure to big builders.

3. Transparency: REITs stocks are listed in stock market, hence details will be available on public domain.

4. Assured Dividends: REITs generates income in form of dividend. REITs dividend payment is relatively assured as most of their income is in the form of rental (lease) income.

5. Tax Free: Dividend earned by the investors of REIT will be tax free.

6. Fast Capital Appreciation: Capital appreciation can be phenomenal.

7. Easy to buy: investment in REITS easier than investment in Real Estate properties.

Ans.

• An Exchange traded fund (ETF) is a security that tracks an index, commodity, bonds, or a basket of assets like an index fund and is traded in the securities market. In simple words, ETFs are funds that track indexes such as Sensex, Nifty, etc.

• When any investor buy shares/ units of an ETF, he buys shares/ units of a portfolio that tracks

• the performance of the index. ETFs just reflect the performance of the index they track.

• Unlike regular mutual funds, ETFs trade like a common stock on the stock exchange and the price of an ETF changes as per the trading in the market takes place.

• The trading value of an ETF depends on the net asset value of the underlying stock that it represents. ETFs, generally, have higher daily liquidity and lower fees than mutual fund schemes.

Therefore, ETF possesses Lower risk due to its diversification across various market securities rather then being limited to performance of single entity.

Distinguish between Currency Derivatives & Commodity Derivatives. (Dec, 24 – 5 Marks)

Ans.

Currency derivatives

Currency derivatives are financial contracts between the buyer and seller involving the exchange of two currencies at a future date, and at a stipulated rate. Currency Derivative Trading is similar to Stock Futures and Options trading. However, the underlying asset are currency pairs (such as USDINR or EURINR) instead of Stocks. Currency Options and Currency Futures trading is done in the Foreign Exchange markets. Forex rates are the value of a foreign currency relative to domestic currency. The major participants of Currency Trading in India are banks, corporations, exporters and importers. Benefits of currency derivatives include:

• Diversification to investments,

• Hedging opportunities to importers & exporters, for their future payables and receivables,

• Trading opportunities because of volatility in currency,

• Transparent rates to traders as it is exchange-traded.

Commodity Derivatives

Commodity is a physical good attributable to a natural resource that is tradable and supplied without substantial differentiation by the general public. Commodities trade in physical (spot) markets and in futures and forward markets. Spot markets involve the physical transfer of goods between buyers and sellers; prices in these markets reflect current (or very near term) supply and demand conditions.

Commodity derivatives are financial instruments whose value is based on underlying commodities,

such as oil, gas, metals, agricultural products and minerals. Other assets such as emissions trading credits, freight rates and even the weather can also underlie commodity derivatives. Commodity Derivatives markets are a good source of critical information and indicator of market sentiments. Since, commodities are frequently used as input in the production of goods or services, uncertainty and volatility in commodity prices and raw materials make the business environment erratic, unpredictable and subject to unforeseeable risks.

Volatility in raw material costs affects businesses and can be significant given that commodity prices are driven by supply and demand from domestics as well as global markets. Ability to manage or mitigate risks by using suitable hedging in commodity derivative products, can positively affect business performance.

Ans. Options Contract give its holder the right, but not the obligation, to take or make delivery on or before a specified date at a stated price. But this option is given to only one party in the transaction while the other party has an obligation to take or make delivery. Since the other party has an obligation and a risk associated with making good the obligation, he receives a payment for that. This payment is called as option premium.

Classification of Option Contracts

Option contracts are classified into two types on the basis of which party has the option:

• Call option - A call option is with the buyer and gives the holder a right to take delivery.

• Put option - The put option is with the seller and the option gives the right to take delivery.

Option Contracts are classified into two types on the basis of time at which the option can be exercised:

• European Option - European style options are those contacts where the option can be exercised only on the expiration date. Options traded on Indian stock exchanges are of European Style.

• American Option - American style options are those contacts where the option can be exercised on or before the expiration date.

(b) Akshay buys 500 shares of PQR Limited @ `210 per share on the stock exchange platform. In order to hedge the position, he sells 300 futures of PQR Limited @ `195 each. Due to fall in the share and futures price by 5% and 3% respectively on next day, Akshay closes his position by counter transactions. Find out his profit or loss. (June, 21 – 5 Marks) (2 + 3 Marks)

Ans. (a) Future refers to a future contract which means an exchange traded forward contract to buy or sell a predetermined quantity of an asset on a predetermined future date at a predetermined price. Contracts are standardized and there's centralized trading ensuring liquidity. There are two positions that one can take in a future contract:

• Long Position - This is when a futures contract is purchased and the buyer agrees to receive delivery of the underlying asset. (Stock/Indices/ Commodities)

• Short Position - This is when a futures contract is sold and the seller agrees to make delivery of the underlying asset. (stock/Indices/Commodities)

(b) Profit or loss in case of buying 500 shares of PQR Ltd.

1. Mr. X writes a call option to purchase share at an exercise price of ₹ 60 for a premium of ₹ 12 per share. The share price rises to ₹ 62 by the time the option expires.

2. Mr. Y buys a put option at an exercise price of ₹ 80 for a premium of ₹ 8.50 per share. The share price falls to ₹ 60 by the time the option expires.

3. Mr. Z writes a put option at an exercise price of ₹ 80 for a premium of ₹ 11 per share. The price of the share rises to ₹ 96 by the time the option expires.

4. Mr. XY writes a put option with an exercise price of ₹ 70 for a premium of ₹ 8 per share. The price falls to ₹ 48 by the time the option expires. (June, 19 – 5 Marks)

Ans. Options Contract give its holder the right, but not the obligation, take or make delivery on or before a specified date at a stated price.

Option Contracts are classified into two types on the basis of which party has the option:

1. Call Option – A call option is with the buyer and gives the right to take delivery. The buyer of the call option has a right to buy the underlying asset from the option seller.

2. Put Option – The put option is with the seller and the option gives the right to take delivery. The buyer of the put option has a right to sell the underlying asset to the option seller.

1. Ascertain the net loss/profit.

2. What would be your answer, if the stock price escalates to `120 as Government slashed GST rate on vehicles? (June, 22 - 5 marks)

Ans. If price of stock fell to ₹ 90

Cost of Call Option = (₹ 5 per share) x (1000 shares i.e. lot of call option)

= ₹ 5000

Cost of Put option = (₹ 4 per share) x (1000 shares i.e. lot of put option)

= ₹ 4000

Total premium paid = ₹ 5000 + `4000 = `9000

The price of the stock fell to ₹ 90. The market price is lower than the strike price, the investor will lose the call premium and gain in put option. Eknath has a right to sell 1000 shares at ₹ 105, the price of which is ₹ 90. By exercising put option, Eknath will earn ? 105 - `90 = `15 per share (lot of 1000 shares in put option).

Net Profit = profit on put – Cost/loss on premium paid on call & put option

= (`15 per share on put × 1000 shares) - `9000

= `15000 - `9000

= `6000/-

If price of stock escalates to `120

The total premium paid is same as in 1st case i.e. `9000

The investor will now lose in put option and gain in call option. By exercising call option, Eknath will earn `120 - `105 = `15 per share. (lot of 1000 shares in call option).

Net Profit = Profit on call – Cost/loss on premium paid on call & put option

= (`15 per share on call × 1000 shares) - `9000

= `15000 - `9000)

= `6000/-

In both the scenario, the net profit will remain the same.

Tarun purchases the following European Call options of TCS. He also purchases the following European put option of ACC. What decision he would take on expiry if TCS closes at ` 835 and ACC closes at ` 565, spot prices? Ignore premium paid.

1. TCS 830 Call

2. ACC 510 Put

3. TCS 840 Call

4. ACC 520 Put (Dec, 22 – 5 Marks)

Ans. Tarun has purchased European option. Therefore, he can exercise them only on expiration date.

1. He would exercise a call option only if the stock price (S=835) is greater than the strike price (X). Call option are right to buy the underlying. Therefore, he would exercise TCS 830 call (835>830). By doing this he makes a gain of Rs. 5.

2. He would exercise a put option only if the stock price (S=565) is less than the strike price (X). Put options are right to sell the underlying. Therefore, he would not exercise ACC 510 Put (565 >510). This is because he can sell stocks at a higher rate of Rs. 565 in the market rather than exercising the put at lower rate.

3. He would not exercise TCS 840 call (835<840). This is because he can buy stocks cheaper at Rs. 835 in the market rather than exercising at Rs. 840.

4. He would exercise a put option only if the stock price (S=565) is le

Issue price of Bond `2000

Coupon rate 2% with maturity period of 2 years Convertible into equity shares @ `100 per share

Y has subscribed for 5 bonds and made an investment of `10,000. On maturity date, investor will have an option to either claim full redemption amount or convert the Bonds into equity @ `100 per share. The quoted share price on maturity date is `150. If he goes for conversion how many shares Y will get ? Will it be fair enough if he opts for redemption value ? Calculate which option is best suitable to Y ? (Dec, 21 – 5 Marks)

Ans. Issue Price per Bond is = Rs.2000/- Coupon rate = 2%

Maturity period =2 years

Convertible into equity per share will be @ Rs. 100/

Option-I:

Y the investor has subscribed for 5 bonds. The total investment made by him will be Rs. 10,000/- He is entitled to get interest @2% p.a.

The interest will be Rs. 400 (Rs. 10,000*2% for 2 years)

Thus his total investment for 2 years period becomes Rs. 10,400/- and the conversion price of equity on maturity will be Rs. 100/-

Therefore, he will get 104 equity shares i.e. 10,400/100

Option-II:

If the Equity shares are quoted at Rs. 150/- per share on maturity date, then Y will get 104 x Rs. 150

= Rs. 15,600.

Therefore, Y can opt for conversion of Bonds in to Equity shares rather than accepting the maturity redemption value of Rs. 10,400/-

(ii) What are the key risk management measures initiated by SEBI in the secondary market ? Describe.

(Dec, 19 - 5 marks each)

Ans. (i)

Market surveillance plays a vital role in ensuring market integrity which is the core objective of regulators. Market integrity is achieved through combination of surveillance, inspection, investigation and enforcement of relevant laws and rules. In India, the primary responsibility of market surveillance has been entrusted to Stock exchanges and is being closely monitored by SEBI. Millions of Orders are transmitted electronically every minute and therefore surveillance mechanisms to detect any irregularities must also be equally developed. Exchanges adopt automated surveillance tools that analyse trading patterns. Market Surveillance is broadly categorised in two parts as under:

Preventive Surveillance

Following are some important features or ingredients of preventive surveillance:

1. Stringent On boarding norms for Trading Members - Stringent net worth, back ground, viability etc. checks while on boarding Trading Members.

2. Index circuit filters - It brings coordinated trading halt in all equity and equity derivative markets at 3 stages of the index movement, either way viz., at 10%, 15% and 20% based on previous day closing index value.

3. Trade Execution Range - Orders are matched and trades take place only if the trade price is within the reference price and execution range.

4. Order Value Limitation - Maximum Order Value limit allowed per order.

5. Cancel on logout - All outstanding orders are cancelled, if the enabled user logs out.

6. Kill switch - All outstanding orders of that trading member are cancelled if trading member executes kill switch.

7. Risk reduction mode - Limits beyond which orders level risk management shall be initiated instead of trade level.

8. Compulsory close out - Incoming order, if it results in member crossing the margins available with the exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading member to create fresh positions.

9. Capital adequacy check - Refers to monitoring of trading member's performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached.

10. Trade for Trade Settlement - The settlement of scrip's available in this segment is done on a trade for trade basis and no netting off is allowed.

11. Periodic call auction - Shifting the security form continuous to call auction method.

12. Rumour Verification - Any unannounced news about listed companies is tracked on online basis and letter seeking clarification is sent to the companies and the reply received is disseminated.

Post trade surveillance

1. End of day alert – Alerts generated using statistical tools. The tool highlights stocks which have behaved abnormally form its past behavior.

2. Pattern Recognition Model – Models designed using high end tools and trading patterns which itself identifies suspects involving in unfair trading practice.

3. Transaction alerts for Member - As part of surveillance obligation of members the alerts are downloaded to members under 14 different heads.

Ans (ii)

Some of the key risk management measures initiated by SEBI in the Secondary Market are as under:

1. Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility.

2. VaR based margining system.

3. Specification of mark to Market margins.

4. Specification of Intra-day trading limits and Gross Exposure Limits.

5. Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges.

6. Specification of time limits of payment of margins.

7. Collection of margins on upfront basis.

8. Index based market wide circuit breakers.

9. Automatic de-activation of trading terminals in case of breach of exposure limits.

10. VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market. • Additional margins have also been specified to address the balance 1% cases.

11. Collection of margins from institutional clients on T+1 basis.

Margins (June,2021)

Ans. Margins: An advance payment of a portion of the value of a stock transaction. The amount of credit a broker or lender extends to a customer for stock purchase.

Margin is of two types:

1. “Initial margin” in this context means the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.

2. “Maintenance margin” means the minimum amount, calculated as a percentage of market value of the securities, calculated with respect to last trading day's closing price, to be maintained by client with the broker.

When the balance deposit in the client's margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities.

The broker may liquidate the securities if the client fails to meet the margin calls made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or the cheque has been dishonoured.

Ans. SEBI vide its circular MRD/DoP/SE/Cir-19/2005 dated September 02, 2005 prescribed guidelines for execution of large size trade through a single transaction. In order to facilitate execution of such large trades, stock exchanges were permitted to provide a separate trading Window. A trade executed on this separate trading window was termed as ‘block deal’.

Execution of Block Deal

1. Session timings:

2. Morning Block Deal Window: This window shall operate between 08:45 AM to 09:00 AM.

The reference price for execution of block deals in this window shall be the previous day closing price of the stock.

Afternoon Block Deal Window: This window shall operate between 02:05 PM to 02:20 PM.

The reference price for block deals in this window shall be the volume weighted average market price (VWAP) of the trade executed in the stock in the cash segment between 01:45 PM to 02:00 PM.

The minimum order size for execution of trades in the block deal window shall be `10 crores.

2. The orders placed shall be within ± 1% of the applicable reference price in the respective windows as stated above.

3. Every trade executed in the block deal Windows must result in delivery and cannot be squared off or reversed.

4. The stock exchanges disseminate the information on block deals such as the name of the script, name of the client, quantity of shares bought/sold, price, etc. to the general public on the same day, after the market hours.

Since last two months, there is heavy fluctuation in the price of the shares of Maxgrow Ltd. and with very thin trading volume. The stock exchange based on its surveillance system, took stringent action in the interest of the investors.

Technet Ltd, subsidiary of Maxgrow Ltd. is in the business of data analytics since last two years. It is providing the services to the fortune 500 companies across the world. The management wishes to list its securities with the stock exchange, by floating an IPO.

After analyzing the case study, answer the following (with reasons) :

1. Is block deal window also open for individual investors ?

2. What are the timings of executing transaction through block deal window ?

3. What first course of action is available to the shareholder for default of payment of dividend by the company ?

4. What types of preventive surveillance restrictions can be imposed by the stock exchance (name any four) ?

5. Is it possible to list shares for a two year old company in the stock exchnage ?

(June, 24 - 2 marks each)

Ans.

1. The block deal is also open for individual investors subject to the minimum order size for execution of trades in the Block deal window shall be Rs. 10 Crore.

2. Morning Block Deal Window: This window shall operate between 08:45 AM to 09:00 AM. Afternoon Block Deal Window: This window shall operate between 02:05 PM to 2:20 PM.

3. It is mandatory for investors to first take up their grievances for redressal with the entity concerned, through their designated persons/officials who handle issues relating to compliance and redressal of investor grievances. In case, the entity concerned fails to redress the complaint within the timeline, the investor may then file their complaint in SCORES. Investors who wish to lodge a Complaint on SCORES (complainant) are required to register themselves with SCORES portal.

4. The types of Preventive Surveillance restrictions that can be imposed by the Stock Exchange are:

   1. Stringent On boarding norms for Trading Members - Stringent net worth, back ground, viability etc. checks while on boarding Trading Members.

   2. Index circuit filters - It brings coordinated trading halt in all equity and equity derivative markets at 3 stages of the index movement, either way viz., at 10%, 15% and 20% based on previous day closing index value.

   3. Trade Execution Range - Orders are matched and trades take place only if the trade price is within the reference price and execution range.

   4. Order Value Limitation - Maximum Order Value limit allowed per order.

   5. Cancel on logout - All outstanding orders are cancelled, if the enabled user logs out.

   6. Kill switch - All outstanding orders of that trading member are cancelled if trading member executes kill switch.

   7. Risk reduction mode - Limits beyond which orders level risk management shall be initiated instead of trade level.

   8. Compulsory close out - Incoming order, if it results in member crossing the margins available with the exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading member to create fresh positions.

   9. Capital adequacy check - Refers to monitoring of trading member’s performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached.

   10. Fixed Price Band/Dynamic Price band - Limits applied within which securities shall move; so that volatility is curbed orderliness is bought about. For non-derivative securities price band is 5%, 10% & 20%. For Derivative products an operating range of 10% is set and subsequently flexed based on market conditions.

   11. Trade for Trade Settlement - The settlement of scrip’s available in this segment is done on a trade for trade basis and no netting off is allowed.

   12. Periodic call auction - Shifting the security form continuous to call auction method.

   13. Rumour Verification - Any unannounced news about listed companies is tracked on online basis and letter seeking clarification is sent to the companies and the reply received is disseminated.

5. In the given case, Technet Ltd. is in business of data analytics since last two years and wishes to list its securities with the stock exchange, by floating an IPO. An issuer not satisfying the condition stipulated in regulation 6(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, shall be eligible to make an initial public offer only if the issue is made through the book-building process and the issuer undertakes to allot at least seventy five per cent. of the net offer to qualified institutional buyers and to refund the full subscription money if it fails to do so.

Therefore, Technet Ltd. opt for the route as available under Regulation 6(2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for making an initial public offer and listing thereof.

1. What are the provisions for section 8 company to tap the public fund under SEBI regulations ?

2. Will it make any difference if CYL is a charitable trust ?

3. What type of instrument is allowable for CYL for fund raising ?

4. What will be your answer, if 40% target population is general public ?

5. If CYL was debarred by Ministry of Home Affairs for carrying out its activities, can it still raise funds through SSE ? (June, 24 - 2 marks each)

Ans.

1. According to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Section 8 companies are included in the definition of “Not for Profit Organization” and a Not for Profit Organisation can raise the funds from public through Social Stock Exchange (SSE). [Regulation 292A (e) and Regulation 292G of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018].

2. No, the answer will not change, as the Charitable trusts are also included in the definition of Not for Profit Organisation. [Regulation 292A (e) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018].

3. A Not for Profit Organization may raise funds on a Social Stock Exchange through:

   1. issuance of Zero Coupon Zero Principal Instruments to institutional investors and/or non- institutional investors;

   2. donations through Mutual Fund schemes as specified by SEBI;

   3. any other means as specified by SEBI from time to time. [Regulation 292G of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

Therefore, CYL is allowed for raising fund through the above-mentioned instruments.

The Social Enterprise shall have at least 67% of its activities, qualifying as eligible activities to the target population, to be established through:

– members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries.

In the given situation, if 40% target population is general public and unserved population, then CYL is not be identified as Social Enterprise and thus, not eligible for fund raising through SSE. [Regulation 292E(2)(c) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

A Social Enterprise shall not be eligible to register or raise fund, if the Social Enterprise or any of its promoters or directors or trustees has been debarred from carrying out its activities or raising funds by the Ministry of Home Affairs. In the given case, CYL was debarred by Ministry of Home Affairs, thus, it cannot register or raise fund through SSE. [Regulation 292H(e)]

Ans. The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve:

• conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;

• promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;

• promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;

• fosters payment and settlement system safety and efficiency through services to the banking Industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and

• promotes consumer protection and community development through consumer- focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

The Fed Funds Rate is the interest rate at which the top US banks borrow overnight money from common reserves. All American banks are required to park a portion of their deposits with the Federal Reserve in cash, as a statutory requirement.

Actually, fed fund rate gives the direction in which US interest rates should be heading at any given point of time. If the Fed is increasing the interest rates, lending rates for companies and retail borrowers will go up and vice versa. In India, hike in repo rate may not impact the countries outside India.

On the other hand, US interest rates matter a lot to global capital flows. Some of the world's richest institutions and investors have their base in USA. They constantly compare Fed rates with interest rates across the world to make their allocation decisions.

In the globalised world, markets are connected. An increase in Fed rates will be negative in general for the US stock market and if it leads to another round of sell-offs, it will also have ripple effects on the Indian market.

Any changes in the Fed Fund Rates impact the domestic borrowing market to a large extent. For instance, if the Fed rates go up, it will make the RBI hesitant in cutting rates at that time. The reason is that if RBI cut rates it will lead to heavy pullout of foreign investors from the Indian bond market.

Rupee Vs Dollar

If the Fed rates are hiked, the value of the dollar would go up, thus weakening Indian rupee in comparison. This might hurt India’s forex reserves and imports. However, the weaker rupee is good for India’s exports but low global demand and stiff competition would not leave much room for Indian exporters to capitalise the situation. DBS said that India’s financing requirements will keep the rupee vulnerable to rising US rates this year.

The rising FED rate will certainly impact the fund flow to rest of the word. Elucidate the statement in the Indian context. (June, 24 – 5 Marks)

Ans. The Federal Funds Rate is the interest rate at which the top US banks borrow overnight money from common reserves. All American banks are required to park a portion of their deposits with the Federal Reserve in cash, as a statutory requirement.

The Fed Fund Rate gives the direction in which US interest rates should be heading at any given point of time. If the Fed is increasing the interest rates, lending rates for companies and retail borrowers will go up and vice versa. In India, hike in repo rate may not impact the countries outside India. On the other hand, US interest rates matter a lot to global capital flows.

Some of the world’s richest institutions and investors have their base in USA. They constantly compare Fed rates with interest rates across the world to make their allocation decisions.

In the globalised world, markets are connected. An increase in Fed rates will be negative in general for the US stock market and if it leads to another round of sell-offs, it will also have ripple effects on the Indian market.

Any changes in the Fed Fund Rates impact the domestic borrowing market to a large extent. For instance, if the Fed rates go up, it will make the RBI hesitant in cutting rates at that time. The reason is that if RBI cut rates it will lead to heavy pullout of foreign investors from the Indian bond market.

Ans. Market Surveillance plays a vital role in ensuring market integrity which is the core objective of regulators. Market integrity is achieved through combination of surveillance, inspection, investigation and enforcement of relevant laws and rules. Exchange adopt automated surveillance tools that analyse trading patterns and are installed with a comparative alert management system.

Preventive Surveillance –

• Stringent on boarding norms for Trading Members - Stringent net worth, back ground, viability etc. checks while on boarding Trading Members.

• Index circuit filters - It brings coordinated trading halt in all equity and equity derivative markets at 3 stages of the index movement, either way viz., at 10%, 15% and 20% based on previous day closing index value.

• Trade Execution Range - Orders are matched and trades take place only if the trade price is within the reference price and execution range.

• Order Value Limitation - Maximum Order Value limit allowed per order.

• Cancel on logout - All outstanding orders are cancelled, if the enabled user logs out.

• Kill switch - All outstanding orders of that trading member are cancelled if trading member executes kill switch.

• Risk reduction mode - Limits beyond which orders level risk management shall be initiated instead of trade level.

• Compulsory close out - Incoming order, if it results in member crossing the margins available with the exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading member to create fresh positions.

• Capital adequacy check - Refers to monitoring of trading member’s performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached

• Fixed Price Band / Dynamic Price band - Limits applied within which securities shall move; so that volatility is curbed orderliness is bought about. For non- derivative securities price band is 5%, 10% & 20%. For Derivative products an operating range of 10% is set and subsequently flexed based on market conditions.

• Trade for Trade Settlement - The settlement of scrip’s available in this segment is done on a trade for trade basis and no netting off is allowed.

• Periodic call auction - Shifting the security form continuous to call auction method

• Rumour Verification - Any unannounced news about listed companies is tracked on online basis and letter seeking clarification is sent to the companies and the reply received is disseminated.

Ans. Market Surveillance plays a vital role in ensuring market integrity which is core objective of regulators. Market integrity is achieved through combination of surveillance, inspection, investigation and enforcement of relevant laws and rules. Globally Market Surveillance is either conducted by the regulators or Exchanges or both. In India, the primary responsibility of market surveillance has been entrusted to Stock exchanges and is being closely monitored by SEBI. Market Surveillance is broadly categorized in two parts, viz. Preventive Surveillance and Post Trade Surveillance.

Preventive Surveillance

• Stringent on-boarding norms for Trading members – Stringent net worth, back ground, viability, etc. checks while on boarding Trading members.

• Index Circuit Filters – It brings coordinated trading halt in all equity and equity derivative markets at 3 stages of the index movement, either way viz. at 10%, 15% and 20% based on previous day closing index value.

• Trade Execution range – Orders are matched and trades take place only if the trade price is within the reference price and execution range.

• Order Value Limitation – Maximum Order Value limit allowed per order.

• Cancel on Logout – All outstanding orders are cancelled, if the enabled user logs out.

• Kill Switch – All outstanding orders of the trading member are cancelled if trading members executes kill switch.

• Risk Reduction Mode – Limits beyond which order level risk management shall be initiated instead of trade level.

• Compulsory Close out – Incoming order, if it results in members crossing the margins available with the exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading member to create fresh positions.

• Capital Adequacy Check – Refers to monitoring of trading member’s performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached.

• Fixed Price Band / Dynamic Price band – Limits applied within which securities shall move; so that volatility is curbed, orderliness in brought about. For non- derivative securities, price band is 5%, 10% & 20%. For derivative products as operating range of 10% is set and subsequently flexed based on market conditions.

• Trade for Trade Settlement – The settlement of scrip’s available in this segment is done on a trade for trade basis and netting off is allowed.

• Periodic Call Auction – Shifting the security form continuous to call auction method.

• Rumour Verification – Any unannounced news about listed companies is tracked on online basis and letter seeking clarification is sent to the companies and the reply received is disseminated.

1. Key difference between WPI & CPI

2. Basis of SENSEX

3. High Net Worth Individuals

4. Bulk Deal. (June, 19 -3 marks each)

Ans. Key difference between Wholesale Price Index (WPI) & Consumer Price Index (CPI)

1. Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.

2. WPI is based on wholesale prices for primary articles, administered process for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.

3. Prices of WPI are collected on voluntary basis while price data for CPI is collected by Investigators by visiting markets.

4. CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.

5. WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

Answer 6(b)

Sensitive Index or Sensex is the stock market index for the BSE. It is also sometimes referred to as BSE S&P Sensex. The calculation of Sensex is done by a Free-Float method that came into existence from September 1, 2003. The level of Sensex is direct indication of the performance of 30 stocks in the market. The free-float method takes into account the proportion of the shares that can be readily traded in the market. This does not include the ones held by various shareholders and promoters or other locked- shares not available in market.

Steps to calculate Sensex

• The market capitalization is taken into account. This is done by multiplying all the shares issued by the company with the price of its stock.

• BSE determines a Free-Float factor that is a multiple of the market capitalization of the company. This helps in determining the free-float factor market capitalization based on details submitted by the company.

• Ratio and Proportion are used based on the base index of 100. This helps to determine the Sensex.

Answer 6(c)

HNIs or High Net worth Individuals is a class of individuals who are distinguished from other retail segment based on their net wealth, assets and investible surplus. While there is no standard put forth for the classification, the definition of HNIs varies with the geographical area as well as financial markets and institutions.

Though there is no specific definition, generally in the Indian context, individuals with over Rs. 2 crore investible surplus may be considered to be HNIs while those with investible wealth in the range of Rs. 25 lakhs to Rs. 2 crore may be deemed as Emerging HNIs.

If one is applying for an IPO of the equity shares in an Indian Company, generally, if one apply for amounts in excess of Rs. 2 lakhs, one falls under the HNI category. On the other hand, if one apply for amount under Rs. 2 lakhs, one is considered as a retail investor.

Answer 6(d)

Bulk deal is a trade, where total quantity bought or sold is more than 0.5% of the number of equity shares of a listed company.

Bulk deal can be transacted by the normal trading window provided by brokers throughout the trading hours in a day. Bulk deals are market driven and take place throughout the trading day.

The stock broker, who facilitates the trade, is required to reveal to the Stock Exchange about the bulk deals on daily basis.

Bulk orders are visible to everyone. If the bulk deal happens through a single trade, it should be notified to the Stock Exchange immediately upon the execution of the order. If it happens through multiple trades, it should be notified to the exchange within one hour from the closure of the trading.

Nifty (Dec, 19 – 3 Marks)

Ans. Nifty

National Stock Exchange’s Fifty or Nifty is the market indicator of NSE. It is a collection of 50 stocks. It is also referred to as Nifty 50. It is owned and managed by India Index Services and Products Ltd. (IISL). Nifty is calculated through the free-float market capitalization weighted method. It multiples the Equity capital (expressed in terms of number of shares outstanding) with a price to derive the market capitalization. To determine the Free-float market capitalization, equity capital (as stated earlier) is multiplied by a price which is further multiplied with Investable Weight Factor (IWF) which is the factor for determining the number of shares available for trading freely in the market. The Index is determined on a daily basis by taking into consideration the current market value (free float market capitalization) divided by base market capital and then multiplied by the Base Index Value of 1000.

What are the key differences between WPI and CPI ? (June, 24 – 5 Marks)

Ans. Key differences between Wholesale Price Index (WPI) & Consumer Price Index (CPI)

• Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is

used for adjusting income and expenditure streams for changes in the cost of living.

• WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.

• Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.

• WPI covers all goods including intermediate goods transacted in the economy while CPI covers only consumer goods and consumer services.

• WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

Ans.

Some of the key risk management measures initiated by SEBI in the Secondary Market are as under:

Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility.

12. VaR based margining system.

13. Specification of mark to Market margins.

14. Specification of Intra-day trading limits and Gross Exposure Limits.

15. Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges.

16. Specification of time limits of payment of margins.

17. Collection of margins on upfront basis.

18. Index based market wide circuit breakers.

19. Automatic de-activation of trading terminals in case of breach of exposure limits.

20. VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market. • Additional margins have also been specified to address the balance 1% cases.

21. Collection of margins from institutional clients on T+1 basis.

Ans. National Stock Exchange Fifty or Nifty is the market indicator of NSE. It is a collection of 50 stocks. It is also referred to as Nifty 50. It is owned and managed by India Index Services and Products Ltd. (IISL).

Nifty is calculated through the free-float market capitalization weighted method. It multiplies the Equity capital (expressed in terms of number of shares outstanding) with a price to derive the market capitalization. To determine the Free-float market capitalization, equity capital (as stated earlier) is multiplied by a price which is further multiplied with IWF (Investible Weight Factors) which is the factor for determining the number of shares available for trading freely in the market. The Index is determined on a daily basis by taking into consideration the current market value (free float market capitalization) divided by base market capital and then multiplied by the Base Index Value of 1000.

Ans. SEBI, vide its circular, had introduced block mechanism in the demat account of clients undertaking sale transactions on optional basis, for ease of operations in Early Pay-in mechanism. When the client intends to make a sale transaction, shares will be blocked in the demat account of the client in favour of Clearing Corporation. If sale transaction is not executed, shares shall continue to remain in the client’s demat account and will be unblocked at the end of the T Day. Thus, this mechanism will do away with the movement of shares from client’s demat account for early pay-in and back to client’s demat account if trade is not executed.

SEBI vide this circular has provided that the facility of block mechanism shall be mandatory for all Early Pay-In transactions with effect from November 14, 2022. Further, SEBI vide its Circular No. SEBI/HO/MIRSD/DOP/P/CIR/2022/143 dated October 27, 2022 has issued a clarification on “Block Mechanism in demat account of clients undertaking sale transactions”. As per the clarification the block mechanism shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.

Ans. Currency derivatives are financial contracts between the buyer and seller involving the exchange of two currencies at a future date, and at a stipulated rate. Currency Derivative trading is similar to Stock Futures and Options trading. However, the underlying asset are currency pairs (such as USDINR or EURINR) instead of stocks. Currency Options and Currency Futures trading is done in the Foreign Exchange markets. Forex rates are the value of a foreign currency relative to domestic currency. The major participants of Currency trading in India are banks, corporations, exporters and importers. In August 2008, SEBI permitted Exchange traded Currency Derivatives on the Indices. The clearing of the currency derivatives market should be done by an independent Clearing Corporation, which satisfies the eligibility for a clearing corporation.

Ans. In order to facilitate execution of large trades, the stock exchanges are permitted to provide a separate trading window. A trade executed on this separate trading window is termed as ‘block deal’. SEBI introduced a new block window mechanism for the block trades from January 01, 2018. A trade, with a minimum quantity of 5,00,000 shares or minimum value of Rs.5 crore executed through a single transaction on this separate window of the stock exchange will constitute a “block deal”.

Session Timings:

1. Morning Block Deal Window: The window shall operate between 08.45 AM to 09.00 AM

2. Afternoon Block Deal Window: This window shall operate between 02:05 PM to 2.20 PM

• In the block deal the minimum order size for execution of trades in the Block deal window shall be Rs.10 Crore.

• The orders placed shall be within ±1% of the applicable reference price in the respective windows as stated above.

• The stock exchanges disseminates the information on block deals such as the name of the scrip, name of the client, quantity of shares bought/sold, traded price, etc to the general public on the same day, after the market hours.

1. How should Rajesh file a complaint with SEBI ?

2. What information does Rajesh needs to provide ?

3. What is the timeline for lodging complaint and one-time Review option ?

4. Can a complaint in SCORES be filed against a company under liquidation ? If yes, state the procedure. (Dec, 24 - 1+1+1+2=5 marks)

Ans.

Investors who wish to lodge a Complaint on SCORES (complainant) are required to register themselves on www.scores.gov.in by clicking on “Register here” under the “Investor Corner”.

5. Rajesh while filing the registration form should give the details like Name of the investor, Permanent Account Number (PAN), contact details, email id, for effective communication and speedy redressal of the grievances.

6. In order to enhance ease, speed and accuracy in the redressal of grievance, the investor may lodge the Complaint against any Entity on SCORES within a period of one year from the date of occurrence of the cause of action. If any complaint is filed on SCORES beyond the limitation period specified above, SEBI may reject such complaint. If the complainant is not satisfied with the resolution provided by the entity, the complainant may request for a review of the resolution provided by the entity within 15 calendar days from the date of the Action Taken Report.

7. Any complaint against a liquidated company(ies), or company(ies) under liquidation cannot be dealt through SCORES. Therefore, no complaint can be filed against such category of company(ies) in SCORES.

Ans. Since monetary policies are influenced by inflation and inflationary expectations in the economy, it is therefore critical that inflation index should be able to predict future inflation with reasonable accuracy. Generally, when a country is operating in a low interest rate regime, borrowers can borrow money at a lower interest rate. This aids in increased purchased power of the consumers. The demand for the goods increases and subsequently sensing a higher demand, the prices will also raise. This condition drives the inflation rates higher. When the inflation rates have raised more than the optimal levels, the Reserve Bank of India (RBI) steps in to increase interest rate to control inflation rate. When inflationary pressure starts building in the economy, RBI hikes the repo rate and/ or cash reserve ratio (CRR) to manage the money supply causing higher inflation. This ultimately impact the supply of money in the Stock Market.

Maintaining an optimal inflation rate is the primary task of Monetary Policy decision makers of any nation. An optimal inflation rate ensures a healthy economy. More often than not, the policy makers tend to spur growth in a stalled economy by slashing the interest rates, thereby increasing the money available in the markets. However, in order to implement such rate cuts the inflation rate should be at an optimal level. So, it becomes the prime responsibility of Reserve Bank to monitor Wholesale Price Index (WPI) and Consumer Price Index (CPI) to ensure that economy is balance.

A rise in the inflation rate impacts market sentiments. A higher inflation rate drives the interest rates higher and hence borrowing becomes costly for the banks, corporates and financial institutions. Therefore, the valuations of capital-intensive companies and sectors may come under pressure as their margins decrease due to the higher interest burden.

However, the markets are governed by many factors and the direction cannot be determined by reading just one factor. Global sentiments and global funds inflows are other crucial factors that impact the direction of stock markets significantly.

Examine the recourses available with the Adjudicating Officer for recovery of amount under the Securities Contract (Regulation) Act, 1956. (June, 2022 – 4 marks)

Ans. RECOVERY OF AMOUNTS – SECTION 23JB of SC®A, 1956

1. If a person fails to pay the penalty imposed under this Act or fails to comply with a direction of disgorgement order issued under section 12A or fails to pay any fees due to the SEBI, the Recovery Officer may draw up under his signature a statement in the specified form specifying the amount due from the person (such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:—

1. attachment and sale of the person's movable property;

2. attachment of the person's bank accounts;

3. attachment and sale of the person's immovable property;

4. arrest of the person and his detention in prison;

5. appointing a receiver for the management of the person's movable and immovable properties,

and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules thereunder were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-tax Act, 1961.

Explanation 1.— For the purposes of this sub-section, the person's movable or immovable property or monies held in bank accounts shall include any property or monies held in bank accounts which has been transferred, directly or indirectly on or after the date when the amount specified in certificate had become due, by the person to his spouse or minor child or son's wife or son's minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property or monies held in bank accounts so transferred to his minor child or his son's minor child is concerned, it shall, even after the date of attainment of majority by such minor child or son's minor child, as the case may be, continue to be included in the person's movable or immovable property or monies held in bank accounts for recovering any amount due from the person under this Act.

Explanation 2. — Any reference under the provisions of the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a reference to the person specified in the certificate.

Explanation 3.— Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act, 1961, shall be construed as a reference to appeal before the Securities Appellate Tribunal under section 23L of this Act.

The Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising the powers under sub-section (1).

2. Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a Recovery Officer under sub-section (1), pursuant to non-compliance with any direction issued by the SEBI under section 12A, shall have precedence over any other claim against such person.

For the purposes of sub-sections (1), (2) and (3), the expression “Recovery Officer” means any officer of the SEBI who may be authorised, by general or special order in writing to exercise the powers of a Recovery Officer.

1. Can Gelwel Ltd. file an appeal against the penalty order, issued by Bombay Stock

Exchange, for default in compliances ?

With whom and within what time period appeal should be filed, if applicable ?

2. What is the time period, within which such appeals if filed should be disposed off ?

(Dec, 24 - 2+2+1=5 marks)

Ans.

1. Section 23L of the Securities Contracts (Regulation) Act, 1956 stipulates that any person aggrieved, by the order or decision of the recognised stock exchange or the adjudicating officer or any order made by the Securities and Exchange Board of India under or sub-section (3) of section 23-I, may prefer an appeal before Securities Appellate Tribunal (SAT).

Therefore, under this case, Gelwel Ltd. is eligible to file an appeal against the penalty order issued by Bombay Stock Exchange.

The appeal by Gelwel Ltd. should be filed with Securities Appellate Tribunal (SAT) within a period of 45 days from the date on which a copy of the order or decision is received by the appellant and it shall be in such form and be accompanied by such fees as may be prescribed.

As the penalty order from stock exchange was received by Gelwel Ltd. on 10th December 2024. Therefore, the appeal should be filed within 45 days from the date of receipt of order. However, the SAT may entertain an appeal after the expiry of the said period of 45 days if it is satisfied that there was sufficient cause for not filing it within that period.

Every appeal filed before the Securities Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within 6 months from the date of receipt of the appeal.

Ans. Section 8A(1) of the Securities Contracts (Regulation) Act, 1956 provides that a recognised stock exchange may, with the prior approval of SEBI, transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under the Companies Act, 2013, for the purpose of –

1. the periodical settlement of contracts and differences thereunder;

2. the delivery of, and payment for, securities;

3. any other matter incidental to, or connected with, such transfer.

Ans. Rule 21 of the Securities Contracts (Regulations) Rules, 1957 deals with the delisting of securities. A recognized stock exchange may, without prejudice to any other action that may be taken under the Act or under any other law for the time being in force, delist any securities listed thereon on any of the following grounds in accordance with the regulations made by the Securities and Exchange Board of India, namely:—

1. the company has incurred losses during the preceding 3 consecutive years and it has negative net-worth;

2. trading in the securities of the company has remained suspended for a period of more than 6 months;

3. the securities of the company have remained infrequently traded during the preceding three years;

4. the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the Act or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than rupees one crore or imprisonment of not less than 3 years;

5. the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act, 2013;

6. shareholding of the company held by the public has come below the minimumlevel applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange. No securities shall be delisted unless the company concerned has been given a reasonable opportunity of being heard.

Ans. ST Ltd. has right to appeal to Securities Appellate Tribunal (SAT) against refusal of stock exchanges to list securities of public companies. As per Regulation 22A of Securities Contracts (Regulation) Act, 1956, where a recognized stock exchange, acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal, it may

1. Within 15 days from the date on which the reasons for such refusal are furnished to it, or

2. Where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the Companies Act, 2013 (i.e within 10 weeks from the date of subscription list), the application for permission for the shares or debentures to be dealt with on the stock exchange, within 15 days from the date of expiry of the specified time or within such further period, not exceeding 1 month as the Securities Appellate Tribunal may, on sufficient cause being shown, allow appeal to the SAT having jurisdiction in the matter against such refusal, omission or failure, the Securities Appellate Tribunal may, after giving the stock exchange, an opportunity of being heard, -

   1. vary or set aside the decision of the stock exchange; or

   2. where the stock exchange has omitted or failed to dispose of the application within the specified time, grant or refuse the permission,

and where the SAT sets aside the decision of the recognized stock exchange or grants the permission, the stock exchange shall act in conformity with the orders of the Securities Appellate Tribunal.

Every appeal shall be in such form and be accompanied by such fee as may be prescribed. The Securities Appellate Tribunal shall send a copy of every order made by it to the SEBI and parties to the appeal.

The appeal filed before the SAT shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within 6 months from the date of receipt of the appeal.

Ans. Power of recognised stock exchanges to make/amend bye-laws

As per Section 9 of the Securities Contracts (Regulations ) Act, 1956 any recognized stock exchange may, subject to the previous approval of SEBI, make bye-laws for the regulation and control of contracts. In particular, and without prejudice to the generality of the foregoing power, such bye-laws may provide for:

1. the opening and closing of markets and the regulation of the hours of trade;

2. a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;

3. the regulation or prohibition of blank transfers;

4. the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;

5. the fixing, altering or postponing of days for settlements;

6. the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities;

7. the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities;

8. the method and procedure for the settlement of claims or disputes, including settlement by arbitration;

9. the levy and recovery of fees, fines and penalties;

10. the regulation of the course of business between parties to contracts in any capacity;

11. the fixing of a scale of brokerage and other charges;

12. the emergencies in trade which may arise, whether as a result of pool or syndicated operations or concerning or otherwise, and the exercise of powers in such emergencies including the power to fix maximum and minimum prices for securities;

13. the making, comparing, settling and closing of bargains;

14. the regulation of dealings by members for their own account;

15. the separation of the functions of jobbers and brokers;

16. the limitations on the volume of trade done by any individual member in exceptional circumstances;

17. the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.

Section 7A of the Securities Contracts (Regulation) Act, 1956, stipulates that a recognized stock exchange may make rules or amend any rules made by it to provide for all or any of the following matters, namely,

1. the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;

2. the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital of the stock exchange;

3. the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange; and

4. such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in clauses (a) (b) and (c).

Powers have been delegated concurrently to SEBI also.

Ans. The continuous listing requirment has been prescribed under Rule 19A(1) of the Securities Contracts (Regulation) Rules ("SCRR"), 1957, which stipulates that every listed company other than public sector company shall maintain public shareholding of at least 25%. However, any listed company which has public shareholding below 25%, shall increase its public shareholding to at least twenty five per cent, within a period of four years from the date of commencement of amendment to the said rules in 2014, in the manner specified by SEBI.

SEBI has vide its Circular dated November 30, 2015 and February 22, 2018 has prescribed the various methods that may be used by a listed entity to achieve compliance with the minimum public shareholding requirements mandated under rules 19(2) (b) and 19A of the SCRR read with regulation 38 of the SEBI Listing Regulations, 2015.

The following are the various methods :

1. Issuance of shares to public through prospectus;

2. Offer for sale of shares held by promoters to public through prospectus;

3. Sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012;

4. Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009;

5. Rights Issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares that may arise from such issue;

6. Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares that may arise from such issue;

7. Sale of shares held by the promoters/promoter group up to 2% of the total paid- up equity share capital of the listed entity in the open market, subject to the conditions specified.

8. Allotment of eligible securities through Qualified Institutions Placement in terms of Chapter VIII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009

Ans. Additional trading floor means a trading ring or trading facility offered by a recognized stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor under the regulatory framework of that stock exchange.

In accordance with Section 13A of the Securities Contracts (Regulation) Act, 1956, a stock exchange may establish an additional trading floor with the prior approval of the SEBI in accordance with the terms and conditions stipulated by the SEBI. Earlier, the trading in the stock exchange was with the physical presence of brokers on the trading floor of a stock exchange. Now, all stock exchanges have screen-based trading. Further, the brokers can have terminals at any place in India and hence the concept of 'trading floor’ has become obsolete.

Ans. According to section 23A of the Securities Contracts (Regulation) Act, 1956, any person, who is required under this Act or any rules made thereunder,—

1. to furnish any information, document, books, returns or report to a recognised stock exchange or to the SEBI, fails to furnish the same within the time specified therefor in the listing agreement or conditions or bye-laws of the recognised stock exchange or the Act or rules made thereunder, shall be liable to a penalty which shall not be less than ₹1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of ₹ 1 crore for each such failure.

2. to maintain books of account or records, as per the listing agreement or conditions, or bye- laws of a recognised stock exchange, fails to maintain the same, shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of ₹ 1 crore.

The answer will not differ as the penalty provisions are same in both the cases in the present scenario, if the information sought by stock exchange or SEBI.

Ans. Section 15Z of the SEBI Act, 1992 or/and Section 22F of the Securities Contracts (Regulation) Act, 1956, lay down that any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within 60 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.

It has been 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 60 days.

Procedure for filing appeal to the Supreme Court:

• Obtaining a copy of the Securities Appellate Tribunal order;

• Preparation of Appeal;

• Filing of appeal to the Supreme Court.

1. Whether in the given case, Mukharjee is entitled to receive and retain the income on these securities for the financial year ended 31st March, 2022?

2. What would be your answer in case the transferee lodged the instrument of transfer 10 days after the date on which the income on these securities became due?

[Dec 23 – 5 (2+3) Marks]

Ans. Section 27A (1) of the Securities Contracts (Regulation) Act, 1956 provides that it shall be lawful for the holder of any securities, being units or other instruments issued by the collective investment scheme, whose name appears on the books of the collective investment scheme issuing the said security to receive and retain any income in respect of units or other instruments issued by the collective investment scheme declared by the collective investment scheme in respect thereof for any year, though the said security, being units or other instruments issued by the collective investment scheme, has already been transferred by him for consideration, unless the transferee who claims the income in respect of units or other instruments issued by the collective investment scheme from the transfer or has lodged the security and all other documents relating to the transfer which may be required by the collective investment scheme with the collective investment scheme for being registered in his name within fifteen days of the date on which the income in respect of units or other instruments issued by the collective investment scheme became due. In view of the above-

1. Mr. Mukharjee is entitled to retain the income received by him as the transferee has lodged an instrument for transfer 1 month after the date on which the income became due.

2. The answer in the second case would differ. The holder i.e. Mr. Mukharjee, cannot receive and retain the income since the instrument for transfer was lodged with the company within the statutory period of 15 days by the transferee. Accordingly, the transferee would be entitled to receive the income on these securities. However, section 27A(1) will not affect the right of transferee to enforce his rights, if any, against the transferor or any other person if the CIS refuses to register, the transfer of the security in the name of the transferee.

During the year 2023-24, SEBI conducted a thorough review of OARSE’s operations to assess its adherence to newly established regulations. The review revealed several deficiencies in OARSE’s trading practices and compliance measures. When SEBI requested detailed information regarding these areas, OARSE failed to provide adequate responses, demonstrating significant lapses in its management and operational framework. As a result, SEBI decided to derecognize OARSE, effectively preventing it from functioning as a stock exchange. This decision highlighted the importance of compliance, technological adaptation, and transparency for the survival of regional exchanges in the competitive financial landscape.

With reference to the above case study, answer the following :

1. What will be the procedure followed by SEBI for withdrawal of recognition of OARSE ?

2. Will the contracts entered by OARSE before the date of withdrawal of recognition be valid ?

3. Who all are bound at OARSE to produce documents sought by SEBI ?

4. What are the provisions relating to the maintain and preserve books of accounts and other documents by any Recognised Stock Exchange in India ?

5. Can business of any Recognised Stock Exchange be suspended ? (Dec, 24 – 2 Marks each)

Ans.

1. Section 5 of the Securities Contracts (Regulation) Act, 1956 lays down that if the Central Government is of opinion that the recognition granted to a stock exchange should in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the governing body of the stock exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the stock exchange.

2. Section 5 of the Securities Contracts (Regulation) Act, 1956 prescribes that the withdrawal of recognition shall not affect the validity of any contract entered into or made before the date of the notification, and the Central Government may, after consultation with the stock exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.

Therefore, the contracts entered by the Old Age Regional Stock Exchange (OARSE) before the date of withdrawal of recognition will be valid.

Where an inquiry in relation to the affairs of a recognised stock exchange or the affairs of any

of its members in relation to the stock exchange has been undertaken:

1. every director, manager, secretary or other officer of such stock exchange;

2. every member of such stock exchange;

3. if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm; and

4. every other person or body of persons who has had dealings in the course of business with any of the persons mentioned in clauses (a), (b) and (c), whether directly or indirectly;

shall be bound to produce before the authority making the inquiry all such books of account, and other documents in his custody or power relating to or having a bearing on the subject- matter of such inquiry and also to furnish the authorities within such time as may be specified with any such statement or information relating thereto as may be required of him.

Every recognised stock exchange and every member thereof shall maintain and preserve for not exceeding five years such books of accounts, and other documents as the Central Government, after consultation with the stock exchange concerned, may prescribe in the interest of the trade or in the public interest, and such books of account, and other documents shall be subject to inspection to all reasonable times by SEBI.

4. Section 12 of the Securities Contracts (Regulation) Act, 1956 states that if in the opinion of the Central Government, an emergency has arisen and for the purpose of meeting the emergency, the Central Government considers it expedient so to do, it may, by notification in the Official Gazette, for reasons to be set out therein, direct a recognised stock exchange to suspend such of its business for such period not exceeding seven days and subject to such conditions as may be specified in the notification, and if, in the opinion of the Central Government, the interest of the trade or the public interest requires that the period should be extended, may, by like notification extend the said period from time to time. However, where the period of suspension is to be extended beyond the first period, no notification extending the period of suspension shall be issued unless the governing body of the recognised stock exchange has been given an opportunity of being heard in the matter.

Ans. Various powers Central Government enjoying under the Securities Contracts (Regulation) Act, 1956 and the Rules and Regulations made thereafter are as follow:

1. To call for periodical returns or direct any inquiries to be made (Section 6): Every recognised stock exchange and every member thereof shall maintain and preserve for such periods not exceeding five years such books of account, and other documents as the Central Government, after consultation with the stock exchange concerned, may prescribe in the interest of the trade or in the public interest.

2. To direct rules to be made or to make the rules (Section 8): Section 8 deals with the power of Central Government to make rules or direct rules to be made in respect of recognised stock exchange.

3. To Supersede governing body of a Recognised Stock Exchange (Section 11): Where the Central Government is of opinion that the governing body of any recognised stock exchange should be superseded, then, it may, by notification in the Official Gazette, declare the governing body of such stock exchange to be superseded.

4. To Suspend Business of a Recognised Stock Exchange (Section 12): If in the opinion of the Central Government, an emergency has arisen and for the purpose of meeting the emergency, the Central Government considers it expedient so to do, it may, by notification in the Official Gazette, for reasons to be set out therein, direct a recognised stock exchange to suspend such of its business for such period not exceeding seven days and subject to such conditions as may be specified in the notification.

5. To prohibit contracts in certain cases (Section 16): Section 16 stipulates that if the Central Government is of opinion that it is necessary to prevent undesirable speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no person in the State or area specified in the notification shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of any security specified in the notification except to the extent and in the manner, if any, specified therein.

6. To grant Immunity (Section 23 O): The Central Government may, on recommendation by the SEBI, grant immunity from prosecution for any offence under Securities Contracts (Regulation) Act, 1956, or the rules or the regulations made thereunder or also from the imposition of any penalty under this Act with respect to the alleged violation.

7. To delegate (Section 29A): Section 29A stipulates that the Central Government may, by order published in the Official Gazette, direct that the powers (except the power under section 30) exercisable by it under any provision of Securities Contracts (Regulation) Act, 1956 shall, in relation to such matters and subject to such conditions, if any, as may be specified in the order, be exercisable also by the SEBI or the Reserve Bank of India.

8. Power to make Rules (Section 30): Section 30 empowers the Central Government to make rules for the purpose of carrying into effect the objects of the Securities Contracts (Regulation) Act, 1956 by notification in the Official Gazette.

Ans. With regulatory jurisdiction extended over the corporates with respect to issue of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market, SEBI is vested with following statutory powers:

1. protecting the interests of investors in securities,

2. promoting the development of the securities market, and

3. regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI can:

• specify the matters to be disclosed and the standards of disclosure required for the protection of investors in respect of issues;

• issue directions to all intermediaries and other persons associated with the securities market in the interest of investors or of orderly development for securities market; and

• conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act.

In short, it has been given necessary autonomy and authority to regulate and develop an orderly securities market.

Enumerate such measures in the light of the provisions of the SEBI Act. (Dec, 20 – 4 Marks)

Ans. As per Section 11(4) of SEBI Act, 1992, the SEBI may, by an order or for reasons to be recorded in writing, in the interest of investors or securities market take any of the following measures either pending investigation or inquiry or on completion of such investigation or inquiry namely:

1. suspend the trading of any security in a recognised Stock Exchange

2. restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities.

3. suspend any office-bearer of any stock exchange or self-regulatory organization from holding such position.

4. impound and retain the proceeds or securities in respect of any transaction which is under investigation

5. attach, for a period not exceeding 90 days, bank accounts for other property of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or regulations made thereunder;

6. direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation.

Ans. Section 28A of the SEBI Act, 1992 deals with recovery the amount of Penalty by Recovery Officer. If a person-

• fails to pay the penalty imposed under this act or

• fails to comply with any direction of SEBI for refund of monies or

• fails to comply with a direction of disgorgement order issued under Section 11B or

• fails to pay any fees due to SEBI, the Recovery Officer may draw up under his signature a statement in the specified form specifying the amount due from the person.

The Recovery Officer shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:

1. attachment and sale of the person's movable property;

2. attachment of the person's bank accounts;

3. attachment and sale of the person's immovable property;

4. arrest of the person and his detention in prison;

5. appointing a receiver for the management of the person's movable and immovable

(a) the term for which he may be appointed as Presiding Officer of the SAT

(b) Whether he can be re-appointed as such and remains as Presiding Officer of the Securities Appellate Tribunal ? (Dec, 18 – 4 Marks)

Ans. According to Section 15N of SEBI Act, 1992, the Presiding Officer or every Judicial or Technical Member of the Securities Appellate Tribunal shall hold office for a term of 5 years from the date on which he enters upon his office, and shall be eligible for reappointment for another term of maximum 5 years.

However, no Presiding Officer or the Judicial or Technical Member shall hold office after he has attained the age of 70 years.

In the given case, Hon'ble Justice A has already attained age of 62 years at the time of first appointment as Presiding Officer of SAT, hence he can be appointed for first 5 years. He can be also re-appointed further but only for 3 years, as after further 3 years he will attain the age of 70 years.

Ans. Appeal to the Securities Appellate Tribunal – Section 15T

1. Appealable Order - any person aggrieved,—

   1. by an order of the Board made under this Act, or the rules or regulations made thereunder; or

   2. by an order made by an adjudicating officer under this Act; or,

   3. by an order of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority,

may prefer an appeal to SAT having jurisdiction in the matter.

Time Limit of Appeal and Extension - Every such appeal shall be filed within a period of 45 days from the date on which a copy of the order made by the Board or the Adjudicating Officer or the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, as the case may be, is received by him and it shall be in such form and be accompanied by such fee as may be prescribed :

Extension - Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of 45 days if it is satisfied that there was sufficient cause for not filing it within that period.

Order by SAT - On receipt of such appeal, the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

3. Non-Appealable Order - No appeal shall lie to the Securities Appellate Tribunal from an order made—

   1. by the Board;

   2. by an adjudicating officer, with the consent of the parties.

4. Copy of Order to be sent by SAT - The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, or the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, as the case may be the parties to the appeal and to the concerned Adjudicating Officer.

5. Disposal of Appeal - The appeal filed before the SAT shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within 6 months from the date of receipt of the appeal.

Procedure and powers of the Securities Appellate Tribunal- Section 15U

Guiding Principles to exercise powers - SAT shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other provisions of this Act, and of any rules, the SAT shall have powers to regulate their own procedure including the places at which they shall have their sittings.

Ans. Section 20A of the SEBI Act, 1992 lays down that no order passed by the SEBI or the adjudicating officer under this Act shall be appealable except as provided in section 15T or section 20 and no civil court shall have jurisdiction in respect of any matter which the SEBI (or the adjudicating officer) is empowered by, or under, this Act to pass any order 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 order passed by the SEBI or the adjudicating officer by, or under, the SEBI Act.

Any person aggrieved by an order of the SEBI made or by an order made by an adjudicating officer under the SEBI Act or by an order of the Insurance Regulatory and Development Authority (IRDA) or the Pension Fund Regulatory and Development Authority (PFRDA) may prefer an appeal to a Securities Appellate Tribunal (SAT) having jurisdiction in the matter within a period of 45 days from the date on which a copy of the order made by the SEBI or the Adjudicating Officer or the IRDA or the PFRDA as the case may be.

In view of the above provisions, the company should move to the Securities Appellate Tribunal (SAT).

1. The term for which he may be appointed as Presiding Officer of the SAT.

2. Whether he can be re-appointed as such and remains as Presiding Officer of the Securities Appellate Tribunal.

(Dec 23 – 4 Marks)

Ans. As per Section 15M of the SEBI Act, 1992, a person shall not be qualified for appointment as the Presiding Officer of the Securities Appellate Tribunal, unless he is, or has been, a Judge of the Supreme Court or a Chief Justice of a High Court or a Judge of High Court for at least seven years.

Further, as per Section 15N, the Presiding Officer of the Securities Appellate Tribunal shall hold office for a term of five years from the date on which he enters upon his office, and shall be eligible for reappointment for another term of maximum five years. However, a person shall not hold office as the Presiding Officer after he has attained the age of 70 years.

Keeping in view the above provisions, Mr. Z can be appointed as Presiding Officer of SAT since at the date of the appointment he has attained the age of 64 years. After five years, he will attain the age of 69 years and hence can be re-appointed. However, on the attainment of the age of 70 years, Mr. Z shall have to vacate the office of Presiding Officer and he shall not be re-appointed as Presiding Officer of Securities Appellate Tribunal.

In the context of Securities and Exchange Board of India Act, 1992 and the various rules &

regulations made thereunder, answer the following :

1. What are the powers of SEBI with regard to issue of directions to an intermediary ?

2. What are the grounds on which SEBI can conduct an investigation into the affairs of the intermediary ?

3. What are the powers of the Investigating Authority in the case ?

4. If penalty is imposed on RNP Financial Services Limited, what factors should be taken into account by SEBI or Adjudicating Officer while adjudging the quantum of penalty ?

5. When and how the Investigating Authority should return the seized records of RNP Financial Services Limited ? (June, 25 – 2 Marks each)

Ans.

1. According to the provisions of Section 11B of SEBI Act, 1992, if SEBI is satisfied, after making or causing to be made an enquiry that it is necessary in the interest of investors or orderly development of securities market; or 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 to secure proper management of such intermediary or person; it may issue such directions to the intermediary as may be appropriate in the interest of investors in securities and the securities market.

The power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

Section 11C of the SEBI Act, 1992 provides that where the SEBI has reasonable ground to believe that:

1. the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or

2. any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by SEBI thereunder;

it may, at any time by order in writing, direct any person specified in the order to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the SEBI.

The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to, or produce such books, or registers, or other documents, or record before him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information or the production of such books, or registers, or other documents, or record is relevant or necessary for the purposes of its investigation.

3. According to the provisions of Section 15J of the SEBI Act, 1992, while adjudging the quantum of penalty, the SEBI or the Adjudicating Officer shall have due regard to the following factors:

1. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default,

2. the amount of loss caused to an investor or group of investors as a result of the default,

3. the repetitive nature of the default.

The Investigating Authority shall keep in its custody the books, registers, other documents and record seized under this section for such period not later than the conclusion of the investigation as it considers necessary and thereafter shall return the same to the company or the other body corporate, or, as the case may be, to the managing director or the manager or any other person, from whose custody or power they were seized and inform the Magistrate or Judge of the Designated Court of such return.

The Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof.

1. Dematerialization

2. Fungibility. (Dec, 18 – 4 Marks)

Ans. Dematerialization

Dematerialization is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited to his account in electronic form at the request of the investors

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to demat the shares if he/she wishes to sell the same through the Stock Exchanges.

Fungibility

Section 9 of the Depositories Act, 1996 states that securities in depositories shall be in fungible form. The act envisages that all securities held in depository shall be fungible i.e. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate which is surrendered at the time of entry into depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Ans. Rematerialisation is the process of converting securities held in electronic form in a demat account back in physical certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the Depository Participant (DP) with whom he has an account. A client can rematerialise his dematerialised holdings at any point of time.

Procedure required for rematerialisation is as under:

1. Client submits rematerialisation request form (RRF) to DP.

2. DP enters the request in its system which blocks the client’s holding.

3. DP intimates to Depository and simultaneously, DP sends the RRF to the Registrar/ Issuer.

4. Registrar/ Issuer prints certificates and dispatch to the client.

5. Registrar/ Issuer electronically confirms remat to Depository.

6. Client’s account with DP debited.

The trading is permitted only in electronic form for the listed entities. Hence, the securities sent for rematerialisation cannot be traded. Therefore, Rohit will not able to trade his securities post-remat.

Ans. Under the Depositories Act, 1996:

A “Beneficial owner” means a person whose name is recorded as such with a depository, and

A “Depository” means a company formed and registered under the Companies Act, and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992.

Section 10 of the Depositories Act, 1996, further lays down that a depository should be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. Thus, the depository as a registered owner should not have any voting rights or any other rights in respect of securities held by it.

The beneficial owner is entitled to all the rights and benefits and is subject to all the liabilities in respect of his securities held by a depository. Under the Depositories Act, 1996, beneficial owners have the following rights:

1. 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. Every beneficial owner should give intimation of such pledge or hypothecation to the depository and such depository is required to make entries in its records accordingly. (Section 12)

2. A beneficial owner may opt out of the depository system in respect of any security by informing the depository. (Section 14)

3. Any loss caused to the beneficial owner due to the negligence of the depository or the participant, would be indemnified by the depository to such beneficial owner. (Section 16)

Ans. Various roles a Company Secretary can exercise under the Laws Governing to Depositories and Depository Participants, are as under:

1. Right to Legal Representation: In case of any decision of the SEBI, the aggrieved entity/ company (the appellant) may either appear in person or authorise one or more chartered accountants or company secretaries (PCS) or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal (SAT). (Section 23C of Depositories Act, 1996)

2. Internal Audit of Depository Participants: The 2 (two) Depository services providers in India, viz., National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Limited (CDSL) have allowed Company Secretaries in whole-time practice to undertake internal audit of the operations of Depository Participants (DPs).

3. Reconciliation of Share Capital Audit: Company Secretary is authorised to issue quarterly certificate with regard to reconciliation of the total issued capital, listed capital and capital held by depositories in dematerialized form, details of changes in share capital during the quarter, and in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such further issued capital under SEBI (Depositories and Participants) Regulations, 2018. [Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018]

4. Concurrent Audit of Depository Participants: Practising Company Secretary is authorized to carry out concurrent audit of Depository Participants which covers audit of the process of demat account opening, control and verification of Delivery Instruction Slips (DIS).

1. Can a foreign bank, operating in India, be registered as a depository participant ?

2. Manoj Soni, a lawyer by profession, has a Demat account with a scheduled commercial bank but he wants to open another account with another depository participant. Can he do so ?

3. Manmohan Reddy holds shares of XYZ Pvt. Ltd. in Demat Form. Advise how he would get the right issue shares ?

4. Are debt instruments viz; debentures and commercial papers available for Demat at the Depository ?

(June, 24 - 1+1+1+2=5 marks)

Ans.

1. Yes, a foreign bank operating in India, with the approval of the Reserve Bank of India can be registered as a depository participant.

2. Yes, Manoj Soni has a choice to open another Demat account with any depository participant.

3. The concerned company obtains the details of beneficiary holders and their holdings from the depository participant (NSDL or CDSL) as on the record date. The concerned company then issue Right Entitlement (RE) as entitlement to Mr. Manmohan Reddy. The number of shares against those REs will be credited to his Demat account by the company / its RTA.

4. All types of equity/ debt instruments viz. equity shares, preference Shares, partly paid shares, bonds, debentures, commercial papers, certificates of deposit, government securities (G-SEC) etc. irrespective of whether these instruments are listed / unlisted / privately placed can be dematerialized with depository, if they have been admitted with the depository.

Ans. Regulation 76 of the SEBI (Depositories and Participants) Regulations, 2018 provides that every issuer shall submit audit report on a quarterly basis to the concerned stock exchanges audited by a practising Company Secretary or a qualified Chartered Accountant, for the purposes of reconciliation of the total issued capital, listed capital and capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and the in principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such further issued capital.

The audit report is required to give the updated status of the register of members of the issuer and confirm that securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer and where the dematerialization has not been effected within the said stipulated period, the report would disclose the reasons for such delay.

The issuer is under an obligation to immediately bring to the notice of the depositories and the stock exchanges, any difference observed in its issued, listed, and the capital held by depositories in dematerialized form.

Ans. Issuance of Delivery Instruction Slips (DIS)

The procedure followed by the Participants with respect to:

1. Issuance of DIS booklets including loose slips.

2. Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique pre-printed serial numbers.

3. Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

Verification of Delivery Instruction Slips (DIS)

The procedure followed by the Participants with respect to:

1. Date and time stamping (including late stamping) on instruction slips.

2. Blocking of used/reported lost/stolen instruction slips in back office system/ manual record.

3. Blocking of slips in the back office system/manual record which are executed in DPM directly.

4. Two step verification for a transaction for more than `5 lakh, especially in case of off market transactions.

5. Instructions received from dormant accounts.

Ans. Depositories Act, 1996 gives the option to investors to receive securities in physical form or in the dematerialized mode.

It is not necessary that all eligible securities must be in the depository mode. In the scheme of the Depositories legislation, the investor has been given supremacy. The investor has the choice of holding physical securities or opt for a depository-based ownership record.

However, in case of fresh issue of securities, all securities issued have to be in dematerialized form. However, after that, investor will also have the freedom to switch from depository mode to Physical mode and vice versa. The decision as to whether or not to hold securities within the depository mode and if in depository mode, which depository or participant, would be entirely with the investor.

According to the Depositories Act, 1996, an investor has the option to hold securities either in physical or electronic form. Part of holding can be in physical form and part in demat form. However, SEBI has notified that settlement of market trades in listing securities should take place only in the demat mode.

Ans. In order to start the depository services, XYZ Ltd. is required to comply with the following requirements. Any company or other institution to be eligible to provide depository services must:

• has a net worth of not less than ? 100 crore;

• be formed and registered as a Company under the Companies Act, 2013;

• be registered with SEBI as a depository under the SEBI Act, 1992;

• has framed bye-laws with the previous approval of SEBI;

• has one or more participants to render depository services on its behalf;

• has adequate systems and safeguards to prevent manipulation of records and transactions to the satisfaction of SEBI;

• complies with Depositories Act, 1996 and SEBI (Depositories and Participants) Regulations, 2018;

• meet eligibility criteria in terms of constitution, network etc.

Ans. National Securities Depository Limited vide its Circular No. NSDL/POLICY/ 2006/0021 dated June 24, 2006 provides for concurrent audit of the Depository Participants. The Circular provides that w.e.f. August 1, 2006, the process of demat account opening, control and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.

Depository Participants have been advised to appoint a firm of qualified Chartered Accountant(s) or Company Secretary(ies) holding a certificate of practice for conducting the concurrent audit. However, the participants in case they so desire, may entrust the concurrent audit to their Internal Auditors. In respect of account opening, the auditor should verify all the documents including KYC documents furnished by the clients and verified by the officials of the Participants.

The scope of concurrent audit with respect to control and verification of DIS cover the areas given below:

1. Issuance of DIS: The procedure followed by the Participants with respect to:

   1. Issuance of DIS booklets including loose slips.

   2. Existence of controls on DIS issued to Clients including pre-stamping of Client lD and unique pre-printed serial numbers.

   3. Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

2. Verification of DIS: The procedure followed by the Participants with respect to:

   1. Date and time stamping (including late stamping) on instruction slips.

   2. Blocking of used/reported lost/stolen instruction slips in back- office system/ manual record.

   3. Blocking of slips in the back-office system/manual record which are executed in DPM directly.

   4. Two step verifications for a transaction for more than Rs. 5 lakhs, especially in case of off-market transactions.

   5. Instructions received from dormant accounts.

The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued and controls on DIS as mentioned above, during the day, by the next working day. In case the audit could not be completed, he should ensure that the audit is completed within a week’s time.

Ans. Dematerialization is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited his/her account in electronic form at the request of the investor. An investor will have to first open an account with a Depository Participant and then request for the dematerialization of his/her share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Dematerialization of shares is optional and an investor can still hold shares in physical form. Dematerialisation is covered by the provisions of the Dematerialisation Act, 1996, the Companies Act, 2013 and SEBI laws.

Procedure for Dematerialisation:

• Investor open account with Depository Participant.

• Fills dematerialization request form (DRF) for registered shares along with share certificate.

• Investor lodges DRF and certificates with Depository Participant.

• Depository Participant intimates the Depository.

• Depository intimates Registrar/Issuer.

• Depository Participant sends certificates and DRF to Registrar/Issuer

• Registrar/ Issuer confirms demat to Depository.

• Depository credits investor account.

Ans. Intermediaries are service providers and are an integral part of any financial system. SEBI regulates various intermediaries in the primary and secondary markets through its regulations for these respective intermediaries. SEBI has defined the role of each of the intermediary, the eligibility criteria for granting registration, their functions and responsibilities and the code of conduct to which they are bound.

With this aim, these intermediaries are working towards their following objectives:

1. To smoothen the process of investment.

2. To establish a link between the investors and the users of funds.

3. Corporations and Governments do not market their securities directly to the investors. Instead, they hire the services of the market intermediaries to represent them to the investors.

4. Investors, particularly small investors, find it difficult to make direct investment. A small investor desiring to invest may be able to diversify across issuers to reduce risk. He may not be equipped to assess and monitor the credit risk of issuers. Market intermediaries help investors to select investments by providing investment consultancy, market analysis and credit rating of investment instruments.

5. In order to operate in secondary market, the investors have to transact through share brokers. Registrars and Share Transfer Agents, Custodians and Depositories Participants are capital market intermediaries that provide important infrastructure services for both primary and secondary markets.

Therefore, it is said that the capital market intermediaries are vital link between investor, issuer and regulators.

Ans. Conditions of Certificate: Any certificate granted by the SEBI to an intermediary has to be subject to the following conditions that:

• where the intermediary proposes to change its status or constitution, it has to obtain prior approval of the SEBI for continuing to act as an intermediary after such change in status or constitution;

• it has to pay the applicable fees in accordance with the relevant regulations;

• it has to abide by the provisions of the securities laws and the directions, guidelines and circulars as may be issued there under;

• it has to continuously comply with the requirements of Regulation 4;

• it has to meet the eligibility criteria and other requirements specified in these regulations and the relevant regulations.

The SEBI may impose other conditions as it may deem fit in the interest of investors or orderly development of the securities market or for regulation of the working of the intermediary and the intermediary has to comply with such conditions.

Period of validity of certificate

The certificate granted to an intermediary has to be permanent unless surrendered by the intermediary or suspended or cancelled in accordance with the SEBI (Intermediaries) Regulations, 2008.

Ans. “Discretionary Portfolio Manager” means a portfolio manager who under a contract relating to portfolio management, exercises or may exercise, any degree of discretion as to the investment of funds or management of the portfolio of securities of the client, as the case may be.

A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as per his income, age as well as ability to undertake risks. A portfolio manager is responsible for making an individual aware of the various investment tools available in the market and benefits associated with each plan. Make an individual realize why he actually needs to invest and which plan would be the best for him. A portfolio manager is responsible for designing customized investment solutions for the clients according to their financial needs.

Ans. Under the SEBI (Bankers to an Issue) Regulations, 1994, a Banker to an Issue means a scheduled bank or such other banking company as may be specified by the SEBI from time to time, carrying on any of the following activities:

1. Acceptance of application and application monies;

2. Acceptance of allotment or call monies;

3. Refund of application monies;

4. Payment of dividend or interest warrants;

5. Providing escrow services for the purposes of issue management, buyback, delisting, or open offer, as required under the relevant regulations made by SEBI;

6. Opening of a separate bank account for depositing the proceeds in the initial public offer/ further public offer; and

7. Such other activities as may be specified by SEBI.

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. While one or more banks may function as Bankers to the Issue as well as collection banks, others may do the limited work of collecting the applications for securities along with the remittance in their numerous branches in different centres. The banks are expected to furnish prompt information and records to the company and to the lead manager for monitoring and progressing the issue work.

Ans. Investment Adviser

The SEBI (Investment Advisers) Regulations, 2013 defines that the Investment Adviser means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called.

General Obligations and Responsibilities:

1. An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.

2. An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.

3. An investment adviser shall maintain an arms-length relationship between its activities as an investment adviser and other activities.

4. An investment adviser which is also engaged in activities other than investment advisory services shall ensure that its investment advisory services are clearly segregated from all its other activities, in the manner as prescribed.

5. An investment adviser shall ensure that in case of any conflict of interest of the investment advisory activities with other activities, such conflict of interest shall be disclosed to the client.

6. An investment adviser shall not divulge any confidential information about its client, which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force.

7. An investment advisor shall not enter into transactions on its own account which is contrary

to its advice given to clients for a period of fifteen days from the day of such advice.

An investment advisor shall follow Know Your Client procedure as specified by the SEBI from time to time.

8. An investment adviser shall abide by Code of Conduct.

9. An investment adviser shall not act on its own account, knowingly to sell securities or investment products to or purchase securities or investment product from a client.

10. In case of change in control of the investment adviser, prior approval from the SEBI shall be taken.

11. Investment advisers shall furnish to the SEBI information and reports as may be specified by the SEBI from time to time.

12. It shall be the responsibility of the investment adviser to ensure compliance with the certification and qualification requirements.

1. Duties Debenture Trustee

2. Foreign Portfolio Investor (3 marks each) (June,2021)

Ans. Answer (a)

‘Debenture Trustee’ means a trustee appointed in respect of any issue of debentures of a body corporate.

Duties of Debenture Trustee:

It shall be the duty of every debenture trustee to-

• satisfy itself that the prospectus or letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;

• satisfy itself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;

• call for periodical status/performance reports from the issuer company within 7 days of the relevant board meeting or within 45 days of the respective quarter whichever is earlier;

• communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor;

• call for reports on the utilization of funds raised by the issue of debentures;

• Take possession of trust property in accordance with the provisions of the trust deed;

• Exercise due diligence to ensure compliance by the body corporate with the provisions of the Companies Act, the listing agreement of the stock exchange or the trust deed

• To take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice.

• To ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the debenture holders.

• Inform the SEBI immediately of any breach of trust deed or provision of any law.

• Appoint a nominee director on the board of the body corporate when required.

Answer(b) “Foreign Portfolio Investor" means a person who has been registered under Chapter II of SEBI (Foreign Portfolio Investors) Regulations, 2019 and shall be deemed to be an intermediary in terms of the provisions of the SEBI Act, 1992.

General Obligations and Responsibilities

The foreign portfolio investor shall –

1. comply with the provisions of Foreign Portfolio Investors Regulations, as far as they may apply, circulars issued thereunder and any other terms and conditions specified by the SEBI from time to time;

2. forthwith inform the Board and designated depository participant in writing, if any information or particulars previously submitted to the SEBI or designated depository participant are found to be false or misleading, in any material respect;

3. forthwith inform the SEBI and designated depository participant in writing, if there is any material change in the information including any direct or indirect change in its structure or ownership or control, previously furnished by him to the SEBI or designated depository participant;

4. as and when required by the SEBI or any other Government agency in India, submit any information, record or documents in relation to its activities as a foreign portfolio investor;

5. forthwith inform the SEBI and the designated depository participant, in case of any penalty, pending litigation or proceedings, findings of inspections or investigations for which action may have been taken or is in the process of being taken by an overseas regulator against it;

6. obtain a Permanent Account Number from the Income Tax Department;

7. in relation to its activities as foreign portfolio investor, at all times, subject itself to the extant Indian laws, rules, regulations, guidelines and circulars issued from time to time;

8. be a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;

9. undertake necessary KYC on its shareholders/investors in accordance with the rules applicable to it in the jurisdiction where it is organised;

10. provide any additional information or documents including beneficiary ownership details of their clients as may be required by the designate depository participant or the SEBI or any other enforcement agency to ensure compliance with the Prevention of Money Laundering Act, 2002 and the rules and regulations specified thereunder, the Financial Action Task Force standards and circulars issued from time to time by the Board; and

11. ensure that securities held by foreign portfolio investors are free from all encumbrances.

Ans. As per the SEBI (Research Analysts) Regulations, 2014, “Research Analyst” means a person who is primarily responsible for:

1. preparation or publication of the content of the research report; or

2. Providing research report; or

3. making ‘buy / sell / hold recommendation; or

4. giving price target; or

5. offering an opinion concerning public offer, with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘Research Analyst’ and include any other entities engaged in issuance of Research Report or Research Analysis.

Net worth requirement : Body Corporate or Limited Liability Partnership firm – not less than Rs. 25 lakhs; Individual or Partnership firm shall have net tangible assets of value not less than Rs. 1 Lakh.

Role and Responsibility : They study companies and Industries, analyse raw data and make forecast or recommendations about whether to buy, hold or sell securities. They analyse information to provide recommendations about investments in securities to their clients. Investors often view analysts as experts and important source of information about the securities they review and often rely on their advice. There are basically three broad types of analysts, viz. sell-side analysts, buy-side analysts and independent analysts.

Custodian of Securities (3 Marks)June.2019

Ans. As per the SEBI (Custodian) Regulations, 1996, a custodian is a person who carries on the business of providing custodial service to the client. The custodian keeps the custody of the securities of the client. The custodian also provides incidental services such as maintaining the accounts of securities of the client, collecting benefits or rights accruing to the client in respect to the securities.

Roles and Responsibilities:

• Administrate an protect the assets of the clients

• Open a separate custody account and deposit account in the name of each client

• Record Assets

• Conduct registration of Securities Net Worth: Minimum Rs. 50 crore.

1. "SEBI has amended the provisions related to registration of Sub-Broker to act as a market intermediary". Elucidate the statement and discuss the migration path for existing registered Sub-Brokers. (5 marks each)June.2019

Ans. Answer (i)

SEBI vide its circular no. SEBI/HO/MIRSD/DoP/CIR/P/2018/113 dated 12/07/2018 has discontinued acceptance of cash by Stock Brokers.

In view of the various modes of payments through electronic means available today, it is directed that Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of stock broker.

All payments shall be received / made by the Stock Brokers from/to the clients strictly by account payee crossed cheques/ demand draft or by way of credit into the bank account through electronic fund transfer, or any other mode permitted by the Reserve Bank of India. The stock brokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of Stock Broker.

Answer (ii)

Under the current regulatory framework, Sub-Brokers (‘SB’) need to seek registration from SEBI under SEBI (Stock Broker and Sub-Broker) Regulations, 1992, and Authorized Persons (‘AP’) need to seek registration from the concerned Exchange. There is no difference in the operative role of a Sub-Broker and that of an Authorized Person. Therefore, SEBI vide its circular no. SEBI/HO/MIRSD/DoP/CIR/P/2018/117 dated 03/ 08/2018 has discontinued with sub-broker as an intermediary to be registered with SEBI. In view of the same, the need for the category of the Sub-Broker as a market intermediary may no longer be required. Therefore, it is decided that –

1. No fresh registration shall be granted to any person as Sub-Broker. Any pending applications for registration as Sub-Broker under process, shall be returned to the concerned Stock Exchanges for onward transmission to the applicant.

2. The registered Sub-Brokers shall have time till March 31, 2019 in order to migrate to act as an Authorised Person (AP) and / or Trading Member (TM). The sub- Brokers, who do not choose to migrate into AP and / or TM, shall deemed to have surrendered their registration with SEBI as Sub-Broker, w.e.f. March 31, 2019.

3. Consequent upon migration/deemed surrender, the Certificate of Registration granted to the Sub-Broker by SEBI shall stand withdrawn.

4. The migration path for existing registered Sub-Broker, shall be under:

   1. In case of a registered Sub-Broker who is already approved to act as AP in Derivatives Segment of the Exchanges, he shall be registered with the Exchanges to continue activities of Sub-Broker as AP in Cash Segment.

   2. In case of a registered Sub-Broker who is not approved by Stock Exchanges to act as AP in Derivatives Segment, Exchanges shall register them as AP in Cash Segment, to continue their operations without disruption.

   3. The existing Sub-Broker has an option to become a Trading Member, if the Sub-Broker meets the eligibility criteria prescribed under Stock Exchange Bye-Laws and SEBI Regulations and by complying with these Regulations.

1. Role of Portfolio Manager

2. Research Analysts. (3 marks each)Dec.2019

Ans. Meaning of Portfolio Manager

Portfolio manager means any person who pursuant to a contract or arrangement with the client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the clients as the case may be.

Role of Portfolio Manager

A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as per his income, age as well as ability to undertake risks. A portfolio manager is responsible for making an individual aware of the various investment tools available in the market and benefits associated with each plan. Make an individual realize why he actually needs to invest and which plan would be the best for him. A portfolio manager is responsible for designing customized investment solutions for the clients according to their financial needs.

Answer (b) Research Analysts

As per SEBI (Research Analysts) Regulations, 2014, “Research analyst” means a person who is primarily responsible for,-

1. preparation or publication of the content of the research report; or

2. providing research report; or

3. making ‘buy/sell/hold’ recommendation; or

4. giving price target; or

5. offering an opinion concerning public offer,

with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’ and includes any other entities engaged in issuance of research report or research analysis.

They study Companies and industries, analyse raw data, and make forecasts or recommendations about whether to buy, hold or sell securities. They analyse information to provide recommendations about investments in securities to their clients. Investors often view analysts as experts and important sources of information about the securities they review and often rely on their advice.

There are basically three broad types of analysts, viz. sell-side analysts, buy-side analysts and independent analysts.

The net worth requirements of Research Analysts are:

• Body corporate or limited liability partnership firm – not less than `25 Lakh.

Individual or partnership firm shall have net tangible assets of value not less than `1 Lakh.

Contract of Indemnity and Guarantee (3 Marks)Dec.2018

Ans. Contract of Indemnity and Guarantee

1. In a contract of indemnity there are only two parties : the indemnifier and the indemnified. In a contract of guarantee, there are three parties; the surety, the principal debtor and the creditor.

2. In a contract of indemnity, the liability of the indemnifier is primary. In a contract of guarantee, the liability of the surety is secondary. The surety is liable only if the principal debtor makes a default, the primary liability being that of the principal debtor.

3. The indemnifier need not necessarily act at the request of the debtor; the surety gives guarantee only at the request of the principal debtor.

4. In the case of a guarantee, there is an existing debt or duty, the performance of which is guaranteed by the surety, whereas in the case of indemnity, the possibility of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.

5. The surety, on payment of the debt when the principal debtor has failed to pay is entitled to proceed against the principal debtor in his own right, but the indemnifier cannot sue third-parties in his own name, unless there be assignment. He must sue in the name of the indemnified.

Ans. With a view to provide investors an idea about the various activities pertaining to primary market issuances as well as exit options like Takeovers, Buybacks or Delisting, an Investor Charter has been developed in consultation with the Merchant Bankers. This charter is a brief document in an easy to understand language and contains different services to the investors at one single place for ease of reference. All the registered Merchant Bankers have to disclose on their website, Investor Charter for each of the following categories, as prescribed by SEBI:

1. Initial Public Offer (IPO) and Further Public Offer (FPO) including Offer for Sale (OFS);

2. Rights Issue;

3. Qualified Institutions Placement (QIP);

4. Preferential Issue;

5. SME IPO and FPO including OFS;

6. Buyback of Securities;

7. Delisting of Equity Shares;

8. Substantial Acquisitions of Shares and Takeovers.

Additionally, in order to bring about transparency in the Investor Grievance Redressal Mechanism, it has also been decided that all the registered Merchant bankers shall disclose on their respective websites, the data on complaints received against them or against issues dealt by them and redressal thereof, on each of the aforesaid categories separately as well as collectively, latest by 7th of succeeding month as per the format prescribed by the SEBI.

Ans. A custodian holding a certificate of registration as on the date of commencement of the SEBI (Custodian) (Amendment) Regulations, 2022, may provide custodial services in respect of silver or silver related instruments held by a mutual fund only after taking prior approval of the SEBI.

“Custodial Services” in relation to securities or goods of a client or gold or gold related instruments or silver or silver related instruments held by a mutual fund or title deeds of real estate assets held by a real estate mutual fund scheme in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 means, the safekeeping of such securities or goods or gold or gold related instruments or silver or silver related instruments or title deeds of real estate assets and providing services incidental thereto, and includes-

1. maintaining accounts of securities or goods or gold or gold related instruments or silver or silver related instruments or title deeds of real estate assets of a client;

2. undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004;

3. collecting the benefits or rights accruing to the client in respect of securities or goods or gold or silver related instruments or title deeds of real estate assets;

4. keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client;

5. keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf; and

6. maintaining and reconciling records of the above-mentioned services.

Ans. Co-investment means investment made by a Manager or Sponsor or investor of Category I and II Alternative Investment Fund(s) in investee companies where such Category I or Category II Alternative Investment Fund(s) make investment. However, Co-investment by investors of Alternative Investment Fund shall be through a Co- investment Portfolio Manager as specified under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020.

Further, ‘Co-investment Portfolio Manager’ is defined under the SEBI (Portfolio Managers) Regulations, 2020. It means a Portfolio Manager who is a Manager of a Category I or Category II Alternative Investment Fund(s); and

1. provides services only to the investors of such Category I or Category II Alternative Investment Fund(s), and

2. makes investment only in unlisted securities of investee companies where such Category I or Category II Alternative Investment Fund(s) make investments:

Provided that the Co-investment Portfolio Manager may provide services to investors from any other Category I or Category II Alternative Investment Fund(s), which are managed by them and are also sponsored by the same Sponsor(s)."

Ans. Qualified Stock Broker means a stock broker referred under Regulation 18 D of the SEBI (Stock Brokers) Regulations, 1992.

According to Regulation 18D (1), the SEBI may designate a stock broker as a qualified stock broker having regard to its size and scale of operations, likely impact on investors and securities market, as well as governance and service standards, on the basis of the following parameters and the appropriate weightages thereon:

1. the total number of active clients;

2. the available total assets of clients with the stock broker;

3. the trading volumes of the stock broker;

4. the end of day margin obligations of all clients of a stock broker;

5. compliance score as may be specified by the Board;

6. grievance redressal score as may be specified by the Board; and

7. the proprietary trading volumes of the stock broker.

Regulation 18D (2) prescribes that the stock broker designated as a qualified stock broker shall be required to meet enhanced obligations and discharge responsibilities to ensure –

1. appropriate governance structure and processes;

2. appropriate risk management policy and processes;

3. scalable infrastructure and appropriate technical capacity;

4. framework for orderly winding down;

5. robust cyber security framework and processes; and

6. investor services including online complaint redressal mechanism.

SEBI has designated stock brokers, based on identified parameters, as Qualified Stock Brokers (QSBs) to mitigate this risk. Certain Stock Brokers in the market handle a very large number of clients, very large amount of client funds and very large trading volumes. Possible failure of such brokers has the potential to cause widespread impact on investors and reputational damage to the Indian securities market. QSBs would need to comply with enhanced risk management practices/requirements. There would also be enhanced monitoring of such QSBs by SEBI / Market Infrastructure Institutions (MIIs).

Ans. Section 12 of the SEBI Act, 1992 requires that any intermediary in the capital market shall function as such only under a Certificate of Registration issued by SEBI. Where an intermediary has failed to make an application or where the existing intermediary has been refused grant of certificate under these regulations, the Intermediary has to;

1. Forthwith cease to act as such intermediary;

2. Transfer its activities to another intermediary which has been granted a certificate for carrying on such activity or allow its clients or investors to withdraw or transfer their securities or funds held in its custody without any additional cost to such client or investor;

3. Make provisions as regards liability incurred or assumed by the intermediary;

4. Take such other action within the time period and in the manner, as may be required under the relevant regulations or as may be directed by the SEBI.

While refusing grant of certificate to an intermediary, the SEBI may impose such conditions upon the intermediary as it deems fit for protection of investors or clients of the intermediary or the securities market and such conditions shall be complied with.

Ans. Capital market intermediaries are a link between issuer and investors. They help in interposing between investors and issuer and are established by the regulators. These intermediaries provide services to Issuer or Investor or both and are regulated under Securities and Exchange Board of India (SEBI). Entities that help the issuing company and investing investors to perform various transactions in capital market are called as capital market intermediaries.

Intermediaries are service providers and are an integral part of any financial system. SEBI regulates various intermediaries in the primary and secondary markets through its regulations for these respective intermediaries. SEBI has defined the role of each of the intermediary, the eligibility criteria for granting registration, their functions and responsibilities and the code of conduct to which they are bound.

Kinds of Capital Market Intermediaries:

1. Merchant bankers

2. Registrars and Share Transfer agents (RTA)

3. Underwriters

4. Debenture trustees

5. Bankers to an issue

6. Portfolio Managers

7. Stock brokers

General obligations of Capital Market Intermediaries:

Capital Market intermediaries are required to perform the necessary due diligence in the discharge of their duties, as per the respective SEBI Regulations, keeping in mind the Code of Conduct laid down by SEBI.

The registered capital market intermediaries shall be required to comply with the general obligations and responsibilities as specified in the SEBI (Intermediaries) Regulations, 2008 as well as the specific regulation pertaining to the intermediary such as SEBI Merchant Bankers Regulations, Portfolio Managers Regulations etc. including -

1. An intermediary and its directors, officers, employees and key management personnel shall continuously abide by the code of conduct.

2. An intermediary shall provide SEBI with a certificate of its compliance officer on the 1st April of each year certifying:

   1. the compliance by the intermediary with all the obligations, responsibilities and the fulfillment of the eligibility criteria on a continuous basis;

   2. that all disclosures made in Form A and under the relevant regulations are true and complete.

3. Each intermediary shall prominently display a photocopy of the certificate at all its offices including branch offices.

4. The intermediary shall also prominently display the name and contact details of the compliance officer to whom complaint may be made in the event of any investor grievance.

5. The intermediary shall maintain such books, accounts and records as specified in the relevant regulations.

6. The intermediary shall make endeavours to redress investor grievances promptly but not later than 45 days of receipt thereof and when called upon by SEBI to do so it shall redress the grievances of investors within the time specified by SEBI.

7. An intermediary shall appoint a compliance officer for monitoring the compliance by it of the requirements of the Act, rules, regulations, notifications, guidelines, circulars and orders made or issued by SEBI or the Central Government, or the rules, regulations and bye-laws of the concerned stock exchanges, or the self regulatory organization, where applicable.

8. An intermediary, its directors, officers, employees or key management personnel shall not render, directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of its interest, direct or indirect, including its long or short position in the said security has been made, while rendering such advice.

9. An intermediary shall comply with the net worth requirement as specified by SEBI.

Ans. Registrars and Share transfer Agent means the person appointed by a body corporate or any person or group of persons to carry on the various activities as prescribed under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.

Pre-issue Activities:

• Sending instructions to Banks for reporting of collection figures and collection of applications.

• Providing practical inputs to the Lead Manager and Printers regarding the design of the Bid cum-Application form.

• Facilitate and establish information flow system between clients, Banks and Managers to the issue.

• Liaisoning with Regulatory Authorities such as SEBI & Stock Exchanges.

Post Issue Activities:

• Data capturing & validation,

• Reconciliation,

• Provide Allotment Alternatives in consultation with Client/ Merchant Banker and Stock Exchanges,

• Facilitating Listing,

• Uploading of data to the Depositories for crediting of securities electronically,

• Dispatch of Refund orders/ Share Certificates /Credit Advise,

• Periodic Report submission to Regulatory Authorities,

• Reconciliation of Refund payments,

• Attending to post issue Investor queries,

• Web-based investor enquiry system for allotment / refund details.

Ans. An intermediary registered with SEBI shall appoint a compliance officer for monitoring the compliance by it of the requirements of the Act, rules, regulations, guidelines, circulars and orders made or issued by the SEBI or the Central Government, or the rules, regulations and byelaws of the concerned stock exchanges, or the self regulatory organisation. However, the intermediary may not appoint compliance officer if it is not carrying on the activity of the intermediary. The compliance officer shall report to the intermediary or its board of directors, in writing, of any material non-compliance by the intermediary.

Ans. “Debenture Trustee” means a trustee appointed in respect of any issue of debentures of a body corporate. Debenture Trustee is a liaison between the issuer company and the debenture holders. It acts in a fiduciary capacity for protecting the interest of debenture holders.

Appointment of Debenture Trustee:

As per Section 71(5) of the Companies Act, 2013, appointment of debenture trustees is mandatory if a company wants to issue prospectus or make an offer or invitation to public or its members exceeding 500 for the subscription of its debentures. Such appointment must be made before issue of debentures.

However, if the debenture issue is proposed to be listed, under the SEBI (Issue and Listing of Non- convertible Securities), 2021, a debenture trustee is required to be appointed for an issue of debentures whether privately placed or for a public issue of debentures.

The company shall appoint debenture trustees, after complying with the following conditions:

1. Names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders.

2. Before appointment a written consent from the debenture trustee shall be taken and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures.

3. A person shall not be appointed as a debenture trustee, if he-

   1. beneficially holds shares in the company;

   2. is promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;

   3. is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;

   4. is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;

   5. has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;

   6. has any pecuniary relationship with the company amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

   7. is relative of any promoter or any person who is in the employment of the company as director or key managerial personnel.

4. The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee may act. When such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

5. Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than 3/4th (75%) in value of the debentures outstanding, at their meeting.

Eligibility for being debenture trustee:

The capital adequacy requirement for registration as Debenture Trustee, as specified under the SEBI (Debenture Trustees) Regulations, 1993, shall not be less than the net worth of Rs. 10 crore. Further, as per regulation 7, only following persons are entitled to act as a debenture trustee, after obtaining necessary registration from SEBI:

• A scheduled bank carrying on commercial activity; or

• A public financial institution; or

• An insurance company; or

• Body corporate.

Ans. In terms of the SEBI (Credit Rating Agencies) Regulations, 1999, Credit Rating Agency means a body corporate which is engaged in, or proposes to be engaged in, the business of rating of securities that are listed or proposed to be listed on a stock exchange recognized by the SEBI.

Minimum net worth requirement for Credit Rating Agency is ₹ 25 crores.

General Obligations of Credit Rating Agency are as under:

1. Every credit rating agency shall abide by the Code of Conduct.

2. Every credit rating agency shall enter into a written agreement with each client whose securities it proposes to rate.

3. Every credit rating agency shall, during the lifetime of securities rated by it continuously monitor the rating of such securities.

4. Every credit rating agency shall disseminate information regarding newly assigned ratings, and changes in earlier rating promptly through press releases and websites, and, in the case of securities issued by listed companies, such information shall also be provided simultaneously to the concerned regional stock exchange and to all the stock exchanges where the said securities are listed.

5. Every credit rating agency shall disclose Rating Definitions and Rationale.

6. Where any information is called for by the SEBI from a credit rating agency for the purposes of the SEBI (Credit Rating Agencies) Regulations, 1999, including any report relating to its activities, the credit rating agency shall furnish such information to the SEBI.

7. Every credit rating agency shall comply with such guidelines, directives, circulars and instructions as may be issued by the SEBI from time to time.

8. Every credit rating agency shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by the SEBI or the Central Government.

9. Every credit rating agency shall keep and maintain books of accounts, records and

documents for a minimum period of five years.

All claims, differences or disputes between a credit rating agency and its client arising out of or in relation to the activities of the credit rating agency in the securities market shall be submitted to a dispute resolution mechanism that includes mediation and/or conciliation and/or arbitration, in accordance with the procedure specified by SEBI.

(a) State the criteria for listing of Start-up companies on recognised stock exchanges in IFSC.

(b) State the salient features related to Direct Listing and Minimum Subscription.

(Dec, 24 - 3+2=5 marks)

Ans

1. In terms of Regulation 50 of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021, the start-up fulfilling the following criteria shall be eligible to list on the recognised stock exchanges in IFSC, with or without making a public offer:

   1. The offer document of the company should be filed within a period of ten years from the date of incorporation/ registration;

   2. The annual turnover of the company for any of the financial years since incorporation/ registration should not have exceeded USD twenty million; and

   3. The company is working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.

Regulation 63 of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 requires the minimum number of subscribers as 50 or as may be satisfied by the IFSC Authority and that at least 75% of the offer size should be subscribed for the offer to be successful.

The salient features for the framework for listing of start-up and SME companies related to listing of Direct Listing and Minimum subscription are as follows:

Direct Listing

The start-ups and SMEs are permitted to list on the recognised stock exchanges in IFSC without public offer. This would encourage start-ups (including Fintech companies) to list in IFSC and would be a step towards developing IFSC as a hub for Fintech companies. Regulation 55 of the IFSCA (Issuance and Listing of Securities) Regulations, 2021 states that the company shall file the information document along with the prescribed fees. The lead manager(s) shall submit a due diligence certificate along with the information document. The issuer shall simultaneously file the information document with the recognised stock exchange(s).

Minimum subscription

Regulation 63 of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 requires the minimum number of subscribers as 50 or as may be satisfied by the IFSC Authority and that at least 75% of the offer size should be subscribed for the offer to be successful.

Ans. The IFSCA (Issuance and Listing of Securities) Regulations, 2021 enables the following types of listing:

1. an initial public offer of specified securities by an unlisted issuer;

2. a follow-on public offer of specified securities by a listed issuer;

3. Listing of specified securities by a start-up company or a SME;

4. Secondary listing of specified securities;

5. An initial public offer of specified securities by a Special Purpose Acquisition Companies

(SPAC);

Listing of depository receipts;

6. Listing of debt securities;

7. Listing of ESG debt securities; and

8. issuance and/or listing of any other securities as may be specified by the Authority from time

to time.

Further, the following entities would be eligible for listing of securities on the recognised stock exchanges in IFSC:

1. A company incorporated in an IFSC;

2. A company incorporated in India; and

3. A company incorporated in a foreign jurisdiction.

The following entities shall also be eligible in respect of listing of debt securities on a recognised stock exchange, -

1. any supranational, multilateral or statutory organisation/ institution/agency provided such organization/institution/agency is permitted to issue securities as per its constitution. Provided that the entity is registered or headquartered in India, IFSC or a Foreign Jurisdiction;

2. any municipality or any statutory body or board or corporation, authority, trust or agency established or notified by any Central or State Act or any special purpose vehicle notified by the State Government or Central Government including for the purpose of raising fund by the issuer to develop infrastructure or SMART city; and

3. An entity whose securities are irrevocably guaranteed by a Sovereign (India or a Foreign Jurisdiction).

An issuer shall be eligible to list its securities under the IFSCA (Issuance and Listing of Securities) Regulations, 2021 in IFSC only if, -

1. the issuer is duly incorporated or established according to the relevant laws of its place of incorporation or establishment;

2. the issuer is operating in conformity with its constitution; and

3. the listing of securities in IFSC is in accordance with the applicable laws of the jurisdiction of incorporation.

An issuer shall not be eligible to list securities under these regulations if the issuer or any of its promoters, promoter group, controlling shareholders or directors or selling shareholders is –

1. debarred from accessing the capital market; or

2. a wilful defaulter; or

3. a fugitive economic offender.

Listing of specified securities through IPO

An issuer shall be eligible to make an initial public offer only if:

1. the issuer has an average pre-tax profit, based on consolidated audited accounts, of at least USD one million during the preceding three financial years; or

2. the issuer has an operating revenue of at least USD 20 million in the preceding financial year;

or

any other eligibility criteria that may be prescribed by IFSCA.

Listing of Start-up and Small and Medium Sized Enterprise (SME) Companies

The start-up fulfilling the following criteria shall be eligible to list on the recognised stock exchanges, with or without making a public offer, in IFSC:

1. The offer document of the company should be filed within a period of ten years from the

date of incorporation/ registration;

The turnover of the company for any of the financial years since incorporation should not

have exceeded USD 20 million.

The company is working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.

A small and medium enterprise company shall be eligible to list its specified securities on a recognised stock exchange, with or without making a public offer, if the annual turnover of the company for any of the financial years since incorporation/ registration should not have exceeded USD 50 million.

Listing of Special Purpose Acquisition Companies (SPAC)

A SPAC shall be eligible to raise capital through IPO of specified securities on the recognised stock exchanges in IFSC, only if:

1. The primary objective of the issuer is to effect a merger or amalgamation or acquisition of shares or assets of a company having business operations (“business acquisition”);

2. The issuer does not have any operating business.

Listing of Debt Securities

The following categories of debt securities shall be eligible for listing on recognised stock exchanges in IFSC:

1. Debt securities issued by issuers incorporated in IFSC;

2. Debt securities issued by issuers incorporated in India or foreign jurisdiction in any currency other than INR;

3. Masala Bonds;

4. Any other debt securities as permitted by relevant authority from time to time.

What is the International Financial Services Centres Authority (IFSCA)? What are the Powers and Functions of the IFSCA?

Ans. International Financial Services Centre

Financial Services Centres those which cater to customers outside their own jurisdiction are referred to as International Financial Services Centres (IFSCs). These centres are ‘international’ in the sense that they deal with the flow of finance and financial products/services across borders.

International financial services (IFS) are those cross-border services, that deal with the flow of finance and financial products and services such as raising of funds such as debt and equity, risk management, mutual funds and pension funds, asset management done by insurance companies, corporate treasury management operations among others. In common parlance, an IFSC is a jurisdiction with high concentration of financial institutions such as Banks, Stock Markets & related entities, Insurance firms, Fund Managers, FinTech firms, etc., which offer specialized financial services to non-residents and residents, in an environment that promotes financial innovation and facilitates cross border transactions.

Powers and Functions of the IFSCA

Functions of the Authority (Section 12 of IFSCA Act, 2019)

1. Section 12 (1) of IFSCA Act, empowers the Authority to develop and regulate the financial products,

financial services and financial institutions in an IFSC, by such measures as it deems fit.

Under this section, the Authority is empowered to develop and regulate the financial products, services and institutions independently. Further, the authority can take all developmental steps such as authorizing the service providers who aid in assisting the financial service providers, which are an important pillar in providing support services for the entities to function effectively and to build a supporting ecosystem around for the entities in IFSC.

It is to be noted that, the legislature has envisaged that the Authority might regulate diverse financial products, services and institutions in IFSC and at times need the regulatory flexibility. Thus, by virtue of Section 12, it has enabled the authority to adopt any measures as it deems fit.

Presently the role of the Authority has broadened as it regulates Bullion exchange, Foreign Universities and Institutions, Aircraft leasing, Ancillary service providers, Finance Companies and Fintech entities, etc. These services are either not regulated in the domestic sector or are not regulated as a financial service, like in the IFSC. Thus, Section 12 has enabled the Authority to adopt flexibility in handling the diverse regulatory landscape.

Section 12 (2) empowers the Authority to regulate those financial products, financial services and financial institutions in an IFSC:

1. which are permitted to operate in IFSC before the commencement of IFSCA Act, by any regulator; and

2. those which are notified by Central Government from time to time.

1. Further, Section 12 (2) enables IFSCA to recommend to the Central Government to notify other financial products, services and institutions in an IFSC.

The IFSCA had suggested Central government to notify multiple financial products and services such as Aircraft leasing, Ship leasing, Global in-house companies, etc. which has broadened the business scope in IFSC and also the number of entities registered in IFSC.

IFSC can also be perceived as a laboratory for financial experimentation which would enable the government to experiment with new financial services and based on their adoption and risk perception can be replicated in the domestic economy. IFSCA as a unified regulator exercises control over all the financial services and hence is equipped to provide better oversight on these new generation initiatives.

Powers of the Authority (Section 13 of IFSCA Act, 2019)

1. Section 13 (1) specifies that, all powers exercisable by an appropriate regulator specified in First Schedule of the IFSCA Act, 2019 under respective acts, in an IFSC shall be exercised by the IFSCA, in so for as it relates to financial products, financial services and financial institutions.

This is a unique experimentation wherein the legislature instead of enumerating various powers of IFSCA has incorporated all the powers of domestic sector financial regulators by simple reference. This ensures that the jurisprudence developed for the domestic regulators will be applicable for IFSCA, thereby saving a lot of time and effort in coming out with new interpretation.

Section 13 (2) of IFSCA Act, empowers Central Government to amend the First Schedule by including or omitting any financial sector regulator and the law administered by it, through notification.

Ans. IFSC Benefits for India

The establishment of GIFT-IFSC will boost the growth of country and GIFT-IFSC is an important gateway to connect India with global opportunities. The benefits of having an IFSC is in India are summarized below:

1. Internationalization of Rupee – pathway for calibrated approach to internationalization of domestic currency

2. Gateway for inbound & outbound Capital flows – IFSC to serve as a captive centre to procure our own requirement for international Financial Services e.g Banking , Capital Markets, Insurance et.

3. Employment Generation – Concentration of financial institutions in IFSC to create middle and high end job opportunities for professionals (Global In-House Centres, Treasury)

4. Regional Financial Integration – IFSC can enable India to play an important role in regional financial integration and increase global influence.

5. Development of Niche Areas – IFSC to be leveraged for development of niche financial sector activities like Bullion Exchange Aircraft & Ship Leasing

6. Innovation in Financial Services – IFSC can become a Laboratory for India and the world to test new age financial innovations and technologies (Fin Tech).

Thus, the setting up and operationalization of India’s maiden IFSC was a bold and historic step which has catapulted India into a 21^st century modern, resilient, and sustainable economy.

Ans. The establishment of The Gujarat International Finance Tech-city (GIFT)-IFSC, under Section 18 of the Special Economic Zones Act, 2005, will boost the growth of country and GIFT-IFSC is an important gateway to connect India with global opportunities. The benefits Indian economy will have, from an IFSC are as under:

1. Internationalization of Rupee – Pathway for calibrated approach to internationalization of domestic currency.

2. Gateway for inbound & outbound Capital Flows – IFSC to serve as a captive centre to procure our own requirement for International Financial Services e.g. Banking, Capital Markets, Insurance etc.

3. Employment Generation – Concentration of financial institutions in IFSC to create middle and high-end job opportunities for professionals (Global in-house Centres, Treasury).

4. Regional Financial Integration – IFSC can enable India to play an important role in regional financial integration and increase global influence.

5. Development of Niche Areas – IFSC to be leveraged for development of niche financial sector activities like Bullion Exchange Aircraft & Ship Leasing.

6. Innovation in Financial Services – IFSC can become a Laboratory for India and the world to test new age financial innovations and technologies (FinTech).

Thus, the setting up and operationalization of India’s maiden IFSC was a bold and historic step which has catapulted India into a 21st century modern, resilient, and sustainable economy.

1. Is SkyBlue Limited eligible to issue such an IPO ? If ‘Yes’ - under what conditions, and if ‘No’ – why ? (2 Marks)

2. What should be the offer size, and how much percentage the sponsors should minimum hold ? (1 Mark)

3. What should be the minimum application size ? (1 Mark)

4. What should be the acquisition time line ? (1 Mark) (June, 25)

Ans.

1. In accordance with IFSCA (Listing) Regulations, 2024, SkyBlu Limited, as a Special Purpose Acquisition Company (SPAC), shall be eligible to raise capital through initial public offer of specified securities on the recognised stock exchange(s), only where-

   1. The target business combination has not been identified prior to the IPO;

   2. The SPAC has the provisions for redemption and liquidation in line with these Regulations;

   3. The sponsor of the SPAC issuer has a good track record in SPAC transactions, business combinations, fund management or investment banking activities and the same shall be disclosed in the offer document.

Here, sponsor shall mean a person sponsoring the formation of the SPAC and shall include persons holding any specified securities of the SPAC prior to the IPO.

However, SkyBlu Limited, as a Special Purpose Acquisition Company (SPAC), shall not be eligible to raise capital through initial public offer or list specified securities on the recognised stock exchange(s):

If the issuer or any of its sponsors is -

1. debarred from accessing the capital market; or

2. a wilful defaulter; or

3. a fugitive economic offender.

The offer size should not be less than USD 50 million or any other amount as may be specified by the Authority from time to time. Further, the sponsors shall hold at least 15% and not more than 20% of the post issue paid up capital.

2. The minimum application size in an initial public offer of SPAC shall be USD 100,000.

3. Maximum acquisition timeline is of 3 years (36 months).

Ans. A public issue of specified securities by an issuer can be either an Initial Public Offer (IPO) or a Further Public Offer (FPO). An IPO is done by an unlisted issuer while a FPO is done by a listed issuer. As per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the issuer shall comply with the conditions mentioned thereunder before making an IPO or FPO of specified securities. The conditions need to be satisfied both at the time of filing the draft offer document (commonly referred to as the Draft Red Herring Prospectus) and the time of filing the final offer document (commonly referred to as the Prospectus) with the Registrar of Companies.

Under Regulation 5(1) & (2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, following entities are not eligible to make an Initial Public Offer;

1. If the issuer, any of its promoters, promoter group, directors, selling shareholders are debarred from accessing the capital market by the SEBI.

2. If any of the promoters or directors of the issuer is a promoter or a director of any other company which is debarred from accessing the capital market.

3. If the issuer or any of its promoters or directors is a willful defaulter or a fraudulent borrower.

4. If any of the promoters or directors of the issuer is a fugitive economic offender.

5. If there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer. This requirement shall not apply to:

• outstanding options granted to employees, whether currently an employee or not, pursuant to an employee stock option scheme in compliance with the Companies Act, 2013, the relevant Guidance Note or accounting standards, if any, issued by the Institute of Chartered Accountants of India or pursuant to the Companies Act, 2013, in this regard;

• fully paid-up outstanding convertible securities which are required to be converted on or before the date of filing of the red herring prospectus (in case of book-built issues) or the prospectus (in case of fixed price issues), as the case may be.

Ans. Regulation 16 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 states that the minimum promoters’ contribution including contribution made by alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with Insurance Regulatory and Development Authority of India referred to in proviso to sub-regulation (1) of regulation 14, shall be locked-in for a period of 18 months from the date of allotment in the initial public offer. Provided that in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be 3 years from the date of allotment in the initial public offer.

Further provided that, promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for a period of 6 months from the date of allotment in the initial public offer. In case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be 1 year from the date of allotment in the initial public offer.

Therefore, Exotica venture capital fund’s pre-issue shareholding will be locked-in as mentioned above to the extent of minimum contribution or excess contribution, hence it cannot sell its shareholding just after the listing of shares.

Ans. Allocation in the net offer [Regulation 32(3A) and 129 (3A) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

In an issue made through book building process, the allocation in the non-institutional investors’ category shall be as follows:

1. 1/3rd of the portion available to non-institutional investors shall be reserved for applicants with application size of more than Rs. 2 lakh and up to Rs. 10 lakh;

2. 2/3rd of the portion available to non-institutional investors shall be reserved for applicants with application size of more than Rs. 10 lakh.

Provided that the unsubscribed portion in either of the sub-categories specified in clauses (a) or (b) may be allocated to applicants in the other sub-category of non-institutional investors.

In view of above, if Rajesh, applied with application size of more than Rs. 10 lakh, the reserved portion will be 2/3rd, hence there will be high chance to get the shares allotted under the IPO.

1. Calculate the warrant premium for S.

2. What are the conditions of eligibility of ABC Company Ltd to issue Warrant?

3. When ABC Company can forfeit the warrant ? (Dec, 21 - 2+2+1=5 marks)

Ans. (i) Minimum price of Warrant = (Current Market Price of equity share - Exercise Price of Warrant)

= (Rs.: 80-Rs.70) i.e. Rs. 10

Warrant Premium

= (Market Value of Warrant - Value of Warrant)

= Rs. 18- Rs. 10 = Rs. 8

For 200 Warrants of S, since Ratio is 1:1, the premium would be = 200 x Rs. 8 = Rs. 16000

(ii) An issuer shall be eligible to issue warrant in an initial public offer subject to the following:

1. the tenure of such warrants shall not exceed eighteen months from the date of their allotment in the initial public offer,

2. a specified security may have one or more warrants attached to it,

3. the price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25% of the consideration amount based on the exercise price shall also be received upfront;

However, in case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.

(iii) When warrant holder does not exercise the option to take equity shares against any of the warrant held by the warrant older, within 3 months from the date of payment of consideration, such consideration made in respect of such warrants shall be forfeited by the issuer.

Ans. As per Regulation 102 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, a company shall not be eligible to make a Further Public Offer where the director of the company is a fugitive offender. Therefore, Turnkey Ltd. would not be able to issue FPO.

General Conditions and eligibility requirement for FPO as prescribed under Regulations 103 and 104 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 are given below:

Eligibility requirements for FPO

An issuer may make a FPO if it has changed its name within the last one year and at least 50% of the revenue in the preceding one full year has been earned from the activity suggested by the new name.

If an issuer does not satisfy the above mentioned conditions, it may make a FPO only, if, the issue is made through the book building process and the issuer undertakes to allot at least 75% of the net offer, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.

General Conditions for FPO

An issuer making an FPO shall ensure that-

1. An application is made for listing of the specified securities to one or more of the recognised stock exchanges and choose one of the exchanges as the designated stock exchange.

2. An agreement is entered into with a depository for dematerialisation of specified securities already issued or proposed to be issued.

3. All the existing partly paid up equity shares have either been fully paid up or have been forfeited in other words, if a company has partly paid up equity shares, they shall not be permitted to make a public issue.

4. The issuer should make firm arrangements of finance through verifiable means towards 75% of the stated means of finance excluding the amount to be raised through the proposed public issue or through existing identifiable internal accruals.

5. The amount of General Corporate Purpose as mentioned in objects of the issue in the draft offer document and the offer document shall not exceed twenty five percent of the amount being raised by the issuer.

Explain the guidelines issued by SEBI, for returning of the draft offer document and its resubmission relating to issue of Capital and Disclosure Requirements. (Dec, 24 – 5 Marks)

Ans. In order to ensure completeness of the offer document for investors and provide greater clarity & consistency in the disclosures and for timely processing, SEBI has issued ‘Guidelines for returning of draft offer document and its resubmission’.

The Broad guidelines for returning of the draft offer document are as under:

Return of Draft Offer document

The draft offer document / draft letter of offer filed with SEBI for public issue / rights issue of securities shall be scrutinized based on the broad guidelines specified as under and accordingly, the draft offer document shall be returned to the Issuer and the Lead Manager(s) for resubmission in accordance with the following guidelines, if-

Disclosures made in the draft offer document do not satisfy one or more of the following

requirements-:

1. Draft offer document must be drafted in simple language with visual representation of data, so as to ensure ease of understanding of its contents.

2. The information in the draft offer document is presented in a clear, concise and intelligible manner.

3. The draft offer document avoids complex presentations, vague, ambiguous and imprecise explanations, complex information, repetition of disclosures and inconsistency.

4. The risk factors are appropriately worded in simple, clear and unambiguous language to bring out clearly the risk to the investor, without undermining the same.

Resubmission of Draft Offer Document

1. While there shall be no requirement for payment of any fees on account of resubmission of draft offer document, the requirement for paying applicable fees for the changes, if any, in terms of changes specified in Schedule XVI of the ICDR Regulations for the updated offer document shall continue to apply as is applicable to issuer for updation in offer document.

2. There shall be no refund of the filing fees on account of non-submission of draft offer document by the issuer after return.

3. The issuer, within two days of resubmission of draft offer document with the SEBI, shall make a public announcement in the mode and manner as prescribed under ICDR Regulations, as applicable, and the issuer shall also include a disclosure that it is a resubmitted document.

4. Issuer shall make written intimation to its sectoral regulator, if any, informing about the return and resubmission of the draft offer document, as applicable.

1. What should be minimum application value and minimum number of equity shares in one application ?

2. What will be minimum sum payable on application ?

3. What should be minimum time period for which issue should remain open for subscription ? (June, 21 – 5 Marks)

Ans. Application and Minimum Application Value (Regulations 47 & 143 of SEBI (ICDR) Regulations, 2018]

The issuer shall stipulate in the offer document the minimum application size in terms of number of specified securities which shall fall within the range of minimum application value of ten thousand rupees to fifteen thousand rupees.

Thus, in the given case Actnow Edge Limited should fix the minimum number of shares in one application in such a manner that minimum application value should not cross the limit of `10,000 to `15,000. Hence, minimum number of shares in one application will be:

At lower level of price band: 20 Shares (`10000/` 500) & 30 Shares (`15000/`500)

At higher level of price band : 17 Shares (`10000/`600) & 25 Shares (`15000/`600)

1. The minimum sum payable on application per specified security shall be at least twenty five per cent of the issue price.

2. Period of Subscription [Regulations 46 & 142]

An IPO shall be kept open for at least three working days and not more than ten working days.

In case of a revision in the price band, the issuer shall extend the bidding (issue) period disclosed in the red herring prospectus, for a minimum period of three working days.

In case of force majeure, banking strike or similar circumstances, the issuer may, for reasons to be recorded in writing, extend the bidding (issue) period disclosed in the red herring prospectus (in case of a book built issue) or the issue period disclosed in the prospectus (in case of a fixed price issue), for a minimum period of three working days.

From the above :

1. Compute the quantum of shares that can be bought by Nishan.

2. State the provisions for balance of shares lying in the special account for Green Shoe Option. (June, 21 – 5 Marks)

Ans. Green Shoe Option is a post listing price stabilising mechanism. Good Luck Finance Ltd. issued 20 lakh equity shares@`180 each. As per SEBI (ICDR) Regulations, 2018, the maximum number of securities that can be borrowed for the purpose of allotment/ allocation of securities in excess of issue size shall not be more than 15% of the issue size.

Hence, Nishan (Stabilising agent) can purchase 3,00,000 equity shares (15% of 20,00,000 equity shares) to stabilise the price.

Having bought back all of the 300000 equity shares, these shares would be temporarily held in a special depository account with the depository participant (Green Shoe Demat Account), and would then be returned back to the lender shareholders, within a maximum period of two days after the stabilisation period.

Any surplus lying in the Green Shoe Escrow Account would then be transferred to the Investor Protection and Education Fund established by SEBI.

Ans.

Cut off price:

Cut off price is the highest price at which demand for securities is fulfilled. Simply, it is the highest price at which all shares offered can be sold by the company. All those investors who have submitted their bid at price equal to or above the cut off price are known as successful bidder and they are entitled for the allotment of shares as per method prescribed in SEBI (ICDR) Regulation, 2018.

In the given question, we calculate cut off price as under: Total number of Equity Shares for public issue: 15,00,000 Price Band: `500 - `600

Firstly, we have to arrange the demand for shares on the basis of price in descending order and cumulative demand has been calculated.

S. No. Demand (Number of Shares) Cumulative Demand Bid Price (in `)

From the above table it is clear that the demand is fulfilled at a price of `575, so cut off price will be `575. Bids that are at or above the issue price only qualify for share allotment.

All those investors who have applied at `575 and above shall be eligible for allotment.

Ans. Regulations 41 and 137 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, prescribes the role of Monitoring agency to track the end use of proceeds of IPO. As per Regulation ‘if the issue size excluding the size of offer for sale by selling shareholders exceeds `100 crore, the issuer shall ensure that the use of proceeds of the issue is monitored by a public financial institutions or by one of the scheduled commercial banks named in the offer document as a banker to the issuer’.

In the given case, the issue exceeds `100 crore i.e `5 crore excluding `20 crore by selling shareholders. Hence, a monitoring agency should be appointed to track the issue proceeds. Further the monitoring agency shall submit its report to the issuer in the format specified in the ICDR Regulations, 2018 on a quarterly basis, till at least 95% of the proceeds of the issue excluding the proceeds raised for general corporate purposes, have been utilised. The Board of Directors and the management of the issues shall provide their comments on the findings of the monitoring agency. The issuer shall, within 45 days from the end of the each quarter, publicly disseminate the report of the monitoring agency by uploading the same on its website as well as submitting the same to the stock exchange(s) on which its equity shares are listed. However, the above mentioned rule is not applicable if the issuer is a bank or a public financial institution or an insurance company.

• Closing price on the relevant date: `250.

• The average weekly high and low of the closing price during the 26 weeks preceding to the relevant date: `275.

• The average weekly high and low of the closing price during the 2 weeks preceding to the relevant date: `280.

You are required to:

1. Identify the minimum price at which share warrants should be issued; and

2. Calculate the amount payable by the promoters at the time of allotment of the warrants. (Dec, 20 – 4 Marks)

Ans. (a) Pricing of frequently traded shares [Regulation 164(1) of SEBI (ICDR) Regulations, 2018] : If equity shares of the issuer have been listed on a recognised stock exchange for a period of 26 weeks or more as on the relevant date, the price of equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

1. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 26 weeks preceding the relevant date i.e `. 275; or

2. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date i.e ` 280

So, the price of warrant should not be less than `280 per share warrant.

b) The price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25 per cent of the consideration amount based on the exercise price shall also be received upfront. However, in case the exercise price of warrants is based on a formula, 25 per cent consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.

Hence, the promoters are liable to pay at least 25% of the share warrant i.e ` 70 per share warrant. This amount should be paid on the date of the allotment of share warrant by the promoters.

Amount to be payable by the promoters at the time of allotment of the warrants

= 20,00,000 shares x `70 = `14 crore.

1. Advice the company whether they can proceed with the IPO

2. Will your answer be different if value of monetary assets is ` 4 crore in 2016-17?

3. How will you deal with the situation, if company has monetary assets of ` 5 crore in the year 2017-18 ? (Dec, 20 – 5 Marks)

Ans. (i) Regulation 6 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 deals with the eligibility requirement of an IPO. The provisions pertaining to Net tangible Assets, Monetary Assets and Net worth as per SEBI (ICDR) Regulations are as under:

1. the issuer has net tangible assets of at least `3 crores on a restated and consolidated basis, in each of the preceding three full years of (12 months each) of which not more than 50% is held in monetary assets;

2. the issuer has a net worth of at least 1 crore in each of the preceding three full years, calculated on a restated and consolidated basis;

In the given case, RP Ltd. has net tangible assets of at least `3 crores in three years and Net worth of at least `1 crores. Monetary assets are also within the threshold limit of 50% in each year, thereby satisfying all the conditions. Therefore, RP Ltd. can proceed with the IPO.

A company can proceed for IPO, if value of monetary assets is upto 50% of the Net Tangible Assets. In case monetary assets is `4 crores in 2016-2017 i.e. 50% of Net Tangible Asset. Hence, RP Ltd. can still proceed for IPO.

2. As per SEBI regulation, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitment to utilize such excess monetary assets in its business or project. Therefore, if monetary assets are `5 corers in 2017-2018, the company should have made firm commitment to utilize such excess monetary assets in its business or project, otherwise the company will not be able to proceed for IPO.

1. Calculate the number of shares that the stabilizing agent needs to borrow in this case at the time of allotment and explain the same with relevant provisions.

2. Explain the responsibility of Issuer Company in the above case with respect to shortfall while exercising Green Shoe Option.

Calculate the amount if any, to be transferred to Investor Protection and Education Fund. (Dec, 20 – 5 Marks)

Ans. As per SEBI (ICDR) Regulations, 2018, the maximum number of shares that can be borrowed by the stabilizing agent shall not be in excess of 15% of the issue size.

In the given case, stabilizing agent can borrow 7.5 Lakh shares (15% of 50 Lakh shares).

1. The issuer company would allot the differential 2.5 Lakhs shares into the Green Shoe Demat Account to cover up the shortfall, and the Stabilising Agent would discharge his obligation to the lending shareholder(s) by returning the 7.5 Lakhs shares that had been borrowed from them.

The issuer company would need to apply to the exchanges for obtaining listing/ trading permissions for the incremental shares allotted by them, pursuant to the Green Shoe mechanism.

The Amount which should be transferred to Investor Protection and Education Fund will be calculated as follows:

= 5,00,000 (200-180) = `1,00,00,000

₹ 600 crore. The promoters group holding includes (acquired during previous year) :

1. ₹ 20 crore equity capital allotted in consideration of transfer of Technical know how by the promoters.

2. ₹ 10 crore equity capital pledged with bank.

Whether the promoters group is satisfying minimum promoters contribution requirement as per SEBI regulation ? Explain. (Dec, 19 – 5 Marks)

Ans. As per regulation 14 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the promoters of the issuer shall hold at least 20% of the post-issue capital.

Further as per regulation 15 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, for the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:

1. specified securities acquired during the preceding three years, if it is acquired for consideration other than cash and revaluation of assets or capitalization of' intangible assets is involved in such transaction;

2. specified securities pledged with any creditor.

In the present case, ₹ 20 crore equity capital acquired in consideration of transfer of

technical know-how will not be eligible for promoters contribution, further `10 crore equity capital was pledged with bank will also not eligible for promoters contribution.

The net promoters contribution after deduction of `30 crore (₹ 20 crore & ₹ 10 crore) will be ₹ 110 crore (₹ 140 crore - ₹ 30 crore), which is below then the prescribed limit i.e, 20% of post issued capital (₹ 600 x 20%= ₹ 120 crore), Therefore, promoters are not satisfying minimum promoters contribution requirements as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Ans. Eligibility Requirements for further public offer (FPO)

Regulation 103 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 stipulates that an issuer shall be eligible to make a further public offer, if it has not changed its name in the last one year period immediately preceding the date of filing the relevant offer document. However, if an issuer has changed its name in the last one year period immediately preceding the date of filing the relevant offer document, such an issuer shall make further public offer if at least 50% of the revenue for the preceding one full year has been earned by it from the activity indicated by its new name.

Further provided that an issuer not satisfying the condition stipulated above, shall make a further public offer only if the issue is made through the book building process and the issuer undertakes to allot at least 75% of the net offer, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.

Lock-in of specified securities held by the promoters in excess of minimum promoters’ contribution

Regulation 115 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 prescribed that Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of 6 months. However, lock in period shall be 1 year in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure.

Therefore, PBR Ltd. shall ensure compliance with the above to issue Further Public Offer (FPO).

Ans. As per the Regulation 30 of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, the issuer may offer its specified securities at different prices, subject to the following:

1. retail individual investors or retail individual shareholders or employees entitled for reservation made under the regulation 33 of SEBI (ICDR) Regulations 2018, may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors:

2. in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants

The difference between the proposed price for Retail Individual Investor (RII) and Qualified Institutional Buyer (QIB) and Non-Institutional Investors (NIIs) is more than 10%, as envisages in the regulation, hence the company cannot issue securities to RII at ` 250 per share.

If the equity shares is proposing to anchor investors at `280, it is not as per the regulation 30 of SEBI (ICDR) Regulations, 2018 as the price is lower than the other applicants i,e., QIB and FII. (assuming QIB and FII are other applicants)

Ans.

Regulation 32 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, prescribes that the companies, who complies the requirement of regulation 6(1), the portion available for allocation shall be not more than 50% for QIBs, not less than 35% for retail individual investors and not less than 15% for non-institutional investors. Companies that do not meet the regulation 6(1) requirements, the portion available for allocation shall be not less than 75% to QIBs, not more than 15% to non-institutional investors and not more than 10% to retail individual investors. In an issue made through the book building process, the issuer may allocate up to sixty per cent. of the portion available for allocation to qualified institutional buyers to anchor investors.

In case of Harish Ltd. which is satisfying the conditions of Regulation 6(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the maximum number of shares to be issued to anchor investors are:

Issue size = ` 600 crore

Shares = ` 600/ ` 10 = 60 crore

Reservation for QIB = 60 crore * 50% = 30 crore

Allocation to anchor investor (out of QIB) = 30 crore * 60% = 18 crore

In case of Monish Ltd., who is not satisfying the requirements of Regulation 6(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the maximum number of shares to be issued to anchor investors are:

Issue size = ₹ 500 crore Shares = `500/`10 = 50 crore

Reservation for QIB = 50 crore * 75% = 37.5 crore

Allocation to anchor investor (out of QIB) = 37.5 crore * 60% = 22.5 crore

Ans. According to the Regulation 59 of the SEBI (ICDR) Regulations, 2018, the promoters, or shareholders in control of an issuer, shall provide an exit offer to dissenting shareholders as provided for in the Companies Act, 2013, in case of change in objects or variation in the terms of contract related to objects referred to in the offer document as per conditions and manner as provided in Schedule XX of the SEBI (ICDR) Regulations, 2018.

According to the Schedule XX, the promoter or the shareholders in control, as the case may be, shall make an exit offer in accordance with the provisions of Chapter II of SEBI (ICDR) Regulations to the dissenting shareholders, in cases only if a public issue has opened after April 1, 2014; if:

1. The proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by atleast ten percent of the shareholders who voted in the general meeting; and

2. The amount to be utilized for the objects for which the offer document was issued is less than seventy five percent of the amount raised (including the amount for general corporate purposes as disclosed in the offer document).

In the given problem M/s Highspeed Ltd. has utilized Rs. 400 crore out of total Rs. 500 crore raised through public issue. As the amount utilized is more than 75% of the total amount raised, the company may utilize the remaining unutilized 100 crore for the purpose as stated in the question.

1. Authorised Share Capital : `700 crore

2. Paid-up Capital : `300 crore

3. Free Reserves : `800 crore

The company has pending convertible debenture of `150 crore, due for conversion in financial year 2018-19. The company proposes to issue bonus shares in the ratio of 1 : 1 after conversion of debenture. You being a company secretary, advise on the procedure to be followed by referring SEBI regulations. (June, 19 – 7 Marks)

Ans. Chapter XI consisting of regulation 293-295 of the SEBI (ICDR) Regulations, 2018 stipulates the provisions with respect to issue of bonus shares. Regulation 293 provides that, subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to issue bonus shares to its members if:

1. it is authorized by its Articles of Association for issue of bonus shares, capitalization of reserves, etc;

Provided that if there is no such provision in the Articles of Association, the issuer shall pass a resolution at its general body meeting making provisions in the Articles of Association for capitalization of reserve;

it has not defaulted payment of interest or principal in respect of fixed deposits or debt securities issued by it;

2. it has not defaulted in payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus;

3. any outstanding partly paid shares on the date of the allotment of the bonus shares are made fully paid-up;

4. any of its promoters or directors is not a fugitive economic offender.

The Article of Association must authorize it to issue the bonus shares. If there is no provision in the Article for Bonus shares, firstly articles shall be amended by the company.

Determination of increase in authorized capital required:

1. Paid-up share capital as on 31/03/2018 : Rs. 300 crores

2. Paid-up share capital after conversion of debentures : Rs. 450 crores

3. Proposed Bonus issue :One share for every share held

4. Post Bonus issue Capital : Rs. 900 Crores

Since authorized capital is Rs.700 crores only, it is required to increase the authorized capital by 200 crores or more.

The Reserves & Surplus is Rs. 800 crores, therefore bonus issue of Rs. 450 crores can be made out of reserves & surplus.

Other conditions to be followed:

• Bonus shares shall not be issued in lieu of dividend

• A resolution shall be passed by the Board in its meeting

• Bonus issue shall be completed within 15 days from the date of approval of Board of Directors, if shareholders’ approval is not required Where approval of shareholders is required, bonus issue shall be completed within 2 months from the date of meeting of Board of Directors wherein the decision to announce the bonus issue was taken subject to shareholder’s approval

• A bonus issue, once announced, shall not be withdrawn.

1. What are the factors that have been taken into account by SEBI for finalization of uniform policy for calculation of the minimum fair compensation?

2. Calculate the minimum fair compensation payable to Girdhar based on the following information : Listing Price : `350, Issue Price : `300, Minimum Bid lot-20 shares, probability of allotment of shares on the basis of allotment (ratio 7 : 8). (Dec, 18 – 4 Marks)

Ans. According to SEBI Circular no. SEBI/HO/CFD/DIL2/CIR/P/2018/22 dated February 15, 2018, the following factors have been taken into account while finalization of uniform policy for calculation of minimum compensation payable to investors:

1. the opportunity loss suffered by the investor due to non-allotment of shares;

2. the number of times the issue was oversubscribed in the relevant category;

3. the probability of allotment; and

4. the listing gains if any on the day of listing.

1. Calculation of minimum fair compensation is as follows:

*Listing price shall be taken as the highest of the opening prices on the day of listing across the recognized Stock Exchanges.

Compensation amount = (`350 - `300) x 20 shares x (7/8)

= `50 x 20 x (7/8) Compensation amount = `875

Ans. According to regulation 69B of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, “dissenting shareholders” means those shareholders who have voted against the resolution for change in objects or variations in terms of a contract, referred to in the prospectus of the issuer

Conditions for applicability of Exit Offers:

The provisions of exit offers by dissenting shareholders shall be applicable only if the following conditions are fulfilled:

1. Exit offer shall be applied on a prospective basis, i.e. the Public Issue has opened after the commencement of April 01, 2014; and

2. The proposal shall be dissented by at least 10% of the shareholder; and

3. The amount to be utilized for the objects for which the prospectus was issued is less than 75% of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

`10 ? Based on the above facts, you are required to state the minimum issue price, with reference to the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. (Dec, 18 – 5 Marks)

Ans. Regulation 31 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, provides that an issuer making an initial public offer may determine the face value of the equity share in the following manner:

1. If the issue price per equity share is `500 or more, the issuer shall have the option to determine the face value at less than `10 per equity share, however, the face value shall not be less than `1 per equity share;

2. If the issue price per equity share is less than `500, the face value of equity shares shall be `10 per equity share.

However, the above mentioned provisions shall not apply to an initial public offer made by any government company, statutory authority or corporation or any special purpose vehicle set up by any of them, which is engaged in infrastructure sector.

Therefore, the amount of issue price is the determining factor for face value of the equity share.

Further, the amount of premium proposed to be charged by the company will be the determining factor for the face value of shares.

Ans. SEBI has notified new norms for listing of Small and Medium Enterprises (SMEs) including the startup companies in Institutional Trading Platform (ITP) on stock exchanges without an initial public offering.

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, "Institutional trading platform" (“ITP”) means the trading platform for listing and trading of specified securities of entities that comply with the eligibility criteria specified in regulation 106Y.

On August 14, 2015, SEBI has come up with a notification for insertion of a new chapter, i.e. Chapter XC of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 with a new set of regulations laying down the terms and conditions for entities desirous of listing on ITP.

Eligibility

The following entities shall be eligible for listing on the ITP:

1. an entity which is intensive in the use of technology, information technology, intellectual property, data Analytics, biotechnology or nanotechnology to provide products, services or business platforms with substantial value addition and at least 25% of its pre-issue capital is held by qualified institutional buyer(s) as on the date of filing of draft information document or draft offer document with the SEBI, the case may be; or

2. Any other entity in which at least 50% of the pre-Issue capital is held by qualified institutional buyers as on the date of filing of draft information document or draft offer document with the SEBI, the case may be.

No person, individually or collectively with persons acting in concert, shall hold 25% or more of the post-issue share capital in an entity.

1. Can Techno AVR Ltd. get listed at BSE SME Platform ?

2. What should be the tangible assets of Techno AVR for this listing ?

3. What should be post issue paid up capital of Techno AVR Ltd ?

4. Is it compulsory for Techno AVR Ltd. to facilitate trading of securities in demat form, or also in physical form ?

5. Techno AVR Ltd. has changed its promoters about ten month preceding the date of filing the listing application with the BSE. Does this have any impact its listing ? (Dec, 24 – 5 Marks)

Ans.

1. Techno AVR Ltd. is incorporated under the Companies Act, 2013, hence it can be listed on BSE SME Platform provided it fulfils other criteria required for SME Listing on BSE.

2. Net Tangible Assets of Techno AVR Ltd. should be ₹ 1.5 Crore in last preceding (full) financial year.

3. The post issue paid up capital of Techno AVR Ltd. shall not be more than ₹ 25 crores.

4. It is mandatory for Techno AVR Ltd. to facilitate trading of securities only in demat form and enter into an agreement with both the depositories i.e. NSDL and CDSL.

5. There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment. Since, defined period of 1 year has not yet been passed, hence Techno AVR Ltd. will not be eligible for listing.

The transaction involves TechGlobal purchasing 50% of RecreateX’s equity shares. This transaction includes, shareholding held by one of its shareholder Mr. X as 5% and another shareholder Mr. Y as 0.5% of RecreateX’s total outstanding shares.

The brokering Firm, ABC Ltd. facilitated the transaction. But once the deal was completed, ABC Ltd. failed to report the details to the National Stock Exchange (NSE), where RecreateX’s shares are listed. Under these scenarios, answer the following :

1. Is these three transactions [50% including 5% and 0.5%] constitutes a bulk deal on a stock exchange ?

2. What is the reporting timing, when a bulk deal happens through a single trade or multiple trades ?

3. Who is required to disclose the details of a bulk deal to the stock exchange ? (2+2+1=5 marks)

Ans.

Ans. According to Regulation 2(1)(c) of SEBI (Issue of Capital and Disclosure Requirements) Regulation 2009, “Anchor Investor” means a qualified institutional buyer who makes an application for a value of `10 crores or more in a public issue made through the book building process in accordance with these regulations.

Allocation to anchor investors shall be on a discretionary basis and subject to the following:

1. Maximum of two such investors shall be permitted for allocation up to `10 crores.

2. Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above `10 crore and up to `250 crore subject to minimum allotment of `5 crore per such investors.

3. In case of allocation above `250 crore; minimum of five such investors and a maximum of 15 such investors for allocation up to `250 crores and an additional 10 such investors for every additional `250 crore or part thereof, shall be permitted, subject to a minimum allotment of `5 crore per such investors. The bidding for Anchor Investors shall open one day before the issue opening date.

4. Allocation to Anchor Investors shall be completed on the day of bidding by Anchor Investors.

5. Shares allotted to the anchor investor shall be locked-in for 30 days from the date of allotment in the public issue.

Up to 60% of the portion available for allocation to QIB shall be available to Anchor Investors for allocation/allotment (“anchor investor portion”) and one third of the anchor investor portion shall be reserved for domestic mutual funds.

`150 per share. The company provided Green shoe option for stabilizing the post listing price of the shares. On the day of listing of shares, the news of trade war between the two developed countries flashes and the price of shares of company fall to `110. Decide how many shares can be purchased by the stabilizing agent to control the price ? State the provisions for balance money lying in the special account for green shoe option. (Dec, 18 – 5 Marks)

Ans. As per regulation 45 (1) of the SEBI (ICDR) Regulations, 2009, the maximum number of securities that may be borrowed for the purpose of allotment or allocation of securities in excess of issue size shall not be more than 15% of the issue size. Therefore stabilizing agent can purchase only 1.5 lakh equity shares to control the price.

The stabilizing agent shall remit the monies with respect to the specified securities allotted to the issue from the special bank account known as GSO Bank A/c. Any money left in the special bank account after remittance of monies to the issuer for securities allotted and deduction of expenses incurred by the stabilizing agent for the sterilization process shall be transferred to the Investor Protection and Education Fund established by the SEBI and the special bank account shall be closed soon thereafter.

Ans. Application Supported by Blocked Amount (ASBA) is an application by an investor containing an authorization to Self-Certified Syndicate Bank (SCSB) to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized.

SEBI, in its endeavour to protect investors' interest and reduce investor grievances relating to refund, introduced ASBA as the sole payment mechanism in the IPO and Rights issues. Considering that payment through ASBA mechanism is investor friendly and enables faster completion of the process, it has been decided by the SEBI vide its circular dated 8th December, 2020 to introduce additional payment mechanism (i.e. ASBA, etc.) for making subscription and/or payment of calls in respect of partly paid specified securities through self-certified syndicate banks (SCSBs) and intermediaries such as Trading Members/ Brokers - having three in one type account and Registrar and Transfer agents (RTA).

For the purpose of making payment of balance money for calls in respect of partly paid specified securities, the additional channels are tabulated below:

The payment period for payment of balance money in Calls shall be kept open for 15 days.

Ans. As per the Regulation 30 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 the issuer may offer its specified securities at different prices, subject to the following:

1. retail individual investors or retail individual shareholders or employees entitled reservation made under the Regulation 33 of the SEBI (ICDR) Regulations, 2018 may be offered specified securities at a price not lower than by more than ten per cent of the price at which net offer is made to other categories of applicants, excluding anchor investors;

2. in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

The proposed price for retail individual investors (RII) is `250 and for QIB is `300. The maximum discount that can be provided to RII shall not be more than ten per cent of the price at which net offer is made to other categories i.e. 300 X 10% = `30. Hence, the price for RII shall not be lower than `270. In the given proposal, the difference between the proposed price for RII and QIB is more than 10% as envisaged in the regulation, hence the company cannot issue securities with such proposal.

If case the company proposes `280 to anchor investors in book building issue, such issue would not be permissible as the Regulation 30 of the SEBI (ICDR) Regulations, 2018 states that the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.

Ans. Allocation in the net offer [Regulation 32(3A) and 129 (3A) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

In an issue made through book building process, the allocation in the non-institutional investors' category shall be as follows:

1. one third of the portion available to non-institutional investors shall be reserved for applicants with application size of more than two lakh rupees and up to ten lakh rupees;

2. two third of the portion available to non-institutional investors shall be reserved for applicants with application size of more than ten lakh rupees.

Provided that the unsubscribed portion in either of the sub-categories specified in clauses (a) or (b), may be allocated to applicants in the other sub-category of non- institutional investors.

Is there any mechanism for monitoring of use of proceeds raised through public issue ? Explain briefly. (Dec, 22 – 4 Marks)

Ans. According to the Regulation 41 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, if the issue size, excluding the size of offer for sale by selling shareholders, exceeds one hundred crore rupees, the issuer shall make arrangements for the use of proceeds of the issue to be monitored by a credit rating agency registered with the SEBI. Provided that nothing contained in this clause shall apply to an issue of specified securities made by a bank or public financial institution or an insurance company.

The monitoring agency shall submit its report to the issuer in the format specified in Schedule XI on a quarterly basis, till hundred per cent of the proceeds of the issue have been utilised.

The board of directors and the management of the issuer shall provide their comments on the findings of the monitoring agency as specified in Schedule XI.

The issuer shall, within forty-five days from the end of each quarter, publicly disseminate the report of the monitoring agency by uploading the same on its website as well as submitting the same to the stock exchange(s) on which its equity shares are listed.

Who are Anchor Investors ? How is allocation made to Anchor Investors ? (Dec, 22 – 5 Marks)

Ans. Anchor investor means a Qualified Institutional Buyer (QIB) who makes an application for a value of at least 10 crore rupees in a public issue on the main board made through the book building process or makes an application for a value of atleast Rs. 2 crore for an public issue on the Small and Medium Enterprises (SME) exchange made in accordance with Chapter IX of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Allocation to anchor investors shall be on a discretionary basis and subject to the following:

1. In case of public issue on the main board, through the book building process:

   1. Maximum of 2 such investors shall be permitted for allocation up to Rs. 10 crore.

   2. Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above Rs.10 crore and upto Rs. 250 crore, subject to minimum allotment of Rs. 5 crore per such investor.

   3. In case of allocation above Rs.250 crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation upto Rs.250 crore and an additional 10 such investors for every additional Rs.250 crore or part thereof, shall be permitted, subject to a minimum allotment of Rs. 5 crore per such investor.

2. In case of public issue on the SME exchange, through the book building process:

   1. Maximum of 2 such investors shall be permitted for allocation up to Rs. 2 crore;

   2. Minimum of 2 and maximum of 15 such investors shall be permitted for allocation above Rs. 2 crore and up to Rs. 25 crore, subject to minimum allotment of Rs. 1 crore per such investor;

   3. In case of allocation above Rs. 25 crore; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to Rs. 25 crore and an additional 10 such investors for every additional Rs. 25 crore or part thereof, shall be permitted, subject to a minimum allotment of Rs. 1 crore per such investor.

Upto 60% of the portion available for allocation to qualified institutional buyers shall be available to anchor investor(s) for allocation/ allotment ("anchor investor portion") and one-third of the anchor investor portion shall be reserved for domestic mutual funds.

1. Jain, a promoter of XY Ltd. is categorized as a willful defaulter by SBI in accordance with the guidelines issued by the RBI. The company requires funds for its business expansion and plans to make IPO.

2. Sinha is one of the Board of Directors of VG Garments Ltd., against whom a warrant for arrest in relation to a Scheduled offence has been issued by the Court. Sinha left India to keep off criminal prosecution and refused to return to India.

(Dec 23 – 4 Marks)

Ans. As per the Regulations of 5(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer shall not be eligible to make an initial public offer if the issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower. In the given case, Jain, one of the promoters of XY Ltd. is categorized as a wilful defaulter by SBI in accordance with the guidelines issued by the RBI. Hence, XY Ltd. cannot proceed to IPO for its business expansion.

Further, an issuer shall not be eligible to make an initial public offer if any of its promoters or directors is a fugitive economic offender. Sinha, the director of VG Garments Ltd., against whom a warrant for arrest was issued by the Court and he left India to keep off criminal prosecution and refused to return to India. Hence, Mr. Sinha being fugitive economic offender, his company is not permitted to make a public issue under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

1. The promoters’ group was earlier debarred from accessing the capital market by the SEBI and the period of debarment is already over on the date of filing of the DRHP with the SEBI.

2. Recently, one of the promoter is declared as wilful fugitive offender.

3. The issuer has changed the name in the last one year and earned 40% of the revenue for the preceding one full year from the activity in the new name.

4. The issuer has a net worth of one crore and fifty lakh rupees in each of the preceding three years, calculated on a restated and consolidated basis.

5. The issuer has an average operating profit of ₹ 10 crore during the three preceding years, with operating profit in each of the preceding three years.

(June 23 – 5 Marks)

Ans. According to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:

1. The entity is eligible to make initial public offer as the period of debarment on the promoter group, who were earlier debarred from accessing capital market by the SEBI, is already over as on the date of filing of the draft offer document with the SEBI. [Regulation 5(1)(a) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

2. The entity is not eligible to make initial public offer if the issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower and a fugitive economic offender. [Regulation 5(1)(c) and Regulation 5(1)(d) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

3. The entity is not eligible to make initial public offer as the issuer has earned only 40% of the revenue for the preceding one full year from the activity indicated by the new name. However, as per requirement of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer shall be eligible to make an initial public offer if issuer has changed its name within the last one year, at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by its new name. [Regulation 6(1)(d) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

4. As per the requirement of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer shall be eligible to make an initial public offer if the issuer has net worth of at least one crore in each of the preceding three full years (of twelve months each), calculated on a restated and consolidated basis.

In the given case, the issuer has a net worth of one crore and fifty lakh rupees in each of the preceding three full years. Thus, the entity is eligible to make initial public offer. [Regulation 6(1)(c) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

As per the requirement of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer shall be eligible to make an initial public offer, if it has an average operating profit of at least ₹ 15 crores, calculated on a restated and consolidated basis, during the three preceding years (of twelve months each), with operating profit in each of the three preceding years. However, in the given situation, the issuer has an average operating profit of ₹ 10 crore. Therefore, the entity is not eligible to make initial public offer. [Regulation 6(1)(b) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018]

Ans.

According to Regulation 2(1)(ss) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, followings are termed as Qualified Institutional Buyers:

1. a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with SEBI;

2. foreign portfolio investor other than individuals, corporate bodies and family offices;

3. a public financial institution;

4. a scheduled commercial bank;

5. a multilateral and bilateral development financial institution;

6. a state industrial development corporation;

7. an insurance company registered with the Insurance Regulatory and Development Authority of India;

8. a provident fund with minimum corpus of ₹ 25 crore;

9. a pension fund with minimum corpus of ₹ 25 crore registered with the Pension Fund Regulatory and Development Authority established under section 3(1) of the Pension Fund Regulatory and Development Authority Act, 2013;

10. National Investment Fund set up by the Government of India;

11. Insurance funds set up and managed by army, navy or air force of the Union of India;

12. Insurance funds set up and managed by the Department of Posts, India;

13. Systemically important non-banking financial companies.

Entities not eligible for Right Issue (June, 25 – 3 Marks)

Ans. Entities not eligible for Rights Issue

Regulation 61 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 stipulates that an issuer shall not be eligible to make a rights issue of specified securities:

1. if the issuer, any of its promoters, promoter group or directors of the issuer are debarred from accessing the capital market by the SEBI,

2. if any of the promoters or directors of the issuer is a promoter or director of any other company which is debarred from accessing the capital market by the SEBI,

3. if any of its promoters or directors is a fugitive economic offender.

The restrictions under (a) and (b) above will not apply to the persons or entities mentioned therein who were debarred in the past by the SEBI and the period of debarment is already over as on the date of filing of the draft letter of offer with the SEBI.

Ans. Provisions relating to the General Employee Benefits Scheme (GEBS) in accordance with regulation 26 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 are as under:

1. GEBS shall contain the details of the scheme and the manner in which the scheme shall be implemented and operated.

2. The shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of GEBS.

3. The secretarial auditor of the company shall certify compliance with sub-regulation (2) at the time of adoption of such balance sheet by the company.

Provisions relating to the Retirement Benefit Scheme (RBS) in accordance with regulation 27 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 are as under:

1. Retirement benefit scheme may be implemented by a company subject to compliance with these regulations and provisions of any other law in force in relation to retirement benefits.

2. The retirement benefit scheme shall contain the details of the benefits under the scheme and the manner in which the scheme shall be implemented and operated.

3. The shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of RBS.

4. The secretarial auditor of the company shall certify compliance with sub-regulation (3) at the time of adoption of such balance sheet by the company.

The Board of directors of Vijay Ltd., a listed entity proposes to issue sweat equity shares to Ganesh, an employee belonging to the promoter’s group. Ganesh also participated in the Shareholders’ resolution for allotment of sweat equity shares. By referring the relevant SEBI Regulations, answer the followings :

1. Can Ganesh participate in the resolution (Give reason) ?

2. Briefly explain the provisions for issuing of sweat equity shares under SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

3. When these regulations are exempted from enforcement in special cases ?

(Dec, 22 - 5 marks)

Ans.

(i) As per Regulation 32 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the issue of sweat equity shares to employees who belong to promoter or promoter group shall be approved by way of a resolution passed by a simple majority of the shareholders in general meeting and the promoters/promoter group shall not participate in such resolution.

Hence in the given case, Ganesh being an employee belonging to the promoter’s group, cannot participate in the resolution.

(ii) A company whose equity shares are listed on a recognised stock exchange may issue sweat equity shares in accordance with Section 54 of the Companies Act, 2013 and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 to its employees for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. A company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year. However, the issuance of sweat equity shares in the company shall not exceed twenty five percent of the paid up equity share capital of the company at any time.

For the purposes of passing a special resolution under clause (a) of sub-section of section 54 of the Companies Act, 2013, the explanatory statement to be annexed to the notice for the general meeting pursuant to section 102 of the Companies Act, 2013 shall contain disclosures as specified in the Schedule – II of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. Each issue of sweat equity shares shall be voted by a separate resolution. The resolution for issue of sweat equity shares shall be valid for a period of not more than twelve months from the date of passing of the resolution.

(iii) As per Regulation 42 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities

Any exemption granted by the SEBI as mentioned above shall be subject to the applicant satisfying such conditions as may be specified by the SEBI including conditions to be complied with on a continuous basis.

Answer with reference to SEBI Regulations :

1. ABC Ltd., a leading software development company is having outstanding paidup equity share capital of `20 crore as on 31st March, 2021. On 20th April, 2021, it has issued sweat equity shares of `2 crore to the eligible employees. To control the high attrition rate, it is planning to allot further sweat equity shares of `2 crore during the year. Is it permissible under the law ?

2. Can a company allot sweat equity shares to an employee working outside India, who has been deputed outside India for last three years ?

3. Himanshu, a non-executive director, approached the company for allotment of sweat equity shares. Whether he is eligible ?

4. Whether the company is free to fix the price of sweat equity shares ? (Dec, 22 - 7 marks)

Ans.

1. As per Regulation 31 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, a company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year. However, the issuance of sweat equity shares in the company shall not exceed twenty five percent of the paid up equity share capital of the company at any time.

In the given case, ABC Ltd has already issued 10% of sweat equity shares of Rs. 2 crore (Rs. 20 crore *10%=Rs. 2 crore). Now, the company cannot issue further 10% sweat equity shares as in a year 15% of paid up equity share capital is allowed for sweat equity shares.

As per Regulation 29 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the term 'employee' means,

1. an employee of the company working in India or abroad; or

2. a director of the company whether a whole time director or not.

As the employee working outside India is also eligible for allotment of sweat equity shares, hence company can allot the same to the employee's working outside India, who has been deputed outside India for last three years.

The director of the company whether a whole time director or not, is eligible for sweat equity shares. Himanshu, who is a non-executive director is also eligible for allotment of sweat equity shares.

3. As per Regulation 33 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. Therefore, the Company is not free to fix the price of sweat equity shares.

Ans. Pricing of Employee Stock Option Scheme (ESOS)

The company granting option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to conforming to the accounting policies as specified in the SEBI (Share Based Employee Benefits) Regulations, 2014.

Vesting Period of ESOS

There shall be a minimum vesting period of one year in case of ESOS. However, in case where options are granted by a company under an ESOS in lieu of options held by a person under an ESOS in another company which has merged or amalgamated with that company, the period during which the options granted by the transferor company were held by him shall be adjusted against the minimum vesting period.

Consequence of failure to exercise option

The amount payable by the employee, if any, at the time of grant of option, -

1. may be forfeited by the company if the option is not exercised by the employee within the exercise period; or

2. may be refunded to the employee if the options are not vested due to non- fulfilment of conditions relating to vesting of option as per the ESOS.

Ans. The provisions of SEBI (Share Based Employee Benefits) Regulations, 2014 shall apply only to a company whose shares are listed on a recognised stock exchange in India and has a scheme. Hence the statement given in the question is not correct.

Further the provision of these regulations shall only apply, if the company is having a scheme:

1. for direct or indirect benefit of employees,

2. involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly and

3. satisfying, directly or indirectly, any one of the following conditions:

   1. the scheme is set up by the company or any other company in its group;

   2. the scheme is funded or guaranteed by the company or any other company in its group;

   3. the scheme is controlled or managed by the company or any other company in its group.

1. Can the company issue shares to its director, Irfan under ESOP scheme ?

2. Prepare a brief note on the process of implementation of ESOP scheme through Trust route. (Dec, 20 – 4 Marks)

Ans. (i) A company can issue shares through employee stock option scheme (ESOP) to its

1. permanent employees (India or outside India)

2. a director whether whole time director or not (excluding independent director)

3. an employee as defined in clauses (a) or (b) of a subsidiary, in India or Outside India or of a holding company but excluding following:

   1. An Employee who is a promoter or a person belongs to the promoter group

   2. A director who either himself or through his relative or through anybody corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company.

In the given case, Irfan holds more than 10% of stake in Tango Trading Ltd. Hence, he is not eligible to participate in the ESOP scheme.

1. The process of implementation of ESOPs scheme through Trust Route is as under:

• The company creates an Employee Welfare Trust specifically for the purpose of running the ESOP schemes.

• Company grants loan to the trust for subscribing its shares

• Company issues fresh shares to the trust and option to employees.

• Where the employees decide to exercise the option to acquire the shares, trust transfers the shares in the name of the employees

• Trust repays the loan to the company from the proceeds on sale of shares to employee.

Ans. To

The Board of Directors

Sub: Procedure for issuing securities under SEBI (Share Based Employee Benefits) Regulations, 2014

As it has been decided by the Board of Directors (BoD), to issue employee stock option, to take up as an agenda in the next meeting of the BoD, the following is the procedure for issuing ESOP by a Listed Company:

• Hold a Board Meeting to consider and approve ESOP and formation of Compensation Committee;

• Compensation committee shall plan draft the scheme of ESOP;

• Hold Board meeting to adopt the final scheme, appoint a registered Merchant banker and approve the notice of the General meeting for shareholders’ approval by passing special resolution;

• Hold General Meeting for approval of shareholders;

• Make an application to the stock exchange for obtaining in-principal approval for listing of proposed ESOP shares;

• Issue letter of grant of option to the eligible employees along with the letter of acceptance of option;

• If the grant is made to NRI employees, comply with norms of RBI as per FDI Policy.

• On receipt of letter of acceptance of option along with upfront payment (if any), from the employee issue the option certificates;

• There shall be a minimum vesting period of one year and after expiry of vesting period, the company shall issue a letter of vesting along with the letter of exercise of options;

• Receipt to letter of exercise from the employee;

• Hold a Board Meeting at the suitable Interval during the exercise period for allotment of shares on options exercised by the Employees;

• Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories;

• Make an application to the Stock exchange for listing of the Shares so allotted; and

• Receipt of listing approval from the Stock Exchange(s).

Mr X

Company Secretary

Note : Notice of Meetings (both Board & Shareholder) has to be given.

For Board Meetings : atleast 7 days notice.

For Shareholder meeting : atleast 21 days notice.

Ans. ESOP (Employees Stock Option Plan)

As per regulation 4 of SEBI (Share Based Employee Benefits) Regulations, 2014, an employee shall be eligible to participate in the schemes of the company and where such employee is a director nominated by an institution as its representative on the board of directors of the company;-

1. The contract or agreement entered into between the institution nominating its employee as the director of a company, and the director so appointed shall, inter alia, specify the following:-

   1. whether the grants by the company under its scheme(s) can be accepted by the said employee in his capacity as director of the company:

   2. that grant if made to the director, shall not be renounced in favour of the nominating institution; and

   3. the conditions subject to which fees, commission, other incentives, etc. can be accepted by the director from the company.

2. the institution nominating its employee as a director of a company shall file a copy of' the contract or agreement with the said company, which shall in turn file the copy with all the stock exchanges on which its shares are listed.

3. the director so appointed shall furnish a copy of the contract or agreement at the first board meeting of the company attended by him after his nomination.

In the current problem, if the above conditions have been satisfied, Yale is eligible for ESOP and company cannot exclude him on the proposal of ESOP.

Ans. According to the Regulation 7 of the SEBI (Share Based Employee Benefits) Regulation, 2014 the company shall not vary the terms of the schemes in any manner which may be detrimental to the interests of the employees, provided that the company shall be entitled to vary the term of the schemes to meet any regulatory requirements.

Subject to the above, the company may by special resolution in a general meeting vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the employees.

The company desires to increase the vesting period from 2 years to 3 years. This will get shares after 3 years instead of earlier 2 years and it is prejudicial to the interests of the employees.

Hence, the company cannot change the vesting period as per SEBI regulations.

Ans. According to SEBI (Share Based Employee Benefits) ("SBEB") Regulations, 2014, “Stock Appreciation Right Scheme” means a scheme under which a company grants Share Appreciation Right (SAR) to employees.

SAR Scheme under SEBI (SBEB) Regulations, 2014

1. Administration and Implementation

The SAR scheme shall contain the details of the manner in which the scheme will be implemented and operated. The company shall have the freedom to implement cash settled or equity settled SAR scheme. However, in case of equity settled SAR scheme, if the settlement results in fractional shares, then the consideration for fractional shares should be settled in cash. SAR shall not be offered unless the disclosures, as specified by SEBI in this regard, are made by the company to the prospective SAR grantees.

Vesting

There shall be a minimum vesting period of one year in case of SAR scheme. However, in a case where SAR is granted by a company under a SAR scheme in lieu of SAR held by the same person under a SAR scheme in another company which has merged or amalgamated with the first mentioned company, the period during which the SAR granted by the transferor company were held by the employee shall be adjusted against the minimum vesting period.

Rights of the SAR Holder

The employee shall not have right to receive dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of SAR granted to him.

1. Ankit is a permanent employee deputed in USA for a specific project.

2. Smart Ltd. is an independent company.

3. Anil is a promoter and employee.

4. Aneesh is a director holding 11% of outstanding equity shares of the company.

5. If it is a startup company, will the situation be the same in (iii) & (iv) above? (Dec, 18 – 5 Marks)

Ans. Rule 12 of Companies (Share Capital and Debentures) Rules 2014, define the eligible employees for the purpose of employee stock option. The answers given below are based on the eligibility criteria set out in the rule:

1. Yes. As per Rule 12 (1) (a), a permanent employee of the company who has been working in India or outside India. Hence, ankit is an eligible employee for ESOP.

2. No. Since Smart Ltd. is a company, the Companies Act, 2013 and rules made there under does not recognise a company as an employee.

3. No. As per Rule 12 (1) (i), an employee who is a promoter or a person belonging to the promoter group is not an employee. Hence, Anil is not an eligible employee for ESOP.

4. No. As per Rule 12 (1) (ii), a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company, is not eligible employee. Hence, Aneesh is not an eligible employee for this purpose.

5. Yes, Anil and Aneesh are eligible employees for both the situation in (iii) & (IV) above. As per notification number GSR 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry Government of India, Government of India, the conditions mentioned in (iii) & (iv) above, shall not apply for a startup company upto 10 years from the date of its incorporation or registration.

Ans. According to the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the provisions of these regulations shall apply to any company whose equity shares are listed on a recognised stock exchange in India and who seeks to issue sweat equity shares or has a scheme:-

1. for direct or indirect benefit of employees;

2. involving dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and

3. satisfying, directly or indirectly, any one of the following conditions: -

   1. the scheme is set up by the company or any other company in its group.

   2. the scheme is funded or guaranteed by the company or any other company in its group.

   3. the scheme is controlled or managed by the company or any other company in its group.

Further the Regulation 2(1)(i) of the said Regulations defines “Employees” as follows: “Employee”, except in relation to issue of sweat equity shares, means, —

1. an employee as designated by the company, who is exclusively working in India or outside India; or

2. a director of the company, whether a whole time director or not, including a nonexecutive director who is not a promoter or member of the promoter group, but excluding an independent director; or

3. an employee as defined in sub-clauses (i) or (ii), of a group company including subsidiary or its associate company, in India or outside India, or of a holding company of the company, but does not include -

   1. an employee who is a promoter or a person belonging to the promoter group; or

   2. a director who, either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten per cent of the outstanding equity shares of the company;

The Regulation 2(1)(c) of the said Regulations defines “Associate Company” as follow:

“Associate Company” shall have the same meaning as defined under Section 2(6) of the Companies Act, 2013.

Further, as per Section 2(6) of the Companies Act, 2013, the term Associate Companies includes Joint Ventures. It is therefore noted that the provisions of the Regulations shall apply to those companies whose shares are listed on any recognised stock exchanges in India and has a scheme, which is set up, funded, or guaranteed and controlled or managed by the company or any other company in its group for direct or indirect benefit of the employees.

However in the given case of MineGame Group, the proposed scheme is being setup by MineGame Group and though the said scheme is for the benefit of the employees of joint venture but linked to the share of MineGame Group and not to listed company MineGame Ltd. Thus the said scheme does not come under the ambit of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Ans. Compliances and Conditions

As per SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021-

1. The company shall not make any fresh grant which involves allotment or transfer of shares to its employees under any schemes formulated prior to its IPO and prior to the listing of its equity shares ('pre-IPO scheme') unless:

   • Such pre-IPO scheme is in conformity with SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021; and

   • Such pre-IPO scheme is ratified by its shareholders subsequent to the IPO.

However, the ratification under clause (ii) may be done at any time prior to grant of new options or shares or SAR under such pre-IPO scheme.

No change shall be made in the terms of options or shares or SAR issued under such pre-IPO schemes, whether by repricing, change in vesting period or maturity or otherwise unless prior approval of the shareholders, by way of special resolutions, is taken for such a change, except for any adjustments for corporate actions made in accordance with these regulations.

2. For listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principle approval of the stock exchanges where it proposes to list the said shares prior to the grant of options or SARs.

3. When holding company issues option, share, SAR or benefits to the employee of its subsidiary, the cost incurred by the holding company for issuing such option, share, SAR or benefits shall be disclosed in the 'notes to accounts' of the financial statements of the subsidiary company.

4. In a case when the holding company issues option, if the subsidiary reimburses the cost incurred by the holding company in granting option, share, SAR or benefits to the employees of the subsidiary, both the subsidiary as well as the holding company shall disclose the payment or receipt, as the case may be, in the 'notes to accounts' to their financial statements.

5. The company shall appoint a registered merchant banker for the implementation of schemes covered by these regulations till the stage of obtaining in-principle approval from the recognised stock exchanges in accordance with clause (b) of regulation 10 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

You being a Company Secretary advise the management about pricing of the shares under SEB (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. (June, 22 – 4 Marks)

Ans. The SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 states that the price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Section 164 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 deals with the pricing requirements stipulated for a preferential issue which is given as under:

In case of frequently traded shares:

Regulation 164(1) states that-

1. if the equity shares of the issuer have been listed on a recognised stock exchange for a period of twenty six weeks or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

   1. the average of the weekly high and low of the volume weighted average price of the related equity shares quoted on the recognised stock exchange during the twenty six weeks preceding the relevant date; or

   2. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.

2. If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than twenty six weeks as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than the higher of the following:

1. the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under sections 391 to 394 of the Companies Act, 1956 or sections 230 to 234 of the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

2. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

3. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.

In case of infrequently traded shares:

The price determined by the issuer shall take into account the valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies. However, the issuer shall submit a certificate stating that the issuer is in compliance of this regulation, obtained from an independent valuer to the stock exchange where the equity shares of the issuer are listed.

You being a Company Secretary advise the management about pricing of the shares under SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. (June, 2022 – 4 Marks)

Ans. Pricing of sweat equity shares

The price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Pricing in case of Preferential Issue

Listed on a RSE more than 90 trading days

(1) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of 90 trading days or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

1. the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

2. the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Listed on a RSE less than 90 trading days

If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 90 trading days as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than the higher of the following:

1. the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under sections 230 to 234 the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

2. the average of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

3. the average of the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Ans. Accounting Treatment : Where the sweat equity shares are issued for a non-cash consideration, such non cash consideration shall be treated in the following manner in the books of account of the company:

1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards; or

2. where the above clause is not applicable, it shall be expensed as provided in the relevant accounting standards.

Placing of Auditors Certificate before Annual General Meeting

In the General meeting subsequent to the issue of sweat equity, the Board of Directors shall place before the shareholders, a certificate from the auditors of the company that the issue of sweat equity shares has been made in accordance with the SEBI Regulations and in accordance with the resolution passed by the company authorizing the issue of such Sweat Equity Shares.

Ceiling of Managerial Remuneration

The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of sections 197 of the Companies Act, 2013, if the following conditions are fulfilled:

1. the Sweat Equity shares are issued to any director or manager; and

2. they are issued for non-cash consideration, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Referring to the provisions of Companies Act, 2013 and SEBI Regulations, answer the following :

1. What are the conditions to be fulfilled for issue of sweat equity shares ?

2. Can sweat equity shares be issued to promoters ? If yes, what are the conditions to be fulfilled ?

3. What is the relevant date in above case ?

4. What should be the minimum price at which sweat equity shares should be issued ? (June, 21 – 8 Marks)

Ans. (i) According to Section 54 of the Companies Act, 2013 a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:

1. The issue is authorized by a special resolution passed by the company in the general meeting.

2. The resolution specifies the number of shares, current market price, consideration if any and the class or classes of directors or employees to whom such equity shares are to be issued.

3. The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the regulations made by SEBI in this regard and if they are not listed, the sweat equity shares are to be issued in accordance with the rules as prescribed under Companies Act, 2013.

1. Yes, sweat equity shares can be issued to promoter's subject to following conditions:

   1. Such issue shall be approved by simple majority of the shareholders in General Meeting.

   2. Further, the promoters to whom such Sweat Equity Shares are proposed to be issued shall not participate in such resolution and separate resolution shall be passed for each transaction of issue of Sweat Equity.

   3. Such resolution shall be valid for a period of not more than twelve months from the date of passing of the resolution. For the purposes of passing the resolution, the explanatory statement shall contain the disclosures as specified in the Schedule.

2. “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of clause (a) of sub section (1) of section 54 of the Companies Act, 2013.

3. The price of sweat equity shares shall not be less than the higher of the following:

• the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

• the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

In the given question, the meeting of the general body of shareholders of Portable Marketing Limited was held on 27th March, 2020 and therefore, the relevant date is 26th February, 2020 (that is the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened). Thus, minimum price at which sweat equity shares are to be issued, will be higher of the following:

1. the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding 26th February, 2020 = `550.

OR

the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the 26th February, 2020 = `575.

Thus, Minimum price for issue of sweat equity shares should be `575.

Ans. As per regulation 9 of the SEBI (Issue of Sweat Equity) Regulations, 2002, where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company: ­

1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards; or

2. where the above clause is not applicable, it shall be treated as expense as provided in the relevant accounting standards.

Ans. To

The Board of Directors

Sub: Pricing of the Sweat Equity Shares

Pricing of sweat equity shares

The price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Pricing in case of Preferential Issue

Listed on a RSE more than 90 trading days

(1) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of 90 trading days or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

3. the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Listed on a RSE less than 90 trading days

If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 90 trading days as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than the higher of the following:

the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under sections 230 to 234 the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

4. the average of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

5. the average of the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

1. In what manner the shares held by the Trust will be disclosed to the stock exchange?

2. Can shares held by the Trust be included in the category of public holding?

(Dec 23 – 4 Marks)

Ans. Regulation 3(9) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 provides the manner of disclosing shares held by the Trust. It is prescribed that for the purpose of disclosures to the recognized stock exchange, the shareholding of the trust shall be shown as “non-promoter and non-public” shareholding. The shares held by the trust shall not form part of the public shareholding which needs to be maintained at a minimum of 25% as prescribed under the Securities Contracts (Regulation) Rules, 1957.

1. Shares held by the Trust of Samrudhi Enterprises Ltd. are required to be shown as "non- promoter and non-public shareholding" while disclosing the shareholding pattern to the stock exchange.

2. Shares held by the Trust of Samrudhi Enterprises Ltd. shall not form part of the public shareholding which needs to be maintained at a minimum of 25% as prescribed under the Securities Contracts (Regulation) Rules, 1957.

1. Excellent Consultants Ltd. is holding 9% of paid-up capital in the company.

2. Karnatak Bank Securities Ltd. has been one of the leading promoters of the company.

(Dec 23 – 4 Marks)

Ans. In accordance with Regulation 3(4) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021:

a) any person shall not be appointed as a trustee of the trust if such person, beneficially holds 10% or more of the paid-up share capital or the voting rights of the company. In the given case, Excellent Consultants Ltd. is holding 9%, which is less than 10% of the paid-up capital of the company. So, Excellent Consultants Ltd. can be appointed as a Trustee.

b) any person shall not be appointed as trustee if he is a director, key managerial personnel or promoter of the company or its group company including its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter. Karnatak Bank Securities Ltd. has been one of the leading promoters of the Joe Pharma Ltd. and hence, cannot be appointed as Trustee.

You being a Company Secretary advise the management about pricing of the shares under SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. (June, 2022 – 4 Marks)

Ans. Pricing of sweat equity shares

The price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Pricing in case of Preferential Issue

Listed on a RSE more than 90 trading days

(1) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of 90 trading days or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

1. the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

2. the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Listed on a RSE less than 90 trading days

If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 90 trading days as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than the higher of the following:

1. the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under sections 230 to 234 the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

2. the average of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

3. the average of the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Ans. Accounting Treatment : Where the sweat equity shares are issued for a non-cash consideration, such non cash consideration shall be treated in the following manner in the books of account of the company:

1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards; or

2. where the above clause is not applicable, it shall be expensed as provided in the relevant accounting standards.

Placing of Auditors Certificate before Annual General Meeting

In the General meeting subsequent to the issue of sweat equity, the Board of Directors shall place before the shareholders, a certificate from the auditors of the company that the issue of sweat equity shares has been made in accordance with the SEBI Regulations and in accordance with the resolution passed by the company authorizing the issue of such Sweat Equity Shares.

Ceiling of Managerial Remuneration

The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of sections 197 of the Companies Act, 2013, if the following conditions are fulfilled:

1. the Sweat Equity shares are issued to any director or manager; and

2. they are issued for non-cash consideration, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Referring to the provisions of Companies Act, 2013 and SEBI Regulations, answer the following :

1. What are the conditions to be fulfilled for issue of sweat equity shares ?

2. Can sweat equity shares be issued to promoters ? If yes, what are the conditions to be fulfilled ?

3. What is the relevant date in above case ?

4. What should be the minimum price at which sweat equity shares should be issued ? (June, 21 – 8 Marks)

Ans. (i) According to Section 54 of the Companies Act, 2013 a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:

1. The issue is authorized by a special resolution passed by the company in the general meeting.

2. The resolution specifies the number of shares, current market price, consideration if any and the class or classes of directors or employees to whom such equity shares are to be issued.

3. The sweat equity shares of a company whose equity shares are listed on a recognised stock exchange are issued in accordance with the regulations made by SEBI in this regard and if they are not listed, the sweat equity shares are to be issued in accordance with the rules as prescribed under Companies Act, 2013.

1. Yes, sweat equity shares can be issued to promoter's subject to following conditions:

   1. Such issue shall be approved by simple majority of the shareholders in General Meeting.

   2. Further, the promoters to whom such Sweat Equity Shares are proposed to be issued shall not participate in such resolution and separate resolution shall be passed for each transaction of issue of Sweat Equity.

   3. Such resolution shall be valid for a period of not more than twelve months from the date of passing of the resolution. For the purposes of passing the resolution, the explanatory statement shall contain the disclosures as specified in the Schedule.

2. “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of clause (a) of sub section (1) of section 54 of the Companies Act, 2013.

3. The price of sweat equity shares shall not be less than the higher of the following:

• the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

• the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

In the given question, the meeting of the general body of shareholders of Portable Marketing Limited was held on 27th March, 2020 and therefore, the relevant date is 26th February, 2020 (that is the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened). Thus, minimum price at which sweat equity shares are to be issued, will be higher of the following:

1. the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding 26th February, 2020 = `550.

OR

the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the 26th February, 2020 = `575.

Thus, Minimum price for issue of sweat equity shares should be `575.

Ans. As per regulation 9 of the SEBI (Issue of Sweat Equity) Regulations, 2002, where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company: ­

1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards; or

2. where the above clause is not applicable, it shall be treated as expense as provided in the relevant accounting standards.

Ans. To

The Board of Directors

Sub: Pricing of the Sweat Equity Shares

Pricing of sweat equity shares

The price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Pricing in case of Preferential Issue

Listed on a RSE more than 90 trading days

(1) If the equity shares of the issuer have been listed on a recognised stock exchange for a period of 90 trading days or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:

the 90 trading days’ volume weighted average price of the related equity shares quoted on the recognised stock exchange preceding the relevant date; or

3. the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Listed on a RSE less than 90 trading days

If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less than 90 trading days as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than the higher of the following:

the price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation under sections 230 to 234 the Companies Act, 2013, as applicable, pursuant to which the equity shares of the issuer were listed, as the case may be; or

4. the average of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during the period the equity shares have been listed preceding the relevant date; or

5. the average of the 10 trading days’ volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.

Provided that if the Articles of Association of the issuer provide for a method of determination which results in a floor price higher than that determined under these regulations, then the same shall be considered as the floor price for equity shares to be allotted pursuant to the preferential issue.

Ans. The obligations of the Company had been specified under the SEBI (Issue of Sweat Equity) Regulations, 2002, where it was prescribed that the company shall ensure –

1. The explanatory statement to the notice for general meeting shall contain disclosures as specified.

2. The Auditor’s certificate shall be placed in the general meeting of shareholders.

3. The company shall within seven days of the issue of sweat equity, issue or send statement to the exchange, disclosing:

1. number of sweat equity shares;

2. price at which the sweat equity shares are issued;

3. total amount invested in sweat equity shares;

4. details of the persons to whom sweat equity shares are issued; and

5. the consequent changes in the capital structure and the shareholding pattern after and before the issues of sweat equity.

However, SEBI has notified the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 on August 13, 2021, hence the SEBI (Issue of Sweat Equity) Regulations, 2002 has been repealed. Therefore, in accordance with Regulation 41 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the obligations of the Company are as under:

1. the explanatory statement to the notice for a general meeting shall contain disclosures as are specified under section 54(1)(b) of the Companies Act, 2013 and Regulation 32(1) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

2. the secretarial auditor’s certificate required under regulation 36 is placed in the general meeting of the shareholders.

3. the company, within seven days of the issue of sweat equity shares, sends a statement to the recognised stock exchange, disclosing:

1. number of sweat equity shares issued;

2. price at which the sweat equity shares are issued;

3. total amount received towards sweat equity shares;

4. details of the persons to whom sweat equity shares have been issued; and

5. the consequent changes in the capital structure and the shareholding pattern before and after the issue of sweat equity shares.

1. Whether Prikshit is entitled to receive the ESOPs (give reason) ?

2. What would be your answer, if Prikshit is a non-executive director belongs to the promoters group and holds 12% outstanding equity shares of the company?

(June 23 – 4 Marks)

Ans. a) In terms of the provisions of regulation 17(6)(d) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, independent directors are not entitled to any stock option. In the given case, Prikshit who is an independent director, is not entitled to receive the ESOPs.

b) As per the definition of employees as provided under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, a non-executive director is eligible for ESOP but he should not be belonging to the promoters group. Further, any director who holds more than ten percent of the outstanding equity shares of the company is also not eligible for ESOP.

Hence, Parikshit is not an eligible employee under the regulations and therefore not eligible for ESOP.

1. Maximum quantum of sweat equity shares

2. Pricing of sweat equity shares

3. Ceiling on managerial remunerations. (Dec, 24 - 2+1+2=5 marks)

Ans. Section 54 of the Companies Act, 2013 inter alia prescribed that where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the SEBI in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

In the given case, PQR Ltd. is a pharmaceutical company, whose shares are listed on BSE. Therefore, the company is required to comply with the provisions of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

1. Maximum quantum of sweat equity shares

In accordance with the regulations 31 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, a company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year. However, the issuance of sweat equity shares in the company shall not exceed 25% of the paid-up equity share capital of the company at any time.

Further, a company listed on Innovators Growth Platform shall be permitted to issue not more than 15% of the paid-up equity share capital in a financial year subject to overall limit not exceeding 50% of the paid-up equity share capital of the company, up to 10 years from the date of its incorporation or registration.

Pricing of sweat equity shares

In accordance with the regulations 33 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the price of sweat equity shares shall be determined in accordance with the pricing requirements stipulated for a preferential issue to a person other than a qualified institutional buyer under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Ceiling on managerial remuneration

In accordance with regulations 37 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of sections 196, 197 and other applicable provisions of the Companies Act, 2013, if the following conditions are fulfilled:

1. the sweat equity shares are issued to any director or manager; and

2. the sweat equity shares are issued for non-cash consideration, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Ans. As per Regulation 29 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the term ‘employee’ in relation to issue of sweat equity shares means,

1. an employee of the company working in India or abroad; or

2. a director of the company whether a whole- time director or not.

Further, Regulation 30 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 states that a company whose equity shares are listed on a recognised stock exchange may issue sweat equity shares in accordance with Section 54 of the Companies Act, 2013 and these regulations to its employees for their providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

In light of the above-mentioned provisions, Sweat Equity Shares can be issued to any director, whether whole-time or not and there is no threshold for holding any equity shares of the company. Hence, Jeevan, who is a whole-time director and who holds 21% of the outstanding equity shares of Sanaya Ltd, is eligible for Sweat Equity Shares of Sanaya Ltd.

According to the Regulation 41 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the company, within seven days of the issue of sweat equity shares, sends a statement to the recognised stock exchange, disclosing:

1. number of sweat equity shares issued;

2. price at which the sweat equity shares are issued;

3. total amount received towards sweat equity shares;

4. details of the persons to whom sweat equity shares have been issued; and

5. the consequent changes in the capital structure and the shareholding pattern before and after the issue of sweat equity shares.

Ans. Under Regulation 23 of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 the obligations of the issuer are prescribed which are as follow:

1. Fair and Equitable Treatment of Applicants - The issuer shall treat all applicants to an issue of non-convertible securities in a fair and equitable manner as per the procedures as may be specified by the SEBI.

2. Prohibition of Fraudulent and Deceptive Practices - The issuer shall not employ any device, scheme, or artifice to defraud in connection with issue or subscription or distribution of non-convertible securities which are listed or proposed to be listed on the recognized stock exchange.

3. Mandatory SCORES Authentication and Usage - The issuer shall apply for Securities and Exchange Board of India Complaints Redress System (SCORES) authentication in the format specified by the SEBI and shall use the same for all issuance of non-convertible securities.

4. Disclosure and Cooperation for Due Diligence in Public Issue - In case of a public issue, the issuer shall provide all required information/ documents to the lead managers for conducting the due diligence, in the form and manner as may be specified by the SEBI.

5. Maintenance of Adequate Security Cover for Secured Debt Securities - The issuer shall ensure that the secured debt securities are secured by 100% security cover or higher security cover as per the terms of the offer document and/ or Debenture Trust Deed, sufficient to discharge the principal amount and the interest thereon at all times for the issued debt securities.

6. Appointment of Debenture Trustee Nominee Director - If an issuer is a company, it shall ensure that its Articles of Association require its Board of Directors to appoint the person nominated by the debenture trustee(s) in terms of clause (e) of sub-regulation(1) of regulation 15 of the SEBI (Debenture Trustees) Regulations, 1993 as a director on its Board of Directors.

7. Fixation of Record Date for Payments and Corporate Actions - The issuer shall fix a record date for the purposes of payment of interest, dividend and payment of redemption or repayment amount or for such other purposes as specified by the SEBI. Such record date shall be fixed at 15 days prior to the due date of payment interest or dividend, repayment of principal or any other corporate actions.

Ans. “Green debt security” is defined under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 which means a debt security issued for raising funds subject to the conditions as may be specified by the SEBI from time to time, to be utilised for project(s) and/ or asset(s) falling under any of the following categories:

1. renewable and sustainable energy including wind, bioenergy, other sources of energy which use clean technology,

2. clean transportation including mass/public transportation,

3. climate change adaptation including efforts to make infrastructure more resilient to impacts of climate change and information support systems such as climate observation and early warning systems,

4. energy efficiency including efficient and green buildings,

5. sustainable waste management including recycling, waste to energy, efficient disposal of wastage,

6. sustainable land use including sustainable forestry and agriculture, afforestation,

7. biodiversity conservation,

8. pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy efficient or emission efficient waste to energy) and sectors mentioned under the India Cooling Action Plan launched by the Ministry of Environment, Forest and Climate Change,

9. circular economy adapted products, production technologies and processes (such as the design and introduction of reusable, recyclable and refurbished materials, components and products, circular tools and services) and/or eco efficient products

10. blue bonds which comprise of funds raised for sustainable water management including clean water and water recycling, and sustainable maritime sector including sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy and ocean mapping,

11. yellow bonds which comprise of funds raised for solar energy generation and the upstream industries and downstream industries associated with it,

12. transition bonds which comprise of funds raised for transitioning to a more sustainable form of operations, in line with India’s Intended Nationally Determined Contributions, and

Explanation: Intended Nationally Determined Contributions (INDCs) refer to the climate targets determined by India under the Paris Agreement at the Conference of Parties 21 in 2015, and at the Conference of Parties 26 in 2021, as revised from time to time.

any other category, as may be specified by SEBI from time to time.

1. Can a Debenture Trustee act for issue of debentures of an associate?

2. Is appointment of Debenture Trustee compulsory?

3. Can a debenture issue be transferred? If so, when can a debenture trustee relinquish his assignments?

4. Is there any registration fee to be paid by the Debenture Trustee?

(Dec 23 – 4 Marks)

Ans. a) A debenture trustee cannot act for issue of debentures of an associate.

b) Debenture Trustee appointment is compulsory in the following cases:

• Section 71(5) of the Companies Act, 2013, stipulate that no company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding 500 for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.

• SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 states that the issuer shall appoint a debenture trustee in case of an issue of debt securities.

• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, provides that an issuer making an initial public offer of convertible debt instruments shall also appoint at least one debenture trustee in accordance with the provisions of the Companies Act, 2013 and the SEBI (Debenture Trustees) Regulations, 1993.

c) Yes, a debenture issue can be transferred. A debenture trustee can relinquish its assignments in respect of the debenture issue of any body corporate only when another debenture trustee is appointed in its place by the body corporate.

d) Fees for the initial as well as permanent registration is to be paid by the applicant for Debenture Trustee. The break-up of fee is given below:

Ans. Trust Deed

Under the SEBI (Issue and Listing of Non-Convertible Securities) Regulation, 2021, trust deed means a deed executed between the issuer and the debenture trustee for the benefit of the holders of the debt securities. The Regulations requires that the issuer and the debenture trustee shall execute the trust deed within such timelines as may be specified by the SEBI. Where an issuer fails to execute the trust deed within the specified period, the issuer shall also pay interest of at least 2 percent per annum or such other rate, as specified by the SEBI to the holder of debt securities, over and above the agreed coupon rate, till the execution of the trust deed.

Every debenture trustee shall amongst other matters, accept the trust deeds which shall contain the matters as provided under Section 71 of the Companies Act, 2013 and Form No. SH.12 of the Companies (Share Capital and Debentures) Rules, 2014. Such trust deed shall consist of two parts:

1. Part A containing statutory/standard information pertaining to the debt issue.

2. Part B containing details specific to the particular debt issue

The trust deed shall not contain any clause which has the effect of:

• Limiting or extinguishing the obligations and liabilities of the debenture trustees or the issuer in relation to any rights or interests of the holders of the debt securities.

• Limiting or restricting or waiving the provisions of the Act, these regulations and circulars or guidelines issued by the SEBI.

• Indemnifying the debenture trustees or the issuer for loss or damage caused by their act of negligence or commission or omission.

The trust deed shall contain the issuer’s bank details from which it proposes to pay the interest and redemption amount of the debt securities and the issuer shall pre-authorise the debenture trustee at the time of executing the trust deed to allow the debenture trustee to seek information about interest payment and redemption payment from such bank.

The trust deed shall contain a provision, mandating the issuer to appoint the person nominated by the debenture trustee(s) in terms of the SEBI (Debenture Trustees) Regulations, 1993, as a director on its Board of Directors at the earliest and not later than one month from the date of receipt of nomination from the debenture trustee(s).

The trust deed shall also contain such other particulars as may be specified by SEBI.

Filing of information documents while Issuance and Listing of Non-convertible Securities

issued on a Private Placement Basis (June, 25 – 3 Marks)

Ans. Filing of information document while Issuance and Listing of Non-convertible Securities issued on a Private Placement Basis

Regulation 50A of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 provides that an issuer making a private placement of non-convertible securities, and seeking listing thereof on stock exchange(s), shall file a general information document with the stock exchange(s), which shall contain the following disclosures, namely-

1. disclosures specified in Schedule I of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021,

2. disclosures specified in the Companies Act, 2013, as applicable, and

3. additional disclosures as may be specified by the SEBI.

The general information document shall be valid for a period of one year from the date of opening of the first offer of non-convertible securities made under that general information document. In respect of a second or subsequent offer of non-convertible securities, during the period of validity for a period of one year of that general information document, no further general information document shall be required to be filed.

An issuer making a private placement of second or subsequent offer of non-convertible securities, during the validity of the general information document or a shelf prospectus or a shelf placement memorandum, as the case may be, shall file a key information document for each such second or subsequent offer of non-convertible securities, with the stock exchange(s).

Ans. Regulation 25(11) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that Independent Director, who resigns from a listed entity, shall not be appointed as an Executive / Whole Time Director on the board of the listed entity, its holding, subsidiary or associate company or on the board of a company belonging to its promoter group, unless a period of one year has elapsed from the date of resignation as an independent director.

In view of the above, Nikunj is not eligible for appointment as an executive director on the Board for next four months as only eight months have been elapsed after his resignation.

Ans. Regulation 17(1C) of the SEBI (Listing Obligations and Disclosure Requirements)

Regulations, 2015 provides that the listed entity shall ensure that approval of shareholders for appointment of a person on the Board of Directors or as a manager is taken at the next general meeting or within a time period of three months from the date of appointment, whichever is earlier.

In view of above and since the general meeting of listed company has already been held prior to appointment of Mr. Mihir, the company is required to hold the general meeting within three months to regularise the appointment of Mr. Mihir.

Regulation 17(1C) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 further provides that if the appointment or a re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. Further, the statement referred to under sub-section (1) of section 102 of the Companies Act, 2013, annexed to the notice to the shareholders, for considering the appointment or re-appointment of such a person earlier rejected by the shareholders shall contain a detailed explanation and justification by the Nomination and Remuneration Committee and the Board of directors for recommending such a person for appointment or re-appointment.

In case the earlier appointment of Mr. Mihir as a director on the Board was rejected by the shareholders, the appointment of Mr. Mihir requires prior approval of shareholders complying with the above-mentioned Regulation.

Ans. As per SEBI (LODR) Regulations, 2015, the independent directors of the listed entity shall hold at least one meeting in a financial year, without the presence of non-independent directors and members of management and all the independent directors shall strive to be present at such meeting.

So as per the provisions inviting members of the management is not required. So action of the Independent director is valid.

Ans. As per the Regulation 17A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the directors of listed entities shall comply with the following conditions with respect to the maximum number of directorships, including any alternate directorships that can be held by them at any point of time:

1. A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020.

However a person shall not serve as an independent director in more than seven listed

entities.

Notwithstanding the above, any person who is serving as a whole time director/ managing director in any listed entity shall serve as an independent director in not more than three listed entities.

In the given case, Saatvik is a Managing Director in a listed company as well as an Independent Director in other three listed companies and hence he is already holding the maximum permissible directorship under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. He therefore cannot accept the independent directorship in a listed e-Commerce company.

Ans. Compliances required to be complied with under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 by Earth Limited being among top 1,000 listed companies are as under:

1. Board of directors shall have at least one independent woman director.

2. Entities shall undertake Directors and Officers insurance (‘D and O insurance’) for all their independent directors of such quantum and for such risks as may be determined by its board of directors.

3. The provisions of Risk Management Committee shall be applicable.

4. Company shall formulate a dividend distribution policy which shall be disclosed on the

website of the listed entity and a web-link shall also be provided in their annual reports.

The Annual Report shall contain a Business Responsibility and Sustainability Report (BRSR) on the environmental, social and governance disclosures, in the format as may be specified by SEBI from time to time.

Ans. As per the Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended, the composition of board of directors of the listed entity shall have optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the board of directors shall comprise of non-executive directors, provided that;

• Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors or the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.

The board of directors of the top 1000 listed entities w.e.f. April 1. 2019 shall comprise of not less than six directors.

• With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall -

  1. be a non-executive director;

  2. not be related to the Managing Director or the Chief Executive Officers as per the definition of the term "relative" defined under the Companies Act, 2013

However this requirement shall not be applicable to the listed companies which do not have identifiable promoters as per the shareholding pattern filed with the stock exchange.

The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.

However, the participation of directors by video conferencing or by other audio- visual means shall also be counted for the purposes of such quorum.

1. Requirement of appointment of women director.

2. Meeting & Quorum of the Board Meeting.

3. Composition of an Audit Committee. (June, 24 - 1+2+2=5 marks)

Ans.

1. Requirement of Appointment of Woman Director: The Board of Directors shall have an optimum combination of executive and non-executive directors with at least one woman director. The Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020. [Regulation 17(1)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]

2. Meetings & Quorum of the Board Meeting: The Board of directors shall meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings. The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director. [Regulation 17(2) & 17(2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]

3. Composition of an Audit Committee: The audit committee shall comprise minimum three directors as members. At least Two-third of the members of audit committee shall be independent directors. In case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors. All members of audit committee shall be financial literate and at least one member shall have accounting or related financial management expertise. The chairperson of the audit committee shall be an independent director. [Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]

Accordingly, Neeraj is advised.

Ans. As per Regulation 17(1A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, no listed entity shall appoint a person or continue the directorship of any person as a non- executive director who has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.

Thus, in the given case, the appointment of Dr. Grace as non-executive director of PQR Ltd. is not valid as special resolution is not passed.

1. Arav has given his office premises on lease to the company.

2. Ehsaan is a component supplier.

3. Manav is 20 years old.

4. Elika holds a 1% of the total voting power. (June, 2022 – 4 Marks)

Ans. Definition of Independent Director as per SEBI (LODR) Regulations, 2015

“Independent Director” means a non-executive director, other than a nominee director of the listed entity:

1. who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise and experience;

2. who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity;

3. who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate company;

4. who, apart from receiving director's remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

5. none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or ₹ 50 Lakhs or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year;

who, neither himself, nor whose relative(s) —

1. holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed;

2. is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, of —

   1. a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company; or

   2. any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

3. holds together with his relatives 2% or more of the total voting power of the listed entity; or

4. is a chief executive or director, by whatever name called, of any non-profit organisation that receives 25% or more of its receipts or corpus from the listed entity, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the listed entity;

5. is a material supplier, service provider or customer or a lessor or lessee of the listed entity;

who is not less than 21 years of age

7. who is not a non-independent director of another company on the board of which any non- independent director of the listed entity is an independent director.

So as per the above definition , answers shall be as follows:

1. he is lessor to the company so cannot become Independent Director in the company.

2. If he is a material component supplier then he cannot become Independent director in the company otherwise he can become.

3. His age is less than 21 years so he cannot become.

4. He holds less than 2% of voting power so he can become Independent Director.

Ans. Regulation 44

• The top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall hold their annual general meetings within a period of 5 months from the date of closing of the financial year.

• The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general meetings.

• The listed entity shall provide the facility of remote e-voting to its shareholders and submit to the stock exchange, within 2 working days of conclusion of its General Meeting, details regarding the voting results in the format specified by the Board.

1. Whether the action of the Pritam Ltd. is tenable ?

2. What is the requirement of proceedings of Annual General Meeting ?

3. Can Pritam Ltd. provide the remote e-voting facility to its shareholders as per the Act ?

4. What is the time period for submitting the required details to stock exchange? (Dec, 22 – 5 Marks)

Ans. Regulation 44 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that the listed entity shall provide the facility of remote e- voting facility to its shareholders, in respect of all shareholders' resolutions and shall submit to the stock exchange, within two working days of conclusion of its General Meeting, details regarding the voting results in the format specified by the SEBI.

Further provided that, the top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall hold their annual general meetings within a period of five months from the date of closing of the financial year and shall provide one- way live webcast of the proceedings of the annual general meetings.

Thus, in view of the above:

1. The action of the Pritam Ltd. is not tenable. Pritam Ltd. shall hold its AGM within five months from the date of closing of financial year i.e. by 31st August, 2022.

2. The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general meetings.

3. Yes, Pritam Ltd. shall provide the facility of remote e-voting to its shareholders mandatorily. The e-voting facility to be provided to shareholders shall be provided in compliance with the conditions specified under the Companies (Management and Administration) Rules, 2014, or amendments made thereto.

4. The time for submitting to stock exchange is within 2 working days of conclusion of its General Meeting, details regarding the voting results in the format specified by the SEBI.

Ans. Maximum Number of Directorships

Regulation 17A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that a person shall not be a director in more than 8 listed entities with effect from April 1, 2019 and in not more than 7 listed entities with effect from April 1, 2020. However, a person shall not serve as an independent director in more than 7 listed entities.

Any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than 3 listed entities.

For the purpose of this regulation, the count for the number of listed entities on which a person is a director / independent director shall be only those whose equity shares are listed on a stock exchange.

Exceptions in the compliance with the corporate governance provisions

As per Regulation 15(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the compliance with the corporate governance provisions shall not apply, in respect of following -

A listed entity having:

• paid up equity share capital not exceeding rupees 10 crore and

• net worth not exceeding rupees 25 crore, as on the last day of the previous financial year.

However, where the provisions of regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and para C, D and E of Schedule V become applicable to a listed entity at a later date, it shall ensure compliance with the same within six months from such date.

Home Technology Ltd. is having paid up share capital of rupees 8 crore and having net worth (paid up capital plus + free reserve) of rupees 20 crore. Therefore, both paid up capital and net worth are within the limit and hence the company is exempted with regards to compliance of corporate governance provisions.

Ans. As per Regulation 17A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities.

Hence, X being the Managing Director of ABC Ltd., can join in only 3 listed companies as an independent Director.

As per Regulation 17A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020. However a person shall not serve as an independent director in more than seven listed entities.

Therefore, after retirement X cannot serve as an Independent Director in ten listed companies and is restricted to only seven listed companies as stated above. Hence the planning of X is not as per the Regulations on Corporate Governance.

1. Quorum in Board meeting

2. Maximum number of directorship in a listed entity by a director. (June, 21 – 4 Marks)

Ans. The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.

Thus, keeping in mind the above provisions, Suzan Limited is required to comply with above provisions with respect to quorum in board meeting with effect from 1st April, 2019.

1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that the directors of listed entities shall comply with the following conditions with respect to the maximum number of directorships, including any alternate directorships that can be held by them at any point of time :

A person shall not be a director in more than 8 listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020. However, a person shall not serve as an independent director in more than 7 listed entities.

Further, any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than 3 listed entities.

For the purpose of this sub-regulation, the count for the number of listed entities on which a person is a director / independent director shall be only those whose equity shares are listed on a stock exchange.

Ans. Yearly Compliances as per the SEBI (LODR) Regulations, 2015

Ans. Nomination and remuneration committee [Regulation 19 of SEBI (LODR) Regulations, 2015]

• The Nomination and Remuneration committee shall comprise of at least three directors;

• All directors of the committee shall be non-executive directors;

• At least 50% of the directors shall be independent directors and in case of a listed entity having outstanding SR equity shares, 2/3 of the nomination and remuneration committee shall comprise of independent directors;

• The Chairperson shall be an independent director;

• The quorum for a meeting of the nomination and remuneration committee shall be either 2 members or 1/3 of the members of the committee, whichever is greater, including at least one independent director in attendance;

• Nomination and Remuneration Committee plays a key role in formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees.

Risk Management Committee [Regulation 21 of SEBI (LODR) Regulations, 2015]

• Applicable to top 500 listed entities determined on the basis of market capitalization, as at the end of the immediate previous financial year;

• The majority of members shall consist of members of the Board of directors. However, in case of a listed entity having outstanding SR equity shares, at least 2/3 of the Risk Management Committee shall comprise of independent directors;

  • The Chairperson of the Risk management committee shall be a member of the Board of directors and senior executives of the listed entity may be members of the committee;

  • The committee shall meet at least once in a year;

  • The Board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit (such function shall specifically cover cyber security).

Write short note on

Composition of Risk Management Committee (June, 24 – 3 Marks)

Ans. Composition of Risk Management Committee [Regulation 21 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

• The Risk Management Committee shall have minimum three members with majority of them being members of the board of directors, including at least one independent director.

• In case of a listed entity having outstanding SR equity shares at least two thirds of the Risk Management Committee shall comprise independent directors.

• The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.

Ans. The corporate governance requirements with respect to subsidiary of listed entity are specified under Regulation 24 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. In terms of the said regulation, Prosperity Limited being the holding company, shall meet the following compliances with respect to Elegance Limited:

1. Board Representation of Independent Director in Material Unlisted Subsidiary - At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, whether incorporated in India or not.

The term “material subsidiary” shall mean a subsidiary, whose income or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Audit Committee Review of Unlisted Subsidiary Financials - The audit committee of the listed entity shall review the financial statements, in particular, the investments made by the unlisted subsidiary.

2. Placing of Unlisted Subsidiary Board Minutes before Listed Entity Board - The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed at the meeting of the board of directors of the listed entity.

3. Reporting of Significant Transactions by Unlisted Subsidiary Management - The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary. The term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately preceding accounting year.

4. Restrictions on Disposal of Shares or Loss of Control in Material Subsidiary - A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than or equal to fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

5. Shareholders’ Approval for Sale, Disposal or Lease of Material Subsidiary Assets - Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

6. Applicability of Provisions to Listed Subsidiary Acting as Holding Company - Where a listed entity has a listed subsidiary, which is itself a holding company, the provisions of this regulation shall apply to the listed subsidiary in so far as its subsidiaries are concerned.

Ans. The SEBI (LODR) Regulations, 2015 has given the following recognitions to Company Secretary in practice:

Certificate regarding Transfer of Securities [Regulation 40(9)] - Certification to the effect that all transfers have been completed within the stipulated time.

Secretarial Audit Report [Regulation 24A] - Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake Secretarial Audit and shall annex with its Annual Report, a Secretarial Audit Report, given by a Company Secretary in Practice, in such form as may be specified with effect from the year ended March 31, 2019.

Certificate Regarding Compliance of Conditions of Corporate Governance under SEBI (LODR) Regulations [Schedule V] - The Regulations authorize Company Secretary in Practice to issue certificate regarding compliance of conditions of Corporate Governance.

1. Certification regarding Director's Disqualification [Schedule V] - A certificate from a Company Secretary in Practice that none of the directors on the Board of the company have been debarred or disqualified from being appointed or continuing as Directors of Companies by the Board/ Ministry of Corporate Affairs or any such Statutory Authority.

Explain the matters for which prior intimation of the Board Meeting shall be given to the BSE under SEBI Regulations. (Dec, 20 – 4 Marks)

Ans. Prior Intimations (Regulation 29 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015)

Yes, Diamond Company Limited shall give prior intimation to BSE about its annual financial results.

As per Regulation 29, the matters for which the prior intimation of the Board Meeting shall be given to the BSE are as follows:

1. Financial Result viz. quarterly, half yearly or annual;

2. Proposal for Buy-back of Securities

3. Proposal for Voluntary delisting by the listed entity from the stock exchange(s)

4. Fund raising by way of FPO, Right Issue, ADR, GDR, QIP, FCCB, Preferential Issue, debt issue or any other method and for determination of issue price. However, intimation shall also be given in case of any annual general meeting or extraordinary general meeting or postal ballot that is proposed to be held for obtaining shareholder approval for further fund raising indicating type of issuance.

5. Declaration/recommendation of dividend

6. Proposal for declaration of Bonus securities etc.

Ans. As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, corporate governance provisions shall apply to listed companies subject to certain exceptions.

Corporate governance provisions as specified in Regulations 17 to 27 and clauses (b) to (i) of Regulation 46(2) and para C, D and E of Schedule V shall not apply, in respect of following:

The listed entity having:

• paid up equity share capital not exceeding rupees 10 crore and

• Net worth not exceeding rupees 25 crore, as on the last day of the previous financial year.

In the given case -

Situation –I

• Paid up equity share capital is `8 Crore i.e. not exceeding `10 Crores AND

• Net worth is `15 Crores i.e. not exceeding 25 Crores.

Hence, regulation 17(5) for Code of Conduct of Board of Directors & Senior Management does not apply to GK Ltd.

Situation-II

If paid up equity share capital is increased to `15 Crores and Net worth is increased to `35 Crores, the regulation 17(5) for Code of Conduct for Board of Directors & Senior Management shall become applicable as it will exceed the criteria of share capital and net worth.

Note: Preference share capital do not have any bearing on the instant case.

1. Promoter is declared as willful defaulter as per RBI guidelines.

2. Promoter is holding 12% of total voting rights in the listed entity.

3. Promoter is acting as CEO of the listed entity.

4. The promoter company has outstanding listing fees only for one year. (June, 19 -4 Marks)

Ans. Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) deals with the conditions for re-classification of any person as promoter / public.

Based on the provisions of Regulation 31A of the SEBI LODR Regulations, the following are the answers to the circumstances given:

1. Promoter is declared as wilful defaulter as per RBI guidelines. As per Regulation 31A (b)(vi), the Promoter declared as a ‘wilful defaulter’ as per the Reserve Bank of India Guidelines is not eligible to apply for re-classification themselves as public shareholders.

2. Promoter is holding 12 % of total voting rights in the listed entity. As per Regulation 31A (b)(i), if the promoter holds more than 10% of the total voting rights in the listed entity, they are not eligible for re-classification. Hence in this case, the promoter is not eligible to apply for re-classification.

3. As per Regulation 31A (b)(v), if the promoter acts as a key managerial person in the listed entity he is not eligible for re-classification. In the given case, the promoter is a CEO hence he is not eligible for re-classification

4. As per Regulation 31A (c)(iii), the listed entity shall not have any outstanding dues to the SEBI, the stock exchanges or the depositories to be is eligible to apply for reclassification. In this case, the promoter company has outstanding listing fees for one year, hence it is not eligible for re-classification.

1. Raman is acting as a Company Secretary

2. Naina defaulted repayment of loans and declared as wilful defaulter as per RBI guidelines

3. Mayank is holding 15% of total voting rights.

4. The trading of equity shares of the company suspended by the stock exchange.

5. Minal acting as a Chief Financial Officer. (June, 24 – 5 Marks)

Ans.

1. As per regulation 31A(3)(b)(v) of the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015, the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not act as key managerial personnel in the listed entity. Raman is acting as Company Secretary of the listed entity. Therefore, Raman is a key managerial person of the listed entity. As promoter is acting as a key managerial person in the listed entity, therefore he is not eligible to apply for re- classification as public shareholder.

2. As per regulation 31A(3)(b)(vi) of the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015, the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not be a ‘wilful defaulter’ as per the Reserve Bank of India Guidelines. Naina, being a promoter, is declared as wilful defaulter as per RBI guidelines. In this case, Naina is not eligible to apply for re-classification as public shareholder.

3. As per regulation 31A(3)(b)(i) of the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015, the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not together, hold more than ten percent of the total voting rights in the listed entity. Mayank is holding 15% of total voting rights in the listed entity. As Mayank, being a promoter, holds more than ten percent of the total voting rights in the listed entity, hence he is not eligible for re-classification as public shareholder.

4. As per Regulation 31A(3)(c)(ii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015, the listed entity shall not have trading in its shares suspended by the stock exchanges. As trading of equity shares of the company is suspended by the stock exchange, hence reclassification will not be allowed.

5. As per regulation 31A(3)(b)(v) of the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015, the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not act as key managerial personnel in the listed entity. Minal is acting as Chief Finance Officer of the listed entity. Therefore, Minal is a key managerial person of the listed entity. As promoter is acting as a key managerial person in the listed entity, and therefore not eligible to apply for re- classification.

Ans. Half Yearly Compliances as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Regulation 7(3) : The listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance officer of the listed entity and the authorized representative of the share transfer agent within one month of end of each half of the financial year.

Regulation 29(1) : The listed entity shall give prior intimation to stock exchange about the meeting of the board of directors in which the proposals is due to be considered for financial results viz. quarterly, half yearly, or annual, as the case may be.

Proviso to Regulation 31(1) : listed entities which have listed their specified securities on SME Exchange, the Holding of specified securities and shareholding pattern shall be submitted on a half yearly basis within twenty one days from the end of each half year.

Regulation 32 : The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc.

1. indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;

2. indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds.

For the purpose of this regulation, reference to “quarterly/quarter” in case of listed entity which has listed their specified securities on SME Exchange shall respectively be read as “half yearly/half year”.

Regulation 33(3)(f) : While preparing financial results, the listed entity shall also submit as part of its standalone or consolidated financial results for the half year, by way of a note, a statement of assets and liabilities as at the end of the half – year.

Regulation 33(3)(g) : The listed entity shall also submit as part of its standalone and consolidated financial results for the half year, by way of a note, statement of cash flows for the half-year.

Regulation 33(5) : For the purpose of ‘Financial Results’ (Regulation 33), any reference to “quarterly/quarter” in case of listed entity which has listed their specified securities on SME Exchange shall be respectively read as “half yearly/half year” and the requirement of submitting ‘year-to-date’ financial results shall not be applicable for a listed entity which has listed their specified securities on SME Exchange.

Regulation 40(9) : The listed entity shall ensure that the share transfer agent and/or the in-house share transfer facility, as the case may be, produces a certificate from a practising company secretary within one month of the end of each half of the financial year, certifying that all certificates have been issued within thirty days of the date of lodgement for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies.

As per Regulation 40(10) of SEBI (LODR), the listed entity shall ensure that certificate mentioned at Regulation 40 (9), shall be filed with the stock exchange(s) simultaneously.

Ans. Based on the recommendations of Kotak Committee, the amendments made in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to Independent Directors are as follows:

1. The Board of Directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of Directors of the top 1000 listed entities shall have at least one independent woman Director By April 1, 2020.

2. The quorum for every meeting of the Board of Directors of the top 1000 listed entities with effect from April 1, 2019 and the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three Directors, whichever is higher, including at least one independent director.

3. A person shall not serve as an independent director in more than seven listed entities. However, any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities.

4. The evaluation of independent director shall be done by the entire Board of Directors which shall include:-

   1. performance of the director; and

   2. fulfilment of the Independence criteria as specified in SEBI Listing Regulations and their Independence from the management.

However in the above evaluation, directors who are subject to evaluations shall not participate.

The quorum for a meeting of the nomination and remuneration committee shall be either two members or one-third of the members of the committee whichever is greater, including at least one independent director in attendance.

5. At least one independent director on the Board of Directors of the listed entities shall be a director on the Board of Directors of an unlisted material subsidiary, whether incorporated in India or not.

6. No person shall be appointed or continue as an alternate director for an independent director of a listed entity with effect from October 1, 2018.

7. Detailed reasons for the resignation of an independent director who resigns before the expiry of his tenure along with a confirmation by such director that there are no other material reasons other than those provided.

8. At least one independent director on the Board of Directors of the listed entity shall be a director on the Board of Directors of an unlisted material subsidiary, whether incorporated in India or not.

9. Every independent director shall, at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, submit a declaration that he meets the criteria of independence as provided in clause (b) of sub-regulation (1) of regulation 16 of SEBI Listing Regulations and that he is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his ability to discharge his duties with an objective independent judgment and without any external influence.

Ans. The followings are the quarterly compliances required to be made under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Ans. Yes, the Audit Committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions:

1. the Audit Committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;

2. the Audit Committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

3. the omnibus approval shall specify:

1. the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into;