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CS Executive Capital Market & Securities Laws Important Questions 2024 Exams

 

 

CS Executive Capital Market & Securities Laws Important Questions Answers for June & Dec, 2024 Exams – New Syllabus

 

 CS Executive Syllabus        

             Index

        Part A – 40 Marks

1. Basics of Capital Market

2. Secondary Market in India

3. Securities Contracts (Regulation) Act, 1956

4. SEBI Act, 1992

5. Depositories

6. Securities Market Intermediaries

7. International Financial Service Centre

            PART – B (60 MARKS)

8. SEBI (ICDR) Regulations, 2018

9. SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

10. Issue and Listing of Non-Convertible Securities

11. Listing Obligations and Disclosure Requirements

12. Takeover Code

13. Insider Trading Regulations

14. Prohibition of Fraudulent and Unfair Trade Practices

15. Delisting of Securities

16. Buy-Back of Securities

17. Mutual Funds

18. Collective Investment Scheme

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Important Questions, Topics & Important Chapters – In this Article, we have covered Important Questions from All Chapters. It is very difficult to say which chapter is important which is not. So students are strictly advised to go through all chapters properly to clear the Exams. Nevertheless these questions answers give you an Idea which chapters can be considered most important in CS Executive Capital Market and Securities Laws Paper of Group 2.

 

STRUCTURE OF CAPITAL MARKET

.

Q. Write short notes on the following :

(a)Leveraged Buyout (LBO)
(b)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) Characteristics of Bond

1.Bond has a Fixed face value, which is the amount to be returned to the investor upon maturity.
2.Fixed maturity date, which can range from a few days to 20-30 years or even more.
3.All bonds repay the principal amount after the maturity date.
4.Provides regular payment of interest, semi-annually or annually.
5.Interest is calculated as a certain percentage of the face value known as a ‘coupon payment’.
6.Generally considered as less risky investment as compared to equity.
7.It helps to diversify and grow investor’s money.

.

Q. Venture Capital is one of the innovative financing resources for an enterprise. Explain briefly and indicate the areas of investment of Venture Capital.

Ans. 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. 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. It is a resource for supporting innovation, knowledge based ideas and technology and human capital intensive enterprises.

“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.

Essentially, a venture capital company is a group of investors who pool investments focused within certain parameters. 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.

.

Q. Write short notes on the following:

(a)Foreign Currency Convertible Bonds
(b)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

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Q. “An Alternative Investment Fund which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of the SEBI”. Enumerate the conditions for approval of SEBI. (June, 19 – 5 Marks)

Ans. 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. Such AIFs are required to make an application in Form A along with necessary supporting documents. Application fees of Rs. 1, 00,000 must be paid along with the application to SEBI. AIFs are not required to pay registration fees for such applications.

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.

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.

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.

.

Q. Write short notes on the following :

(a)Optionally Fully Convertible Debenture
(b)Angel Fund (Dec, 19 – 3 marks each)

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

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.

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. 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. 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)

.

(b)     Angel Fund

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. 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.

Angel investments are typically the earliest equity investments made in start-up companies. They commonly band together in investor networks. Often these networks are based on regional, industry in investor or academic affiliation. Angel Investors are often former entrepreneurs themselves, and typically enjoy working with companies at the earliest stages of business formation. 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.

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

     

Q. What is Pension Fund and Government Pension ? State the legislations governing pension in India. (Dec, 19 – 5 marks)

AnsPension 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. 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. 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. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Pension funds play a huge role in development of the economy and it play active role in the Indian equity market. 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:

A.Formal sector Pensions
B.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.

.

Q. Write short notes on the following :

(a)Private Equity
(b)Venture capital
(c)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 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. 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. It is a resource for supporting innovation, knowledge based ideas and technology and human capital-intensive enterprises.

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 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.

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:

(i)Formal sector pensions
(ii)Informal sector pensions

 

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Secondary Market in India

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Q. What is the option contract ? How the option contract is classified on the basis of party who exercise the option and time at which the option can be exercised? (Dec, 21 – 5 Marks)

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.

.

Q. (a) What is future contract ?

(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.

Buying Cost = 500 x ` 210

=

`1,05,000

Selling price = 500 x [`210 (5% of ` 210)]

=

`99,750

Loss= (`1,05,000 `99,750)

=

`5,250

Profit or Loss in case of Future 300 shares of PQR Ltd.

Selling Value= 300 x `195

=

`58,500

Buying Value = 300 x [`195 (3% of `195)]

=

`56,745

Profit = (`58,500 `56745)

=

`1,755

Net Loss = `5,250 –`1,755

=

`3,495

.

Q. What are the Option contracts ? You are required to compute the profit/loss for each investors in below option contracts :

(i)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.
(ii)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.
(iii)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.
(iv)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:

a.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.
b.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.

.

(i) For Mr. X : Profit

=

[{Rs. 60 Rs. 62} + Rs. 12] = Rs. 10

(ii) For Mr. Y : Profit

=

[{Rs. 80 Rs. 60} Rs. 8.50] = Rs. 11.50

(iii) For Mr. Z : Profit

=

Rs. 11.00 (Option will not be exercised)

(iv) For Mr. XY : Loss

=

[{Rs. -70 + Rs. 48} + Rs. 8] = Rs. 14

Q. Eknath, a risk averse investor is planning to take advantage of market rumour that in the upcoming budget, the Government is likely to announce some economic package including production linked incentive (PLI) scheme for auto industries. As he does not like to take higher risk; he purchases one call and put option contract (Lot size 1000 shares) of a leading auto component manufacturing company at a premium of ` 5 and ` 4 respectively with strike price of `105. In the budget, no PLI scheme was declared and the price of stock fell to `90.

(i)Ascertain the net loss/profit.
(ii)What would be your answer, if the stock price escalates to `120 as Government slashed GST rate on vehicles ? (June, 22 – 5 marks)

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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.

.

Q.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.
(i)TCS 830 Call
(ii)ACC 510 Put
(iii)TCS 840 Call                                              
(iv)ACC 520 Put                                           (Dec, 22 – 5 Marks)

.

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

(i)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.
(ii)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.
(iii)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.

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

.

Q. Suppose B. Co. Ltd. issues bonds with following terms :

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/-

.

Q. (i) How does market surveillance try to ensure market integrity in the securities market ? Explain.

(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:

A.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
B.Post trade surveillance
End of day alert Alerts generated using statistical tools. The tool highlights stocks which have behaved abnormally form its past behavior.
Pattern recognition model Models designed using high end tools and trading patterns which itself identifies suspects involving in unfair trading practice.
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:

(a)Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility.
(b)VaR based margining system.
(c)Specification of mark to Market margins.
(d)Specification of Intra-day trading limits and Gross Exposure Limits.
(e)Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges.
(f)Specification of time limits of payment of margins.
(g)Collection of margins on upfront basis.
(h)Index based market wide circuit breakers.
(i)Automatic de-activation of trading terminals in case of breach of exposure limits.
(j)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.
(k)Collection of margins from institutional clients on T+1 basis.

.

Q. Write short notes on the following :

(a)Key features of Preventive Surveillance (3 Marks) (June,2021)
(b)Margins (3 Marks)

Ans.(a) Key features of 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.
13.End of day alert – Alerts generated using statistical tools. The tool highlights stocks which have behaved abnormally form its past behaviour.
14.Pattern recognition model Models designed using high end tools and trading patterns which itself identifies suspects involving in unfair trading practice.
15.Transaction alerts for member As part of surveillance obligation of members   the alerts are downloaded to members under 14 different heads.

(b) 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.

.

.

Q. What is meant by Block deal ? How is it being executed in the Stock Exchange? (Dec. 18 – 5 Marks)

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

i.Session timings:
(a)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.

(b)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.

ii.The minimum order size for execution of trades in the block deal window shall be `10 crores.
iii.The orders placed shall be within ± 1% of the applicable reference price in the respective windows as stated above.
iv.Every trade executed in the block deal Windows must result in delivery and cannot be squared off or reversed.
v.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.

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Q. What do you mean by FED policy ? Briefly state how change in US fed rate can impact India ? (Dec, 21 – 5 Marks)

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.

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Q. What do you know about Market Surveillance? Enumerate different ways of Preventive Surveillance. (Dec, 20 – 5 Marks)

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.

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Q. “Prior information of open position of any share during market hours can easily fluctuate the price of the share”. How Preventive Surveillance helps to reduce the fraudulent price variation in the shares in a day ? (5 marks)June,2019

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.

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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.

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Q. Write short notes on the following :

(a)Key difference between WPI & CPI
(b)Basis of SENSEX
(c)High Net Worth Individuals
(d)Bulk Deal. (June, 19 -3 marks each)

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

i.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.
ii.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.
iii.Prices of WPI are collected on voluntary basis while price data for CPI is collected by Investigators by visiting markets.
iv.CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
v.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.

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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.

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Q. Write short notes on the following :

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.

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Q. (i) How does market surveillance try to ensure market integrity in the securities market ? Explain.

(ii) What are the key risk management measures initiated by SEBI in the secondary market ? Describe. (Dec, 19 – 5 marks each)

Ans. Answer (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:

C.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
D.Post trade surveillance
End of day alert Alerts generated using statistical tools. The tool highlights stocks which have behaved abnormally form its past behavior.
Pattern recognition model Models designed using high end tools and trading patterns which itself identifies suspects involving in unfair trading practice.
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:

(l)Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility.
(m)VaR based margining system.
(n)Specification of mark to Market margins.
(o)Specification of Intra-day trading limits and Gross Exposure Limits.
(p)Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges.
(q)Specification of time limits of payment of margins.
(r)Collection of margins on upfront basis.
(s)Index based market wide circuit breakers.
(t)Automatic de-activation of trading terminals in case of breach of exposure limits.
(u)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.
(v)Collection of margins from institutional clients on T+1 basis.

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Securities Contracts (Regulations) Act, 1956

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Q. Akilesh, one of the Executive Director of a listed company has violated the provisions of Insider Trading Regulations of SEBI. The Adjudicating Officer has imposed penalty of ₹ 5 Lakh. The Adjudicating officer has imposed penalty of ₹ 5 lakh. The Executive Director did not pay the amount within the stipulated time as stated in the order.

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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

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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:—
a)attachment and sale of the person’s movable property;
b)attachment of the person’s bank accounts;
c)attachment and sale of the person’s immovable property;
d)arrest of the person and his detention in prison;
e)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.

2)The Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising the powers under sub-section (1).
3)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.

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Q. The stock exchange wants to transfer the duties and functions of a clearing house to a clearing corporation. Is it possible to do so ? Explain the purpose if any, it serves. (Dec, 21 – 4 Marks)

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

(a)the periodical settlement of contracts and differences thereunder;
(b)the delivery of, and payment for, securities;
(c)any other matter incidental to, or connected with, such transfer.

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Q. ‘A stock exchange on its own can delist any security thereon’. Explain how Recognized Stock Exchange delists any securities listed thereon under Securities Contracts (Regulations) Rules, 1957. (June, 19 – 5 Marks)

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:—

(a)the company has incurred losses during the preceding 3 consecutive years        and it has negative networth;
(b)trading in the securities of the company has remained suspended for a period of more than 6 months;
(c)the securities of the company have remained infrequently traded during the preceding three years;
(d)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;
(e)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;
(f)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.

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Q. ST Ltd. applied for listing of instruments in a recognized stock exchange. However, permission was refused by the stock exchange. Can the company appeal to SAT against such refusal ? Explain. (Dec, 19 – 5 Marks)

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

a)Within 15 days from the date on which the reasons for such refusal are furnished        to it, or
b)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,
(i)vary or set aside the decision of the stock exchange; or
(ii)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.

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Q. “A recognized stock exchange may frame rules/amend rules made by it to provide for all or any of the matters specified therein.” Describe them. (Dec, 19 – 4 Marks)

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:

(a)the opening and closing of markets and the regulation of the hours of trade;
(b)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;
(c)the regulation or prohibition of blank transfers;
(d)the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;
(e)the fixing, altering or postponing of days for settlements;
(f)the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities;
(g)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;
(h)the method and procedure for the settlement of claims or disputes, including settlement by arbitration;
(i)the levy and recovery of fees, fines and penalties;
(j)the regulation of the course of business between parties to contracts in any capacity;
(k)the fixing of a scale of brokerage and other charges;
(l)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;
(m)the making, comparing, settling and closing of bargains;
(n)the regulation of dealings by members for their own account;
(o)the separation of the functions of jobbers and brokers;
(p)the limitations on the volume of trade done by any individual member in exceptional circumstances;
(q)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,

(a)the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;
(b)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;
(c)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
(d)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.

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Q. What are the provisions for continuous listing requirement under Securities Contracts (Regulation) Rules, 1957 ? List any six methods for achieving minimum public shareholding by a listed company. (Dec, 18 – 4 Marks)

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 :

(i)Issuance of shares to public through prospectus;
(ii)Offer for sale of shares held by promoters to public through prospectus;
(iii)Sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012;
(iv)Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009;
(v)Rights Issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares that may arise from such issue;
(vi)Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares that may arise from such issue;
(vii)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.
(viii)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

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