SECURITIES AND EXCHANGE BOARD OF INDIA (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019

GAZETTE OF INDIA

EXTRAORDINARY

PART – III – SECTION 4

PUBLISHED BY AUTHORITY

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 23rd September 2019

SECURITIES AND EXCHANGE BOARD OF INDIA (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019

No. SEBI/LAD-NRO/GN/2019/36 – In exercise of the powers conferred by sub-section (1) of Section 30 read with sub section (1) of Section 11, clause (ba) of sub-section (2) of Section 11 and sub-sections (1) and (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992, and under Section 25 of the Depositories Act, 1996, the Securities and Exchange Board of India hereby, makes the following regulations, to provide the framework for registration and procedures with regard to foreign investors who propose to make portfolio investment in India, namely,—

CHAPTER I

PRELIMINARY

Short title and commencement.

1. (1) These regulations may be called the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019.

(2) They shall come into force on the date of their publication in the Official Gazette.

Definitions.

2. (1) In these regulations, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below, and their cognate expressions and variations shall be construed accordingly,—

(a) “Act” means the Securities and Exchange Board of India Act, 1992;

(b) “appropriately regulated” entity means an entity which is regulated by the securities market regulator or the banking regulator of home jurisdiction or otherwise, in the same capacity in which it proposes to make investments in India;

(c) “Bilateral Memorandum of Understanding with the Board” shall mean a bilateral

Memorandum of Understanding between the Board and any authority outside India that provides for information sharing arrangement as specified under clause (ib) of sub-section
(2) of Section 11 of the Act;

(d) “Board” means the Securities and Exchange Board of India established under section 3 of the Act;

(e) “certificate” means a certificate of registration granted to a foreign portfolio investor by the designated depository participant on behalf of the Board under these regulations;

(f) “control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

(g) “custodian” means a person registered under the Securities and Exchange Board of India (Custodian) Regulations, 1996;

(h) “designated bank” means a scheduled bank in India, which has been authorised by the Reserve Bank of India to act as a banker to foreign portfolio investors;

(i) “designated depository participant” means a person who has been approved by the Board under Chapter III of these regulations;

(j) “foreign portfolio investor” means a person who has been registered under Chapter II of these regulations and shall be deemed to be an intermediary in terms of the provisions of the Act;

(k) “Form” means an application form for obtaining registration as foreign portfolio investor as notified by the Government of India or as specified by the Board;

(l) “International Financial Services Centre” or “IFSC” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;

(m) “investment manager” shall include an entity performing the role of investment management or any equivalent role, including trustee(s);

(n) “non-resident Indian” and “overseas citizen of India” shall have the same meaning as assigned to such terms under regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999;

(o) “offshore derivative instrument” means any instrument, by whatever name called, which is issued overseas by a foreign portfolio investor against securities held by it in India, as its underlying;

(q) “resident Indian” shall have the same meaning assigned to the term “person resident in India” under the Foreign Exchange Management Act, 1999;

(r) “Schedule” means a Schedule to these regulations;

(s) ‘stock exchange’ means a recognised stock exchange under the Securities Contracts

(Regulation) Act, 1956.

(2) Words and expressions used and not defined in these regulations, but defined in the Act or the Foreign Exchange Management Act, 1999, the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 or the rules and regulations made thereunder shall have the same meaning respectively assigned to them in those Acts or rules or regulations or any statutory modification or re-enactment thereto.

CHAPTER II

REGISTRATION OF FOREIGN PORTFOLIO INVESTORS

Application for grant of certificate as a foreign portfolio investor.

3. (1) No person shall buy, sell or otherwise deal in securities as a foreign portfolio investor unless it has obtained a certificate granted by a designated depository participant on behalf of the Board.

Explanation – An offshore fund floated by an asset management company that has received no-objection certificate in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, shall be required to obtain registration as a foreign portfolio investor, for investment in securities in India, within one hundred and eighty days from the date of notification of these regulations.

(2) An application for the grant of certificate as a foreign portfolio investor shall be made to a designated depository participant in the Form specified by the Government or the Board from time to time and shall be supported by the fee specified in Part A of the Second Schedule.

Eligibility criteria of foreign portfolio investor.

4 A designated depository participant shall consider an application for grant of certificate of registration as a foreign portfolio investor if the applicant satisfies the following conditions namely: –

(a) the applicant is not a resident Indian;

(b) the applicant is not a non-resident Indian or an overseas citizen of India;

(c) non-resident Indians or overseas citizens of India or resident Indian individuals can be constituents of the applicant provided they meet conditions specified by the Board from time to time;

(d) the applicant is a resident of the country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral

Memorandum of Understanding (Appendix A Signatories) or a signatory to the bilateral Memorandum of Understanding with the Board:

Provided that an applicant being Government or Government related investor shall be considered as eligible for registration, if such applicant is a resident in the country as may be approved by the Government of India;

(e) the applicant being a bank is a resident of a country whose central bank is a member of Bank for International Settlements:

Provided that a central bank applicant need not be a member of Bank for International Settlements;

(f) the applicant or its underlying investors contributing twenty-five per cent or more in the corpus of the applicant or identified on the basis of control, shall not be the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and is not a resident in the country identified in the public statement of Financial Action Task Force as –

(i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

(ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies;

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

(h) any other criteria specified by the Board from time to time:

Provided that clause (a), (d) and (e) shall not apply to an applicant incorporated or established in an International Financial Services Centre.

Categories of foreign portfolio investor.

5. An applicant seeking registration as a foreign portfolio investor may apply in one of the categories mentioned hereunder or any other category as may be specified by the Board from time to time –

(a) “Category I foreign portfolio investor” which shall include –

(i) Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s);

(ii) Pension funds and university funds;

(iii)Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker dealers and swap dealers;

(iv) Entities from the Financial Action Task Force member countries which are –

I. appropriately regulated funds;

II. unregulated funds whose investment manager is appropriately regulated and registered as a Category I foreign portfolio investor:

Provided that the investment manager undertakes the responsibility of all the acts of commission or omission of such unregulated fund;

III. university related endowments of such universities that have been in existence for more than five years;

(v) An entity (A) whose investment manager is from the Financial Action Task Force member country and such an investment manager is registered as a Category I foreign portfolio investor; or (B) which is at least seventy-five per cent owned, directly or indirectly by another entity, eligible under sub-clause (ii), (iii) and (iv) of clause (a) of this regulation and such an eligible entity is from a Financial Action Task Force member country:

Provided that such an investment manager or eligible entity undertakes the responsibility of all the acts of commission or omission of the applicants seeking registration under this sub-clause.

(b) “Category II foreign portfolio investor” shall include all the investors not eligible under Category I foreign portfolio investors such as –

(i) appropriately regulated funds not eligible as Category-I foreign portfolio investor;

(ii) endowments and foundations;

(iii) charitable organisations;

(iv) corporate bodies;

(v) family offices;

(vi) Individuals;

(vii) appropriately regulated entities investing on behalf of their client, as per conditions specified by the Board from time to time;

(viii) Unregulated funds in the form of limited partnership and trusts;

Explanation: An applicant incorporated or established in an International Financial Services Centre shall be deemed to be appropriately regulated.

Furnishing of information, and personal representation.

6.(1) The Board or the designated depository participant may require the applicant to furnish such further information or clarification as may be considered necessary for the grant of the certificate of registration as a foreign portfolio investor.

(2) The applicant or his authorised representative shall, if so required by the Board or the designated depository participant, appear before them for personal representation in connection with the grant of a certificate.

Certificate of registration

7.(1) The designated depository participant shall on behalf of the Board grant the certificate of registration, bearing registration number generated by National Securities Depositories Limited, as specified in the First Schedule to an applicant if it is satisfied that the applicant is eligible and fulfils the requirements as specified in these regulations.

(2) The designated depository participant shall endeavour to dispose of the application for grant of certificate of registration as soon as possible but not later than thirty days after receipt of application by the designated depository participant, or after the information called for under regulation 6 has been furnished; whichever is later.

(3) Upon grant of certificate of registration to the applicant, the designated depository participant shall remit the fees, as specified in Part A of the Second Schedule, received from the applicant to the Board.

(4) If an applicant seeking registration as a foreign portfolio investor has any grievance with respect to its application or if the designated depository participant has any question in respect of interpretation of any provision of this regulation, it may approach the Board for appropriate instructions.

(5) The foreign portfolio investor needs to have a valid registration as long as it is holding securities or derivatives in India:

Provided that a foreign portfolio investor whose registration is not valid and who is holding securities or derivatives in India shall be allowed to sell such securities or wind up their open position in derivatives within one year from the date of publication of these regulations.

Application to conform to the requirements

8 (1) An application for grant of certificate of registration to act as a foreign portfolio investor, which is not complete in all respects or is false or misleading in any material particular or does not satisfy the requirements specified in these regulations shall be deemed to be deficient and liable to be rejected by the designated depository participant:

Provided that before rejecting any such application, the applicant shall be given a reasonable opportunity of being heard and to remove the deficiency, within the time as specified by the designated depository participant.

(2) The decision to reject the application shall be communicated by the designated depository participant to the applicant in writing indicating the grounds for rejection of the application.

(3) The applicant, who is aggrieved by the decision of the designated depository participant under sub-regulation (1) may, within a period of thirty days from the date of receipt of communication under sub-regulation (2), apply to the Board for reconsideration of the decision of the designated depository participant:

Provided that such application for reconsideration shall not be considered by the Board where the rejection was on account of technical reasons such as non-submission of complete information, documents, including non-payment of specified fees.

(4) The Board shall, as soon as possible, after considering the submissions made in the application seeking reconsideration made under sub-regulation (3) and after giving a reasonable opportunity of being heard, communicate its decision in writing to the applicant.

Suspension, cancellation or surrender of certificate.

9. (1) Subject to the compliance with the provisions of the Act, these regulations and the circulars issued thereunder, the registration granted by the designated depository participant on behalf of the Board under these regulations shall be permanent unless suspended or cancelled by the Board or surrendered by the foreign portfolio investor.

(2) The suspension and cancellation of the certificate of registration granted by the Board under these regulations, shall be dealt with in the manner as provided in Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

(3) When the foreign portfolio investor fails to pay the required fees for continuance of registration within the specified due date and such foreign portfolio investor does not have any cash or security or derivative position in India, such foreign portfolio investor shall be deemed to have applied for surrender of its registration and the designated depository participant of such foreign portfolio investor shall process the surrender after obtaining the approval from the Board.

(4) Any foreign portfolio investor desirous of surrendering the certificate of registration may request for such surrender to the designated depository participant who shall accept the surrender of the certificate of registration after obtaining approval from the Board.

(5) While accepting the surrender of registration, the designated depository participant may impose such conditions as may be specified by the Board.

CHAPTER III

APPROVAL OF DESIGNATED DEPOSITORY PARTICIPANT

Application to act as a designated depository participant.

10. (1) No person shall act as a designated depository participant unless it has obtained the approval of the Board.

(2) An application for approval to act as a designated depository participant shall be made to the Board through a depository with which the applicant has an agreement to act as a participant and shall be accompanied by the application fee specified in Part B of the Second Schedule which shall be paid in the manner specified therein.

(3) The depository shall forward the application to the Board, as early as possible, but not later than thirty days from the date of its receipt by the depository, along with its recommendations and after certifying that the participant has complied with the eligibility criteria as provided for in these regulations.

Eligibility criteria of designated depository participant.

11. (1) The Board shall not consider an application for the grant of approval as designated depository participant unless the applicant satisfies the following conditions,

(a) the applicant is a registered depository participant under the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996;

(b) the applicant is a registered Custodian under the Securities and Exchange Board of India (Custodian) Regulations, 1996;

(c) the applicant is an Authorised Dealer Category-1 bank authorised by the Reserve Bank of India under the Foreign Exchange Management Act, 1999;

(d) the applicant has a multinational presence, either through its branches or through agency relationships with overseas intermediaries regulated in their respective home jurisdictions;

(e) the applicant has systems and procedures to comply with the requirements of the Financial Action Task Force Standards, Prevention of Money Laundering Act, 2002, Rules prescribed thereunder and the circulars issued from time to time by the Board;

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

(g) any other criteria as may be specified by the Board from time to time.

(2) Notwithstanding anything contained in sub-regulation (1) of this regulation, the Board may consider an application from an entity, regulated in India or in its home jurisdiction, for grant of approval to act as designated depository participant, upon being satisfied that the applicant has sufficient experience in providing custodial services and that the grant of such approval is in the interest of the development of the securities market:

Provided that such entity shall be registered with the Board as a participant and custodian, and shall have a tie up with Authorised Dealer Category-1 bank.

Furnishing of information, clarification and personal representation.

12. (1) The Board may require the applicant or the depository of which the applicant is a participant to furnish such further information or clarification as may be considered necessary for grant of approval to act as a designated depository participant.

(2) The applicant or its authorised representative shall, if so required by the Board, appear before it for personal representation in connection with the grant of approval.

Procedure for granting of approval to designated depository participant.

13. (1) After considering the application made under regulation 10 of these regulations, the Board may grant approval to the applicant, upon being satisfied that the applicant is eligible and fulfils the requirements as specified in these regulations including payment of fees as specified in Part B of Second Schedule.

(2) The Board shall dispose of the application for grant of approval as soon as possible but not later than thirty days after receipt of application by the Board or, after all the information called for under regulation 12 has been furnished, whichever is later.

Application to conform to the requirements.

14. An application for grant of approval to act as designated depository participant which is not complete in all respects or is false or misleading in any material particular, shall be deemed to be deficient and shall be liable to be rejected by the Board:

Provided that, before rejecting any such application, the applicant shall be given a reasonable opportunity to remove the deficiency, within the time as specified by the Board.

Procedure where approval is not granted.

15. (1) Where an application for grant of an approval does not satisfy the requirements specified in these regulations, the Board may reject the application after giving the applicant a reasonable opportunity of being heard.

(2) The decision to reject the application shall be communicated by the Board to the applicant in writing stating therein the grounds on which the application has been rejected.

(3) The applicant, who is aggrieved by the decision of the Board under sub-regulation (1) may, within a period of thirty days from the date of receipt of communication under sub-regulation
(2), apply to the Board for reconsideration of its decision.

(4) The Board shall, as soon as possible, in light of the submissions made in the application for reconsideration made under sub-regulation (3) and after giving a reasonable opportunity of being heard, convey its decision in writing to the applicant.

Validity of approval.

16. Subject to the compliance with the provisions of the Act, these regulations and the circulars issued thereunder, the approval granted by the Board under these regulations shall be permanent unless suspended or withdrawn by the Board or surrendered by the designated depository participant.

Suspension or withdrawal of approval.

17. Where any designated depository participant who has been granted approval under these regulations-

(a) fails to comply with any conditions subject to which an approval has been granted to him under these regulations, or

(b) contravenes any of the provisions of the securities laws or directions, instructions or circulars issued thereunder;

the Board may, without prejudice to any action under the securities laws or directions, instructions or circulars issued thereunder, by an order suspend or withdraw such approval after providing the designated depository participant a reasonable opportunity of being heard.

Surrender of approval.

18. (1) Any designated depository participant, who has been granted approval under these regulations, desirous of surrendering the approval granted, may make a request for such surrender to the Board.

(2) While accepting the surrender under sub-regulation (1), the Board may impose such conditions as it deems fit for the protection of investors or the clients of the designated depository participant or the securities market and such person shall comply with such conditions.

CHAPTER IV

INVESTMENT CONDITIONS AND RESTRICTIONS

Commencement of investment.

19. No foreign portfolio investor shall make any investment in securities in India without complying with the provisions of this Chapter.

Investment restrictions.

20. (1) A foreign portfolio investor shall invest only in the following securities, namely-

(a) shares, debentures and warrants issued by a body corporate; listed or to be listed on a recognized stock exchange in India;

(b) units of schemes launched by mutual funds under Chapter V, VI-A and VI-B of the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996;

(c) units of schemes floated by a Collective Investment Scheme in accordance with the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999;

(d) derivatives traded on a recognized stock exchange;

(e) units of real estate investment trusts, infrastructure investment trusts and units of Category III Alternative Investment Funds registered with the Board;

(f) Indian Depository Receipts;

(g) any debt securities or other instruments as permitted by the Reserve Bank of India for foreign portfolio investors to invest in from time to time; and

(h) such other instruments as specified by the Board from time to time.

(2) Where a foreign portfolio investor, prior to commencement of these regulations, holds equity shares in a company whose shares are not listed on any recognised stock exchange, and continues to hold such shares after the initial public offering and listing thereof, such shares shall be subject to lock-in for the same period, if any, as is applicable to shares held by a foreign direct investor placed in similar position, under the policy of the Government of India relating to foreign direct investment for the time being in force.

(3) Nothing contained in sub-regulation (2) shall be deemed to prejudice the applicability of any other law, regulation or guideline.

(4) In respect of investments in the secondary market, the following additional conditions shall apply –

(a) A foreign portfolio investor shall transact in the securities in India only on the basis of taking and giving delivery of securities purchased or sold;

(b) Nothing contained in clause (a) shall apply to –

(i) any transactions in derivatives on a recognized stock exchange;

(ii) short selling transactions in accordance with the framework specified by the Board;

(iii) any transaction in securities pursuant to an agreement entered into with the merchant banker in the process of market making or subscribing to unsubscribed portion of the issue in accordance with Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(iv) any other transaction specified by the Board;

(c) The transaction involving dealing in securities by a foreign portfolio investor shall be only through stock brokers registered with the Board;

(d) Nothing contained in clause (c) of this sub-regulation shall apply to –

(i) transactions in Government securities and such other securities falling under the purview of the Reserve Bank of India carried out in the manner as specified by the Reserve Bank of India;

(ii) sale of securities in response to a letter of offer sent by an acquirer in accordance with the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

(iii) sale of securities in response to an offer made by any promoter or acquirer in accordance with the Securities and Exchange Board of India (Delisting of Equity shares) Regulations, 2009;

(iv) sale of securities in accordance with the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018;

(v) divestment of securities in response to an offer by Indian companies in accordance with Operative Guidelines for Disinvestment of Shares by Indian Companies in the overseas market through issue of American Depository Receipts or Global Depository Receipts as notified by the Government of India from time to time;

(vi) any bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the Central Government or any State Government;

(vii) any transaction in securities pursuant to an agreement entered into with merchant banker in the process of market making or subscribing to unsubscribed portion of the issue in accordance with Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(viii) transactions in corporate bonds by foreign portfolio investors;

(ix) transactions on the electronic book provider platform of recognised stock exchanges;

(x) transactions to receive, hold and sell unlisted securities as referred at regulation 20(2) and transactions in unlisted securities received through involuntary corporate actions including a scheme of a merger or demerger approved in accordance with the provisions of the Companies Act, 2013 as well as the applicable guidelines issued by the Board or pursuant to implementation of any resolution plan approved under the Insolvency and Bankruptcy Code, 2016 or in accordance with the guidelines issued by the Government of India or the Reserve Bank of India or any other regulator for a scheme of debt resolution:

Provided that such unlisted holdings of the foreign portfolio investor shall be treated as Foreign Direct Investment;

(xi) transactions for transfer of right entitlements;

(xii) purchase or sale transactions of illiquid or suspended or delisted securities by a foreign portfolio investor;

Explanation – Illiquid securities shall mean those securities that are not frequently traded in terms of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(xiii) transactions between registered foreign portfolio investors, who are multi investment manager structure of the same beneficial owner and have common Permanent Account Number; and

(xiv) any other transaction as may be specified by the Board;

(e) A foreign portfolio investor shall hold, deliver or cause to be delivered securities only in the dematerialized form:

Provided that any shares held in the physical form, before the commencement of these regulations, may continue to be held in the physical form, if such shares cannot be dematerialised:

Provided further that all the Rights Entitlements may be held or transferred in non-dematerialized form.

(5) In respect of investments in the debt securities, the foreign portfolio investors shall also comply with terms, conditions or directions, specified or issued by the Board or Reserve Bank of India, from time to time, in addition to other conditions specified in these regulations.

(6) Unless otherwise approved by the Board, securities shall be registered in the name of the foreign portfolio investor as a beneficial owner as defined in clause (a) of sub-section (1) of section 2 of the Depositories Act, 1996.

(7) The purchase of equity shares of each company by a single foreign portfolio investor including its investor group shall be below ten per cent of the total paid-up equity capital on a fully diluted basis of the company:

Provided that where the total investment under these regulations by a foreign portfolio investor including its investor group exceeds the threshold of below ten per cent of the total paid up equity capital in a listed or to be listed company on a fully diluted basis, the foreign portfolio investor shall divest the excess holding within five trading days from the date of settlement of the trades resulting in the breach:

Provided further that in case the foreign portfolio investor fails to divest the excess holding, the entire investment in the company by such foreign portfolio investor including its investor group shall be considered as investment under the Foreign Direct Investment, as per the procedure specified by the Board and the foreign portfolio investor and its investor group shall not make further portfolio investment in that company under these regulations,

Explanation I – ‘investor group’ shall have the meaning as provided under regulation 22(3) of these regulations.

Explanation II – ‘fully diluted basis’ means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

(8) An entity, registered as a foreign portfolio investor shall be permitted to invest in Indian securities as a person resident outside India in accordance with provisions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999.

(9) In cases where the Government of India enters into agreements or treaties with other sovereign Governments and where such agreements or treaties specifically recognize certain entities to be distinct and separate, the Board may, during the validity of such agreements or treaties, recognize them as such, subject to conditions as may be specified by it.

(10) A foreign portfolio investor may lend or borrow securities in accordance with the framework specified by the Board in this regard.

(11) The investment by the foreign portfolio investor shall also be subject to such other conditions and restrictions as may be specified by the Government of India from time to time.

Conditions for issuance of offshore derivative instruments.

21. (1) No foreign portfolio investor may issue, subscribe to or otherwise deal in offshore derivative instruments, directly or indirectly, unless the following conditions are satisfied –

(a) such offshore derivative instruments are issued only by persons registered as Category I foreign portfolio investor;

(b) such offshore derivative instruments are issued only to persons eligible for registration as Category I foreign portfolio investors;

Explanation – For the purpose of this sub-regulation, where an entity has an investment manager who is from the Financial Action Task Force member country, the investment manager shall not be required to be registered as a Category I foreign portfolio investor;

(c) such offshore derivative instruments are issued after compliance with the ‘know your client’ norms as specified by the Board; and

(d) such other conditions as may be specified by the Board from time to time.

(2) A foreign portfolio investor shall ensure that any transfer of offshore derivative instruments issued by or on behalf of it, is subject to the following conditions –

(a) such offshore derivative instruments are transferred to persons subject to the fulfilment of sub-regulation (1); and

(b) prior consent of the foreign portfolio investor is obtained for such transfer, except in cases, where the persons to whom the offshore derivative instruments are to be transferred, are pre-approved by the foreign portfolio investor.

(3) A foreign portfolio investor shall fully disclose to the Board any information concerning the terms of and parties to off-shore derivative instruments, by whatever names they are called, entered into by it relating to any securities listed or proposed to be listed in any stock exchange in India, as and when and in such form as the Board may specify.

(4) A foreign portfolio investor shall collect the regulatory fee, as specified in Part C of the Second Schedule, from every subscriber of the offshore derivative instrument issued by it and deposit the same with the Board.

CHAPTER V

GENERAL OBLIGATIONS AND RESPONSIBILITIES OF FOREIGN PORTFOLIO INVESTORS

General obligations and responsibilities of foreign portfolio investors.

22. (1) The foreign portfolio investor shall –

(a) comply with the provisions of these regulations, as far as they may apply, circulars issued thereunder and any other terms and conditions specified by the Board from time to time;

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

(c) forthwith inform the Board 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 Board or designated depository participant;

(d) as and when required by the Board or any other Government agency in India, submit any information, record or documents in relation to its activities as a foreign portfolio investor;

(e) forthwith inform the Board 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;

(f) obtain a Permanent Account Number from the Income Tax Department;

(g) 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;

(h) 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;

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

(j) provide any additional information or documents including beneficiary ownership details of their clients as may be required by the designated depository participant or the Board 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

(k) ensure that securities held by foreign portfolio investors are free from all encumbrances.

Explanation – An encumbrance created to meet any statutory and regulatory requirements shall not be considered under this clause.

(2) In case of jointly held depository accounts, each of the joint holders shall meet the requirements specified for foreign portfolio investor and each shall be deemed to be holding a depository account as a foreign portfolio investor.

(3) Multiple entities registered as foreign portfolio investors and directly or indirectly, having common ownership of more than fifty per cent or common control, shall be treated as part of the same investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio investor:

Provided that in case the limit is breached due to transaction(s) by foreign portfolio investors under these regulations, the excess holding shall be divested within five trading days from the date of settlement of the trades causing the breach.

Provided further that in case the foreign portfolio investor fails to divest the excess holding, the entire investment in the company by such foreign portfolio investors including its investor group shall be considered as investment under the Foreign Direct Investment as per the procedure specified by the Board and the foreign portfolio investor and its investor group shall not make further portfolio investment in that company under these regulations.

(4) Notwithstanding anything contained in sub-regulation (3), the clubbing of investment limit of foreign portfolio investors having common control shall not be applicable where –

(a) foreign portfolio investors are appropriately regulated public retail funds; or

(b) the foreign portfolio investors are public retail funds where the majority is owned by appropriately regulated public retail fund on look through basis; or

(c) foreign portfolio investors are public retail funds and investment managers of such foreign portfolio investors are appropriately regulated.

Explanation – Public retail funds means –

(i) mutual funds or unit trusts which are open for subscription to retail investors and which do not have specific investor type requirements like accredited investors;

(ii) insurance companies where segregated portfolio with one to one correlation with a single investor is not maintained; and

(iii)pension funds.

(5) In case of any direct or indirect change in structure or common ownership or control of the foreign portfolio investor, it shall forthwith bring the same to the notice of its designated depository participant.

Code of conduct.

23. A foreign portfolio investor shall, at all times, abide by the code of conduct as specified in the Third Schedule of these regulations.

Engagement of designated depository participant

24. An applicant seeking registration as a foreign portfolio investor shall engage a designated depository participant to avail its services for obtaining a certificate of registration as foreign portfolio investor and at all times the designated depository participant and the custodian of the foreign portfolio investor shall be the same entity.

Appointment of custodian.

25. (1) A foreign portfolio investor or a global custodian who is acting on behalf of the foreign portfolio investor, shall enter into an agreement with the designated depository participant engaged by it to act as a custodian, before making any investment under these regulations.

(2) In addition to the obligation of custodian under any other regulations, the custodian shall –

(a) report to the depositories and the Board on a daily basis the transactions entered into by the foreign portfolio investor in the form and manner specified by the Board or depositories from time to time;

(b) monitor investment of the foreign portfolio investors;

(c) maintain the relevant true and fair records, books of accounts, and documents including the records relating to transactions of foreign portfolio investors;

(d) report the holdings of foreign portfolio investors who form part of investor group to the depositories and the depositories shall club the investment limits to ensure that combined holdings of all these foreign portfolio investors remains below ten per cent of the total paid-up equity capital on a fully diluted basis of a investee company at any time.

Appointment of designated bank.

26. A foreign portfolio investor shall appoint a branch of a bank authorised by the Reserve Bank of India for opening a foreign currency denominated account and special non-resident rupee account before making any investments in India.

Appointment of compliance officer.

27. (1) Every foreign portfolio investor shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the designated depository participant or the Board or the Central Government:

Provided that in case of a foreign portfolio investor who is an individual, such individual shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the designated depository participant or the Board or the Central Government.

(2) The compliance officer shall immediately and independently report any non-compliance observed by him to the Board and the designated depository participant.

Investment advice in publicly accessible media.

28. (1) A foreign portfolio investor, or any of its employees shall not render directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or otherwise, unless a disclosure of its interest including long or short position in the said security has been made, while rendering such advice.

(2) In case, an employee of the foreign portfolio investor is rendering such advice, he shall also disclose the interest of his dependent family members and his employer including their long or short position in the said security, while rendering such advice.

Maintenance of proper books of accounts, records and documents.

29. Every foreign portfolio investor shall maintain the following books of accounts, records and documents, namely –

(a) true and fair accounts relating to remittances of funds to India for buying and selling; and realising capital gains or losses on investment made from such remittances;

(b) bank statement of accounts;

(c) contract notes relating to purchase and sale of securities; and

(d) communication including in electronic mode from and to the designated depository participants, stock brokers and depository participants regarding investments in securities.

Preservation of books of accounts, records and documents.

30. Subject to the provisions of any other law, for the time being in force, every foreign portfolio investor shall preserve the books of accounts, records and documents specified in regulation 29 for a minimum period of five years from the date of approval of the surrender or cancellation of registration by the Board.

CHAPTER VI

GENERAL OBLIGATIONS AND RESPONSIBILITIES OF DESIGNATED

DEPOSITORY PARTICIPANTS

Obligations and responsibilities of designated depository participants.

31. (1) All designated depository participants who have been granted approval by the Board shall –

(a) comply with the provisions of these regulations, as far as they may apply, circulars issued thereunder and any other terms and conditions specified by the Board from time to time;

(b) forthwith inform the Board in writing, if any information or particulars previously submitted to the Board are found to be false or misleading, in any material respect;

(c) forthwith inform the Board in writing, if there is any material change in the information previously furnished by him to the Board;

(d) furnish such information, record or documents to the Board and Reserve Bank of India, as may be required, in relation to its activities as a designated depository participant;

(e) ensure that only registered foreign portfolio investors are allowed to invest in securities market;

(f) have adequate systems to ensure that in case of jointly held depository accounts, each of the joint holders meet the requirements specified for foreign portfolio investors and shall perform KYC due diligence for each of the joint holders;

(g) 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 any regulator against a designated depository participant, the designated depository participant shall bring such information forthwith, to the attention of the Board, depositories and stock exchanges;

(h) be guided by the relevant circular on Anti-Money Laundering or Combating the Financing of Terrorism specified by the Board from time to time.

(2) The designated depository participant engaged by an applicant seeking registration as foreign portfolio investor shall –

(a) ascertain at the time of granting registration and whenever applicable, whether the applicant forms part of any investor group;

(b) open a dematerialized account for the applicant only after ensuring compliance with all the requirements under Prevention of Money Laundering Act, 2002 and rules and regulations specified thereunder, Financial Action Task Force standards and circulars issued by the Board in this regard, from time to time and shall also ensure that foreign portfolio investors comply with all these requirements on an ongoing basis;

(c) carry out necessary due diligence to ensure that no other depository account per depository is held by any of the concerned applicant as a foreign portfolio investor, before opening a depository account

Provided that a foreign portfolio investor can open separate depository accounts for holding securities under the Voluntary Retention Route or any other scheme as specified by the Reserve Bank of India or the Board;

(d) collect and remit fees to the Board, in the manner as specified in Part A of Second Schedule; and

(e) in case of change in structure or constitution or direct or indirect change in common ownership or control reported by the foreign portfolio investor, re-assess the eligibility of such foreign portfolio investor.

(3) The designated depository participant shall maintain segregation of activities such that there is no conflict of interest between the activity of grant of registration to a foreign portfolio investor in the capacity of a designated depository participant and its other activities.

(4) The designated depository participant shall submit the reports as specified by the Board from time to time.

(5) The designated depository participant shall carry out an annual review of its systems, procedures and controls by an independent professional.

Explanation: The review shall cover the systems and procedures being followed by them to meet its obligations towards its clients, regulators and other relevant bodies and compliance with the requirements of the regulations and circulars issued by the Board.

(6) The designated depository participant shall furnish to the Board annual audit reports on its internal control for a particular calendar year within ninety days of the next calendar year.

(7) The designated depository participant shall submit the Action Taken Report, if any, on the audit report on a quarterly basis to the Board.

Maintenance of proper books of accounts, records and documents.

32. (1) Every designated depository participant shall maintain the relevant true and fair records, books of accounts, and documents including the physical or electronic records relating to registration of foreign portfolio investors.

(2) The designated depository participant shall intimate to the Board in writing the location where such books, records and documents shall be maintained.

(3) Subject to the provisions of any other law for the time being in force, every designated depository participant shall preserve the books of accounts, physical or electronic records and documents specified in this regulation at all times.

Appointment of compliance officer.

33. (1) Every designated depository participant shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the Board or the Central Government.

(2) The compliance officer shall immediately and independently report any non-compliance observed by him to the Board.

Information to the Board or the Reserve Bank of India.

34. Every designated depository participant shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, such records or documents in relation to its activities of foreign portfolio investor.

Investment advice in publicly accessible media.

35. (1) A designated depository participant, or any of its employees shall not render directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or otherwise, unless a disclosure of its interest including long or short position in the said security has been made, while rendering such advice.

(2) In case, an employee of the designated depository participant is rendering such advice, he shall also disclose the interest of his dependent family members and his employer including their long or short position in the said security, while rendering such advice.

CHAPTER VII

INSPECTION

Board’s right to inspect.

36. The Board may suo moto or upon receipt of any information or complaint, appoint one or more persons as inspecting authority to undertake inspection of the books of account, records and documents relating to a designated depository participant for any of the following purposes, namely, –

(a) to ensure that the books of account, records including telephone records and electronic records and documents are being maintained by the designated depository participants;

(b) to ascertain whether any circumstances exist that would render the designated depository participants unfit or ineligible;

(c) to inquire into the complaints received from investors, clients, other market participants or any other person on any matter having a bearing on the activities of the designated depository participants;

(d) to ascertain whether the provisions of the securities laws and the directions or circulars issued thereunder are being complied with by the designated depository participants;

(e) to ascertain whether the established and are being adequate; and

systems, procedures and safeguards which have been followed by the designated depository participants are

(f) to investigate suo moto into the affairs of the designated depository participants in the interest of the securities market or in the interest of investors.

Notice before inspection.

37. (1) Before undertaking an inspection under regulation 36, the Board shall give not less than ten days’ notice to the designated depository participants:

Provided that where the Board is satisfied that, in the interest of the investors, no such notice should be given, it may, by an order in writing direct that such inspection be taken up without such notice.

(2) During the course of an inspection, the designated depository participants against whom the inspection is being carried out shall be bound to discharge its obligation as provided in regulation 38.

Obligations of designated depository participants in connection with inspection by the Board.

38. (1) It shall be the duty of the designated depository participants whose affairs are being inspected, and of every director, officer and employee thereof to produce to the inspecting officer such books, securities, accounts, records and other documents in its custody or control and furnish him with such statements and information relating to its activities, as the inspecting officer may require, within such reasonable period as the inspecting officer may specify.

(2) The designated depository participants shall allow the inspecting officer to have reasonable access to the premises occupied by such designated depository participant or by any other person on its behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the designated depository participants or such other person and also provide copies of documents or other materials which in the opinion of the inspecting officer are relevant for the purposes of the inspection.

(3) The inspecting officer, in the course of inspection, shall be entitled to examine or to record the statements of any director, officer or employee of the designated depository participants.

(4) It shall be the duty of every director, officer or employee of the designated depository participants to give to the inspecting officer all assistance in connection with the inspection, which the inspecting officer may reasonably require.

Submission of report to the Board.

39. The inspecting officer shall, as soon as possible, on completion of the inspection or investigation as the case may be, submit a report to the Board:

Provided that if directed to do so by the Board, the inspecting officer may submit interim report(s).

Action on inspection report.

40. The Board shall after consideration of the inspection report, take such action as it may deem fit including action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Appointment of an auditor.

41. The Board shall have the power to appoint an auditor to inspect or investigate, as the case may be, into the books of account, records, documents, infrastructures, systems and procedures or affairs of the applicant or the designated depository participants, as the case may be:

Provided that the auditors so appointed shall have the same powers as vested in the inspecting officer under regulation 36 and the applicant or designated depository participants and its directors, officers and employees shall be under the same obligations, towards the auditor so appointed, as are mentioned in regulation 38.

Board to recover the expenses.

42. The Board shall be entitled to recover from the designated depository participants or applicant, as the case may be, such expenses including the fees paid to the auditors as may be incurred by it for the purposes of inspecting or investigating the books of account, records, documents, infrastructures, systems and procedures or affairs of the designated depository participants or applicant, as the case may be.

CHAPTER VIII

PROCEDURE FOR ACTION IN CASE OF DEFAULT

Liability for action in case of default.

43. A foreign portfolio investor, designated depository participant, depository or any other person who contravenes any of the provisions of these regulations shall be liable for action under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 or the relevant provisions of the Act or the Depositories Act, 1996 and the regulations made thereunder.

CHAPTER IX

MISCELLANEOUS

Power of the Board to issue clarifications.

44. In order to remove any difficulties in the application or interpretation of the provisions of these regulations, the Board may issue clarifications and guidelines in the form of circulars or issue separate circular or guidelines or framework for each category of foreign portfolio investors or designated depository participant.

Repeal, rescission and saving.

45. (1) The Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 shall stand repealed.

(2) Notwithstanding such repeal–

(a) anything done or any action taken or purported to have been done or taken, including registration or approval granted, fees collected, registration or approval, suspended or cancelled, any adjudication, enquiry or investigation commenced or show-cause notice issued under the repealed regulations, shall be deemed to have been done or taken under the corresponding provisions of these regulations;

(b) a foreign portfolio investor registered under the Securities and Exchange Board of India (Foreign Portfolio Investor) Regulations, 2014 shall be re-categorised by their respective designated depository participant;

(c) any offshore derivative instrument issued under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 before the commencement of these regulations shall be deemed to have been issued under the corresponding provisions of these regulations;

(d) any application made to the Board under the repealed regulations, prior to such repeal, and pending before it shall be deemed to have been made under the corresponding provisions of these regulations; and

(e) the previous operation of the repealed regulations or anything duly done or suffered thereunder, any right, privilege, obligation or liability acquired, accrued or incurred under the repealed regulations, any penalty, incurred in respect of any violation committed against the repealed regulations, or any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty as aforesaid, shall remain unaffected as if the repealed regulations has never been repealed;

(3) After the repeal of Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, any reference thereto in any other regulations made, guidelines or circulars issued thereunder by the Board shall be deemed to be a reference to the corresponding provisions of these regulations.


FIRST SCHEDULE

SECURITIES AND EXCHANGE BOARD OF INDIA

(FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019

[See regulation 7(1)]

CERTIFICATE OF REGISTRATION

I. In exercise of the powers conferred by sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (the “Act”), read with the regulations made thereunder the Board hereby grants a certificate of registration to _________________________________ as

a foreign portfolio investor, subject to the conditions specified in the Act and in the regulations made thereunder.

II. The category and sub-category of the foreign portfolio investor is _______and

__________respectively.

III. The registration number for the foreign portfolio investor is …/…/…/…/….

IV. The address of the foreign portfolio investor is __________________.

V. This certificate shall be valid till it is suspended, cancelled or surrendered in accordance with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019.

Date:

Place:

By Order

Signature

Name and Designation of the Authorised Signatory of

Designated depository participant

Issued on behalf of

Securities and Exchange Board of India


SECOND SCHEDULE

PART A

PAYMENT OF FEES APPLICABLE TO FOREIGN PORTFOLIO INVESTOR

[See regulation 3 and regulation 7(3)]

Registration Fee

(1) Foreign portfolio investor belonging to Category I and II shall pay registration fees of US $ 3000 and US $300, respectively or any other amount specified by the Board from time to time at the time of submission of the Form to the designated depository participant.

(2) Foreign portfolio investor belonging to Category I and II shall pay registration fees for every block of three years, till the validity of its registration,

(3) International or multilateral agency such as World Bank and other institutions, established outside India for providing aid, which have been granted privileges and immunities from payment of tax and duties by the Central Government shall be exempted from the payment of registration fees.

(4) The designated depository participants of the respective foreign portfolio investors shall collect the registration fees in advance once in every three years from all the foreign portfolio investors registered by it, and remit the fees to the Board in the manner specified by the Board from time to time.

(5) Every designated depository participant shall remit the fees collected from the foreign portfolio investors during the immediate preceding month, to the Board, by 5th working day of every month, along with the details in the format, as may be specified from time to time.

PART B

PAYMENT OF FEES APPLICABLE TO DESIGNATED DEPOSITORY

PARTICIPANT

[See regulation 10(2) and regulation 13(1)]

(1) Every designated depository participant shall pay application fees and approval fees, before commencement of its activity.

(2) Every designated depository participant shall pay application fees of ` 10,000/- at the time of making application, by way of direct credit through NEFT/RTGS/IMPS in the bank account in the name of “Securities and Exchange Board of India” payable at Mumbai.

(3) Every designated depository participant shall pay approval fees of ` 5,00,000/- by way of direct credit through NEFT/RTGS/IMPS in the bank account in the name of “Securities and Exchange Board of India” payable at Mumbai, at the time of grant of prior approval by the Board.

PART C

COLLECTION OF REGULATORY FEES BY FOREIGN PORTFOLIO INVESTOR

FROM ODI SUBSCRIBERS

[See sub-regulation (4) of Regulation 21]

Regulatory Fee

(1) A foreign portfolio investor shall collect the regulatory fee of US $ 1000 or any other amount, as may be specified by the Board from time to time, from every subscriber of offshore derivative instrument issued by it and deposit the same with the Board by way of electronic transfer in the designated bank account of the Board.

(2) The regulatory fee shall be deposited once every three years beginning April 1, 2017.


THIRD SCHEDULE

SECURITIES AND EXCHANGE BOARD OF INDIA (FOREIGN PORTFOLIO

INVESTORS) REGULATIONS, 2019

CODE OF CONDUCT

[See regulation 23]

1. A foreign portfolio investor and its key personnel shall observe high standards of integrity, fairness and professionalism in all dealings in the Indian securities market with intermediaries, regulatory and other government authorities.

2. A foreign portfolio investor shall, at all times, render high standards of service, exercise due diligence and independent professional judgment.

3. A foreign portfolio investor shall ensure and maintain confidentiality in respect of trades done on its own behalf or on behalf of its clients.

4. A foreign portfolio investor shall ensure the following –

(a) Clear segregation of its own money and securities and that of its client’s money and securities.

(b) Arm’s length relationship between its business of fund management/investment and its other business.

5. A foreign portfolio investor shall maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations made thereunder and the circulars and guidelines, which may be applicable and relevant to the activities carried on by it. Every foreign portfolio investor shall also comply with award of the Ombudsman and decision of the Board under Securities and Exchange Board of India (Ombudsman) Regulations, 2003.

6. A foreign portfolio investor shall not make any untrue statement or suppress any material fact in any documents, reports or information to be furnished to the designated depository participant and/or Board.

7. A foreign portfolio investor shall ensure that good corporate policies and corporate governance policies are observed by it.

8. A foreign portfolio investor shall ensure that it does not engage in fraudulent and manipulative transactions in the securities listed in any stock exchange in India.

9. A foreign portfolio investor or any of its directors or managers shall not, either through its/his own account or through any associate or family members, relatives or friends indulge in any insider trading.

10. A foreign portfolio investor shall not be a party to or instrumental for – a) creation of false market in securities listed or proposed to be listed in any stock exchange in India; b) price rigging or manipulation of prices of securities listed or proposed to be listed in any stock exchange in India; c) passing of price sensitive information to any person or intermediary in the securities market.

Sd/-

AJAY TYAGI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA


DEPOSITORIES ACT 1996

An Act to provide for the regulation of depositories in securities and for matters connected therewith or incidental thereto.

The Depositories Act, 1996 [As amended by Finance Act, 2018]

DEPOSITORIES ACT, 1996

SECTIONS

CHAPTER I

PRELIMINARY

1. Short title, extent and commencement

2. Definitions

CHAPTER II

CERTIFICATE OF COMMENCEMENT OF BUSINESS

3. Certificate of commencement of business by depositories

CHAPTER III

RIGHTS AND OBLIGATIONS OF DEPOSITORIES, PARTICIPANTS,

ISSUERS AND BENEFICIAL OWNERS

4. Agreement between depository and participant

5. Services of depository

6. Surrender of certificate of security

7. Registration of transfer of securities with depositories

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

9. Securities in depositories to be in fungible form

10. Rights of depositories and beneficial owner

11. Register of beneficial owner

12. Pledge or hypothecation of securities held in a depository

13. Furnishing of information and records by depository and issuer

14. Option to opt out in respect of any security

15. Act 18 of 1891 to apply to depositories

16. Depositories to indemnify loss in certain cases

17. Rights and obligations of depositories, etc.

CHAPTER II

ENQUIRY AND INSPECTION

18. Power of Board to call for information and enquiry

19. Power of Board to give directions in certain cases

19A. Penalty for failure to furnish information, return, etc.

19B. Penalty for failure to enter into an agreement

19C. Penalty for failure to redress investors’ grievances

19D. Penalty for delay in dematerialisation or issue of certificate of securities

19E. Penalty for failure to reconcile records

19F. Penalty for failure to comply with directions issued by Board under section 19 of the Act

19FA. Penalty for failure to conduct business in a fair manner

19G. Penalty for contravention where no separate penalty has been provided

19H. Power to adjudicate

19-I. Factors to be taken into account by adjudicating officer

19-IA. Settlement of Administrative Civil Proceedings

19-IB. Recovery of amounts

19-IC Continuance of Proceedings

19-J. Crediting sums realised by way of penalties to Consolidated Fund of India

CHAPTER V

MISCELLANEOUS

20. Offences

21. Offences by companies

22. Cognizance of offences by courts

22A. Composition of certain offences

22B. Power to grant immunity

22C.Establishment of Special Courts

22D.Offences triable by Special Courts

22E.Appeal and revision

22F.Application of Code to proceedings before Special Court

22G. Transitional Provisions

23. Appeals

23A. Appeal to Securities Appellate Tribunal

23A. Appeal to Securities Appellate Tribunal

23B. Procedure and powers of Securities Appellate Tribunal

23C. Right to Legal Representation

23D. Limitation
23E. Civil court not to have jurisdiction
23F. Appeal to Supreme Court

24. Power of Central Government to make rules

25. Power of Board to make regulations

26. Power of depositories to make bye-laws

27. Rules and regulations to be laid before Parliament

28. Application of other laws not barred

29. Removal of difficulties

30. Amendments to certain enactments

30A. Validation of certain acts

31. Repeal and saving

SCHEDULE

AMENDMENT TO CERTAIN ENACTMENTS [Repealed by Repealing & Amending Act, 2001.]

DEPOSITORIES ACT, 1996

[22 OF 1996]

[10th August, 1996]

An Act to provide for regulation of depositories in securities and for matters connected
therewith or incidental thereto.

BE it enacted by Parliament in the Forty-seventh Year of the Republic of India as follows :—

CHAPTER I

PRELIMINARY

Short title, extent and commencement.

1. (1) This Act may be called the Depositories Act, 1996.

(2) It extends to the whole of India.

(3) It shall be deemed to have come into force on the 20th day of September, 1995.

Definitions.

2. (1) In this Act, unless the context otherwise requires,—

(a) “beneficial owner” means a person whose name is recorded as such with a depository;

(b) “Board” means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c) “bye-laws” means bye-laws made by a depository under section 26;

(d) “Company Law Board” means the Board of Company Law Administration constituted under section 10E of the Companies Act, 1956 (1 of 1956);

(e) “depository” means a company formed and registered under the Companies Act, 1956 (1 of 1956), 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 (15 of 1992);

(f) “issuer” means any person making an issue of securities;

(g) “participant” means a person registered as such under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(h) “prescribed” means prescribed by rules made under this Act;

(i) “record” includes the records maintained in the form of books or stored in a computer or in such other form as may be determined by regulations;

(j) “registered owner” means a depository whose name is entered as such in the register of the issuer;

(k) “regulations” means the regulations made by the Board;

1[(ka) “Securities Appellate Tribunal” means a Securities Appellate Tribunal established under sub-section (1) of section 15K of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]

(l) “security” means such security as may be specified by the Board;

(m) “service” means any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository.

(2) Words and expressions used herein and not defined but defined in the Companies Act, 1956 (1 of 1956), or the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall have the meanings respectively assigned to them in those Acts.

CHAPTER II

CERTIFICATE OF COMMENCEMENT OF BUSINESS Certificate of commencement of business by depositories.

3. (1) No depository shall act as a depository unless it obtains a certificate of commencement of business from the Board.

(2) A certificate granted under sub-section (1) shall be in such form as may be specified by the regulations.

(3) The Board shall not grant a certificate under sub-section (1) unless it is satisfied that the depository has adequate systems and safeguards to prevent manipulation of records and transactions :

Provided that no certificate shall be refused under this section unless the depository concerned has been given a reasonable opportunity of being heard.

CHAPTER III

RIGHTS AND OBLIGATIONS OF DEPOSITORIES, PARTICIPANTS, ISSUERS AND

BENEFICIAL OWNERS

Agreement between depository and participant.

4. (1) A depository shall enter into an agreement with one or more participants as its agent.

(2) Every agreement under sub-section (1) shall be in such form as may be specified by the bye-laws.

Services of depository.

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

Surrender of certificate of security.

1 Inserted by the Securities Laws (Second Amendment) Act, 1999, Sec 13, w.e.f. 16-12-1999.

6. (1) Any person who has entered into an agreement under section 5 shall surrender the certificate of security, for which he seeks to avail the services of a depository, to the issuer in such manner as may be specified by the regulations.

(2) The issuer, on receipt of certificate of security under sub-section (1), shall cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly.

(3) A depository shall, on receipt of information under sub-section (2), enter the name of the person referred to in sub-section (1) in its records, as the beneficial owner.

Registration of transfer of securities with depository.

7. (1) Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.

(2) If a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly.

Options to receive security certificate or hold securities with depository.

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

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

Securities in depositories to be in fungible form.

9. (1) All securities held by a depository shall be dematerialised and shall be in a fungible form.

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

Rights of depositories and beneficial owner.

10. (1) Notwithstanding anything contained in any other law for the time being in force, a depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner.

(2) Save as otherwise provided in sub-section (1), the depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it.

2 Substituted by the Depositories Related Laws (Amendment) Act, 1997, Sec 22, w.e.f. 15-01-1997. Prior to its substitution sub-section (2) read as under :

“(2) Nothing contained in sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act, 1956 (1 of 1956) shall apply to the securities held by a depository on behalf of the beneficial owners.”

(3) The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository.

Register of beneficial owner.

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

Pledge or hypothecation of securities held in a depository.

12. (1) Subject to such regulations and bye-laws, as may be made in this behalf, a beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.

(2) Every beneficial owner shall give intimation of such pledge or hypothecation to the depository and such depository shall thereupon make entries in its records accordingly.

(3) Any entry in the records of a depository under sub-section (2) shall be evidence of a pledge or hypothecation.

Furnishing of information and records by depository and issuer.

13. (1) Every depository shall furnish to the issuer information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws.

(2) Every issuer shall make available to the depository copies of the relevant records in respect of securities held by such depository.

Option to opt out in respect of any security.

14. (1) If a beneficial owner seeks to opt out of a depository in respect of any security he shall inform the depository accordingly.

(2) The depository shall on receipt of intimation under sub-section (1) make appropriate entries in its records and shall inform the issuer.

(3) Every issuer shall, within thirty days of the receipt of intimation from the depository and on fulfillment of such conditions and on payment of such fees as may be specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the case may be.

Act 18 of 1891 to apply to depositories.

15. The Bankers’ Books Evidence Act, 1891 shall apply in relation to a depository as if it were a bank as defined in section 2 of that Act.

Depositories to indemnify loss in certain cases.

16. (1) Without prejudice to the provisions of any other law for the time being in force, any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner.

(2) Where the loss due to the negligence of the participant under sub-section (1) is indemnified by the depository, the depository shall have the right to recover the same from such participant.

Rights and obligations of depositories, etc.

17. (1) Subject to the provisions of this Act, the rights and obligations of the depositories, participants and the issuers whose securities are dealt with by a depository shall be specified by the regulations.

(2) The eligibility criteria for admission of securities into the depository shall be specified by the regulations.

CHAPTER IV

ENQUIRY AND INSPECTION

Power of Board to call for information and enquiry.

18. (1) The Board, on being satisfied that it is necessary in the public interest or in the interest of investors so to do, may, by order in writing,—

(a) call upon any issuer, depository, participant or beneficial owner to furnish in writing such information relating to the securities held in a depository as it may require; or

(b) authorise any person to make an enquiry or inspection in relation to the affairs of the issuer, beneficial owner, depository or participant, who shall submit a report of such enquiry or inspection to it within such period as may be specified in the order.

(2) Every director, manager, partner, secretary, officer or employee of the depository or issuer or the participant or beneficial owner shall on demand produce before the person making the enquiry or inspection all information or such records and other documents in his custody having a bearing on the subject-matter of such enquiry or inspection.

Power of Board to give directions in certain cases.

19. 3[(1)] Save as provided in this Act, if after making or causing to be made an enquiry or inspection, the Board is satisfied that it is necessary—

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any depository or participant being conducted in the manner detrimental to the interests of investors or securities market,

it may issue such directions,—

(a) to any depository or participant or any person associated with the securities market; or

3 Renumbered by the Finance Act, 2018 w.e.f. 08-03-2019

(b) to any issuer,

as may be appropriate in the interest of investors or the securities market.

4[Explanation- For the removal of doubts, it is hereby declared that 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.]

5[(2) Without prejudice to the provisions contained in sub-section (1) and section 19H, the Board may, by order, for reasons to be recorded in writing, levy penalty under sections 19A, 19B, 19C, 19D, 19E, 19F, 19FA and 19G after holding an inquiry in the prescribed manner.]

6[Penalty for failure to furnish information, return, etc.

19A. Any person, who is required under this Act or any rules or regulations or bye-laws made thereunder,—

(a) to furnish any information, document, books, returns or report to the Board, fails to furnish the same within the time specified therefor, 7[or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents] he shall be liable to a penalty 8[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] for each such failure;

(b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations or bye-laws, fails to file return or furnish the same within the time specified therefor, he 9[or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents] shall be liable to a penalty 10[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees];

(c) to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty 11[which shall not be less than one lakh rupees but which may extend to one

4 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 08-09-2014.
5 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

6 Inserted by the Securities Laws (Amendment) Act, 2004, Sec. 17, w.r.e.f. 12-10-2004.
7 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

8 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

9 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

10 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

11 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees].

Penalty for failure to enter into an agreement.

19B. If a depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), and is required under this Act or any rules or regulations made thereunder, to enter into an agreement, fails to enter into such agreement, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty 12[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] for every such failure.

Penalty for failure to redress investors’ grievances.

19C. If any depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), after having been called upon by the Board in writing, to redress the grievances of the investors, fails to redress such grievances within the time specified by the Board, such depository or participant or issuer or its agents or intermediary shall be liable to a penalty 13[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees].

Penalty for delay in dematerialisation or issue of certificate of securities.

19D. If any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), fails to dematerialise or issue the certificate of securities on opting out of a depository by the investors, within the time specified under this Act or regulations or bye-laws made thereunder or abets in delaying the process of dematerialisation or issue the certificate of securities on opting out of a depository of securities, such issuer or its agent or intermediary shall be liable to a penalty 14[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees].

Penalty for failure to reconcile records.

12 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

13 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

14 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

19E. If a depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), fails to reconcile the records of dematerialised securities with all the securities issued by the issuer as specified in the regulations, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty 15[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees].

Penalty for failure to comply with directions issued by Board under section 19 of the Act.

19F. If any person fails to comply with the directions issued by the Board under section 19, within the time specified by it, he shall be liable to a penalty 16[which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees].

17[Penalty for failure to conduct business in a fair manner.

19FA. Where a depository fails to conduct its business with its participants or any issuer or its agent or any person associated with the securities markets in a fair manner in accordance with the rules, regulations made by the Board or directions issued by the Board under this Act, it shall be liable to penalty which shall not be less than five crore rupees but which may extend to twenty-five crore rupees or three times the amount of gains made out of such failure, whichever is higher.]

Penalty for contravention where no separate penalty has been provided.

19G. Whoever fails to comply with any provision of this Act, the rules or the regulations or bye-laws made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be 18[liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees].

Power to adjudicate.

19H. (1) For the purpose of adjudging under sections 19A, 19B, 19C, 19D, 19E, 19[19F, 19FA and 19G, the Board may] appoint any officer not below the rank of a Division Chief of the Securities and Exchange Board of India to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

15 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.

16 Substituted for the words “‘‘of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” by the Securities Laws(Amendment) Act, 2014, w.e.f. 08-09-2014.
17 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

18 Substituted for the words “liable to a penalty which may extend to one crore rupees” by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 28-03-2014.
19 Substituted for the words “19F and 19G, the Board shall” by the Finance Act, 2018 w.e.f. 08-03-2019.

(2) While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document, which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.

20[(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:

Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:

Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 23A , whichever is earlier.]

21[Factors to be taken into account while adjudging quantum of penalty]

19-I. While adjudging the quantum of penalty under 22[section 19 or section 19H, the Board or the adjudicating officer] shall have due regard to the following factors, namely:—

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default.

23[Explanation.—For the removal of doubts, it is clarified that the power 24[***] to adjudge the quantum of penalty under sections 19A to 19F shall be and shall always be deemed to have been exercised under the provisions of this section.’’.]

25[ Settlement of Administrative Civil Proceedings.

19-IA. (1) Notwithstanding anything contained in any other law for the time being in force, any person, against whom any proceedings have been initiated or may be initiated under section 19,

20 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.

21 Substituted for the words “Factors to be taken into account by adjudicating officer.” by the Finance Act, 2018 w.e.f. 08-03-2019

22 Substituted for the words “section 19H, the adjudicating officer” by the Finance Act, 2018 w.e.f. 08-03-2019

23 Inserted by Part IX of Chapter VI of the Finance Act, 2017 vide Gazette Notification No. 7,Extraordinary Prt II Section 1 dated March 31, 2017

24 Omitted the words “of an adjudicating officer” by the Finance Act, 2018 w.e.f. 08-03-2019

25 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 20-04-2007.

section 19H, as the case may be, may file an application in writing to the Board proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.

(2) The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992.

(3) For the purpose of settlement under this section, the procedure specified by the Board under the Securities and Exchange Board of India Act, 1992 shall apply.

(4) No appeal shall lie under section 23A against any order passed by the Board or the adjudicating officer, as the case may be, under this section.]

26[(5) All settlement amounts, excluding the disgorgement amount and legal costs, realised under this Act shall be credited to the Consolidated Fund of India.]

27[ Recovery of amounts.

19-IB. (1) If a person fails to pay the penalty imposed 28[ under this Act] or fails to comply with a direction of disgorgement order issued under Section 19 or fails to pay any fees due to the Board, 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 section 221 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 purpose 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

26 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

27 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.
28 Substituted for the words “by the adjudicating officer” by the Finance Act, 2018 w.e.f. 08-03-2019

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 23A 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 Board under section 19, shall have precedence over any other claim against such person.

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

29[Continuance of proceedings.

19-IC. (1) Where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased:

Provided that, in case of any penalty payable under this Act, a legal representative shall be liable only in case the penalty has been imposed before the death of the deceased person.

(2) For the purposes of sub-section (1),—

(a) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act, except a proceeding for levy of penalty, initiated against the deceased before his death shall be deemed to have been initiated against the legal

29 Inserted by the Finance Act, 2018 w.e.f. 08-03-2019

representative, and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased and all the provisions of this Act shall apply accordingly;

(b) any proceeding for disgorgement, refund or an action for recovery before the Recovery Officer under this Act, except a proceeding for levy of penalty, which could have been initiated against the deceased if he had survived, may be initiated against the legal representative and all the provisions of this Act shall apply accordingly.

(3) Every legal representative shall be personally liable for any sum payable by him in his capacity as legal representative if, while his liability for such sum remains undischarged, he creates a charge on or disposes of or parts with any assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited to the value of the asset so charged, disposed of or parted with.

(4) The liability of a legal representative under this section shall be limited to the extent to which the estate of the deceased is capable of meeting the liability.

Explanation.—For the purposes of this section “legal representative” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued.]

Crediting sums realised by way of penalties to Consolidated Fund of India.

19J. All sums realized by way of penalties under this Act shall be credited to the Consolidated Fund of India.]

CHAPTER V

30[ MISCELLANEOUS]

31[Offences.

20. (1) Without prejudice to any award of penalty by the adjudicating officer 32[or the Board] under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations or bye-laws made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.

30 Substituted for the word “PENALTY” by the Finance Act, 2018 w.e.f. 08-03-2019

31 Substituted by the Securities Laws (Amendment) Act, 2004, Sec. 18, w.r.e.f. 12-10-2004. Prior to its substitution, section 20 read as under:—

“20. Offences.— Whoever contranvenes or attempts to contravene or abets the contravention of the provisions of this Act or any regulations or bye-laws made thereunder shall be punishable with imprisonment for a term which may extend to five years, or with fine or with both.”
32 Inserted by the Finance Act, 2018 w.e.f. 2019

(2) If any person fails to pay the penalty imposed by the 33[adjudicating officer or the Board or fails to comply with any] directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.]

34[ Contravention by companies.]

21. (1) Where 35[a contravention of any of the provisions of this Act or any rule, regulation, direction or order made thereunder] has been committed by a company, every person who at the time the 36[contravention] was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the 37[contravention] and shall be liable to be proceeded against and punished accordingly :

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the 38[contravention] was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such 39[contravention].

(2) Notwithstanding anything contained in sub-section (1), where 40[a contravention of any of the provisions of this Act or any rule, regulation, direction or order made thereunder] has been committed by a company and it is proved that the 41[contravention} has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the 42[contravention] and shall be liable to be proceeded against and punished accordingly.

Explanation.—For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.

43[*]

33 Substituted for the words “adjudicating officer or fails to comply with any of his” by the Finance Act, 2018 w.e.f.

08-03-2019
34 Substituted for the words “Offences by companies.” by the Finance Act, 2018 w.e.f. 08-03-2019

35 Substituted for the words “an offence under this Act ” by the Finance Act, 2018 w.e.f. 08-03-2019

36 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

37 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

38 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

39 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

40 Substituted for the words “an offence under this Act” by the Finance Act, 2018 w.e.f. 08-03-2019

41 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

42 Substituted for the word “offence ” by the Finance Act, 2018 w.e.f. 08-03-2019

43 Omitted the words ” Chapter VI MISCELLANEOUS” by the Finance Act, 2018 w.e.f. 08-03-2019

44[Cognizance of offences by courts.

22. (1) No court shall take cognizance of any offence punishable under this Act or any rules or regulations or bye-laws made thereunder, save on a complaint made by the Central Government or State Government or the Securities and Exchange Board of India or by any person.

45[****]

Composition of certain offences.

22A. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Power to grant immunity.

22B. (1) The Central Government may, on recommendation by the Board, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this Act or the rules or the regulations made thereunder, has made a full and true disclosure in respect of alleged violation, grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence under this Act, 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 :

Provided that no such immunity shall be granted by the Central Government in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of application for grant of such immunity :

Provided further that recommendation of the Board under this sub-section shall not be binding upon the Central Government.

(2) An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Central Government, if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with respect

44 Substituted by the Securities Laws (Amendment) Act, 2004, Sec. 19, w.r.e.f. 12-10-2004. Prior to its substitution, section 22 read as under:—

“22. Cognizance of offences by courts.—(1) No Court shall take cognizance of any offence punishable under this Act or any regulations or bye-laws made thereunder, save on a complaint made by the Board.

(2) No court inferior to that of a Metropolitan Magistrate or a judicial Magistrate of the first class shall try any offence punishable under this Act.”

45 Omitted by the Securities Laws (Amendment) Act, 2014, w.r.e.f. 18-07-2013. Prior to omission, sub-section (2) read as “No court inferior to that of a Court of Session shall try any offence punishable under this Act.”

to which the immunity was granted or for any other offence of which he appears to have been guilty in connection with the contravention and shall also become liable to the imposition of any penalty under this Act to which such person would have been liable, had not such immunity been granted.]

46[ Establishment of Special Courts.

22C. (1) The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate as many Special Courts as may be necessary.

(2) A Special Court shall consist of a single judge who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

(3) A person shall not be qualified for appointment as a judge of a Special Court unless he is, immediately before such appointment, holding the office of a Sessions Judge or an Additional Sessions Judge, as the case may be.

Offences triable by Special Courts.

22D. Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences under this Act committed prior to the date of commencement of the Securities Laws Ordinance, 2014 or on or after the date of such commencement, shall be taken cognizance of and triable by the Special Court established for the area in which the offence is committed or where there are more Special Courts than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.

Appeal and Revision

22E. The High Court may exercise, so far as may be applicable, all the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of the High Court.

Application of Code to proceedings before Special Court

22F. (1) Save as otherwise provided in this Act, the provisions of the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session and the person conducting prosecution before a Special Court shall be deemed to be a Public Prosecutor within the meaning of clause (u) of section 2 of the Code of Criminal Procedure, 1973.

46 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.

(2) The person conducting prosecution referred to in sub-section (1) should have been in practice as an Advocate for not less than seven years or should have held a post, for a period of not less than seven years, under the Union or a State requiring special knowledge of law.

Transitional provisions

22G. Any offence committed under this Act, which is triable by a Special Court shall, until a Special Court is established, be taken cognizance of and tried by a Court of Session exercising jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973:

Provided that nothing contained in this section shall affect the powers of the High Court, under section 407 of the Code to transfer any case or class of cases taken cognizance by a Court of Session under this Section.]

Appeals.

23. (1) Any person aggrieved by an order of the Board made 47[before the commencement of the Securities Laws (Second Amendment) Act, 1999] under this Act, or the regulations made thereunder may prefer an appeal to the Central Government within such time as may be prescribed.

(2) No appeal shall be admitted if it is preferred after the expiry of the period prescribed therefor :

Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant satisfies the Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.

(3) Every appeal made under this section shall be made in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.

(4) The procedure for disposing of an appeal shall be such as may be prescribed :

Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

48[Appeal to Securities Appellate Tribunal.

47 Substituted by the Securities Laws (Second Amendment) Act, 1999, Sec. 14, w.e.f. 16-12-1999 for “an order of the Board made”.

48 Sections 23A to 23F inserted by the Securities Laws (Second Amendment) Act, 1999 , Sec. 15, w.e.f. 16-
12-1999.

23A. (1) Save as provided in sub-section (2), any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act, or the regulations made thereunder, 49[or by an order made by an adjudicating officer under this Act] may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

50[****]

(3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Board is received by the person referred to in sub-section (1) and it shall be in such form and be accompanied by such fee as may be prescribed :

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

(4) On receipt of an appeal under sub-section (1), 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.

(5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board and parties to the appeal.

(6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

Procedure and powers of Securities Appellate Tribunal.

23B. (1) The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 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 Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.

(2) The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely :—

(a) summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) issuing commissions for the examination of witnesses or documents;

49 Inserted by the Securities Laws (Amendment) Act, 2004, Sec. 20, w.r.e.f. 12-10-2004.

50 Omitted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.Prior to omission, Sub-section (2) read as under:

“No appeal shall lie to the Securities Appellate Tribunal from an order made by the Board with the consent of the parties.”

(e) reviewing its decisions;

(f) dismissing an application for default or deciding it ex parte;

(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte; and

(h) any other matter which may be prescribed.

(3) Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code (45 of 1860) and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).

Right to legal representation.

23C. The appellant may either appear in person or authorise one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal.

Explanation.—For the purposes of this section,—

(a) “chartered accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(b) “company secretary” means a company secretary as defined in clause (c) of sub-section

(1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(c) “cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(d) “legal practitioner” means an advocate, vakil or an attorney of any High Court, and includes a pleader in practice.

Limitation.

23D. The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to an appeal made to a Securities Appellate Tribunal.

Civil court not to have jurisdiction.

23E. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Securities Appellate Tribunal is empowered by or under this Act to determine 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 power conferred by or under this Act.

51[Appeal to Supreme Court.

23F. Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order :

Provided that the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.]]

Power of Central Government to make rules.

24. (1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely :—

52[(a) the manner of inquiry under sub-section (1) of section 19H;

(aa) the time within which an appeal may be preferred under sub-section (1) of section 23;]

(b) the form in which an appeal may be preferred under sub-section (3) of section 23 and the fees payable in respect of such appeal ;

(c) the procedure for disposing of an appeal under sub-section (4) of section 23;

53[(d) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 23A and the fees payable in respect of such appeal.]

Power of Board to make regulations.

25. (1) Without prejudice to the provisions contained in section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and the rules made thereunder to carry out the purposes of this Act.

51 Substituted by the Securities Laws (Amendment) Act, 2004, Sec. 21, w.r.e.f. 12-10-2004. Prior to its substitution, Section 23F, as inserted by Securities Laws (Second Amendment) Act, 1999, w.e.f. 16-12-1999, read as under:—

“23F. Appeal to High Court.—Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of fact or law arising out of such order:

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.”

52 Substituted by the Securities Laws (Amendment) Act, 2004, Sec. 22, w.r.e.f. 12-10-2004. Prior to its substitution, clause (a) read as under:—

“(a) the time within which an appeal may be preferred under sub-section (1) of section 23;”

53 Inserted by the Securities Laws (Second Amendment) Act, 1999, Sec. 16, w.e.f. 16-12-1999.

(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for—

(a) the form in which record is to be maintained under clause (i) of sub-section (1) of section 2;

(b) the form in which the certificate of commencement of business shall be issued under sub-section (2) of section 3;

(c) the manner in which the certificate of security shall be surrendered under sub-section
(1) of section 6;

(d) the manner of creating a pledge or hypothecation in respect of security owned by a beneficial owner under sub-section (1) of section 12;

(e) the conditions and the fees payable with respect to the issue of certificate of securities under sub-section (3) of section 14;

(f) the rights and obligations of the depositories, participants and the issuers under sub-section (1) of section 17;

(g) the eligibility criteria for admission of securities into the depository under sub-section
(2) of section 17.

54[(h) the terms determined by the Board for settlement of proceedings under subsection (2) of section 19-IA;

(i) any other matter which is required to be, or may be, specified by regulations or in respect of which provision to be made by regulations.]

Power of depositories to make bye-laws.

26. (1) A depository shall, with the previous approval of the Board, make bye-laws consistent with the provisions of this Act and the regulations.

(2) In particular, and without prejudice to the generality of the foregoing power, such bye-laws shall provide for—

(a) the eligibility criteria for admission and removal of securities in the depository;

(b) the conditions subject to which the securities shall be dealt with;

(c) the eligibility criteria for admission of any person as a participant;

(d) the manner and procedure for dematerialisation of securities;

(e) the procedure for transactions within the depository;

(f) the manner in which securities shall be dealt with or withdrawn from a depository;

(g) the procedure for ensuring safeguards to protect the interests of participants and beneficial owners;

(h) the conditions of admission into and withdrawal from a participant by a beneficial owner;

54 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.

(i) the procedure for conveying information to the participants and beneficial owners on dividend declaration, shareholder meetings and other matters of interest to the beneficial owners;

(j) the manner of distribution of dividends, interest and monetary benefits received from the company among beneficial owners;

(k) the manner of creating pledge or hypothecation in respect of securities held with a depository;

(l) inter se rights and obligations among the depository, issuer, participants, and beneficial owners;

(m) the manner and the periodicity of furnishing information to the Board, issuer and other persons;

(n) the procedure for resolving disputes involving depository, issuer, company or a beneficial owner;

(o) the procedure for proceeding against the participant committing breach of the regulations and provisions for suspension and expulsion of participants from the depository and cancellation of agreements entered with the depository;

(p) the internal control standards including procedure for auditing, reviewing and monitoring.

(3) Where the Board considers it expedient so to do, it may, by order in writing, direct a depository to make any bye-laws or to amend or revoke any bye-laws already made within such period as it may specify in this behalf.

(4) If the depository fails or neglects to comply with such order within the specified period, the Board may make the bye-laws or amend or revoke the bye-laws made either in the form specified in the order or with such modifications thereof as the Board thinks fit.

Rules and regulations to be laid before Parliament.

27. Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.

Application of other laws not barred.

28. The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force relating to the holding and transfer of securities.

Removal of difficulties.

29. (1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as appear to it to be necessary or expedient for removing the difficulty :

Provided that no order shall be made under this section after the expiry of a period of two years from the commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be after it is made, before each House of Parliament.

Amendments to certain enactments.

30. [Repealed by Repealing & Amending Act, 2001.]

55[Validation of certain acts.

31. Any act or thing done or purporting to have been done under the principal Act, in respect of settlement of administrative and civil proceedings, shall, for all purposes, be deemed to be valid and effective as if the amendments made to the principal Act had been in force at all material times.]

Repeal and saving.

31. (1) The Depositories (Third) Ordinance, 1996 (Ord. 28 of 1996), is hereby repealed.

(2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under the corresponding provisions of this Act.

SCHEDULE

[See section 30]

AMENDMENTS TO CERTAIN ENACTMENTS

[Repealed by Repealing & Amending Act, 2001.]

55 Inserted by the Securities Laws(Amendment) Act, 2014, w.r.e.f. 18-07-2013.

Mutual Funds shall not park funds of a Scheme in Short Term Deposit of a Bank if that Bank itself invested in that scheme: SEBI-16/08/2019

Trustees/Asset Management Companies (AMCs) shall ensure that no funds of a scheme is parked in STD of a bank which has invested in that scheme and ensure that the bank in which a scheme has STD do not invest in the said scheme until the scheme has STD with such bank.

Circular

SEBI/HO/IMD/DF4/CIR/P/2019/093 August 16, 2019

All Mutual Funds/ Asset Management Companies (AMCs)/ Trustee Companies/ Boards of Trustees of Mutual Funds

Sir/ Madam,

Sub: Parking of Funds in Short Term Deposits of Scheduled Commercial Banks by Mutual Funds – Pending deployment

  1. Kindly refer to Clause 8 of Schedule VII of SEBI (Mutual Funds) Regulations 1996 read with SEBI circular SEBI/IMD/CIR No. 1/91171/07 dated April 16, 2007 pertaining to investment in Short Term Deposits (STDs) of scheduled commercial banks, pending deployment.
  2. As regards point 5 of the aforementioned Circular, it is clarified that Trustees/Asset Management Companies (AMCs) shall ensure that no funds of a scheme is parked in STD of a bank which has invested in that scheme. Trustees/AMCs shall also ensure that the bank in which a scheme has STD do not invest in the said scheme until the scheme has STD with such bank.

  3. This circular is issued in exercise of powers conferred under Section 11

(1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Lamber Singh

Deputy General Manager

Email: lambers@sebi.gov.in

An administrative circular issued by SEBI under Section 11(1) of the SEBI Act, 1992, can be subject matter of appeal under Section 15T of the said Act

Supreme Court in the case of National Securities Depository Ltd. v.
Securities and Exchange Board of India [Civil Appeal No.5173 of 2006], while
examining the question as to whether an administrative circular issued by SEBI
under Section 11(1) of the Securities Exchange Board of India Act, 1992, can be the
subject matter of appeal under Section 15T of the said Act, it was held that “it is
orders referable to Sections 11(4), 11(b), 11(d), 12(3) and 15-I of the Act, being
quasi-judicial orders, and quasi judicial orders made under the Rules and
Regulations that are the subject matter of appeal under Section 15T.” It was
observed that administrative orders such as circulars issued referable to Section
11(1) of the Act are outside the appellate jurisdiction of the Securities Appellate
Tribunal [On 7th March, 2017]

The Securities And Exchange Board Of India Act, 1992

LAW LIBRARY

parliament

Sections Securities and Exchange Board of India Act, 1992
Preamble
CHAPTER I: PRELIMINARY
1. Short title, extent and commencement
2. Definitions
CHAPTER II: ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA
3. Establishment and incorporation of Board
4. Management of the Board
5. Term of office and conditions of service of Chairman and members of the Board
6. Removal of member from office
7. Meetings
7A. Member not to participate in meetings in certain cases
8. Vacancies, etc. not to invalidate proceedings of Board
9. Officers and employees of the Board
CHAPTER II: ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA
10. Transfer of assets, liabilities, etc. of existing Securities and Exchange Board to the Board
CHAPTER IV: POWERS AND FUNCTIONS OF THE BOARD
11. Functions of Board
11A. Matters to be disclosed by the companies
11AA. Collective investment scheme
11B. Power to issue directions
CHAPTER V: REGISTRATION CERTIFICATE
12. Registration of stock-brokers, sub-brokers, share transfer agents, etc.
13. Grants by the Central Government
14. Fund
15. Accounts and audit
15A. Penalty for failure to furnish information, return, etc.
15B. Penalty for failure by any person to enter into agreement with clients
15C. Penalty for failure to redress investors’ grievances
15D. Penalty for certain defaults in case of mutual funds
15E. Penalty for failure to observe rules and regulations by an asset management company
15F. Penalty for default in case of stock brokers
15G. Penalty for insider trading
15H. Penalty for non-disclosure of acquisition of shares and takeovers
15-I. Power to adjudicate
15J. Factors to be taken into account by the adjudicating officer
CHAPTER VIB: ESTABLISHMENT, JURISDICTION, AUTHORITY AND PROCEDURE OF APPELLATE TRIBUNAL
15K. Establishment of Securities Appellate Tribunals
15L. Composition of Securities Appellate Tribunal
15M. Qualifications for appointment as Presiding Officer of the Securities Appellate Tribunal
15N. Term of office
15-O. Salary and allowances and other terms and conditions of service of Presiding Officers
15P. Filling up of vacancies
15Q. Resignation and removal
15R. Orders constituting Appellate Tribunal to be final and not to invalidate its proceedings
15S. Staff of the Securities Appellate Tribunal
15T. Appeal to the Securities Appellate Tribunal
15U. Procedure and powers of the Securities Appellate Tribunal
15V. Right to legal representation
15W. Limitation
15X. Presiding Officer and staff of Securities Appellate Tribunals to be public servants
15Y. Civil court not to have jurisdiction
15Z. Appeal to High Court
CHAPTER VII: MISCELLANEOUS
16. Power of Central Government to issue directions
17. Power of Central Government to supersede the Board
18. Returns and reports
19. Delegation
20. Appeals
20A. Bar of jurisdiction
21. Saving
22. Members, officers and employees of the Board to be public servants
23. Protection of action taken in good faith
24. Offences
25. Exemption from tax on wealth and income
26. Cognisance of offences by courts
27. Offences by companies
28. Power to exempt
29. Power to make rules
30. Power to make regulations
31. Rules and regulations to be laid before Parliament
32. Application of other laws not barred
33. Amendment of certain enactments
34. Power to remove difficulties
35. Power to remove difficulties
SCHEDULE

(15 OF 1992)

[4th April, 1992]

An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.

Be it enacted by Parliament in the Forty-third Year of the Republic of India as follows:-


CHAPTER I

Preliminary

  1. Short title, extent and commencement.– (1) This Act may be called The Securities and Exchange Board of India Act, 1992.

(2) It extends to the whole of India.

(3) It shall be deemed to have come into force on the 30th day of January, 1992.

  1. Definitions.– (1) In this Act, unless the context otherwise requires,-

(a) “Board” means the Securities and Exchange Board of India established under section 3;

(b) “Chairman” means the Chairman of the Board;

[(ba) “collective investment scheme” means any scheme or arrangement which satisfies the conditions specified in section 11-AA;]

(c) “existing Securities and Exchange Board” means the Securities and Exchange Board of India constituted under the Resolution of the Government of India in the Department of Economic Affairs No. 1 (44) SE/86, dated the 12th day of April, 1988;

(d) “Fund” means the Fund constituted under section 14;

(e) “member” means a member of the Board and includes the Chairman;

(f) “notification” means a notification published in the Official Gazette;

(g) “prescribed” means prescribed by rules made under this Act;

(h) “regulations” means the regulations made by the Board under this Act;

[(ha) “Reserve Bank” means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);]

(i) “securities” has the meaning assigned to it in section 2 of the Securities Contracts (Regulation) Act, 1956.

[(2) Words and expressions used and not defined in this Act but defined in] [the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Depositories Act, 1996 (22 of 1996)] [shall have the meanings respectively assigned to them in that Act.]

CHAPTER II

Establishment Of The Securities And Exchange Board Of India

  1. Establishment and incorporation of Board.– (1) With effect from such date as the Central Government may, by notification, appoint, there shall be established, for the purposes of this Act, a Board by the name of the Securities and Exchange Board of India.

(2) The Board shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.

(3) The head office of the Board shall be at Bombay.

(4) The Board may establish offices at other places in India.

 4. Management of the Board.– (1) The Board shall consist of the following members, namely:-

(a) a Chairman;

(b) two members from amongst the officials of the [Ministry] of the Central Government dealing with finance [and administration of the Companies Act, 1956 (1 of 1956)] ;

(c) one member from amongst the officials of [the Reserve Bank] ;

[(d) five other members of whom at least three shall be the whole-time members,]

to be appointed by the Central Government.

(2) The general superintendence, direction and management of the affairs of the Board shall vest in a Board of members, which may exercise all powers and do all acts and things which may be exercised or done by the Board.

(3) Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by that Board.

(4) The Chairman and members referred to in clauses (a) and (d) of sub-section (1) shall be appointed by the Central Government and the members referred to in clauses (b) and (c) of that sub-section shall be nominated by the Central Government and the [Reserve Bank]respectively.

(5) The Chairman and the other members referred to in clauses (a) and (d) of sub-section (1) shall be persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to the Board.

 5. Term of office and conditions of service of Chairman and members of the Board.– (1) The term of office and other conditions of service of the Chairman and the members referred to in clause (d) of sub-section (1) of section 4 shall be such as may be prescribed.

(2) Notwithstanding anything contained in sub-section (1), the Central Government shall have the right to terminate the services of the Chairman or a member appointed under clause (d) of sub-section (1) of section 4, at any time before the expiry of the period prescribed under sub-section (1), by giving him notice of not less than three months in writing or three months’ salary and allowances in lieu thereof, and the Chairman or a member, as the case may be, shall also have the right to relinquish his office, at any time before the expiry of the period prescribed under sub-section (1), by giving to the Central Government notice of not less than three months in writing.

 6. Removal of member from office.– [*]The Central Government shall remove a member from office if he-

(a) is, or at any time has been, adjudicated as insolvent;

(b) is of unsound mind and stands so declared by a competent Court;

(c) has been convicted of an offence which, in the opinion of the Central Government, involves a moral turpitude;

[* * * *]

(e) has, in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest:

Provided that no member shall be removed under this clause unless he has been given a reasonable opportunity of being heard in the matter.

 

  1. Meetings.– (1) The Board shall meet at such times and places, and shall observe such rules of procedure in regard to the transaction of business at its meetings (including quorum at such meetings) as may be provided by regulations.

(2) The Chairman or, if for any reason, he is unable to attend a meeting of the Board, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting.

(3) All questions which come up before any meeting of the Board shall be decided by a majority votes of the members present and voting, and, in the event of an equality of votes, the Chairman, or in his absence, the person presiding, shall have a second or casting vote.

 [7-A. Member not to participate in meetings in certain cases. – Any member, who is a director of a company and who as such director has any direct or indirect pecuniary interest in any matter coming up for consideration at a meeting of the Board, shall, as soon as possible after relevant circumstances have come to his knowledge, disclose the nature of his interest at such meeting and such disclosure shall be recorded in the proceedings of the Board and the member shall not take any part in any deliberation or decision of the Board with respect to that matter.]

 

  1. Vacancies, etc., not to invalidate proceedings of Board.– No act or proceeding of the Board shall be invalid merely by reason of-

(a) any vacancy in, or any defect in the constitution of, the Board; or

(b) any defect in the appointment of a person acting as a member of the Board; or

(c) any irregularity in the procedure of the Board not affecting the merits of the case.

 

  1. Officers and employees of the Board.– (1) The Board may appoint such other officers and employees as it considers necessary for the efficient discharge of its functions under this Act.

(2) The term and other conditions of service of officers and employees of the Board appointed under sub-section (1) shall be such as may be determined by regulations.

CHAPTER III

Transfer Of Assets, Liabilities, Etc., Of The Existing Securities And Exchange Board To The Board

  1. Transfer of assets, liabilities, etc., of existing Securities and Exchange Board to the Board.– (1) On and from the date of establishment of the Board,-

(a) any reference to the existing Securities and Exchange Board in any law other than this Act or in any contract or other instrument shall be deemed as a reference to the Board;

(b) all properties and assets, movable and immovable, of, or belonging to, the existing Securities and Exchange Board, shall vest in the Board;

(c) all rights and liabilities of the existing Securities and Exchange Board shall be transferred to, and be the rights and liabilities of, the Board;

(d) without prejudice to the provisions of clause (c), all debts, obligations and liabilities incurred, all contracts entered into and all matters and things engaged to be done by, with or for the existing Securities and Exchange Board immediately before that date, for or in connection with the purpose of the said existing Board shall be deemed to have been incurred, entered into or engaged to be done by, with for, the Board;

(e) all sums of money due to the existing Securities and Exchange Board immediately before that date shall be deemed to be due to the Board;

(f) all suits and other legal proceedings instituted or which could have been instituted by or against the existing Securities and Exchange Board immediately before that date may be continued or may be instituted by or against the Board; and

(g) every employee holding any office under the existing Securities and Exchange Board immediately before that date shall hold his office in the Board by the same tenure and upon the same terms and conditions of service as respects remuneration, leave, provident fund, retirement and other terminal benefits as he would have held such office if the Board had not been established and shall continue to do so as an employee of the Board or until the expiry of the period of six months from that date if such employee opts not to be the employee of the Board within such period.

(2) Notwithstanding anything contained in the Industrial Disputes Act, 1947, or in any other law for the time being in force, absorption of any employee by the Board in its regular service under this section shall not entitle such employee to any compensation under that Act or other law and no such claim shall be entertained by any Court, tribunal or other authority.

CHAPTER IV

Powers And Functions Of The Board

  1. Functions of Board.– (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for-

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;

[(ba) registering and regulating the working of the] [depositories, participants, custodians] [of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification specify in this behalf;]

(c) registering and regulating the working of [venture capital funds and collective investment schemes] , including mutual funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investors’ education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

(h) regulating substantial acquisition of shares and take-over of companies;

(i) calling for information from, undertaking inspection, conducting inquiries and audits of the [stock exchanges, mutual funds, other persons associated with the securities market] intermediaries and self-regulatory organisations in the securities market;

[(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities]

[(ib) calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard:

Provided that the Board, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government]

(j) performing such functions and exercising such powers under the provisions of [* * *] the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;

(k) levying fees or other charges for carrying out the purposes of this section;

(l) conducting research for the above purposes;

[(la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions;]

(m) performing such other functions as may be prescribed.

[(2-A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.]

[(3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under] [clause (i) or clause (ia) of sub-section (2) or sub-section (2-A)], [the Board shall have the same powers as are vested in a civil Court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely:-

(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board;

(ii) summoning and enforcing the attendance of persons and examining them on oath;

(iii) inspection of any books, registers and other documents of any person referred to in section 12, at any place;]

(iv) inspection of any book, or register, or other document or record of the company referred to in sub-section (2-A);

(v) issuing commissions for the examination of witnesses or documents.

[(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2-A) and (3) and section 11-B, the Board may, by an order, for reasons to be recorded in writing, in the interests 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:-

(a) suspend the trading of any security in a recognised stock exchange;

(b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;

(c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position;

(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation;

(e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts 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 the regulations made thereunder:

Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached;

(f) 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:

Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2-A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market:

Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.]

[(5) The amount disgorged, pursuant to a direction issued, under section 11B of this Act or section 12A of the Securities Contracts (Regulation) Act, 1956 or section 19 of the Depositories Act, 1996, as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act.]

 [11-A. Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities. – (1) Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), the Board may, for the protection of investors,-

(a) specify, by regulations-

(i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and

(ii) the manner in which such matters shall be disclosed by the companies;

(b) by general or special orders-

(i) prohibit any company from issuing prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities;

(ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued.

(2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto.]

 

[11-AA. Collective investment scheme. – (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2A)] shall be a collective investment scheme.

(2) Any scheme or arrangement made or offered by any [person] under which,-

(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

(ii) the contributions, or payments made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.

[(2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act.]

(3) Notwithstanding anything contained in [sub-section (2A)] , any scheme or arrangement-

(i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State;

(ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);

(iii) being a contract of insurance to which the Insurance Act, 1938 (4 of 1938), applies;

(iv) providing for any scheme, pension scheme or the insurance scheme framed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952);

(v) under which deposits are accepted under section 58-A of the Companies Act, 1956 (1 of 1956);

(vi) under which deposits are accepted by a company declared as a Nidhi or a Mutual Benefit Society under section 620-A of the Companies Act, 1956 (1 of 1956);

(vii) falling within the meaning of chit business as defined in clause (e) of section 2 of the Chit Funds Act, 1982 (40 of 1982);

(viii) under which contributions made are in the nature of subscription to a mutual fund;

shall not be a collective investment scheme.]

[(ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify.]

[Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme.]

 

11-B. Power to issue directions. – Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary-

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors of securities market; or

(iii) to secure the proper management of any such intermediary or person, it may issue such directions-

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in section 11-A, as may be appropriate in the interests of investors in securities and the securities market.

[ Explanation. – For the removal of doubts, it is hereby declared that 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.]

 

[11-C. Investigation. – (1) Where the Board has reasonable ground to believe that-

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

(b) 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 the Board thereunder, it may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board.

(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary referred to in section 12 or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorised by him in this behalf, all the books, registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power.

(3) 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 him in this behalf as he 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.

(4) The Investigating Authority may keep in its custody any books, registers, other documents and record produced under sub-section (2) or sub-section (3) for six months and thereafter shall return the same to any intermediary or any person associated with securities market by whom or on whose behalf the books, registers, other documents and record are produced:

Provided that the Investigating Authority may call for any book, register, other document and record if they are needed again:

Provided further that if the person on whose behalf the books, registers, other documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, it shall give certified copies of such books, registers, other documents and record to such person or on whose behalf the books, registers, other documents and record were produced.

(5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before him personally.

(6) If any person fails without reasonable cause or refuses-

(a) to produce to the Investigating Authority or any person authorised by him in this behalf any book, register, other document and record which is his duty under sub-section (2) or sub-section (3) to produce; or

(b) to furnish any information which is his duty under sub-section (3) to furnish; or

(c) to appear before the Investigating Authority personally when required to do so under sub-section (5) or to answer any question which is put to him by the Investigating Authority in pursuance of that sub-section; or

(d) to sign the notes of any examination referred to in sub-section (7), he shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to one crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues.

(7) Notes of any examination under sub-section (2) shall be taken down in writing and shall be read over to, or by, and signed by, the person examined, and may thereafter be used in evidence against him.

[(8) Where in the course of an investigation, the Investigating Authority has reason to believe that any person or enterprise, as the case may be, to whom a notice under sub-section (3) has been issued or might be issued,—

(a) has omitted or failed to provide the information or produce documents as required in the notice; or

(b) would not provide the information or produce documents which shall be useful for, or relevant to, the investigation; or

(c) would destroy, mutilate, alter, falsify or secrete the information or documents useful for, or relevant to, the investigation,

then, the Chairman may, after being satisfied that it is necessary to do so, authorise the Investigating Authority or any other officer of the Board (the officer so authorised in all cases being hereinafter referred to as the authorised officer), to—

(i) enter and search, with such assistance, as may be required, the building, place, vessel, vehicle or aircraft where such information or documents are expected or believed to be kept;

(ii) break open the lock of any door, box, locker, safe almirah or other receptacle for exercising the powers conferred by sub-clause (i), where the keys thereof are not available;

(iii) search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account or other documents;

(iv) require any person who is found to be in possession or control of any books of account or other documents, maintained in the form of electronic record, to provide the authorised officer the necessary facility to inspect such books of account or other documents.

Explanation — For the purposes of this sub-clause, the expression “electronic record” shall have the meaning assigned to it in clause (t) of sub-section (1) of section 2 of the information Technology Act, 2000.

(v) seize any such books of account or other documents found as a result of such search;

(vi) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;

(vii) record on oath the statement of any person who is found to be in possession or in control of the information or documents referred to in sub-clause (i), (iii) and (iv).]

[(8A) The authorised officer may requisition the services of any police officer or any officer of the Central Government, or of both, to assist him for all or any of the purposes specified in sub-section (8) and it shall be the duty of every such officer to comply with such requisition.]

(9) After considering the application and hearing the Investigating Authority, if necessary, [the Magistrate or Judge of the Designated Court] may, by order, authorise the Investigating Authority-

(a) to enter, with such assistance, as may be required, the place or places where such books, registers, other documents and record are kept;

(b) to search that place or those places in the manner specified in the order; and

(c) to seize books, registers, other documents and record, it considers necessary for the purposes of the investigation:

Provided that the Magistrate shall not authorise seizure of books, registers, other documents and record, of any listed public company or a public company (not being the intermediaries specified under section 12) which intends to get its securities listed on any recognised stock exchange unless such company indulges in insider trading or market manipulation.

(10) 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:

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

(11) Save as otherwise provided in this section, every search or seizure made under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to searches or seizures made under that Code.

 

11-D. Cease and desist proceedings. – If the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation:

Provided that the Board shall not pass such order in respect of any listed public company or a public company (other than the intermediaries specified under section 12) which intends to get its securities listed on any recognised stock exchange unless the Board has reasonable grounds to believe that such company has indulged in insider trading or market manipulation.]

CHAPTER V

Registration Certificate

  1. Registration of stock-brokers, sub-brokers, share transfer agents, etc.– (1) No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the [regulations]made under this Act:

Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the said period of three months, till the disposal of such application:

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

(1-A) No] [depository, participant custodian] [of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act:

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

(1-B) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations:

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

 [Explanation. – For the removal of doubts, it is hereby declared that, for the purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer.]

(2) Every application for registration shall be in such manner and on payment of such fees as may be determined by regulations.

(3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations:

Provided that no order under this sub-section shall be made unless the person concerned has been given a reasonable opportunity of being heard.

[CHAPTER V-A]

Prohibition Of Manipulative And Deceptive Devices, Insider Trading And Substantial Acquisition Of Securities Or Control

12-A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. – No person shall directly or indirectly-

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.

CHAPTER VI

Finance, Accounts And Audit

  1. Grants by the Central Government.– The Central Government may, after due appropriation made by Parliament by law in this behalf, make to the Board grants of such sums of money as that Government may think fit for being utilised for the purposes of this Act.
  2. Fund.– (1) There shall be constituted a Fund to be called the Securities and Exchange Board of India General Fund and there shall be credited thereto-

(a) all grants, fees and charges received by the Board under this Act; [*]

[* * *]

(b) all sums received by the Board from such other sources as may be decided upon by the Central Government.

(2) The Fund shall be applied for meeting-

(a) the salaries, allowances and other remuneration of the members, officers and other employees of the Board;

(b) the expenses of the Board in the discharge of its functions under section 11;

(c) the expenses on objects and for purposes authorised by this Act.

  1. Accounts and audit.– (1) The Board shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor-General of India.

(2) The accounts of the Board shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and any expenditure incurred in connection with such audit shall be payable by the Board to the Comptroller and Auditor-General of India.

(3) The Comptroller and Auditor-General of India and any other person appointed by him in connection with the audit of the accounts of the Board shall have the same rights and privileges and authority in connection with such audit as the Comptroller and Auditor-General generally has in connection with the audit of the Government accounts and, in particular, shall have the right to demand the production of books, accounts, connected vouchers and other documents and papers and to inspect any of the offices of the Board.

(4) The accounts of the Board as certified by the Comptroller and Auditor-General of India or any other person appointed by him in this behalf together with the audit report thereon shall be forwarded annually to the Central Government and that Government shall cause the same to be laid before each House of Parliament.

[CHAPTER VI-A]

Penalties And Adjudication

15-A. Penalty for failure to furnish information, return, etc. – If any person, who is required under this Act or any rules or regulations made thereunder,-

(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to [a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] ]

(b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] ]

(c) to maintain books of account or records, fails to maintain the same, he shall be liable to [a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] ]

15-B. Penalty for failure by any person to enter into agreement with clients. – If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to [a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] ]

[15-C. Penalty for failure to redress investors’ grievances. – If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] ]

15-D. Penalty for certain defaults in case of mutual funds. – If any person, who is-

(a) required under this Act or any rules or regulations made thereunder to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to [a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds subject to a maximum of one crore rupees]

(b) registered with the Board as a collective investment scheme, including mutual funds, for sponsoring or carrying on any investment scheme, fails to comply with the terms and conditions of certificate of registration, he shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees]

(c) registered with the Board as a collective investment scheme including mutual funds, fails to make an application for listing of its schemes as provided for in the regulations governing such listing, he shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees]

(d) registered as a collective investment scheme, including mutual funds, fails to despatch unit certificates of any scheme in the manner provided in the regulation governing such despatch, he shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees]

(e) registered as a collective investment scheme, including mutual funds, fails to refund the application monies, paid by the investors within the period specified in the regulations, he shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees]

(f) registered as a collective investment scheme, including mutual funds, fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations, he shall be liable to a penalty [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees] .

 

15-E. Penalty for failure to observe rules and regulations by an asset management company. – Where any asset management company of a mutual fund registered under this Act fails to comply with any of the regulations providing for restrictions on the activities of the asset management companies, such asset management company shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees]

 

15-F. Penalty for default in case of stock brokers. – If any person, who is registered as a stock broker under this Act,-

(a) fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to [a penalty which shall not be less than one lakh rupees but which may extend to] for which the contract note was required to be issued by that broker;

(b) fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations, he shall be liable to [a penalty] [which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds subject to a maximum of one crore rupees]

(c) charges an amount of brokerage which is in excess of the brokerage specified in the regulations, he shall be liable to [a penalty of one lakh rupees] or five times the amount [which shall not be less than one lakh rupees but which may extend to five times the amount of brokerage] whichever is higher.

15-G. Penalty for insider trading. – If any insider who,-

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or

(ii) communicates any unpublished price sensitive information to any person with or without his request for such information except as required in the ordinary course of business or under any law; or

(iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information, shall be liable to a penalty [which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher] .

15-H. Penalty for non-disclosure of acquisition of shares and takeovers. – If any person, who is required under this Act or any rules or regulations made thereunder, fails to-

(i) disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or

(ii) make a public announcement to acquire shares at a minimum price;

[(iii) make a public offer by sending letter of offer to the shareholders of the concerned company; or

(iv) make payment of consideration to the shareholders who sold their shares pursuant to letter of offer,] he shall be liable to a penalty [which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher] .

 [15-HA. Penalty for fraudulent and unfair trade practices. – If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty not exceeding [which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher] .

 15-HB. Penalty for contravention where no separate penalty has been provided. – Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be [liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees] .]

 15-I. Power to adjudicate. – (1) For the purpose of adjudging under sections 15-A, 15-B, 15-C, 15-D, 15-E, 15-F, 15-G, [15-H, 15-HA and 15-HB], the Board shall appoint any officer not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

(2) While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.

[(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:

Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:

Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.]

 15-J. Factors to be taken into account by the adjudicating officer. – While adjudging the quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely:-

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default.

 [15-JA. Crediting sum realised by way of penalties to Consolidated Fund of India. – All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India.]

[15JB. Settlement of administrative and civil proceedings. – (1) Notwithstanding anything contained in any other law for the time being in force, any person, against whom any proceedings have been initiated or may be initiated under section 11, section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an application in writing to the Board proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.

(2) The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board in accordance with the regulations made under this Act.

(3) The settlement proceedings under this section shall be conducted in accordance with the procedure specified in the regulations made under this Act.

(4) No appeal shall lie under section 15T against any order passed by the Board or adjudicating officer, as the case may be, under this section.]

CHAPTER VI-B

Establishment, Jurisdiction, Authority And Procedure Of Appellate Tribunal

15-K. Establishment of Securities Appellate Tribunals. – (1) The Central Government shall by notification, establish one or more Appellate Tribunals to be known as the Securities Appellate Tribunal to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act [or any other law for the time being in force.]

(2) The Central Government shall also specify in the notification referred to in sub-section (1) the matters and places in relation to which the Securities Appellate Tribunal may exercise jurisdiction.

 

[15-L. Composition of Securities Appellate Tribunal. – A Securities Appellate Tribunal shall consist of a Presiding Officer and two other Members, to be appointed, by notification, by the Central Government:

Provided that the Securities Appellate Tribunal, consisting of one person only, established before the commencement of the Securities and Exchange Board of India (Amendment) Act, 2002, shall continue to exercise the jurisdiction, powers and authority conferred on it by or under this Act or any other law for the time being in force till two other Members are appointed under this section.

 15-M. Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal. – [(1) A person shall not be qualified for appointment as the Presiding Officer of the Securities Appellate Tribunal unless he-

(a) is a sitting or retired Judge of the Supreme Court or a sitting or retired Chief Justice of a High Court; or

(b) is a sitting or retired Judge of a High Court who has completed not less than seven years of service as a Judge in a High Court.

(1A) The Presiding Officer of the Securities Appellate Tribunal shall be appointed by the Central Government in consultation with the Chief Justice of India or his nominee.]

(2) A person shall not be qualified for appointment as Member of a Securities Appellate Tribunal unless he is a person of ability, integrity and standing who has shown capacity in dealing with problems relating to securities market and has qualification and experience of corporate law, securities laws, finance, economics or accountancy:

Provided that a member of the Board or any person holding a post at senior management level equivalent to Executive Director in the Board shall not be appointed as Presiding Officer or Member of a Securities Appellate Tribunal during his service or tenure as such with the Board or within two years from the date on which he ceases to hold office as such in the Board.]

 [15-N. Tenure of office of Presiding Officer and other Members of Securities Appellate Tribunal. – The Presiding Officer and every other Member of a 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 re-appointment:

Provided that no person shall hold office as the Presiding Officer of the Securities Appellate Tribunal after he has attained the age of sixty-eight years:

Provided further that no person shall hold office as a Member of the Securities Appellate Tribunal after he has attained the age of sixty-two years.]

15-O. Salary and allowances and other terms and conditions of service of Presiding Officers. – The salary and allowances payable to and the other terms and conditions of service (including pension, gratuity and other retirement benefits) of, the [Presiding Officer and other Members of a Securities Appellate Tribunal] shall be such as may be prescribed:

Provided that neither the salary and allowances nor the other terms and conditions of service of the [Presiding Officer and other Members of a Securities Appellate Tribunal] shall be varied to their disadvantage after appointment.

 

15-P. Filling up of vacancies. – If, for reason other than temporary absence, any vacancy occurs in [the office of the Presiding Officer or any other Member,] of a Securities Appellate Tribunal, then the Central Government shall appoint another person in accordance with the provisions of this Act to fill the vacancy and the proceedings may be continued before the Securities Appellate Tribunal from the stage at which the vacancy is filled.

15-Q. Resignation and removal. – (1) [The Presiding Officer or any other Member of a Securities Appellate Tribunal] may, by notice in writing under his hand addressed to the Central Government, resign his office:

Provided that the [Presiding Officer or any other Member] shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest.

(2) The [Presiding Officer or any other Member] of a Securities Appellate Tribunal shall not be removed from his office except by an order by the Central Government on the ground of proved misbehaviour or incapacity after an inquiry made by a Judge of the Supreme Court, in which the[Presiding Officer or any other Member] concerned has been informed of the charges against him and given a reasonable opportunity of being heard in respect of these charges.

(3) The Central Government may, by rules, regulate the procedure for the investigation of misbehaviour or incapacity of [the Presiding Officer or any other Member] .

15-R. Orders constituting Appellate Tribunal to be final and not to invalidate its proceedings. – No order of the Central Government appointing any person as the [Presiding Officer or a Member] of a Securities Appellate Tribunal shall be called in question in any manner, and no act or proceeding before a Securities Appellate Tribunal shall be called in question in any manner on the ground merely of any defect in the constitution of a Securities Appellate Tribunal.

15-S. Staff of the Securities Appellate Tribunal. – (1) The Central Government shall provide the Securities Appellate Tribunal with such officers and employees as that Government may think fit.

(2) The officers and employees of the Securities Appellate Tribunal shall discharge their functions under general superintendence of the Presiding Officer.

(3) The salaries and allowances and other conditions of service of the officers and employees of the Securities Appellate Tribunal shall be such as may be prescribed.

15-T. Appeal to the Securities Appellate Tribunal. – [(1) Save as provided in sub-section (2), any person aggrieved,-

(a) by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act, or the rules or regulations made thereunder; or

(b) by an order made by an adjudicating officer under this Act, may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

(2) [***]

(3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which [a copy of the order made by the Board or the adjudicating officer, 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:

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

(4) On receipt of an appeal under sub-section (1), 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.

(5) The Securities Appellate Tribunal shall send a copy of every order made by it to the [Board, the parties] to the appeal and to the concerned adjudicating officer.

(6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

15-U. Procedure and powers of the Securities Appellate Tribunal. – The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 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 Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.

(2) The Securities Appellate Tribunal shall have, for the purposes of discharging their functions under this Act, the same powers as are vested in a civil Court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:-

(a) summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) issuing commissions for the examination of witnesses or documents;

(e) reviewing its decisions;

(f) dismissing an application for default or deciding it ex parte ;

(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte ;

(h) any other matter which may be prescribed.

(3) Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code (45 of 1860) and the Securities Appellate Tribunal shall be deemed to be a civil Court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).

 

[15-V. Right to legal representation. – The appellant may either appear in person or authorise one or more legal chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal.

Explanation. – For the purposes of this section,-

(a) “chartered accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(b) “company secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(c) “cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

(d) “legal practitioner” means an advocate, vakil or an attorney of any High Court, and includes a pleader in practice.]

15-W. Limitation. – The provisions of the Limitation Act, 1963, shall, as far as may be, apply to an appeal made to a Securities Appellate Tribunal.

 

[15-X. Presiding Officer, Members and Staff of Securities Appellate Tribunals to be public servants. – The Presiding Officer, Members and other officers and employees of a Securities Appellate Tribunal shall be deemed to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).]

 

15-Y. Civil Court not to have jurisdiction. – No civil Court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine 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 power conferred by or under this Act.

 

[15-Z. Appeal to Supreme Court. – Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order:

Provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.]

CHAPTER VII

Miscellaneous

  1. Power of Central Government to issue directions.– (1) Without prejudice to the foregoing provisions of [this Act or the Depositories Act, 1996], the Board shall, in exercise of its powers or the performance of its functions under this Act, be bound by such directions on questions of policy as the Central Government may give in writing to it from time to time:

Provided that the Board shall, as far as practicable, be given an opportunity to express its views before any direction is given under this sub-section.

(2) The decision of the Central Government whether a question is one of policy or not shall be final.

[(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:

Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:

Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.]

 

  1. Power of Central Government to supersede the Board.– (1) If at any time the Central Government is of opinion-

(a) that on account of grave emergency, the Board is unable to discharge the functions and duties imposed on it by or under the provisions of this Act; or

(b) that the Board has persistently made default in complying with any direction issued by the Central Government under this Act or in the discharge of the functions and duties imposed on it by or under the provisions of this Act and as a result of such default the financial position of the Board or the administration of the Board has deteriorated; or

(c) that circumstances exist which render it necessary in the public interest so to do, the Central Government may, by notification, supersede the Board for such period, not exceeding six months, as may be specified in the notification.

(2) Upon the publication of a notification under sub-section (1) superseding the Board,-

(a) all the members shall, as from the date of supersession, vacate their offices as such;

(b) all the powers, functions and duties which may, by or under the provisions of this Act, be exercised or discharged by or on behalf of the Board, shall until the Board is reconstituted under sub-section (3), be exercised and discharged by such person or persons as the Central Government may direct; and

(c) all property owned or controlled by the Board shall, until the Board is reconstituted under sub-section (3), vest in the Central Government.

(3) On the expiration of the period of supersession specified in the notification issued under sub-section (1), the Central Government may reconstitute the Board by a fresh appointment and in such case any person or persons who vacated their offices under clause (a) of sub-section (2), shall not be deemed disqualified for appointment:

Provided that the Central Government may, at any time, before the expiration of the period of supersession, take action under this sub-section.

(4) The Central Government shall cause a notification issued under sub-section (1) and a full report of any action taken under this section and the circumstances leading to such action to be laid before each House of Parliament at the earliest.

 

  1. Returns and reports.– (1) The Board shall furnish to the Central Government at such time and in such form and manner as may be prescribed or as the Central Government may direct, such returns and statements and such particulars in regard to any proposed or existing programme for the promotion and development of the securities market, as the Central Government may, from time to time, require.

(2) Without prejudice to the provisions of sub-section (1), the Board shall, within [ninety days] after the end of each financial year, submit to the Central Government a report in such form, as may be prescribed, giving a true and full account of its activities, policy and programmes during the previous financial year.

(3) A copy of the report received under sub-section (2) shall be laid, as soon as may be after it is received, before each House of Parliament.

 

  1. Delegation.– The Board may, by general or special order in writing delegate to any member, officer of the Board or any other person subject to such conditions, if any, as may be specified in the order, such of its powers and functions under this Act (except the powers under section 29) as it may deem necessary.

 

  1. Appeals.– (1) Any person aggrieved by [an order of the Board made, before the commencement of the Securities Laws (Second Amendment) Act, 1999,]under this Act, or the rules or regulations made thereunder may prefer an appeal to the Central Government within such time as may be prescribed.

(2) No appeal shall be admitted if it is preferred after the expiry of the period prescribed therefor:

Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant satisfies the Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.

(3) Every appeal made under this section shall be made in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.

(4) The procedure for disposing of an appeal shall be such as may be prescribed:

Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

 

[20-A. Bar of jurisdiction. – No order passed by the] [Board or the adjudicating officer] [under this Act shall be appealable except as provided in][section 15-T or section 20] [and no civil Court shall have jurisdiction in respect of any matter which the Board 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 Board by, or under, this Act.]

 

  1. Savings.– Nothing in this Act shall exempt any person from any suit or other proceedings which might, apart from this Act, be brought against him.

 

  1. Members, officers and employees of the Board to be public servants.– All members, officers and other employees of the Board shall be deemed, when acting or purporting to act in pursuance of any of the provisions of this Act, to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).

 

  1. Protection of action taken in good faith.– No suit, prosecution or other legal proceedings shall lie against the Central Government [or Board]or any officer of the Central Government or any member, officer or other employee of the Board for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder.

 

  1. Offences.– (1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to][ten years, or with fine, which may extend to twenty-five crore rupees or with both] .

[(2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to] [ten years or with fine, which may extend to twenty-five crore rupees or with both] .

 

[24-A. Composition of certain offences. – Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a Court before which such proceedings are pending.

 24-B. Power to grant immunity. – (1) The Central Government may, on recommendation by the Board, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this Act or the rules or the regulations made thereunder, has made a full and true disclosure in respect of the alleged violation, grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence under this Act, 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:

Provided that no such immunity shall be granted by the Central Government in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of application for grant of such immunity:

Provided further that recommendation of the Board under this sub-section shall not be binding upon the Central Government.

(2) An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Central Government, if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with respect to which the immunity was granted or for any other offence of which he appears to have been guilty in connection with the contravention and shall also become liable to the imposition of any penalty under this Act to which such person would have been liable, had not such immunity been granted.]

 

  1. Exemption from tax on wealth and income.– Notwithstanding anything contained in the Wealth-tax Act, 1957, the Income-tax Act, 1961, or any other enactment for the time being in force relating to tax on wealth, income, profits or gains-

(a) the Board;

(b) the existing Securities and Exchange Board from the date of its constitution to the date of establishment of the Board, shall not be liable to pay wealth-tax, income-tax or any other tax in respect of their wealth, income, profits or gains derived.

  1. Cognizance of offences by Courts.– (1) No Court shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, save on a complaint made by the Board, [* * * *].

(2) [***]

26A. Establishment of Special Courts. – (1) The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate as many Special Courts as may be necessary.

(2) A Special Court shall consist of a single judge who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

(3) A person shall not be qualified for appointment as a judge of a Special Court unless he is, immediately before such appointment, holding the office of a Sessions Judge or an Additional Sessions Judge, as the case may be.

 26B. Offences triable by Special Courts. – Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences under this Act committed prior to the date of commencement of the Securities Laws (Amendment) Act, 2014 or on or after the date of such commencement, shall be taken cognizance of and tried by the Special Court established for the area in which the offence is committed or where there are more Special Courts than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.

 26C. Appeal and revision. – The High Court may exercise, so far as may be applicable, all the powers conferred by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits of the jurisdiction of the High Court were a Court of Session trying cases within the local limits of the jurisdiction of the High Court.

 

26D. Application of Code to proceedings before Special Court. – (1) Save as otherwise provided in this Act, the provisions of the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session and the person conducting prosecution before a Special Court shall be deemed to be a Public Prosecutor within the meaning of clause (u) of section 2 of the Code of Criminal Procedure, 1973.

(2) The person conducting prosecution referred to in sub-section (1) should have been in practice as an advocate for not less than seven years or should have held a post, for a period of not less than seven years, under the Union or a State, requiring special knowledge of law.

 

26E. Transitional provisions. – Any offence committed under this Act, which is triable by a Special Court shall, until a Special Court is established, be taken cognizance of and tried by a Court of Session exercising jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973:

Provided that nothing contained in this section shall affect the powers of the High Court under section 407 of the Code of Criminal Procedure, 1973 to transfer any case or class of cases taken cognizance by a Court of Session under this section.]

 

  1. Offences by companies.– (1) Where an offence under this Act has been committed by a company, every person who at the time the offence was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation. – For the purposes of this section,-

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director” , in relation to a firm, means a partner in the firm.

 

  1. Power to exempt.– [Omitted by the Securities Laws (Amendment) Act, 1995 (9 of 1995), section 15 (w.r.e.f.25-1-1995).]

 

[28A. Recovery of amounts. – (1) If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board 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 the Board, 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(43 of 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 made 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(43 of 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(43 of 1961), shall be construed as a reference to appeal before the Securities Appellate Tribunal under section 15T 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 Board under section 11B, shall have precedence over any other claim against such person.

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

 

  1. Power to make rules.– (1) The Central Government may, by notification, make rules for carrying out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:-

(a) the term of office and other conditions of service of the Chairman and the members under sub-section (1) of section 5;

(b) the additional functions that may be performed by the Board under section 11;

[* * *]

(d) the manner in which the accounts of the Board shall be maintained under section 15;

[(da) the manner of inquiry under sub-section (1) of section 15-I;

(db) the salaries and allowances and other terms and conditions of service of the] [Presiding Officers, Members] [and other officers and employees of the Securities Appellate Tribunal under section 15-O and sub-section (3) of section 15-S;

(dc) the procedure for the investigation of misbehaviour or incapacity of the] [Presiding Officers, or other Members] [of the Securities Appellate Tribunals under sub-section (3) of section 15-Q;

(dd) the form in which an appeal may be filed before the Securities Appellate Tribunal under section 15-T and the fees payable in respect of such appeal;]

(e) the form and the manner in which returns and report to be made to the Central Government under section 18;

(f) any other matter which is to be, or may be, prescribed, or in respect of which provision is to be, or may be, made by rules.

 30. Power to make regulations.– (1) The Board may, [* * *]by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:-

(a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of section 7 including the quorum necessary for the transaction of business;

(b) the term and other conditions of service of officers and employees of the Board under sub-section (2) of section 9;

[(c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under section 11-A;

[(ca) the utilisation of the amount credited under sub-section (5) of section 11;

(cb) the fulfilment of other conditions relating to collective investment scheme under sub-section (2A) of section 11AA

(cc) the procedure to be followed by the authorised officer for search or seizure under sub-section (9) of section 11C;]

(d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration and the manner of suspension or cancellation of certificate of registration under section 12.]

[(da) the terms determined by the Board for settlement of proceedings under sub-section (2) and the procedure for conducting of settlement proceedings under sub-section (3) of section 15JB;

(db) any other matter which is required to be, or may be, specified by regulations or in respect of which provision is to be made by regulations.]

 

  1. Rules and regulations to be laid before Parliament.– Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.

 

  1. Application of other laws not barred.– The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

 

  1. Amendment of certain enactments.– The enactments specified in Parts I and II of the Schedule to this Act shall be amended in the manner specified therein and such amendments shall take effect on the date of establishment of the Board.

 

  1. Power to remove difficulties.– (1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order, published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to be necessary for removing the difficulty:

Provided that no order shall be made under this section after the expiry of five years from the commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be after it is made, before each House of Parliament.

 

[34A. Any act or thing done or purporting to have been done under the principal Act, in respect of calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board and in respect of settlement of administrative and civil proceedings, shall, for all purposes, be deemed to be valid and effective as if the amendments made to the principal Act had been in force at all material times.]

 

  1. Repeal and saving.– (1) The Securities and Exchange Board of India Ordinance, 1992, is hereby repealed.

(2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance, shall be deemed to have been done or taken under the corresponding provisions of this Act.

The Schedule

[See section 33]

Amendment of Certain Enactments

Part I

Amendment to the Capital Issues (Control) Act, 1947 (29 of 1947)

In section 10 for “to that Government” substitute “to that Government or the Securities and Exchange Board of India”.

Part II

Amendments to the Securities Contracts (Regulation) Act, 1956 (42 of 1956)

  1. Section 2 in clause (h) for sub-clause (ii), substitute the following :–

“(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and”.

  1. Section 6,-

(i) in sub -section (1), for “Central Government”, substitute “Securities and Exchange Board of India”;

(ii) in sub -section (2) for “by the Central Government”, substitute “by the Securities and Exchange Board of India”.

(iii) in sub -section (3), for “Central Government”, wherever it occurs, substitute “Securities and Exchange Board of India”;

  1. Section 9, for “Central Government” wherever it occurs, substitute “Securities and Exchange Board of India”;
  2. Section 10, for “Central Government” wherever it occurs, substitute “Securities and Exchange Board of India”;
  3. Section 17, in sub-section (1), for “licence granted by the Central Government”, substitute “licence granted by the Securities and Exchange Board of India”;
  4. Section 21 for “Central Government”, substitute “Securities and Exchange Board of India”;
  5. Section 22A, in sub -section (3), for clause (b), substitute the following –

“(b) that the transfer of the securities is in contravention of any law or rules made thereunder or any administrative instructions or conditions of listing agreement laid down in pursuance of such laws and rules.”;

  1. In sub-section (2) of section 23, for “Central Government under section 21 or section 22”, substitute “Securities and Exchange Board of India under section 21 or the Central Government under section 22”;
  2. After section 29 insert the following :

29A. Power to delegate. – The Central Government may, by order published in the Official Gazette, direct that the powers exercisable by it under any provision of this Act shall, in relation to such matters and subject to such conditions, if any as may be specified in order, be excusable also by the Securities and Exchange Board of India.”


CONNECTED LAWS
  1. Securities And Exchange Board Of India (Appeal To Central Government) Rules, 1993
  2.  Securities And Exchange Board Of India (Buy Back Of Securities) Regulations, 1998
  3.  Securities And Exchange Board Of India (Portfolio Managers) Rules, 1993
  4.  Securities And Exchange Board Of India (Registrars To An Issue And Share Transfer Agents) Rules, 1993
  5.  Securities And Exchange Board Of India (Underwriters) Rules, 1993
  6.  Securities And Exchange Board Of India (Bankers To An Issue) Regulations, 1994
  7.  Securities And Exchange Board Of India (Bankers To An Issue) Rules, 1994
  8.  Securities And Exchange Board Of India (Central Listing Authority) Regulations, 2003
  9.  Securities And Exchange Board Of India (Certification Of Associated Persons In The Securities Markets) Regulations, 2007
  10.  Securities And Exchange Board Of India (Collective Investment Schemes) Regulations, 1999
  11.  Securities And Exchange Board Of India (Credit Rating Agencies) Regulations, 1999
  12.  Securities And Exchange Board Of India (Custodian Of Securities) Regulations, 1996
  13.  Securities And Exchange Board Of India (Debenture Trustees) Regulations, 1993
  14.  Securities And Exchange Board Of India (Debenture Trustees) Rules, 1993
  15.  Securities And Exchange Board Of India (Depositories And Participants) Regulations, 1996
  16.  Securities And Exchange Board Of India (Foreign Institutional Investors) Regulations, 1995
  17.  Securities And Exchange Board Of India (Issue Of Sweat Equity) Regulatons, 2002
  18.  Securities And Exchange Board Of India (Merchant Bankers) Regulations, 1992
  19.  Securities And Exchange Board Of India (Merchant Bankers) Rules, 1992
  20.  Securities And Exchange Board Of India (Mutual Funds) Regulations, 1996
  21.  Securities And Exchange Board Of India (Ombudsman) Regulations, 2003
  22.  Securities And Exchange Board Of India (Portfolio Managers) Rules, 1993
  23.  Securities And Exchange Board Of India (Procedure For Holding Enquiry By Enquiry Officer And Imposing Penalty) Regulations, 2002
  24.  Securities And Exchange Board Of India (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003
  25.  Securities And Exchange Board Of India (Stock Brokers And Sub-Brokers) Regulations, 1992
  26.  Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 1997
  27.  Securities And Exchange Board Of India (Venture Capital Funds) Regulations, 1996
  28.  Securities And Exchange Board of India Appellate Tribunal (Procedure) Rules, 1995
  29.  Securities And Exchange Board of India Notification (Certification of Associated Persons in the Securities Markets) Regulations, 2007
  30.  Securities Appellate Tribunal (Procedure) Rules, 2000
  31.  Securities Appellate Tribunal (Salaries, Allowance and other Terms and Conditions of Presiding Officer and Other Members) Rules, 2003
  32.  Securities and Exchange Board Of India (Delisting of Equity Shares) Regulations, 2009
  33.  Securities and Exchange Board of India (Intermediate) Regulations, 2008
  34.  Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009
  35.  Securities and Exchange Board of India (Procedure For Holding Inquiry and Imposing Penalties By Adjudicating Officer) Rules, 1995
  36.  Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008
  37.  Securities and Exchange Board of India (Registrars to an issue and Share Transfer Agents) Regulations, 1993
  38.  Securities and Exchange Board of India (Underwriters) Regulations, 1993
  39.  Securities and Exchange Board of India Act, 1992

Securities and Exchange Board of India Vs. Rakhi Trading Pvt. Ltd.[ALL SC 2018 FEBRUARY ]

KEYWORDS:-synchronized trades- ECONOMIC FRAUD-

c

DATE:- February 08, 2018-

Main function of SEBI in this regard is to make inquiry, investigation and to give directions, to promote the orderly and healthy growth of the securities market. With a view to curb unfair trade practices, market manipulation, price rigging and other frauds in securities market, SEBI is empowered to make inquiries and inspection.

ACTS:-Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003

SUPREME COURT OF INDIA

Securities and Exchange Board of India Vs. Rakhi Trading Pvt. Ltd.

[Civil Appeal No. 1969 of 2011]

[Civil Appeal Nos. 3174-3177 of 2011]

[Civil Appeal No. 3180 of 2011]

KURIAN, J.

1. Fairness, integrity and transparency are the hallmarks of the stock market in India. The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) is the vigilant watchdog. Whether the factual matrix justified the watchdog’s bite is the issue arising for consideration in this case.

2. There are two sets of party respondents – the traders and the brokers. SEBI proceeded against the traders for violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “the PFUTP Regulations”). In the case of brokers, the charge is that they also violated Regulations 7A (1), (2), (3) and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992.

3. As the matter before us involves three traders and three brokers, for convenience, we have extracted the dates of the decision of the Adjudicating Officer (hereinafter referred to as “A.O.”) and the Securities Appellate Tribunal (hereinafter referred to as “the SAT”) in the table below:

S. No.

Name of the Party

Trader/ Broker

Date of A.O’s order

Date of SAT’s decision

1.

Rakhi Trading Private Limited (“Rakhi Trading”)

Trader

26.03.2009

11.10.2010

2.

Tungarli Tradeplace Private Limited (“Tungarli”)

Trader

30.04.2010

16.11.2010

3.

TLB Securities Limited (“TLB”)

Trader

16.03.2009

26.10.2010

4.

Indiabulls Securities Limited (“Indiabulls”)

Broker

25.02.2009

26.10.2010

5.

Angel Capital and Debt Market Limited (“Angel”)

Broker

22.05.2009

26.10.2010

6.

Prashant Jayantilal Patel (“Prashant”)

Broker

31.08.2009

26.10.2010

SAT set aside the decisions of the A.O. in all the aforementioned cases. Aggrieved, SEBI is before this Court under Section 15Z of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “SEBI Act”).

4. Both the facts and the law are complex, and hence, we shall first analyse the legal framework.

5. The Securities Contracts (Regulation) Act, 1956 was introduced “… to prevent undesirable transactions in securities by regulating the business of dealing therein, by providing for certain other matters connected therewith”.

Section 18A dealing with contracts in derivatives was introduced with effect from 22.02.2000. The provision reads as follows:

“18A. Contracts in derivative.-Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are –

(a) traded on a recognised stock exchange;

(b) settled on the clearing house of the recognised stock exchange; or in accordance with the rules and byelaws of such stock exchange;

(c) between such parties and on such terms as the Central Government may, by notification in the official Gazette, specify.”

“Derivative” is defined under Section 2(ac) of the 1956 Act, which read as under:

“2(ac)] “derivative” includes-

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities.

(C) commodity derivatives; and

(D) such other instruments as may be declared by the Central Government to be derivatives;”

6. “Option in securities” is defined under Section 2 (d) of the 1956 Act, which reads as under:

“2(d) “option in securities” means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.”

7. The term “securities” is defined under Section 2(h) of the 1956 Act, which reads as under: “2(h) “securities” include-

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.

xxx xxx xxx

(ia) derivative;”

8. In 1992, the SEBI Act was introduced “…to provide for the establishment of a Board, to protect the interest of investors in securities and to promote the development of and to regulate, the securities market and for matters connected therewith or incidental thereto”.

9. Section 15HA of the SEBI Act provides for penalty for fraudulent and unfair trade practices. The provision reads as under: “15HA. Penalty for fraudulent and unfair trade practices.- If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.”

10. Adjudication is provided under Section 15I. Section 15T provides for appeal to SAT against any order made by an Adjudicating Officer and Section 15Z provides for an appeal to Supreme Court against an order passed by the SAT “…on any question of law arising out of such order..”

11. Under Section 30 of the SEBI Act “….the Board may, by notification, make regulations consistent with this Act and the Rules made thereunder to carry out the purposes of this Act.” The PFUTP Regulations were notified on 17.07.2003.

12. Regulation 2(1)(b) of the PFUTP Regulations provides the definition of “dealing in securities”, which reads as under: “2(1)(b) “dealing in securities” includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in section 12 of the Act.”

13. Chapter II of the PFUTP Regulations comprising Regulations 3 and 4 deals with the prohibition of fraudulent and unfair trade practices relating to securities in the market. Regulation 3 speaks of prohibition about certain dealings in securities and Regulation provides for prohibition of manipulative, fraudulent and unfair trade practices. The regulations relevant for the purpose of the present case read as under:

“3. Prohibition of certain dealings in securities No person shall directly or indirectly-

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

“4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice insecurities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;

xxx xxx xxx

(e) any act or omission amounting to manipulation of the price of a security;

xxx xxx xxx

(g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;

14. The Regulations do not provide a definition for unfair trade practices but “fraud” and “fraudulent” have been defined under Regulation 2(1)(c), which reads as under:

“2(1)(c) “fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include:

(1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;

(2) a suggestion as to a fact which is not true by one who does not believe it to be true;

(3) an active concealment of a fact by a person having knowledge or belief of the fact;

(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless manner whether it be true or false;

(6) any such act or omission as any other law specifically declares to be fraudulent,

(7) deceptive behavior by a person depriving another of informed consent or full participation,

(8) a false statement made without reasonable ground for believing it to be true.

(9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And “fraudulent” shall be construed accordingly; Nothing contained in this clause shall apply to any general comments made in good faith in regard to-

(a) the economic policy of the government

(b) the economic situation of the country

(c) trends in the securities market;

(d) any other matter of a like nature whether such comments are made in public or in private;

xxx xxx xxx

(e) “securities” means securities as defined in section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).”

15. The Securities and Exchange Board of India (Stock brokers and Sub-brokers) Regulations, 1992 in Schedule II deals with the code of conduct for stockbrokers which reads as follows:

“SCHEDULE II

Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992

CODE OF CONDUCT FOR STOCK BROKERS

[Regulation 7]

A. General.

(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.

(2) Exercise of due skill and care : A stock-broker shall act with due skill, care and diligence in the conduct of all his business.

(3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.

(4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.

(5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.”

16. As the facts pertain to transactions involving certain technical terms, we will have to necessarily deal with their meaning and content.

17. Derivatives – Derivatives are a form of financial instruments which are traded in the securities market and whose values are derived from the value of the underlying variables like the share price of a particular scrip in the cash segment of the market or the stock index of a portfolio of stocks. Derivative trading is governed by Section 18A of the 1956 Act. There are two types of derivative instruments – ‘futures’ and ‘options’. In futures and options, the trading can either be of individual stocks or of indices like NIFTY, Bank NIFTY etc.

18. Futures – a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price agreed upon on the date of the contract. All the futures contracts are settled in cash.

19. Options – options are contracts between a buyer and the seller which gives a right, but not an obligation, to buy or sell the underlying asset at a stated price on or before a specified date. While a buyer of an option pays the premium and buys 13 his right to exercise his option, the writer of an option is the one who receives the option premium and is therefore obliged to sell or buy the asset as per the option exercised by the buyer. Options are of two types, ‘Call’ and ‘Put’. Call Option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. Put Option gives the buyer the right, but not obligation to sell a given quantity of underlying asset at a given price on or before a given future date.

20. The impugned SAT order in the case of Rakhi Trading has succinctly dealt with the working of options: “2. …The seller in an options contract sells a right to the buyer and since nothing can be sold without a cost, the former charges an amount from the latter which is called the premium. It is this premium which is the only negotiable element in an options contract that is negotiated on the trading screen of the stock exchange.

At the beginning of every trading cycle which is fixed by the concerned stock exchange, it (stock exchange) prescribes in the case of stock options a series of strike rates based upon the prevailing market price of particular shares that are allowed to be traded in the F & O segment. In the case of index options, the strike rates are determined with reference to the index value in the cash segment.

These strike rates are based on the general market perception both bullish and bearish. Equal number of strike rates both upwards and downwards of the prevailing market price/index value are fixed by the stock exchange.

The stock exchange also fixes the size of the contracts that are traded in lots. When an investor chooses to trade in the options contracts, he has to choose a scrip or the Nifty, then assess whether the same will go up or down on the next settlement date and by how much. That is his gamble. Accordingly, he will select a strike rate which is the exercise price. He can then buy or sell a “call Option” or a “Put Option”.

A Call Option is an option to “buy”, that is, the contract is to buy the shares on a settlement date at the selected strike rate. A Put Option is an option to sell, that is, the contract is to sell the shares on the settlement date at the selected strike rate. In case the price of the underlying or the value of the index in the cash segment goes below the selected strike rate/exercise price, the buyer will have no attraction to exercise his option under the contract and will allow the contract to lapse and thereby lose whatever premium was paid by him. Premium amount is the maximum that the buyer can lose in case the market moves contrary to his perception. In case the price of the underlying or the index value in the cash segment were to go beyond the selected strike rate/exercise price, the buyer would certainly exercise his option under the contract depending upon how high the price or the stock index has gone after adjusting the premium amount.

These are some of the motivating factors which weigh with the investors in the options contracts. It is a one sided contract where the loss suffered, if any, by the buyer is limited only to the premium amount whereas the loss which could be suffered, if any, by the buyer is limited only to the premium amount whereas the loss which could be suffered by the writer of the contract (seller) is limitless. If during the period of the contract the market perception of the seller (writer) changes or the market starts moving contrary to his expectations, he may, in his anxiety to cap his losses, take a reverse position. He would then put in an offer or accept an offer of a higher premium for the same option and this in effect would result in his repurchasing the contract at a higher rate/premium to avoid greater losses.”

(Emphasis supplied)

21. Index – a stock market index is a measure of the relative value of a group of stocks in numerical terms. As the stocks within an index change value, the index value changes. NIFTY 50 is an index on National Stock Exchange which tracks the behaviour of 50 companies covering different sectors of the Indian economy.

22. Trading in Index – an investor can trade even the entire stock market by buying index futures instead of buying individual securities. The advantages of trading in index futures are- the contracts are highly liquid, the index futures provide higher leverage than any other stocks, it requires 16 comparatively low initial capital investment (only the premium), it has lower risk than buying and holding stocks, it is just as easy to trade the short side as the long side, the trader needs to study only one index instead of several stocks and finally, the contracts are settled in cash in the stock exchange and therefore, all problems related to bad delivery, fake or forged certificate etc. can be avoided.

23. The case at hand deals, inter alia, with questions related to synchronised trading. The concept of synchronised trading has been explained by SAT in Ketan Parekh v. Securities and Exchange Board of India.

To quote:

“20. …. “A synchronised trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. Every buy and sell order has to match before the deal can go through. This matching may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronised deal depending on the time when the buy and sell orders are placed. …”

Facts:

24. As mentioned before, this case involves three traders and three brokers.

Traders:

Rakhi Trading: Rakhi Trading was issued a show cause notice (hereinafter referred to as “SCN”) on 05.10.2007 alleging execution of non genuine transactions in the Futures and Options segment (hereinafter referred to as the “F & O segment”). The trades in question pertain to NIFTY options. In his decision, the A.O. analysed the trade logs and observed that the trades executed by Rakhi Trading matched with the counter-party Kasam Holding Private Limited in a few seconds. The counter-party to all the trades in the NIFTY contract was Kasam Holding Pvt. Ltd. and the reversals took place in a matter of minutes/hours. The A.O. also noted that on various occasions, when the time was not matched by the respective parties, the first order was placed at an unattractive price relative to market price. These transactions took place on 21.03.2007, 22.03.2007. 23.03.2007 and 30.03.2007 and resulted in a close out difference of Rs 115.79 18 lakhs without any significant change in the value of the underlying.

Tungarli: The SCN was issued to Tungarli on 05.10.2007. The allegation in the SCN was that through these synchronized transactions, one party booked profits and the other party booked losses. The trades pertained to future scrips. The A.O.’s order notes that the trades were reversed in all the cases in a matter of few seconds showing significant difference between the buy and sell trade prices. The change in positions took place without any significant change/negligible change in the price of the underlying security. The trades took place on 12.03.2007, 15.03.2007, 23.03.2007, 26.03.2007 and 28.03.2007 and the total profit made by Tungarli was Rs 64.52 lakhs.

TLB: The SCN was issued to TLB on 05.10.2007. The trades pertained to future scrips. As per the A.O.’s order, TLB traded through stock broker SMC Global Securities Ltd and the same broker is the counter party broker as well, trading on behalf of different clients. All the transactions undertaken by TLB resulted in loss to TLB and the total loss was Rs.38.69 lakhs. The trades in question took place on 22.01.2007, 23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and 06.02.2007. The A.O.’s order notes that in many cases, the trades were reversed in a matter of minutes showing significant difference in prices without any significant change in value of the underlying. The A.O.’s order notes that during investigation, it was also seen that when the time was not matched by the respective parties, the first order that was placed was at an unattractive price relative to the market price.

Brokers:

Indiabulls : The case pertains to 23 reverse trades in 21 futures and 2 options on 22 different scrips and one Bank Nifty futures. The A.O. takes into account the fact, that in many cases, the reversals took place in a matter of seconds/minutes without change in the value of the underlying. The A.O. records that the Indiabulls representative stated that they could not have known about the intention of the clients, however, the representative admitted that the trades were non-genuine and should not have taken place.

Angel: In the SCN dated 05.10.2007, the charge is that as a stock-broker, it executed 56 reversal trades. As per the A.O., these trades were reversed in a matter of a few minutes/ hours. However, the A.O. noted the positive steps taken by Angel in curbing such trades (post reversal trades) and submitted proof of its actions in this regard and therefore, a lesser penalty was imposed on Angel.

Prashant Jayantila l: The SCN was dated 05.10.2007. The case pertains to 19 reversal trades wherein the original trades were closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed.

25. The crux of the allegations in the show cause notices is that the parties were buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronised and reverse transactions.

26. After affording an opportunity for filing reply to the SCNs and a personal hearing, the A.O. passed a detailed order dated 26.03.2009 in the case of Rakhi Trading. Paragraphs 22 to 24 read as follows:

“22. If the individual trades are seen from the order log provided to the noticee, it is seen that the time difference between the buy and sell order is only in seconds. Most of the orders were matched in a time gap of 1, 2 or 3 seconds and many orders have matched to the exact second, i.e. time difference is 0 (zero).

This is proof enough to establish the existence of synchronization of trades; otherwise the trades would not have matched repeatedly to the exact second in the NIFTY Contracts which is the most active contract in the options segment. Hence it overrides the noticee’s submission that no material or data has been disclosed to substantiate the said allegation of “synchronization” of any trades.

23. On analysis of the reversal transactions undertaken by the noticee, it is seen that the percentage to market gross is in the range of 30 percent to 50 percent in the 14 contracts executed by the noticee. In two contracts of NIFTY, the percentage to market gross reached 50 percent. This accounts for a significant percentage of trades on the concerned days and the traded value was Rs.95.75 lakhs for those two reversal trades. The trade quantities are also high. The total traded value is Rs.503.00 lakh in a matter of just 4 (four) trading days. As submitted by the noticee, NIFTY moves constantly.

Also, NIFTY is the most active of the options contracts traded on the exchange and it has contributed to 92.21 percent of the contracts traded in the Options segment during March 2007. Further, the NIFTY options contracts contributed to 99.97 percent of the total Index Options contracts traded in March 2007 (source: NSE website). In such a scenario it is seen that the noticee’s counter party to all the trades in NIFTY contracts is Kasam Holding Pvt. Ltd. (trading through the broker Vibrant Securities Private Limited), this clearly gives an indication to the existence of a pre-arrangement/synchronization / matched trades between the clients.

Otherwise it does seem unrealistic that the orders should match exactly both quantity and price wise, just as a matter of coincidence, with the same party again and again. It is clear that there was an intention of creating a false or misleading appearance in the market and also that a manipulative /deceptive device was used for synchronization of trades.

24. The trades executed by the noticee in all NIFTY contracts, matched with the counter party client, Kasam Holding Pvt. Ltd. in less than a few seconds. It is pertinent to note here that the noticee executed all the reversal trades in a matter of minutes/hours, at a profit of Rs.107.79 lakh without any significant change in the value of the underlying security. This raises doubts about the genuineness of the transactions. The fact that such transactions took place repeatedly over a period of time reinstates the fraudulent nature of such trades.”

Thus, according to the A.O. a manipulative/deceptive devise was used for synchronization of trades and the trades were fraudulent/fictitious in nature. It was found that there is violation of Regulations 3(a), (b) and (c) and 4(1), (2)(a) and (b) of the PFUTP Regulations, 2003. Consequently, a penalty of Rs.1,08,00,000/- was imposed under Section 15HA of the SEBI Act, 1992. Appeal was filed under Section 15T before the SAT. An appeal was disposed of by order dated 11.10.2010 whereby SAT set aside the order of SEBI. The detailed consideration is available at paragraphs 5 to 8 of the SAT order in Rakhi Trading, which read as follows:

“5. Index in a capital market is a statistical indicator of how the market is functioning and acts as a barometer for market behaviour. It is not a product but a measure expressed in numbers and a benchmark against which financial or economic performance is evaluated. Unlike stocks in the cash segment, it is not traded as such though investors speculate on market behaviour using index as the underlying in the F & O segment. Nifty, the stock index of NSE, is computed using market capitalization weighted method (share price x number of outstanding shares) of fifty stocks being traded in the cash segment of NSE. It is a well diversified stock index covering 22 different sectors of the Indian economy.

The eligibility of a particular stock for being selected for Nifty index depends on the liquidity of the stock as well as the floating stock of the company. Nifty, therefore, is a very dynamic index which is not constant but evolves continuously. Obviously, to manipulate such a diverse and changing portfolio of stocks in the cash segment is extremely difficult, if not impossible by trading in the F & O segment.

It is also NSE’s stated position on its website that “stock index is difficult to manipulate as compared to stock prices, more so in India and the possibility of cornering is reduced. This is partly because an individual stock has a limited supply which can be cornered”. It is obvious that when Nifty is traded in options contracts, the movement of prices in that segment cannot have any impact on the price discovery system in the cash segment which is one of the allegations brought out in the ad-interim ex-parte order and the show cause notice.

The charge against the appellant in the show cause notice is that by executing trades in Nifty options in the F & O segment “the original trades were closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed without significant variations in the traded price of the underlying security”. The insinuation is that by executing manipulative trades in the F & O segment, Nifty index was sought to be tampered with.

This charge proceeds on the assumption that the movement of Nifty options in the F & O segment should be in harmony with the movement of Nifty index in the cash segment. This assumption is fallacious and we cannot agree. Movement of index in the cash segment does influence the index options in the F & O segment because the strike rate is directly linked with the index value in the cash segment. However, the converse is not always true. While transactions in the cash market are based on the current market price of the underlying derived by the principle of demand and supply and in the case of an index, the value depends on the performance of the stocks that constitute it, the pricing in the F & O segment is based on future expected events which may or may not happen.

Anticipated future events may not have a discernible effect on the cash segment today where delivery of shares is given/taken immediately. Such events may have a great impact on perceptions in the F & O market where the investor holds an open position and a continuous liability during the currency of the contract which is generally for one to three months with anticipation of future events which are always pregnant with all sorts of possibilities. Again, volatility and potential for greater losses may trigger movements in the F & O market without any equivalent cash market movements.

Further, the cash market may move up today but the prediction for the F & O market could be that at the end of a month, two months or three months the market may move down. Only short term investors like speculators trade in the F & O market whereas in the cash market long terms investors also trade. We are, therefore, satisfied that the movement in the two segments need not be in tandem. In the instant case the appellant executed Nifty option contracts and it must be remembered that Nifty index is determined by fifty highly liquid scrips which also vary from time to time and the index moves on the basis of their performance in the cash segment.

These movements cannot be in tandem with the movement of the price of Nifty options in the F & O segment because Nifty as an index is not capable of being traded in the cash segment. What is traded in the cash segment are the fifty stocks which constitute Nifty. To say that some manipulative trades in Nifty options in the F & O segment could influence the Nifty index is too farfetched to be accepted. The only way Nifty index could be influenced is through manipulation of the prices of all or majority of the scrips in the cash segment that constitute Nifty. This is extremely difficult, if not impossible. It is common case of the parties that the appellant traded only 13 Nifty option contracts in the F & O segment.

Assuming these trades were manipulative, could these ever influence the Nifty index. As already observed, Nifty index is a very large well diversified portfolio of stocks which is not capable of being influenced much less manipulated by the movement of prices in the F & O segment particularly by the handful of trades executed by the appellant. In this view of the matter, we have no hesitation to hold that the 13 trades in Nifty options executed by the appellant had no impact on the market or affected the investors in any way nor did these influence the Nifty index in any manner. The charge in this regard must fail.

6. Another charge against the appellant is that its trades in Nifty options were fictitious transactions which were synchronized and reversed resulting in the creation of misleading appearance of trading in those options. Derivative segment is highly volatile and involves a complexed form of trading with high risks and the players in this segment do not follow the herd mentality as is often noticed in the cash segment but take decisions based on their own perception of the market. The number of persons trading in this segment is comparatively much less than those in the cash segment.

The Board has found that only 14 contracts executed by the appellant in the options segment constituted 30 to 50 per cent of the market gross in that segment though nifty is the most active of the options contracts traded on the exchange and contributed 92.21 per cent of the trades during March, 2007. This is indicative of the fact that the number of players in the options segment is very less. Artificial/fictitious trades in the cash segment do give a false appearance of active trading in a particular scrip by increasing volumes which tend to lure the lay investors to invest in that scrip .

The impression given to the investors is that the scrip is highly liquid and much in demand and this interferes with the price discovery mechanism of the exchange and it is for this reason that such trades are held illegal in the cash segment. This, however, cannot be the case in the F & O segment. Since all the trades are executed through the stock exchange and settled in cash through its mechanism they cannot be said to be artificial trades creating a misleading appearance of trading in the options. The charge is misconceived.

7. This brings us to the issue of synchronization of the buy and sell orders in the Nifty option contracts executed by the appellant where the counter party in the 13 impugned transactions was the same entity. Impugned order records that Nifty contracts which are the most active contracts in the options segment cannot be traded in the way the appellant has traded matching its orders to seconds with the counter party client. This, according to the adjudicating officer, was a pre-planned arrangement between the appellant and its counter party and their intention was to create a false and misleading appearance in the market and a manipulative device was used for synchronizing the trades.

The learned senior counsel appearing for the appellant did not dispute the fact that the trades had been synchronized and reversed but he argued that these did not manipulate the market and that only the synchronized trades which manipulate the market are prohibited. He placed reliance on a judgment of this Tribunal in Ketan Parekh vs. Securities and Exchange Board of India, Appeal No.2 of 2004 decided on 14.7.2006. He also referred to the order passed by the Board in the case of ICICI Brokerage Services Ltd. wherein a similar view had been taken and strenuously argued that since the synchronized trades of the appellant did not manipulate the market, the impugned order deserves to be set aside.

We find merit in this contention. The fact that the trades executed by the appellant had been synchronized with the counter party is not really in dispute before us. We have already held that the  trades in Nifty options executed by the appellant had no impact on the market or affected the investors or the Nifty index in any manner. In Ketan Parekh’s case (supra) this Tribunal had observed that synchronized trades per se are not illegal but only those which manipulate the market in any manner are the ones that are prohibited and violate the Regulations. Relying upon the observations made by this Tribunal in Nirmal Bang Securities Pvt. Ltd. vs. Securities and Exchange Board of India [2004] 49 SCL 421, the then chairman of the Board while dealing with the synchronized trades executed by the appellant therein observed as under:-

“For the above reason, although it cannot be said that synchronized deals are pre se illegal, for the same reason, it cannot be said that 30 all synchronized transactions are legal and permitted. All synchronized transactions which have the effect of manipulating the market are against fair market practices and hence undesirable and prohibited.” We have reproduced the observations from the order of the Board only to highlight that the Board also understands that the law is that only such synchronized trades violate the Regulations which manipulate the market. Since the impugned trades of the appellant in the F & O segment had no impact on the market, we hold that they did not violate the Regulations.

Shri Kumar Desai learned counsel for the respondent was equally emphatic in arguing that the appellant had not only executed synchronized trades but had also reversed them during the course of the trading with the same counter party and, therefore, the trades were fictitious and non-genuine and that the adjudicating officer was justified in holding so and imposing the monetary penalty for violating the Regulations. He placed strong reliance on the observations of the Tribunal in Ketan Parekh’s case (supra) wherein it has been held that reversal of trades between the same parties results in fictitious trades and they are illegal. We are unable to agree with him.

The observations in Ketan Parekh’s case were made with reference to the trades that were executed in the cash segment and we are clearly of the view that all those observations cannot apply to the trades executed in the F & O segment. Reverse trades in the cash segment have been held to be illegal and violate the Regulations because there is no “change of beneficial ownership” in the traded scrip. More- over, in the cash segment the scrip is actually traded entailing not only “change of beneficial ownership” but also physical delivery/movement of the traded scrip.

When this does not happen in the cash segment, the trade is described as a fictitious trade creating false volumes which manipulates the market. The scenario in the F & O segment, particularly in the options contracts with which we are concerned in the present case, is altogether different from that of the cash segment. In the F & O segment there is no concept of “change of beneficial ownership” since what is traded in this segment are contracts and not the underlying stock or index and it is only through cash settlement that the trade is concluded and no physical delivery of any asset is involved. In this view of the matter, synchronized and reversed trades in Nifty options in the F & O segment can never manipulate the market which, in the present context, means the value of the Nifty index in the cash segment.

To repeat, we may again observe that it is almost impossible to manipulate the Nifty index which consists of fifty well diversified highly liquid stocks in the cash segment. Since the trades of the appellant were settled in cash through the stock exchange mechanism, they were genuine and these could not create a false or misleading appearance of trading in the F & O segment. It is the Board’s own case that the appellant made profits in all these transactions and the counter party suffered losses.

8. When we analyse the nature of the trades executed by the appellant, we find that it played in the derivative market neither as a hedger nor as a speculator and not even as an arbitrageur. The question that now arises is why did the appellant execute such trades with the counter party in which it continuously made profits and the other party booked continuous losses. All these trades were transacted in March 2007 at the end of the financial year 2006-07.

It is obvious and, this fact was not seriously disputed by the learned senior counsel appearing for the appellant, that the impugned trades were executed for the purpose of tax planning. The arrangement between the parties was that profits and losses would be booked by each of them for effective tax planning to ease the burden of tax liability and it is for this reason that they synchronized the trades and reversed them.

They have played in the market without violating any rule of the game. This Tribunal in Viram Investment Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal no.160 of 2004 decided on February 11, 2005 while dealing with a contention as to whether trades could be executed through the stock exchange for tax planning, made the following observations which are relevant for our purpose:- “Even if we consider transactions undertaken for tax planning as being non genuine trades, such trades in order to be held objectionable, must result in influencing the market one way or the other.

We do not find any evidence of that either in the investigation conducted by the Bombay Stock Exchange, copy of which has been annexed to the memorandum of appeal or in the impugned order that there was any manipulation. ……… Trading in securities can take place for any number of reasons and the authorities enquire into such transactions which artificially influence the market and induce the investors to buy or sell on the basis of such artificial transactions.” The observations even though made in the context of the cash segment are equally applicable to the F & O segment.

We are in agreement with the aforesaid observations and relying thereon we hold that the impugned transactions in the case before us do not become illegal merely because they were executed for tax planning as they did not influence the market. The learned counsel for the respondent Board drew our attention to Regulation 3(a), (b) & (c) and Regulation 4(1) and 4(2)(a) & (b) of the Regulations to contend that the trades of the appellant were in violation of these provisions.

We cannot agree with him. Regulation 3 of the Regulations prohibits a person from buying, selling or otherwise dealing in securities in a fraudulent manner or using or employing in connection with purchase or sale of any security any manipulative or deceptive device in contravention of the Act, Rules or Regulations. Similarly, Regulation 4 prohibits persons from indulging in fraudulent or any unfair trade practices in securities which include creation of false or misleading appearance of trading in the securities market or dealing in a security not intended to effect transfer of beneficial ownership. Having carefully considered these provisions, we are of the view that market manipulation of whatever kind, must be in evidence before any charge of violating these Regulations could be upheld. We see no trace of any such evidence in the instant case.

We have, therefore, no hesitation in holding that the charge against the appellant for violating Regulations 3 and 4 must also fail.” (Emphasis Supplied) 27. The SAT has also taken a view that the circular dated 10.03.2005 issued by the NSE was not legally binding.

The members were advised to desist from entering orders/transactions on illiquid securities/contracts where some set of members/clients executed reversing transactions/both buy and sell at abnormal price differences in premiums that had no relevance to the movement in prices of the underlying. In the said circular, members were also advised to desist from entering such orders which prima facie appeared to be non-genuine and further advised to put in appropriate internal systems for checking such orders. SAT held that only SEBI-the Regulator can issue and should issue such directions.

28. SAT, in the case of Tungarli, squarely followed its decision in Rakhi Trading. In TLB Securities also, after briefly 35 discussing the facts, SAT relied on Rakhi Trading to set aside the SEBI order.

29. As far as the brokers are concerned, in addition to relying on its decision in Rakhi Trading, SAT held in Indiabulls Securities that the brokers must succeed for two additional reasons. To quote: “7. The appellant before us which is a stock broker must also succeed for two additional reasons as well. The appellant is said to have executed trades on behalf of its clients which were reversed between the same parties.

Assuming that these trades were manipulative and had been executed by the clients with a premeditated plan, the fact still remains that the appellant only acted as a broker and carried out the directions of its clients which it ought to. Could the appellant be held liable merely because it acted as a broker? This question has come up for the consideration of this Tribunal time and again and this is what was held in Kasat Securities Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal No. 27 of 2006 decided on June 20, 2006 wherein this Tribunal observed as under:-

“The trades, on the face of it, appear to be fictitious and we shall proceed on that assumption. It is obvious that these trades were executed by the clients and the appellant acted only as a broker. If the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding of the Board that it aided 36 and abetted the parties to execute fraudulent transactions. Having heard the learned counsel for the parties and after going through the record we are satisfied that this link is missing.

There is no material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the same persons. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and the learned counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or the seller ever getting to meet.

Therefore it was not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the transactions but it did not do so. As a broker, the appellant would welcome any person who comes to buy or sell shares.

The Board in the impugned order while drawing an inference that the appellant must have known about the nature of the transactions has observed that the appellant failed to enquire from its clients as to why they were wanting to sell the securities. We do not think that any broker would ask such a question from its clients when he is getting business nor is such a question relevant unless, of course, he suspects some wrong doing for which there has to be some material on the record.”

In Kishor R. Ajmera vs. Securities and Exchange Board of India, Appeal No. 13 of 2007 decided on February 5, 2008 this Tribunal again observed as under:-

“Merely because two clients have executed matched trades, it does not follow that their brokers were necessarily a party to the game plan. On a screen based trading through the price order matching mechanism of the exchange, it is not possible for either of the brokers (or sub-brokers) to know who the counter party or his broker (or sub broker) is and when the trade is executed, their names or codes do not appear on the screen.

A unique feature of the stock exchange is that, unlike other moveable properties, securities are bought and sold among the 38 unknowns who never get to meet and they are traded at prices determined by the forces of demand and supply. If the Board is to hold the broker (or the sub-broker) responsible for a matching trade, it has to allege and establish that the broker (or the sub-broker) was aware of the counter party or his broker at the time when the trade was executed. There is no such allegation in this case.” The aforesaid observations apply with full force to the facts of the present case because the trading system is the same, both in the cash segment as well as in the F & O segment.

As already observed, even if we assume that the appellant’s clients had executed reverse trades with the same counter party for some mischief, we cannot impute knowledge of the same to the appellant when the anonymity of the trading system does not allow a broker to know who the counter party or counter party broker is. The screen based trading system provides complete anonymity and the trades are executed through the price order matching mechanism. In the instant case, no link other than broker client relationship between the appellant and its clients has been established, let alone any relation with the counter parties or the counter party brokers.

Moreover, the appellant executed only 23 trades on behalf of clients with a total close out difference of Rs. 35.44 lacs (positive) which have been called in question. Having regard to the fact that the appellant had executed 1,69,71,078 trades for 1,21,306 clients with a turnover of 39 Rs. 1,11,659 crores during the investigation period we are of the view that in terms of materiality and substance this miniscule number of trades done on behalf of 15 clients were not likely to raise any alarm for the appellant with a client base of over 4,70,000 clients. In these circumstances, we cannot hold the appellant liable for the impugned trades.

8. The other additional reason for which we cannot hold the appellant liable is that out of the 23 impugned trades that it executed on behalf of its clients, were executed directly by the clients through the Internet. NSE by its circular of August 24, 2000 has set detailed guidelines on Internet based trading through order routing system which route client orders to the exchange trading system and the software for this service has to be in compliance with the parameters set by the Board.

The appellant as a broker has very little direct control over such trades though it is recorded as a broker in those trades. Having regard to the total volume of trades executed by the appellant and the wide client base that it has, the learned counsel for the appellant was right in contending that the appellant could not be expected to put every single trade under its scanner on a continuous basis particularly those executed by the clients through the Internet and that the impugned trades being so miniscule, there was no occasion for the appellant to get a red alert. It is a fact that the clients had sufficient margins with the appellant with no credit defaults at any stage and that all the trades were settled in cash through the clearing system of the exchange.

In this background, we find no 40 evidence of lack of due diligence on the part of the appellant while executing the impugned transactions which could make him guilty of violating the code of conduct prescribed for the stock brokers. The charge must, therefore, fail.” 30. Aggrieved by the SAT orders, SEBI is before us under Section 15Z of the SEBI Act.

31. We have extensively heard learned senior counsel and other counsel appearing on both sides. SEBI has assailed the SAT order on the ground that SAT has misunderstood SEBI’s case. It is the submission of Mr. Gourab Banerji, learned Senior Counsel appearing for SEBI, that the stock exchange is a platform created to facilitate efficient and fair trading. However, the transactions between the parties were non-genuine and orchestrated which is prohibited under the PFUTP Regulations. The Show Cause Notice makes it clear that the transactions were a misuse of market mechanism as they were not genuine trades. The non-genuineness of these transactions is evident from the fact that there was no commercial basis to suddenly, within a matter of minutes, reverse a transaction when the value of the underlying had not undergone any significant change.

32. According to SAT, the synchronization and reversal of trades effected by the parties with a significant price difference, some in a few seconds and majority, in any case, on the same day had no impact on the market and it has not affected the NIFTY index in any manner or induced investors. SAT has held that such trades are illegal only when they manipulate the market in any manner and induce investors. It has also taken a view that there being no physical delivery of any asset, there is no change of beneficial ownership and what is traded in the F & O segment are only contracts and hence, such synchronised and reverse trades in NIFTY options in the F & O segment “can never manipulate the market”.

It has also held that the trades being settled in cash through a stock exchange mechanism, are genuine and therefore cannot create a false or misleading appearance of trading in the F & O segment. Further, any trade to be objectionable must result in influencing the market one way or the other. SAT held that these trades were for the purpose of tax planning which is not violative of any regulation. We are not inclined to get in to the issue of tax planning as it was not mentioned in the show cause notices.

33. We find it difficult to appreciate the stand taken by the SAT which is endorsed by the learned senior counsel appearing for the respondents. Mr. Chidambaram, learned senior counsel appearing for Rakhi Trading argues that the SAT decision is valid and proper. Reliance is also placed on the case of Ketan Parekh (supra) in which SAT held that synchronised trades are not per se illegal. As far as reversal of trades is concerned, the senior counsel has sought to distinguish Ketan Parekh (supra) as it pertained to dealings in the cash segment whereas the present case deals with the F & O segment. The learned senior counsel has strenuously argued that no rules of the game have been violated.

34. We are unable to agree with the arguments of the learned senior counsel appearing for Rakhi Trading. Regulation 4(1) in clear and unmistakable terms has provided that “no person shall indulge in a fraudulent or an unfair trade practice in securities”. In Securities and Exchange Board of India and Ors. v. Shri Kanaiyalal Baldevbhai Patel 43 and Ors.3, it has been held by this Court that a trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between the parties engaged in business transactions. To quote:

“31. Although unfair trade practice has not been defined under the regulation, various other legislations in India have defined the concept of unfair trade practice in different contexts. A clear cut generalized definition of the ‘unfair trade practice’ may not be possible to be culled out from the aforesaid definitions. Broadly trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between parties engaged in business transactions.

It is to be noted that unfair trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of ‘unfairness’ appears to be broader than and includes the concept of ‘deception’ or ‘fraud’.

xxx xxx xxx

60. Coupled with the above, is the fact, the said conduct can also be 3 2017 SCC Online SC 1148. 44 construed to be an act of unfair trade practice, which though not a defined expression, has to be understood comprehensively to include any act beyond a fair conduct of business including the business in sale and purchase of securities. However the said question, as suggested by my learned Brother, Ramana, J. is being kept open for a decision in a more appropriate occasion as the resolution required presently can be made irrespective of a decision on the said question.”

35. Having regard to the fact that the dealings in the stock exchange are governed by the principles of fair play and transparency, one does not have to labour much on the meaning of unfair trade practices in securities. Contextually and in simple words, it means a practice which does not conform to the fair and transparent principles of trades in the stock market. In the instant case, one party booked gains and the other party booked a loss. Nobody intentionally trades for loss. An intentional trading for loss per se, is not a genuine dealing in securities.

The platform of the stock exchange has been used for a non-genuine trade. Trading is always with the aim to make profits. But if one party consistently makes loss and that too in preplanned and rapid reverse trades, it is not genuine; it is an unfair trade practice. Securities market, as the 1956 Act provides in the preamble, does not permit “undesirable transactions in securities”. The Act intends to prevent undesirable transactions in securities by regulating the business of dealing therein.

Undesirable transactions would certainly include unfair practices in trade. The SEBI Act, 1992 was enacted to protect the interest of the investors in securities. Protection of interest of investors should necessarily include prevention of misuse of the market. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects the market integrity.

36. Ordinarily, the trading would have taken place between anonymous parties and the price would have been determined by the market forces of demand and supply. In the instant case, the parties did not stop at synchronised trading. The facts go beyond that. The trade reversals in this case indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in 46 these trades. The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market.

37. We also find it difficult to appreciate the stand of SAT that the rationale of change of beneficial ownership does not arise in the derivatives segment. No doubt, as in the case of trade in a scrip in the cash segment, there is no physical delivery of the asset. However, even in the derivative segment there is a change of rights in a contract. In the instant case, through reverse trades, there was no genuine change of rights in the contract.

SAT has erred in its understanding of change in beneficial ownership in reverse trades. Even in derivatives, the ownership of the right is restored to the first party when the reverse trade occurs. In this context, the discussion in Ketan Parekh (supra) assumes significance:

“20. …As already observed ‘synchronisation’ or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal.

Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available.

The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive.

Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.” (Emphasis Supplied) From the facts before us, it is clear that the traders in question did not intend to transfer beneficial ownership and therefore these trades are non genuine.

38. Rather than allowing the market forces to operate in their natural course, the traders repeatedly carried out the 48 impugned transactions which deprived other market players from full participation. The repeated reversals and predetermined arrangement to book profits and losses respectively, made it clear that the parties were not trading in the normal sense and ordinary course. Resultantly, there has clearly been a restriction on the free and fair operation of market forces in the instant case.

39. Regulation 2(1)(c) defines fraud. Under Regulation 2(1) (c)(2) a suggestion as to a fact which is not true while he does not believe it to be true is fraud. Under Regulation 2(1) (c)(7), a deceptive behaviour of one depriving another of informed consent or full participation is fraud. And under Regulation 2(1)(c)(8), a false statement without any reasonable ground for believing it to be true is also fraud. In a synchronised and reverse dealing in securities, with predetermined arrangement to book loss or gain between pre-arranged parties, all these vices are attracted.

40. Regulation 3(a) expressly prohibits buying, selling or otherwise dealing in securities in a fraudulent manner. Under Regulation 4(2) dealing in securities shall be deemed to be fraudulent if the trader indulges in an act which creates a 49 false or misleading appearance of trading in the securities market. It is a deeming provision. Such trading also involves an act amounting to manipulation of the price of the security in the sense that the price has been artificially and apparently prefixed. The price does not at all reflect the value of the underlying asset. It is also a transaction in securities entered into without any intention of performing it and without any intention of effecting a change of ownership of such securities, ownership being understood in the limited sense of the rights in the contract.

41. According to SAT, only if there is market impact on account of sham transactions, could there be violation of the PFUTP Regulations. We find it extremely difficult to agree with the proposition. As already noted above, SAT has missed the crucial factors affecting the market integrity, which may be direct or indirect. The stock market is not a platform for any fraudulent or unfair trade practice. The field is open to all the investors. By synchronization and rapid reverse trade, as has been carried out by the traders in the instant case, the price discovery system itself is affected. Except the parties who have pre-fixed the price nobody is in the position to participate in the trade. It also has an adverse impact on the fairness, integrity and transparency of the stock market.

42. We are fortified in our conclusion by the judgment of this Court in Securities And Exchange Board of India v. Kishore R. Ajmera4, though it is a case pertaining to brokers, wherein it has been held at paragraph 25:

“25. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors’ confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors’ confidence in the capital market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market which is vital to the growth and development of the economy.

The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light.” In this case it was also held that in the absence of direct proof of meeting of minds elsewhere in synchronised transactions, the test should be one of preponderance of 4 (2016) 6 SCC 368 51 probabilities as far as adjudication of civil liability arising out of the violation of the Act or the provision of the Regulations is concerned. To quote:

“31. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors…” We do not think that those illustrations are exhaustive. There can be several such situations, some of which we have discussed hereinabove.

43. The traders thus having engaged in a fraudulent and unfair trade practice while dealing in securities, are hence liable to be proceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations. Appeal Nos.1969/2011, 3175/2011 and 3180/2011 are hence allowed. The orders of the Securities Appellate Tribunal are set aside and that of the SEBI are restored to the extent indicated above.

44. As far as brokers are concerned, we are of the view that there is hardly any evidence on their involvement so as to 52 proceed against them for violation of Regulation 7A of the Brokers Regulations and PFUTP Regulations. Merely because a broker facilitated a transaction, it cannot be said that there is violation of the Regulation. SEBI has not provided any material to suggest negligence or connivance on the part of the brokers. As held by this Court in Kishore R. Ajmera (supra), there are several factors to be considered.

We would especially like to refer to the case of Angel Trading wherein the broker repeatedly wrote to the National Stock Exchange informing them about trades in the options segment that were executed at unrealistic prices and requesting them to put in mechanisms in the Options segment so that these trades are not allowed to enter the system. In the absence of any material provided by SEBI to prove the charges against the brokers, particularly regarding aiding and abetting fraudulent or unfair trade practices, we are of the opinion that the orders of SEBI against the brokers should be interfered with. Accordingly, the appeals filed against the brokers are dismissed.

45. Before concluding, we would like to reiterate the observations made by this Court in Kishore R. Ajmera (supra) and Kanaiyalal Patel (supra) regarding the need for a more comprehensive legal framework governing the securities market. As the market grows, ingenuous means of manipulation are also employed. In such a scenario, it is essential that SEBI keeps up with changing times and develops principles for good governance in the stock market which ensure free and fair trading.

46. There shall be no order as to costs.

…………………..J. (KURIAN JOSEPH)

New Delhi;

February 8, 2018.

Securities and Exchange Board of India Vs. Rakhi Trading Private Ltd.

[Civil Appeal No. 1969 of 2011]

[Civil Appeal Nos. 3174-3177 of 2011]

[Civil Appeal No. 3180 of 2011]

R. BANUMATHI, J.

I have gone through the judgment proposed by His Lordship Justice Kurian Joseph. I am in agreement with the conclusion arrived at by His Lordship. However, in view of the importance of the issues involved, I prefer to give my own additional reasonings also for my concurrence.

2. Since the issues involved in all the appeals are one and the same, appeals filed by SEBI pertaining to the traders and the brokers were heard together. For convenience and reference on facts, I have taken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the lead case.

3. Brief facts of the case are that in 2007, SEBI had examined the nature of transactions occurring in the derivative segment of the capital market. Upon examination of the trading data of the Future and Option Segment (herein after referred as “F & O Segment”) on the NSE for the period January to March, 2007, it was observed that the brokers at NSE were buying and selling almost equal quantities of contracts within the day. Moreover, it was noticed that such buy/sell orders were synchronized [Synchronized trade is one where buy and sell orders are placed simultaneously for the same volume].

In most of the cases, the same quantity and in few cases, substantially the same quantity of the original trade was closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed without significant variations in the traded price of the underlying security.

After preliminary examination into the trading of F & O contracts, SEBI identified that certain entities including the respondent-Rakhi Trading operating in the derivative segment had executed fictitious and non-genuine trades. Exercising its powers under Section 19 read with Section 11B and 11D of the Securities and 56 Exchange Board of India Act, 1992, (for short ‘SEBI Act, 1992’) the Whole Time Member of the Board had passed an ex parte order directing the respondent and other entities to cease and desist from indulging in the violations till further orders as they were found indulging in non-genuine transactions.

4. Meanwhile, in terms of provisions of Rule 4(1) of the Securities and Exchange Board of India Rules, 1995, the Board issued a show cause notice to the respondent on 05.10.2007 alleging that the respondent executed synchronized/matched/reversal trades and indulged in non-genuine transactions with certain clients/stock brokers during the period of examination in the F & O Segment by enclosing a report showing fourteen Options Contracts executed by it in F & O Segment between 21st March to 30th March, 2007 with a total close out difference (COD) of Rs. 1,15,79,312.15/- i.e. net profit of Rs. 115.79 lakhs, thereby violating Regulations 3(a), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent and

Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short “PFUTP Regulations”). On the show cause notice, the respondent, inter alia, contended that the impugned transactions were genuine trades, traded on the screen in anonymity in compliance with the rules and regulations of the 57 exchange for trading in Options Segment and the said transactions in no manner undermined price discovery or influenced the market.

5. Upon consideration of the findings in the preliminary enquiry and submissions of the respondent, the Adjudicating Officer found that most of the trades i.e. buying and selling of contracts within a gap of few seconds between the same parties through same set of brokers matched and found that it is unrealistic that the orders would match exactly both the quantity and price and with the same party again and again. The Adjudicating Officer further held that manipulative device was used for synchronization of trades and the trades were fraudulent/fictitious in nature.

After referring to SAT’s judgment in Ketan Parekh v. SEBI (Appeal No. 2 of 2004) and other judgments, the Adjudicating Officer found that the respondent has executed synchronized/reversal trades, in violation of PFUTP Regulations, 2003 and imposed a penalty of Rs.1,08,00,000/- on the respondent in terms of the provisions of Section 15HA of SEBI Act, 1992.

6. On appeal by the respondent, Securities Appellate Tribunal (SAT) set aside the order of the Adjudicating Officer and held that NIFTY is a large well diversified index of stocks which is not capable of being influenced. SAT further held that the thirteen trades in the 58 NIFTY options executed by the respondent had no impact on the market and those transactions did not influence the NIFTY index in any manner. SAT held that the impugned transactions do not become illegal merely because they were executed for tax planning as they did not influence the market. Holding that there has been no violation of any regulation of SEBI, SAT set aside the order of the Adjudicating Officer. Being aggrieved, SEBI has preferred this statutory appeal under Section 15Z of SEBI Act, 1992.

RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS

7. Section 12-A contained in Chapter V-A of the SEBI Act, 1992 deals with “Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control” and reads as follows:

12A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.-No person shall directly or indirectly-

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which 59 are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.

8. Section 30 of the SEBI Act reads as follows:-

30. Power to make regulations.-

(1) The Board may, with the previous approval of the Central Government by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. ………..

9. Section 15HA of the Act which deals with penalty for fraudulent and unfair trade practices, Section 15HB which deals with penalty for contravention where no separate penalty has been provided and Section 15J which lays down the factors to be taken into account while adjudging the quantum of penalty read as follows:

15HA. Penalty for fraudulent and unfair trade practices.-If any person indulges in fraudulent and unfair trade practices relating to securities he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.

15HB. Penalty for contravention where no separate penalty has been provided.- Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

15J. Factors to be taken into account by the adjudicating officer.-While adjudging the quantum of penalty under Section 15-I, the adjudicating officer shall have due regard to the following factors, namely-

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default.

10. Section 12A has to be read along with the provisions of the PFUTP Regulations, 2003, SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3 of the PFUTP Regulations, 2003 deals with “Prohibition of certain dealings in securities”.

Regulation 4 deals with “Prohibition of manipulative, fraudulent and unfair trade practices”. Regulation 2 (1)(c) defines “fraud”. For relevant Capital Market Terms, I have made reference to SEBI Act and K. Sekar’s Guide to SEBI, Capital Issues, Debentures & Listing, Lexis Nexis fourth Edition 2017 and Economics 61 of Derivatives by Cambridge University Press by T.V. Somanathan and V. Anantha Nageswaran. To avoid repetition, I refrain from referring to the explanation of the relevant Capital Market Terms.

11. Re-Contention: The impugned trades were normal transactions traded on the system and not fictitious transactions:- Contention of the respondent is that the impugned trades were normal transactions traded on the system maintaining complete anonymity and the trades were not illegal and the respondent has not violated the provisions of SEBI Regulations. Respondent-Rakhi Trading Pvt. Ltd. contended that the trading was done on automated screen based trading and it was not possible for them to know who the counter party was and therefore, the synchronization of trade was a mere coincidence. Per contra, SEBI maintained that the respondent-Rakhi Trading and the counter party-Kasam Holding Pvt. Ltd. had prior understanding and have thwarted the checks and balances of the trading system by executing non-genuine transactions with ulterior purpose.

12. To appreciate the contentious issues raised by the parties, I refer to the impugned reversal trade transactions:

Trade Date and Time

Buy Order Time

Sell Order Time

Time diff bet- ween Buy & Sell Order

Strike Price

Trade Price

Buy Client Name

Sell Client Name

Total traded volume

Diff. in price of 2 legs of the trade

Close out Diffe- rence

% Market Gross

21-Mar-07 14:50:28

14:50:28

14:50:27

0:00:01

3,930.00

270.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT. LTD

10000

160

40.82

21-Mar-07 15:06:45

15:06:42

15:06:45

0:00:03

3,930.00

110.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10000

1600000

21-Mar-07 11:37:43

11:37:43

11:37:37

0:00:06

3,730.00

112.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

4750

45

49.74

21-Mar-07 12:04:05

12:04:05

12:04:05

0:00:00

3,730.00

67.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

4750

213750

21-Mar-07 14:33:19

14:33:19

14:33:18

0:00:01

# 120

12.25

SPARK SECU- RITIES P LTD

RAKHI TRADING PVT LTD

80000

10

31.5

21-Mar-07 14:53:18

14:53:16

14:53:18

0:00:02

# 120

2.25

RAKHI TRADING PVT LTD

SPARK SECU- RITIES P LTD

80000

800000

21-Mar-07 12:04:51

12:04:51

12:04:50

0:00:01

3,650.00

115.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10000

58

49.02

21-Mar-07 12:52:19

12:52:19

12:52:18

0:00:01

3,650.00

173.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

8000

50

21-Mar-07 13:07:20

13:07:20

13:07:19

0:00:01

3,650.00

165.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

2000

564000

22-Mar-07 14:02:25

14:02:25

14:02:23

0:00:02

4,190.00

410.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11500

125

38.59

22-Mar-07 11:39:28

11:39:28

11:39:26

0:00:02

4,190.00

285.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11500

1437500

22-Mar-07 15:02:37

15:02:37

15:02:36

0:00:01

3,960.00

190.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11700

89

50

22-Mar-07 15:23:15

15:23:15

15:23:15

0:00:00

3,960.00

101.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11700

1041300

Trade Date and Time

Buy Order Time

Sell Order Time

Time diff bet- ween Buy & Sell Order

Strike Price

Trade Price

Buy Client Name

Sell Client Name

Total traded volume

Diff. in price of 2 legs of the trade

Close out Diffe- rence

% Market Gross

22-Mar-07 10:15:21

10:15:21

10:15:21

0:00:00

4,050.00

200.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10500

85

35.84

22-Mar-07 11:37:08

11:37:08

11:37:07

0:00:01

4,050.00

285.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10500

892500

23-Mar-07 10:22:37

10:22:37

10:22:37

0:00:00

3,880.00

190.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11600

133

30.05

23-Mar-07 11:14:05

11:14:05

11:14:04

0:00:01

3,880.00

57.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11600

1542800

23-Mar-07 13:18:21

13:18:18

13:18:21

0:00:03

3,930.00

32.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10500

54

30

23-Mar-07 14:16:36

14:16:36

14:16:35

0:00:01

3,930.00

86.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10500

567000

23-Mar-07 13:19:06

13:19:06

13:19:05

0:00:01

3,960.00

63.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10700

52

31.6

23-Mar-07 14:17:49

14:17:49

14:17:49

0:00:00

3,960.00

115.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10700

556400

23-Mar-07 12:17:02

12:16:59

12:17:02

0:00:03

4,050.00

155.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11500

72

41.07

23-Mar-07 13:15:42

13:15:42

13:15:41

0:00:01

4,050.00

227.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11500

828000

23-Mar-07 12:17:44

12:17:44

12:17:44

0:00:00

4,150.00

230.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11600

72

50

23-Mar-07 13:16:19

13:16:19

13:16:19

0:00:00

4,150.00

302.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11600

835200

30-Mar-07 11:36:40

11:36:37

11:36:40

0:00:03

3,810.00

80.25

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

8950

39.75

49.58

30-Mar-07 11:48:44

11:48:44

11:48:44

0:00:00

3,810.00

120.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

8950

355762.5

30-Mar-07 14:30:04

14:30:04

14:30:04

0:00:00

3,550.00

270.00

RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11900

29

46.21

30-Mar-07 14:43:02

14:43:00

14:43:02

0:00:02

3,550.00

299.00

KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11900

345100

13. Synchronized Trading: As per the Oxford dictionary the word ‘synchronize’ means “cause to occur at the same time; be simultaneous”. A synchronized trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. [Ketan Parekh v. SEBI, Manu/SB/0229/2006]

14. Synchronized trade is one wherein ‘buy and sell’ orders are placed simultaneously for the same quantity and price they wish to transact at substantially the same time. Synchronized trades are not illegal provided that they are executed on the screens of the exchange in the price and order matching mechanism of the exchanges just like any other normal trade. As per SEBI’s circular No.SMDRP/ POLICY/CIR-32/99 dated 14.09.1999, “All negotiated deals…… shall be executed only on the screens of the exchanges in the price and order matching mechanism of the exchanges just like any other 64 normal trade.”. In the said circular, it was stated that “The above decision was taken as negotiated deals avoid transparency requirements, do not contribute to price discovery and some investors do not have benefit of the best possible price and militate against the basic concept of stock exchanges, which are meant to bring together a large number of buyers and sellers in an open manner.”.

(Reference: https://www.sebi.gov.in/legal/circulars/sep-1999/negotiated-deals_186 29. html)

15. In Ketan Parekh v. SEBI Manu/SB/0229/2006, the Securities Appellate Tribunal (SAT) has considered the circumstances under which “Synchronized trade” will be legal and held as under: “There are yet another type of transactions which are commonly called synchronized deals. The word ‘synchronise’ according to the Oxford dictionary means “cause to occur at the same time; be simultaneous”. A synchronized trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers.

Every buy and sell order has to match before the deal can go through. This matching may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronized deal depending on the time when the buy and sell orders are placed. There are deals which match off market i.e., the buyer and the seller agree on the price and quantity and execute the transaction outside the market and then report the same to the exchange. These are also called negotiated transactions…… It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise.

It would, therefore, follow that a synchronized trade or a trade that matches off market is per se not illegal. Merely because a trade was crossed on the floor of the stock 65 exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronized transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations….”

[underlining added]

16. A synchronized transaction will become illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and with a view to manipulate the price or volume of the scrip or with some ulterior purpose. In Ketan Parekh case, SAT held as under: “….. A synchronized transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium.

Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available.

The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.”

(underlining added)

17. In the present case, all the fourteen transactions (except one) pertaining to Nifty were synchronized. Be it noted that as pointed out by SAT in para (7) of its order, the respondent did not dispute the fact 66 that “….trades had been synchronized and reversed….”. The respondent only contended that the impugned “synchronized trade’ did not manipulate the market and that what is prohibited are only the synchronized trades and that the impugned trades were normal transactions and the respondent had not violated the provisions of PFUTP Regulations. In the context of the stand taken by Rakhi Trading before SAT, it is now not open to respondent Rakhi Trading to contend that the transactions were not synchronized and reversed.

18. By perusal of details of ‘buy and sell’, ‘volume of trade’ and ‘timing of trade’ of the impugned transactions, it was observed that the reversal trades were executed almost of the same quantity and the trade was also within a short gap of few seconds with significant variation of the price, though, there was no major variation in the underlying price during that period. Upon examination of the trade transactions, it was further observed that the respondent in the impugned transactions had operated through Prashant Jayantilal Patel as its broker and the counter party Kasam Holding Pvt. Ltd., which executed those transactions through Vibrant Securities Pvt. Ltd. as its broker. As pointed out in the tabular column, all reversed/closed out transactions were executed at prices with significant variation within a short period though there was no major variation in the underlying price during that period.

19. For instance, let us refer to one of the impugned reversal trades. On 21.03.2007 at 14:50:27, NIFTY 50 (Strike Price 3930) Options (Trade volume 10,000) was sold within a second at 14:50:28 at Trade Price of Rs.270/-. Within a short gap of time, at 15:06:42, the same NIFTY 50 (Trade Volume 10,000) (Strike Price 3930) was bought by the respondent within three seconds at Trade Price of Rs.110/- and the price difference of two legs of the trade being Rs.160/- with COD Rs.16,00,000/-. The percentage of the gross of the trade on that day was 40.82%. As seen from the chart, the other reversal trade transactions were also almost similar within a gap of few seconds, between ‘buy’ and ‘sell’ order, with significant price variation, though no major price variation in the underlying price.

During examination of those transactions, the Whole Time Member observed that the synchronized transactions had a definite objective of enabling one party (Rakhi Trading Pvt. Ltd.) to book profits and the other party (Kasam Holding Pvt. Ltd.) to book losses in the close out difference. Thirteen Options Contracts executed by respondent-Rakhi Trading in the F & O Segment between March and March 30, 2007 with a total 68 Close Out Difference (COD) of Rs.1,15,79,312.15 (Positive) showing a net profit of Rs.115.79 lakhs to Rakhi Trading Pvt. Ltd. and loss to the counter party i.e. Kasam Holding Pvt. Ltd. 20. The question whether there was fictitious transactions creating illegal synchronization has to be gathered from the facts and circumstances and intention of the parties. Acting in concert is something about which it is difficult to obtain direct evidence. Proof of manipulation might depend upon inferences drawn from factual details. Such inferences could be gathered from pattern of trading data and the nature of the transactions etc.

21. ‘By manipulation and synchronization’, it is meant that two parties have pre-meditated; as such a drastic movement in price within few seconds could have been only through prior understanding between the parties concerned only to fulfill an unlawful objective through misuse of the stock exchange. That is, prior arrangement/prior understanding with each other wherein one will make profit and other will lose and thereby as soon as one party opens up its trade in the market, the other party will buy it. Though the trading is shown on the screen, but prior arrangement is very well possible behind the screen.

This is what has been done in the case in hand. Buy and sell orders were placed at a difference of few seconds/minutes, while ‘sell’ by respondent to Kasam Holding at a high price and “buy” by the respondent from Kasam Holding Pvt. Ltd. at a low price. The transactions wherein the ‘buy and sell’ orders entered almost simultaneously and the transactions matched in time and quantity with significant price variation and respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss.

Number of reversal trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade taking place repeatedly over a period of time only indicates that there was pre-arrangement between the parties before the trade was executed. The transactions involving only the same two parties within few seconds with huge difference in ‘buy and sell’ value, though there is no difference in the underlying security, can take place only with prior understanding between the two parties. The Board who is the regulator of the market, can always lift the veil of such transactions to show the non-genuineness of such transactions.

22. Buying and selling of equal quantities within the day may not be wrong but the trades with ulterior purpose are not genuine for sure. In the present case, every time one party is making profit and other party is facing loss. Further, there was proximity in the time of sell orders at a high price to the party-Kasam Holding Pvt. Ltd. and the same quantity being reversed by Kasam Holding Pvt. Ltd. to the same party-Rakhi Trading Pvt. Ltd. at a low price through the same set of brokers. As discussed earlier, during March, 2007 thirteen Nifty Option Contracts got matched between the same parties through the same brokers.

I fail to understand as to why Kasam Holding has made the transactions repeatedly by incurring losses. It seems improbable that Kasam Holding which was facing loss in each transaction by trading with the respondent, was still eager to trade with the same repeatedly for about four days which is not in consonance with the market trend and human conduct; more so, when there has not been any major difference in the underlying price. It is thus difficult to accept that several such sell and buy orders between the respondent and Kasam Holding being within a gap of “1”, “2” or “3” or few seconds were by mere coincidence. As contended by the appellant-SEBI, it was too much of coincidence that there were number of transactions of ‘buy and sell orders’ between the same parties with same quantity of stock with significant variation in price.

23. Insofar as synchronized trade involving same set of brokers and meeting of minds, in Securities and Exchange Board of India v. Kishore R. Ajmera (2016) 6 SCC 368, this Court held as under:

“29. This will take us to the second and third category of cases i.e. Ess Ess Intermediaries (P) Ltd., Rajesh N. Jhaveri and Rajendra Jayantilal Shah (second category) and Monarch Networth Capital Ltd. (earlier known as Networth Stock Broking Ltd.) (third category). In these cases the volume of trading in the illiquid scrips in question was huge, the extent being set out hereinabove. Coupled with the aforesaid fact, what has been alleged and reasonably established, is that buy and sell orders in respect of the transactions were made within a span of 0 to 60 seconds.

While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions.

When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s). It must be specifically taken note of herein that the trades in question were not “negotiated trades” executed in accordance with the terms of the Board’s circulars issued from time to time. A negotiated trade, it is clarified, invokes consensual bargaining involving synchronising of buy and sell orders which will result in matching thereof but only as per permissible parameters which are programmed accordingly.

30. It has been vehemently argued before us that on a screen-based trading the identity of the 2nd party be it the client or the broker is not known to the first party/client or broker. According to us, knowledge of who the 2nd party/client or the broker is, is not relevant at all. While the screen-based trading system keeps the identity of the parties anonymous it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned. Prosecution under Section 24 of the Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt.

31. The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors. The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine.

The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations.”

[underlining added]

24. In Nirmal Bang Securities Private Ltd. v. The Chairman, Securities and Exchange Board of India (MANU/SB/0206/2003), SAT applied the test of price, quantity and time to hold that synchronized trading in that case was violative of norms of trading in securities and held as under:-

“249. BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities.

Synchronized trading on a large scale, can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable.

It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc.

As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of regulation 4 of the FUTP Regulations. The facts on record categorically establishes that BEB had indulged in synchronized trading in violation of regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit.”

25. In the quasi-judicial proceeding before SEBI, the standard of proof is preponderance of probability. In a case of similar synchronized trading involving same set of brokers emphasizing that the standard of proof is “preponderance of probability” in paras (26) and (27), in Kishore R. Ajmera case, this Court held as under:-

“26. It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

[underlining added]

26. There was no possibility of such perfect matching of quantity, timing, prices etc. between the same parties unless there was prior meeting of minds or a specific understanding/arrangement between the parties. After referring to Ketan Parekh and Nirmal Bang cases, in SEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBI held as under:-

“4.12 I note that most of the synchronized trades executed by the Broker were perfectly matched with the counter party orders even with respect of the price to the extent of two decimal points. The proximity in placing the orders at the same price and for the same quantity almost at the same time (in majority of the cases) resulted in the matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. The time difference (between the buy and sell orders) of majority of the synchronized trades was very less with the price and quantity matching. The said synchronization cannot take place in the absence of any specific understanding/arrangement between the clients at the first instance, especially when the shares of the company were highly liquid at the time of the trades. ………..

4.24 The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions etc. Several circumstances of a determinative character coupled with the inference arising from the conduct of the parties in a major market manipulation could reasonably lead to conclusion that the Broker was responsible in the manipulation. The evidence, direct or circumstantial, should be sufficient to raise a presumption in its favour with regard to the existence of a fact sought to be proved.

As pointed out by Best in “Law of Evidence”, the presumption of innocence is no doubt presumption juris; but everyday practice shows that it may be successfully encountered by the presumption of guilt arising from circumstances, though it may be a presumption of fact. Since it is exceedingly difficult to prove facts which are especially within the knowledge of parties concerned, the legal proof in such circumstances partakes the character of a prudent man’s estimate as to the probabilities of the case. Hon’ble Securities Appellate Tribunal (SAT) has observed in the matter of Ketan Parekh v. SEBI: “…Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available….”

4.25 Presumption plays a critical role in coming to a finding as to the involvement or otherwise of a market participant in any manipulation. For instance, while trading, a lip service can be paid to a screen based trading system while agreement is reached beforehand between brokers to effect the transaction. Anonymity can be a cloak to cover anastomosis of interest. Therefore, the hackneyed plea based on intentions in the market place cannot pass muster in all circumstances, more so when such intentions are in the special/peculiar knowledge of the parties to the transactions. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else.”

27. Applying the test laid down in Kishore R. Ajmera case to the present case, I find that by cumulative analysis of the reversal transactions between respondent and Kasam Holding, quantity, time and significant variation of prices, without major variation in the underlying price of the securities clearly indicate that the respondent’s trades are not genuine and had only misleading appearance of trading in the securities market, without intending to transfer beneficial ownership.

28. Contention of the appellant is that if the market starts moving or there is a change in the perception of the market and the anticipated future performance thereof, then the seller often gets very apprehensive and may even panic, anticipating a substantial loss and would want to square off his position to restrict a loss. I find no merit in this contention. Insofar as the impugned transactions are concerned, it is seen that the market of underlying shares had remained unmoved altogether, then there was no question of getting panic.

When there were no other transactions in the market affecting the price of the underlying shares or F & O Segment and the price in both the segments had remained static, then there was no reasonable ground to get apprehensive and panic. Therefore, squaring off the position appears to adjust the financial results with a view to avoid the tax incidence through an unfair trade practice or for some ulterior purpose.

29. On behalf of respondent, learned senior counsel Mr. P. Chidambaram contended that securities like Nifty are vast pools and Nifty has a dynamic index which evolves continuously and it is too difficult for a manipulator to affect such prices. Further contention of the respondent is that whether the impugned trades are synchronized or not had no impact on the market and the respondent cannot be held to have violated regulations.

30. On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd., Mr. Mehta learned counsel submitted that a person can be found to have violated Regulations 3 and 4, he should have indulged in some fraudulent practice with an intention to manipulate the securities market and has drawn our attention to Regulation 2(c) of the SEBI Regulations, 2003 in which ‘fraud’ has been defined. Learned counsel submitted that for a person to be held liable for breach of the above mentioned Regulations, SEBI has to establish the following:-

(i) that the party entered into the transactions with the intention to manipulate the market; and

(ii) that there is evidence that the market was in fact manipulated.

31. Per contra, learned senior counsel for SEBI contended that SAT had misconstrued the charge that the impugned synchronized trades had no effect of manipulating the Nifty index and SAT was not right in holding that only those synchronized transactions which have the effect of manipulating the market are undesirable and prohibited. It was contended that it was never the case of SEBI that Nifty was being manipulated by the impugned trade executed by the respondent and findings of SAT are not sustainable in law and would have serious repercussion on the market integrity.

32. The respondent has made the transactions repeatedly by incurring losses, particularly when there were no transactions made by any third party in the market. Abnormal difference between the prices at which the trades were executed without corresponding effect on the price of the underlying security, shows that the option in which the party traded was not in demand in the market. It is unusual that the trades were transacted with such huge profits when there was no change in the underlying prices. These trade transactions obviously only aimed at carrying out manipulative objective.

33. Once the reversal transactions are shown to be non-genuine or shown to be fictitious creating a false or misleading appearance in the market for ulterior purpose and that the stock market was misused by such manipulative device, this is in clear violation of the provisions of PFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations prohibit such manipulative trades, unfair trade practices.

34. SAT mainly proceeded that the impugned reversal trade transactions had no impact on the market and it could have never 79 influenced the Nifty. After extracting the show cause notice, SAT, inter alia, recorded the findings:-

(i) The insinuation is that by executing manipulative trades in the F & O segment, Nifty was sought to be tampered with;

(ii) It is a common case of the parties that the appellant-Rakhi Trading traded only thirteen Nifty option contracts in the F & O Segment; assuming these trades were manipulative, they could have never influenced the Nifty; Nifty which consists of fifty well diversified highly liquid stocks in the cash segment is a very large well diversified index of stocks which is not capable of being influenced much less manipulated by the movement of prices; and

(iii) thirteen impugned trades in Nifty options executed by the appellant had no impact on the market or affected the investors in any way nor did they influence the Nifty in any manner.

35. Regulation 3 deals with “Prohibition of certain dealings in securities”. Regulation 4 deals with “Prohibition of manipulative, fraudulent and unfair trade practices”. Regulation 4 starts as “Without prejudice to the provisions of Regulation 3…..”. Regulation 4(2) is an inclusive provision. Regulation 4(2) stipulates that “Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the…..”, instances pointed out thereon.

Regulation 4(2)(a) deals with “…..an act which creates false or misleading appearance of trading in the securities market”. An act to fall within Regulation 4(2)(a), it is not necessary that the transactions entered into by the party was with intention to manipulate the market and that the market was in fact manipulated. Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price, market, product, security and currency.

36. Respondent-Rakhi Trading and Kasam Holding on facts are found to have been engaged in non-genuine transactions creating appearance of trading. If the factum of manipulation is established, it will necessarily follow that the investors in the market have been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so widespread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and the Board cannot be imposed with a burden which is impossible to be discharged.

37. In the context of 1995 Regulations, old Regulation 4(2)(a), SAT, observing that if the factum of manipulation is established, it will necessarily follow that the investors in the market had been induced to buy and sell and no further proof is required in this regard, in Ketan Parekh’s case (supra), held as under:- “12. ….The stock exchange is also a platform for the fair price discovery of a scrip based on the market forces of demand and supply. Securities market is so wide spread and in a system of screen based trading various potential investors who track the scrips through the screens of the exchanges only see whether a particular scrip is active or not, whether it is trading in large volumes and whether the price is going up or down.

Having regard to these factors he makes up his mind to invest or disinvest in the securities. When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy/sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer/seller thereby inducing him to buy or sell depending upon how the market has been manipulated….

In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged. This, in our view, clearly flows from the plain language of Regulation 4 (a) of the Regulations.”

38. The smooth operation of the securities market and its healthy growth and development depends upon large extent on the quality and integrity of the market. Unfair trade practices affect the integrity and efficiency of the securities market and the confidence of the investors. Prevention of market abuse and preservation of market integrity are the hallmark of securities law. In N. Narayanan v. Adjudicating Officer, Securities and Exchange Board of India (2013) 12 SCC 152, it was held as under:-

“33. Prevention of market abuse and preservation of market integrity is the hallmark of securities law. Section 12-A read with Regulations 3 and 4 of the 2003 Regulations essentially intended to preserve “market integrity” and to prevent “market abuse”. The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors’ protection. Securities market is based on free and open access to information, the integrity of the market is predicated on the quality and the manner on which it is made available to market.

“Market abuse” impairs economic growth and erodes investor’s confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to the abusers. The statutory provisions mentioned earlier deal with the situations where a person, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the “creation of artificiality”. The same can be achieved by inflating the company’s revenue, profits, security deposits and receivables, resulting in price rise of the scrip of the company. Investors are then lured to make their “investment decisions” on those manipulated inflated results, using the above devices which will amount to market abuse.”

39. In an interview, Lawrence E. Harris, a former chief economist at the Securities and Exchange Commission and now a Finance Professor at the University of Southern California, has stated that the difficulty in proving manipulation is probably an inherent feature of modern markets. “Because the markets are so complex”, he said, “…..It is relatively easy for traders engaged in manipulation to offer alternative explanations for their behaviour that would make it difficult to successfully prosecute them”. Professor Harris nonetheless said “when presented with the data suggesting manipulation by firm proprietary traders, it is reasonable to expect that the S.E.C. would consider investigation of the matter further”. The S.E.C. had no comment on the researchers’ study. [Ref.:www.nytimes.com/2006/ 05/07/business/yourmoney/07stra.html]

40. Stock market is regulated mainly by SEBI and to some extent by the Departments of Economic Affairs and Company Affairs of Government of India. Market manipulation can occur in a variety of ways. Manipulations/unfair trade practices reduce the market efficacy. Section 11 of the SEBI Act, 1992 provides for the functions of the Board, as per which it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development and to regulate the securities market by such measures as it thinks fit. Main function of SEBI in this regard is to make inquiry, investigation and to give directions, to promote the orderly and healthy growth of the securities market. With a view to curb unfair trade practices, market manipulation, price rigging and other frauds in securities market, SEBI is empowered to make inquiries and inspection.

41. Section 12A of the SEBI Act, 1992 read with Regulations 3 and 4 of the PFUTP Regulations, 2003 are essentially intended to preserve ‘market integrity’ and to prevent ‘market abuse’. The object of the SEBI Act is to protect the interest of the investors in securities and to promote the development and to regulate the securities market so as to promote orderly, healthy growth of securities market and to promote investor’s protection. N. Narayanan case arose in connection with violation of Section 12A of the SEBI Act as well as the relevant provisions of PFUTP Regulations, 2003.

In N. Narayanan’s case, it was found that the financial results of the company as disclosed to the stock exchanges were inflated and the manipulation in financial results of the company resulted in price rise of the scrip of the company and that they did not represent the true state of affairs of the company and which has enabled certain shareholders to raise financing of pledging of shares. The director of the company was restrained in dealing with the securities for a period of two years and also monetary penalty was imposed on the appellant thereon which was affirmed by this Court.

The Supreme Court observed that message should go that our country  will not tolerate ‘market abuse’ and that the securities market abuse and that fraud, deceit artificiality, have no place in the securities market of the country and held as under:

“1. India’s capital market in the recent times has witnessed tremendous growth, characterised particularly by increasing participation of public. Investors’ confidence in the capital market can be sustained largely by ensuring investors’ protection. Disclosure and transparency are the two pillars on which market integrity rests. Facts of the case disclose how the investors’ confidence has been eroded and how the market has been abused for personal gains and attainments. …..

11. We would like to demonstrate on the facts of this case as well as law on the point that “market abuse” has now become a common practice in the Indian security market and, if not properly curbed, the same would result in defeating the very object and purpose of the SEBI Act which is intended to protect the interests of investors in securities and to promote the development of securities market. Capital market, as already stated, has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investor’s confidence in capital market can be sustained largely by ensuring investors’ protection.

……. 42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading, etc. or else they will be failing in their duty to promote orderly and healthy growth of the securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only the country’s economic growth, but also slow the inflow of foreign investment by genuine investors and also cast a slur on India’s securities market. Message should go that our country will not tolerate “market abuse” and that we are governed by the “rule of law”.

Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and “market security” is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors’ contributions but they are a divided lot. SEBI has, therefore, a duty to protect investors, individual and collective, against opportunistic behaviour of Directors and insiders of the listed companies so as to safeguard market’s integrity.” [underlining added] The Supreme Court has also emphasized the duties of print and electronic media, that they should not mislead the public who are present and prospective investors, in their forecast on the securities market.

42. The capital market regulator, SEBI has a significant role to play in safeguarding the interest of investors and to ensure strict compliance of all the relevant SEBI rules and regulations targeting at safeguarding the interest of small investors. In order to protect the interests of the investors and the integrity of the markets, as a regulator, SEBI has to make the market place efficient and clean, wherein all the participants play their role diligently and professionally within the four corners of the system, without there being any scope for market abuse. Where certain unscrupulous elements are trying to manipulate the market to serve their own interest, it becomes imperative on the part of SEBI to intervene and to curb further mischief and to take necessary action to maintain public confidence in the integrity of the securities market.

43. In N. Narayanan’s case, Supreme Court expressed a ‘word of caution’ that SEBI-the regulator is to ensure stringent enforcement, and efficacy of cleanliness of the market place; otherwise SEBI will be failing in their duty to promote orderly and healthy growth of the securities market. I am conscious as supervisory functionary/ regulating body, SEBI has the duty and obligation to protect ordinary genuine investors and SEBI is empowered to do so under the SEBI Act, 1992 so as to make security market a secure and safe place to carry on the business in securities.

At the same time, under the guise of supervisory intervention, SEBI cannot affect the development of the market or market oriented creativity. Intense supervision might distort the path of securities market development; but SEBI cannot be a silent spectator to unfair trade practices/manipulative market for some ulterior purpose like tax evasion etc. To find the right balance between market forces and Regulatory body’s intervention, SEBI has to deal sternly with those who indulge in manipulative trading and deceptive devices to misuse the market and at the same time ensuring the development of the market.

44. Before I conclude, it is necessary to refer to the findings of SAT on ‘tax planning’. SAT held that even assuming that non-genuine synchronized trades have been entered into for the purposes of tax planning, such trade could be held objectionable only if they have resulted in influencing the market in one way or other. For its finding that every person is entitled to arrange his affairs as to avoid taxation, SAT relied upon Viram Investment Pvt. Ltd. and Ors. v. Securities and Exchange Board of India (MANU/SB/0046/2005) decided on 11.02.2005. Contention of the respondents is that transactions which have been entered into with a view to achieve tax planning are not illegal and respondents placed reliance upon Viram Investment Pvt. Ltd. case.

The learned counsel for SEBI contended that the market cannot be manipulated by fictitious transactions either for tax planning or for some ulterior purposes like money laundering etc.

45. No grounds have been raised in the show cause notice alleging that the impugned fictitious transactions have been entered into with a view to avoid payment of tax and was an act of tax planning. Adjudicating officer also has not gone into this aspect. Hence, I am not inclined to go into this aspect, whether the impugned transactions were intended to reduce the brunt of taxation and an act of tax planning. The correctness of findings of SAT in the case of Viram Investment Pvt. Ltd. is left open.

Conclusion:-

46. Considering the reversal transactions, quantity, price and time and sale, parties being persistent in number of such trade transactions with huge price variations, it will be too native to hold that the transactions are through screen-based trading and hence anonymous. Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the board’s circular.

The impugned transactions are manipulative/deceptive device to create a desired loss and/or profit. Such synchronized trading is violative of transparent norms of trading in securities. If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside. On the above additional reasonings also, I agree with the conclusion allowing the appeal preferred by SEBI against the traders. I also agree with the conclusion dismissing the appeal preferred by the SEBI against the brokers.

J. [R. BANUMATHI]

NEW DELHI,

FEBRUARY 08, 2018

SEBI Appellate Tribunal

LAW LIBRARY

SEBI

Securities Appellate Tribunal is a statutory body established under the provisions of Section 15K of the Securities and Exchange Board of India Act, 1992 to hear and dispose of appeals against orders passed by the Securities and Exchange Board of India.

Rules 
  • Depositories (appeal to SAT) Rules 2000

  • Depositories (appeal to Securities Appellate tribunal) (Amendment) Rules 2000

  • Securities Contract (Regulation) (Appeal to Securities Appellate Tribunal) Rules 2000

  • Securities Appellate Tribunal (Procedure) Rules, 2000

  • Pension Fund Regulatory and Development Authority (Appeal to Securities Appellate Tribunal) Rules, 2014

  • Securities Appellate Tribunal (Salaries, Allowances And Other Terms And Conditions Of Presiding Officer And Other Members) Rules, 2003

  • Securities Appellate Tribunal (Salaries And Allowances And Other Conditions Of Service Of The Officers And Employees) Rules,1997

  • Tribunal, Appellate Tribunal and other Authorities (Qualifications, Experience and other Conditions of Service of Members) Rules, 2017

Devider

SUPREME COURT 2 Supreme Court cases:ARROW

BULLET 2SECURITIES AND EXCHANGE BOARD OF INDIA Versus SHRI KANAIYALAL BALDEVBHAI PATEL[20-09-2017]