Compliance

COMPLIANCE AND LIABILITY UNDER SECURTIES LAWS COURSE: LEGAL ASPECTS OF BUSINESS PRGRAMME: LEGAL ASPECTS OF BUSINESS INSTRUCTORS: PROF.LALITHA SRINATH & PROF. M.R. SRINATH PARTICIPANT: ASHOK KUMAR MAURYA ROLL NO.2008PGP1040D

DATE: 11.07.2008

1

FIRST OF ALL I WOULD LILKE TO INTODUCE THE WORD ‘ SECURITIES’ AND ‘LIABILITY’ AS USED IN LAW I HAVE BORROWD THESE DEFINTION FROM THE WEBSITE “LAW.COM” AS WELL AS “SHUDHIRLAW.COM” THEN COMES THE VARIOUS TYPES OF LIABILITIES.THEN SECURITIES (SHARES,DEBENTURES,ETC.) SECURITIES GENERIC TERM FOR SHARES OF STOCK, BONDS AND DEBENTURES ISSUED BY CORPORATIONS AND GOVERNMENTS TO EVIDENCE OWNERSHIP AND TERMS OF PAYMENT OF DIVIDENDS OR FINAL PAY-OFF.

THEY

ARE CALLED SECURITIES BECAUSE

THE ASSETS AND/OR THE PROFITS OF THE CORPORATION OR THE CREDIT OF THE GOVERNMENT STAND AS SECURITY FOR PAYMENT. TRANSACTIONS IN WHICH SPECIFIC PROPERTY IS

HOWEVER, UNLIKE SECURED PLEDGED, SECURITIES ARE ONLY

AS

GOOD AS THE FUTURE PROFITABILITY OF THE CORPORATION OR THE MANAGEMENT OF THE GOVERNMENTAL AGENCY.

MOST

SECURITIES ARE TRADED ON VARIOUS

STOCK OR BOND MARKET.

LIABLITY ONE

OF THE MOST SIGNIFICANT WORDS IN THE FIELD OF LAW, LIABILITY MEANS

LEGAL RESPONSIBILITY FOR ONE'S ACTS OR OMISSIONS.

FAILURE

OF A PERSON OR

ENTITY TO MEET THAT RESPONSIBILITY LEAVES HIM/HER/IT OPEN TO A LAWSUIT FOR ANY RESULTING DAMAGES OR A COURT ORDER TO PERFORM CONTRACT OR VIOLATION OF STATUTE). PARTY

(PLAINTIFF)

IN

(AS

IN A BREACH OF

ORDER TO WIN A LAWSUIT THE SUING

MUST PROVE THE LEGAL LIABILITY OF THE DEFENDANT IF THE

PLAINTIFF'S ALLEGATIONS ARE SHOWN TO BE TRUE.

THIS

REQUIRES EVIDENCE OF

THE DUTY TO ACT, THE FAILURE TO FULFILL THAT DUTY AND THE CONNECTION

(PROXIMATE LIABILITY

CAUSE) OF THAT FAILURE TO SOME INJURY OR HARM TO THE PLAINTIFF.

ALSO APPLIES TO ALLEGED CRIMINAL ACTS IN WHICH THE DEFENDANT

MAY BE RESPONSIBLE FOR HIS/HER ACTS WHICH CONSTITUTE A CRIME, THUS MAKING HIM/HER SUBJECT TO CONVICTION AND PUNISHMENT.

A

SIGNER OF A PROMISSORY

NOTE HAS LIABILITY FOR MONEY DUE IF IT IS NOT PAID AND SO WOULD A CO-SIGNER WHO GUARANTEES IT.

A

CONTRACTOR WHO HAS AGREED TO COMPLETE A BUILDING

2

HAS LIABILITY TO THE OWNER IF HE FAILS TO COMPLETE ON TIME.

JOINT LIABILITY WHEN

TWO OR MORE PERSONS ARE BOTH RESPONSIBLE FOR A DEBT, CLAIM OR

JUDGMENT.

IT

CAN BE IMPORTANT TO THE PERSON MAKING THE CLAIM, AS WELL AS

TO A PERSON WHO IS SUED, WHO CAN DEMAND THAT ANYONE WITH JOINT LIABILITY FOR THE ALLEGED DEBT OR CLAIM FOR DAMAGES BE JOINED IN

(BROUGHT

INTO)

THE LAWSUI

C IV IL L IA BILIT Y POTENTIAL

RESPONSIBILITY FOR PAYMENT OF DAMAGES OR OTHER COURT-

ENFORCEMENT IN A LAWSUIT, AS DISTINGUISHED FROM CRIMINAL LIABILITY, WHICH MEANS OPEN TO PUNISHMENT FOR A CRIME.

L IMIT ED L IA BILIT Y THE

MAXIMUM AMOUNT A PERSON PARTICIPATING IN A BUSINESS CAN LOSE OR BE

CHARGED IN CASE OF CLAIMS AGAINST THE COMPANY OR ITS BANKRUPTCY.

A

STOCKHOLDER IN A CORPORATION CAN ONLY LOSE HIS/HER INVESTMENT, AND A LIMITED PARTNER CAN ONLY LOSE HIS/HER INVESTMENT, BUT A GENERAL PARTNER CAN BE RESPONSIBLE FOR ALL THE DEBTS OF THE PARTNERSHIP. CONTRACT CAN LIMIT CONTRACT AWAY THE

PARTIES TO A THE AMOUNT EACH MIGHT OWE THE OTHER, BUT CANNOT RIGHTS OF A THIRD PARTY TO MAKE A CLAIM.

P RODUCT L IA BILIT Y THE

RESPONSIBILITY OF MANUFACTURERS, DISTRIBUTORS AND SELLERS OF

PRODUCTS TO THE PUBLIC, TO DELIVER PRODUCTS FREE OF DEFECTS WHICH HARM AN INDIVIDUAL OR NUMEROUS PERSONS AND TO MAKE GOOD ON THAT RESPONSIBILITY IF THEIR PRODUCTS ARE DEFECTIVE.

THESE

CAN INCLUDE FAULTY

AUTO BRAKES, CONTAMINATED BABY FOOD, EXPLODING BOTTLES OF BEER,

FLAMMABLE CHILDREN'S PAJAMAS OR LACK OF LABEL WARNINGS.THE KEY ELEMENT IN PRODUCT LIABILITY LAW IS THAT A PERSON WHO SUFFERS HARM NEED PROVE ONLY THE FAILURE OF THE PRODUCT TO MAKE THE SELLER, DISTRIBUTOR AND/OR MANUFACTURER RELIABLE FOR DAMAGES.

AN

INJURED PERSON USUALLY NEED ONLY

SUE THE SELLER AND LET HIM/HER/IT BRING THE MANUFACTURER OR DISTRIBUTOR INTO THE LAWSUIT OR REQUIRE CONTRIBUTION TOWARD A JUDGMENT.

HOWEVER, 3

ALL THOSE POSSIBLY RESPONSIBLE SHOULD BE NAMED IN THE SUIT AS DEFENDANTS IF THE THEY ARE KNOWN.

S TRI CT L IABILI TY AUTOMATIC

(WITHOUT HAVING TO PROVE NEGLIGENCE) FOR DAMAGES DUE TO POSSESSION AND/OR USE OF EQUIPMENT, MATERIALS OR POSSESSIONS WHICH ARE INHERENTLY DANGEROUS, SUCH AS EXPLOSIVES, WILD ANIMALS, POISONOUS SNAKES OR ASSAULT WEAPONS. RESPONSIBILITY

S EVE RAL L IA BILIT Y REFERRING

TO RESPONSIBILITY OF ONE PARTY FOR THE ENTIRE DEBT

(AS

IN

"JOINT

AND SEVERAL") OR JUDGMENT WHEN THOSE WHO JOINTLY AGREED TO PAY THE DEBT OR ARE JOINTLY ORDERED TO PAY JUDGMENT DO NOT DO SO. IS STUCK WITH

"SEVERAL

A

PERSON WHO

LIABILITY" BECAUSE THE OTHERS DO NOT PAY THEIR PART

MAY SUE THE OTHER JOINT DEBTORS FOR CONTRIBUTION TOWARD THE PAYMENT HE/SHE HAS MADE.

V IC ARI OU S L IA BILIT Y SOMETIMES

CALLED

"IMPUTED

LIABILITY," ATTACHMENT OF RESPONSIBILITY TO A PERSON FOR

HARM OR DAMAGES CAUSED BY ANOTHER PERSON IN EITHER A NEGLIGENCE LAWSUIT OR CRIMINAL PROSECUTION.

THUS,

AN EMPLOYER OF AN EMPLOYEE WHO INJURES SOMEONE THROUGH

NEGLIGENCE WHILE IN THE SCOPE OF EMPLOYMENT

(DOING

WORK FOR THE EMPLOYER) IS

VICARIOUSLY LIABLE FOR DAMAGES TO THE INJURED PERSON. A CRIME

(LIKE

IN

MOST STATES A PARTICIPANT IN

A HOLD-UP) MAY BE VICARIOUSLY LIABLE FOR MURDER IF ANOTHER MEMBER OF

THE GROUP SHOOTS AND KILLS A SHOPKEEPER OR POLICEMAN.

PRE SENT G OVERN ING S ECURI TIE S LA WS I N IND IA: THE SECURITIES TRANSACTIONS IN INDIA AT PRESENT ARE MAINLY GOVERNED BY ACTS. 1. THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, AND THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992.

TWO

2.

THE DEPO SI TORI ES A CT, 1 99 6:

4

THE

PAPER BASED OWNERSHIP AND TRANSFER OF SECURITIES HAS BEEN A MAJOR

DRAWBACK OF THE

INDIAN SECURITIES MARKETS

SINCE IT OFTEN RESULTED IN DELAY IN

SETTLEMENT AND TRANSFER OF SECURITIES AND ALSO LEAD TO FORGERY ETC.

THE DEPOSITORIES ACT, 1996

"BAD

DELIVERY", THEFT,

WAS THEREFORE ENACTED TO PAVE THE

WAY FOR SMOOTH AND FREE TRANSFER OF SECURITIES.

THE

OTHER RELEVANT LAWS WHICH AFFECT THE CAPITAL MARKET ARE

:-

1. THE FOREIGN EXCHANGE REGULATIONS ACT, 1973;2. ARBITRATION AND CONCILIATION ACT, 1996;3. COMPANIES ACT, 1956;4. DEBT RECOVERY ACT (BANK AND FINANCIAL INSTITUTIONS RECOVERY OF DUES ACT, 1993);5. BANKING REGULATION ACT;6. BENAMI PROHIBITION ACT;7. INDIAN PENAL CODE;8. INDIAN EVIDENCE ACT, 1872 AND;9. INDIAN TELEGRAPH ACT, 1885. THE SECUR IT IES CONTRA CTS (R EGULA TION) A CT, 1 95 6 THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (HEREINAFTER REFERRED TO AS THE "ACT"), CONTAINING A MERE 31 SECTIONS, KEEPS A TIGHT VIGIL OVER ALL THE STOCK EXCHANGES OF INDIA SINCE 20TH FEBRUARY, 1957. THE PROVISIONS OF THE ACT WERE FORMALLY ADMINISTERED BY THE CENTRAL GOVERNMENT. HOWEVER, SINCE THE ENACTMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 THE BOARD ESTABLISHED UNDER IT (SEBI) IS CONCURRENTLY HAVING POWERS TO ADMINISTER ALMOST ALL THE PROVISIONS OF THE ACT. BY

VIRTUE OF THE PROVISIONS OF THE

IN SECURITIES WITHOUT A LICENSE FROM WHICH

IS

DESIROUS

SECTION 3

OF THE

OF

ACT

BEING TO

ACT, CARRYING ON THE BUSINESS OF DEALING SEBI IS PROHIBITED. ANY STOCK EXCHANGE

RECOGNIZED

SEBI

HAS

MAKE

AN

APPLICATION

UNDER

WHO IS EMPOWERED TO GRANT RECOGNITION AND

PRESCRIBE CONDITIONS INCLUDING THAT OF HAVING THREE PERSONS) ON THE

TO

SEBI'S

REPRESENTATION

(MAXIMUM EXCHANGE

STOCK EXCHANGE AND PROHIBITING THE STOCK FROM AMENDING ITS RULES WITHOUT THE SEBI'S PRIOR APPROVAL. THE RECOGNITION CAN BE WITHDRAWN IN THE INTEREST OF TRADE OR PUBLIC. SEBI IS AUTHORIZED TO CALL FOR PERIODICAL RETURNS FROM THE RECOGNIZED STOCK EXCHANGES AND TO MAKE ENQUIRIES IN RELATION TO THEIR AFFAIRS. EVERY STOCK EXCHANGE IS OBLIGED TO FURNISH ANNUAL REPORTS TO SEBI. STOCK EXCHANGES ARE ALLOWED TO MAKE RULES

5

SEBI. THE CENTRAL GOVERNMENT AND SEBI FRAME RULES. RECOGNIZED STOCK EXCHANGES ARE

ONLY WITH THE PRIOR APPROVAL OF

STOCK EXCHANGES TO TO MAKE BYE-LAWS FOR THE

CAN DIRECT ALLOWED

REGULATION AND CONTROL OF CONTRACTS BUT

SUBJECT TO THE PREVIOUS APPROVAL OF THESE

BYE-LAWS.

SUPERSEDE

THE

SEBI

THE CENTRAL GOVERNMENT

GOVERNING

BODY

OF

ANY

SEBI HAS THE POWER TO AMEND AND SEBI HAVE THE POWER TO

AND

RECOGNIZED

STOCK

EXCHANGE

AND

TO

SUSPEND ITS BUSINESS.

A ON OR

INDIA, HAS NO OBLIGATION TO HAVE ITS SHARES LISTED A RECOGNIZED STOCK EXCHANGE. BUT IF A COMPANY INTENDS TO OFFER ITS SHARES DEBENTURES TO THE PUBLIC FOR SUBSCRIPTION BY ISSUE OF A PROSPECTUS, IT MUST, PUBLIC LIMITED COMPANY IN

BEFORE ISSUING SUCH PROSPECTUS APPLY TO ONE OR MORE OF THE RECOGNIZED STOCK EXCHANGES FOR PERMISSION TO HAVE THE SHARES OR DEBENTURES INTENDED TO BE SO OFFERED TO THE PUBLIC TO BE DEALT WITH IN EACH OF SUCH STOCK EXCHANGE IN TERMS

SECTION 73 OF THE COMPANIES ACT, 1956. SEBI CAN HOWEVER UNDER THE PROVISIONS OF SECTION 21 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 COMPEL THE LISTING OF SECURITIES BY PUBLIC COMPANIES IF IT IS OF AN OPINION THAT IT IS NECESSARY OR EXPEDIENT IN THE INTEREST OF TRADE OR PUBLIC. IN THE EVENT OF THE STOCK EXCHANGE REFUSING TO LIST THE SECURITIES OF ANY PUBLIC COMPANY AN APPEAL TO SEBI IS PROVIDED UNDER THE ACT. OF

A

SECTION 22A OF THE ACT IS ENTITLED TO ITS SECURITIES, NOTWITHSTANDING ANYTHING 82 OR SECTION 111 OF THE COMPANIES

COMPANY ON THE GROUNDS SPECIFIED IN

REFUSE TO REGISTER TRANSFER OF ANY OF CONTAINED IN ITS ARTICLES OR

ACT, 1956. T HE S ECU RIT IES

AND

SECTION

E XCH AN GE B OARD

OF

I NDI A A CT , 19 92.

THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (HEREINAFTER REFERRED AS "THE SEBI ACT") IS DEEMED TO HAVE COME INTO FORCE ON JANUARY 30, 1992. RELATIVELY A BRIEF ACT CONTAINING ONLY 35 SECTIONS, THE SEBI ACT GOVERNS ALL THE STOCK EXCHANGES AND THE SECURITIES TRANSACTIONS IN INDIA. A BOARD

EXCHANGE BOARD OF INDIA (SEBI) CONSISTING OF ONE CHAIRMAN AND FIVE MEMBERS, TWO FROM THE DEPARTMENT OF THE FINANCE AND LAW OF THE CENTRAL GOVERNMENT, ONE FROM THE RESERVE BANK OF BY THE NAME OF THE

SECURITIES

AND

6

INDIA

AND TWO OTHER PERSONS AND HAVING ITS HEAD OFFICE IN

AND REGIONAL

MADRAS HAS BEEN CONSTITUTED UNDER THE SEBI ACT TO ADMINISTER ITS PROVISIONS. THE CENTRAL GOVERNMENT HAS THE RIGHT TO TERMINATE THE SERVICES OF THE CHAIRMAN OR ANY MEMBER OF THE BOARD. THE BOARD DECIDES ALL QUESTIONS IN ITS MEETING BY MAJORITY VOTE WITH THE CHAIRMAN HAVING A SECOND OR CASTING VOTE. OFFICES IN

DELHI, CALCUTTA

BOMBAY

SECTION 11 PROTECT

OF THE

THE

AND

SEBI ACT

INTEREST

OF

PROVIDES THAT IT SHALL THE DUTY OF THE

INVESTORS

IN

SECURITIES

AND

TO

BOARD

PROMOTE

TO

THE

DEVELOPMENT OF AND TO REGULATE THE SECURITIES MARKET BY SUCH MEASURES AS IT

STOCK EXCHANGES, TO REGISTER AND REGULATE THE WORKING OF STOCK BROKERS, SUBBROKERS, SHARE TRANSFER AGENTS, BANKERS TO AN ISSUE, TRUSTEES OF TRUST DEEDS, REGISTRARS TO AN ISSUE, MERCHANT BANKERS, UNDERWRITERS, PORTFOLIO MANAGERS, INVESTMENT ADVISERS, ETC., TO REGISTER AND REGULATE THE WORKING OF COLLECTIVE INVESTMENT SCHEMES INCLUDING MUTUAL FUNDS, TO PROHIBIT FRAUDULENT AND UNFAIR TRADE PRACTICES AND INSIDER TRADING, TO REGULATE TAKE-OVERS, TO CONDUCT ENQUIRIES AND AUDITS OF THE STOCK EXCHANGES, ETC. THINKS

AS

FIT.

IT

EMPOWERS

THE

BOARD

TO

REGULATE

THE

BUSINESS

IN

STOCK EXCHANGES ARE REQUIRED TO BE REGISTERED WITH SEBI UNDER THE PROVISIONS OF THE ACT, UNDER SECTION 12 OF THE SEBI ACT ALL THE STOCK BROKERS, SUB-BROKERS, SHARE TRANSFER AGENTS, BANKERS TO AN ISSUE, TRUSTEES OF TRUST DEED, REGISTRARS TO AN ISSUE, MERCHANT BANKERS, UNDERWRITERS, PORTFOLIO MANAGERS, INVESTMENT ADVISERS AND SUCH OTHER INTERMEDIARY WHO MAY BE ASSOCIATED WITH THE SECURITIES MARKETS ARE OBLIGED TO REGISTER WITH THE BOARD AND THE BOARD HAS THE POWER TO SUSPEND OR CANCEL SUCH REGISTRATION. THE BOARD IS BOUND BY THE DIRECTIONS GIVEN BY THE CENTRAL GOVERNMENT FROM TIME TO TIME ON QUESTIONS OF POLICY AND THE CENTRAL GOVERNMENT HAS THE RIGHT TO SUPERSEDE THE BOARD. THE BOARD IS ALSO OBLIGED TO SUBMIT A REPORT TO THE CENTRAL GOVERNMENT EVERY YEAR, GIVING TRUE AND FULL ACCOUNT OF ITS ACTIVITIES, POLICIES AND PROGRAMMES. ANY ONE AGGRIEVED BY THE BOARD'S DECISION IS ENTITLED TO APPEAL TO THE CENTRAL GOVERNMENT. ALL

THE CENTRAL GOVERNMENT UP SECTION 29 OF THE SEBI ACT.

TILL NOW HAS FRAMED TEN

RULES

BY VIRTUE OF

7

THE BOARD

SECTION 30 OF THE SEBI ACT HAS TILL NOW WITH CENTRAL GOVERNMENT MADE TWELVE REGULATIONS.

EMPOWERED BY

PREVIOUS APPROVAL OF THE

THE

THE DEPO SI TORI ES A CT, 1 99 6 AND REGULA TIONS. WITH EFFECT DEPOSITORIES INCIDENTAL

FROM IN

20TH SEPTEMBER 1995

SECURITIES

THERETO

HAS

AND

BEEN

FOR

AN

MATTERS

ENACTED

IN

ACT,

TO PROVIDE REGULATION OF

CONNECTED

INDIA

WHICH

IS

THEREWITH TITLED

AS

AND/OR

"THE

DEPOSITORIES ACT, 1996". IT EXTENDS TO THE WHOLE OF INDIA. AS PER THE DEFINITION PROVIDED IN SECTION 2(E) OF THE SAID ACT, A "DEPOSITORY" MEANS A COMPANY FORMED AND REGISTERED UNDER THE COMPANIES ACT, 1956 AND WHICH HAS BEEN GRANTED CERTIFICATE OF REGISTRATION UNDER SUB-SECTION (1A) OF SECTION 12 OF THE SECURITIES & EXCHANGE BOARD OF INDIA ACT, 1992. THE SECURITIES & EXCHANGE BOARD OF INDIA HAVE IN EXERCISE OF THE POWERS CONFERRED UPON IT MADE REGULATIONS WHICH ARE CALLED "THE SECURITIES & EXCHANGE BOARD OF INDIA (DEPOSITORIES & PARTICIPANTS) REGULATIONS, 1996". REGULATION 3 3. (1) AN DEPOSITORY

OF THE SAID

REGULATIONS

PROVIDES AS FOLLOWS:

APPLICATION FOR THE GRANT OF A CERTIFICATE OF REGISTRATION AS A

BOARD BY THE SPONSOR IN FORM A, SHALL BE ACCOMPANIED BY THE FEE SPECIFIED IN PART A OF THE SECOND SCHEDULE AND BE PAID IN THE MANNER SPECIFIED IN PART B THEREOF. SHALL BE MADE TO THE

(2) THE

DEPOSITORY

APPLICATION SHALL BE ACCOMPANIED BY DRAFT BYE-LAWS OF THE

THAT IS PROPOSED TO BE SET UP.

REGULATION 6 PROVIDES THAT THE BOARD SHALL NOT CONSIDER AN APPLICATION UNDER REGULATION 3 FOR GRANT OF A CERTIFICATE FOR REGISTRATION AS A DEPOSITORY UNLESS THE SPONSOR BELONGS TO ONE OF THE CATEGORIES MENTIONED IN REGULATION 6. REGULATION 7 PROVIDES THAT AFTER CONSIDERING THE APPLICATION UNDER SECTION 3 WITH REGARD TO THE CLARIFICATION SPECIFIED IN REGULATION 6 IF THE BOARD IS SATISFIED WITH THE COMPANY ESTABLISHED BY THE SPONSOR BEING ELIGIBLE TO ACT AS DEPOSITORY, IT MAY GRANT A CERTIFICATE OF REGISTRATION SUBJECT TO THE CONDITIONS MENTIONED IN REGULATION 7. A DEPOSITORY WHICH HAS BEEN GRANTED A CERTIFICATE OF REGISTRATION UNDER REGULATION 7 IS OBLIGED TO

8

MAKE AN APPLICATION TO THE

BOARD

WITHIN ONE YEAR FROM THE DATE OF ISSUE OF

THE CERTIFICATE OF REGISTRATION FOR COMMENCEMENT OF BUSINESS IN A PRESCRIBED FORM.

REGULATION 12

EMPOWERS THE

BOARD

TO ASK THE

DEPOSITORY

TO FURNISH

FURTHER INFORMATION AND/OR CLARIFICATION REGARDING THE MATTERS RELEVANT FOR THE GRANT OF CERTIFICATE OF COMMENCEMENT OF BUSINESS AND

REGULATION 13

LAYS

DOWN THE MATTERS WHICH ARE RELEVANT FOR CONSIDERING GRANT OF CERTIFICATE FOR COMMENCEMENT OF BUSINESS.

THE

RIGHTS AND OBLIGATIONS OF

DEPOSITORY

ARE PROVIDED IN

CHAPTER V

OF THE

REGULATIONS. THEY INTER ALIA PROVIDE FOR SECURITIES ELIGIBLE FOR DEMATERIALIZATION, AGREEMENT BETWEEN DEPOSITORY AND ISSUER, INTERNAL AND EXTERNAL MONITORING, REVIEW AND EVALUATION OF SYSTEMS AND CONTROLS, INSURANCE AGAINST RISKS, MANNER OF KEEPING RECORDS, RECORDS TO BE MAINTAINED, PROHIBITION OF ASSIGNMENT, AGREEMENT BY PARTICIPANT, OPENING OF SEPARATE ACCOUNTS, TRANSFER OR WITHDRAWAL BY BENEFICIAL OWNER, RECONCILIATION, MANNER OF SURRENDER OF CERTIFICATE OF SECURITY, MANNER OF CREATING PLEDGE OR HYPOTHECATION, ETC. SAID

T AK E O VER C ODE : SEBI UNDER THE PROVISIONS OF SECTION 11 OF THE SECURITIES EXCHANGE BOARD OF INDIA ACT 1992 IS INTER ALIA EMPOWERED TO REGULATE THE SECURITIES MARKET BY SUCH MEASURES AS IT MAY DEEM FIT. ONE OF THE MATTERS SPECIFIED UNDER THAT SECTION IS "REGULATING SUBSTANTIAL ACQUISITION OF SHARES AND TAKE OVER OF COMPANIES". SECTION 30 OF THE SAME ACT EMPOWERS SEBI TO MAKE REGULATIONS TO CARRY OUT THE PURPOSES OF THIS ACT. EMPOWERED BY THESE PROVISIONS OF THE ACT SEBI ENACTED "THE SECURITIES & EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKE OVERS) REGULATIONS, 1997. THEY CAME INTO EFFECT ON 20TH FEBRUARY 1997. AND COMPRISED OF 47 REGULATIONS. THE REGULATIONS, AFTER DEFINING, INTER ALIA, AS TO WHAT THE TERMS "ACQUIRER" MEANS, WHO COULD BE CALLED AS "PERSON ACTING IN CONSORT", WHAT IS MEANT BY "OFFER PERIOD", WHO IS A "PROMOTER", WHICH IS A "TARGET COMPANY", ETC. GO TO PROVIDE: (I)

PROVISIONS OF DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY,

9

(II)

PROVISIONS FOR SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AN

ACQUISITION OF CONTROL OVER A LISTED COMPANY,

(III)

PROVISIONS FOR BAIL OUT TAKEOVERS APPLICABLE TO SUBSTANTIAL ACQUISITION OF

SHARES IN A FINANCIALLY WEAK COMPANY, NOT BEING A SICK INDUSTRIAL COMPANY, IN PURSUANCE

TO

A

SCHEME

OF

REHABILITATION

APPROVED

BY

A

PUBLIC

FINANCIAL

INSTITUTION OR A SCHEDULED BANK.

THE REGULATIONS

ALSO PROVIDE FOR

SEBI'S

RIGHT TO INVESTIGATE INTO THE

COMPLAINTS ON MATTERS HAVING A BEARING ON THE SUBSTANTIAL ACQUISITION OF SHARES AND TAKE OVERS AND PROVIDE FOR PENALTIES FOR VIOLATION OF ANY OF THE PROVISIONS OF THE REGULATIONS.

1997 REGULATIONS A)

EQUALITY

B)

PROTECTION

C)

FAIR &

FOR:

ADEQUATE

PROVISIONS HAVE BEEN MADE IN THE

OF TREATMENT AND OPPORTUNITY TO ALL SHAREHOLDERS OF SHAREHOLDERS INTEREST

TRUTHFUL DISCLOSURE OF ALL MATERIAL INFORMATION BY THE ACQUIRER IN

ALL PUBLIC ANNOUNCEMENTS AND OFFER DOCUMENTS D)

PROHIBITING

THE ACQUIRER AND OTHER PARTIES FOR

FURNISHING INFORMATION

CONCERNING OFFER EXCLUSIVELY TO ONE GROUP OF SHAREHOLDERS E) F)

ALLOWING

SUFFICIENT TIME TO SHAREHOLDERS FOR MAKING UNIFORM DECISIONS

ANNOUNCING

THE

OFFER

ONLY

AFTER

MOST

CAREFUL

AND

RESPONSIBLE

CONSIDERATION G)

HIGHEST

DOCUMENTS

STANDARD OF CARE AND ACCURACY TO BE UTILIZED IN PREPARING OFFER BY

THE

ACQUIRER

AND

ALL

OTHER

INTERMEDIARIES

PROFESSIONALLY

INVOLVED IN THE OFFER H)

REFRAINING

FROM CREATING A FALSE MARKET IN SECURITIES BY ALL PARTIES TO AN

OFFER I)

TARGET

COMPANY NOT TO TAKE ANY ACTION TO FRUSTRATE AN OFFER WITHOUT THE

APPROVAL OF THE SHAREHOLDERS, ETC.

10

THE 1997

REGULATIONS REPEAL THE EARLIER REGULATIONS.

FORE IGN E XCHANGE MAN AGEM ENT BI LL 19 98 (FE MA ): AS

A PART OF THE ON GOING PROCESS OF ECONOMIC LIBERALIZATION RELATING TO

INDIA AND AS A MEASURE FOR CLOSER INTERACTION WITH THE WORLD ECONOMY THE FOREIGN EXCHANGE REGULATION ACT, 1973 (FERA) WAS REVIEWED IN THE YEAR 1993 AND SEVERAL AMENDMENTS WERE MADE THEREIN. FURTHER REVIEW OF THE FERA WAS UNDERTAKEN BY THE CENTRAL GOVERNMENT OF INDIA IN THE LIGHT OF SUBSEQUENT DEVELOPMENTS AND ON ACCOUNT OF THE EXPERIENCE IN RELATION TO FOREIGN TRADE AND INVESTMENT IN INDIA, THE CENTRAL GOVERNMENT FELT THAT INSTEAD OF FURTHER AMENDING THE FERA, THE BETTER COURSE WOULD BE TO REPEAL THE EXISTING ACT AND TO ENACT A NEW LEGISLATION IN ITS PLACE. IN VIEW OF THE SAME, THE RBI WAS ASKED TO SUGGEST A FOREIGN INVESTMENTS AND FOREIGN TRADE IN

NEW LEGISLATION BASED ON THE REPORT SUBMITTED BY A TASK FORCE CONSTITUTED FOR THIS PURPOSE BY THE

RBI

RECOMMENDING SUBSTANTIAL CHANGES IN

FERA.

THERE HAS BEEN A SUBSTANTIAL INCREASE IN THE FOREIGN EXCHANGE RESERVES OF INDIA. SINCE THE YEAR 1993, FOREIGN TRADE HAS GROWN UP. DEVELOPMENT HAS TAKEN PLACE SUCH AS CURRENT ACCOUNT CONVERTIBILITY, LIBERALIZATION IN INVESTMENTS ABROAD, INCREASED ACCESS TO EXTERNAL COMMERCIAL BORROWINGS BY INDIAN COMPANIES AND PARTICIPATION BY FOREIGN INSTITUTIONAL INVESTORS IN SECURITIES MARKETS IN INDIA. KEEPING IN VIEW THESE CHANGES THE CENTRAL GOVERNMENT OF INDIA HAS INTRODUCED THE FEMA TO REPEAL FERA. A

ACCUSED IS PRESUMED TO BE INNOCENT UNTIL PROVED GUILTY BEYOND REASONABLE DOUBT, IS FOUND IN THE FEMA. A PRESUMPTION REGARDING DOCUMENTS, CONTAINED IN THIS BILL IS CONTRARY TO THE GENERAL RULES OF EVIDENCE. FOR EXAMPLE, WHEN DOCUMENTS MARKED DIGRESSION FROM THE GENERAL RULE THAT THE

PERTAINING TO A CRIME UNDER

FEMA

ARE DISCOVERED THE

COURT

WILL PRESUME THAT THE CONTENTS OF THE

DOCUMENTS ARE TRUE AND CORRECT AND WILL NOT GO INTO THE QUESTION WHETHER THE INCRIMINATING DOCUMENTS MAY HAVE BEEN FORGED. RESPONSIBILITY OF THE FABRICATED.

THE

ACCUSED

THUS,

IT BECOMES THE

TO PROVE, IN CASE THAT THE DOCUMENTS ARE

MAIN CHANGE BETWEEN

FERA

AND

FEMA

IS IN THE APPROACH.

11

FERA

SEEKS

EXCHANGE

AND

TO

REGULATE

ALMOST

INBOUND/OUTBOUND

ALL

THE

TRANSACTIONS

INVESTMENTS.

INVOLVING

IN FERA

EVERY

FOREIGN

PROVISION

IS

RESTRICTIVE AND STARTS WITH A NEGATIVE PROPOSITION STATING THAT WHATEVER IS MENTIONED IN THAT SECTION IS PROHIBITED UNLESS THE PRIOR PERMISSION EITHER GENERAL OR SPECIAL, AS MAY BE REQUIRED IN THE SPECIFIC CASE, OF

FERA

PROVIDES

THAT

NOTHING

CAN

BE

IS OBTAINED.

RBI'S PERMISSION. IN LEGISLATION, THE PROVISIONS OF THE

DONE

COMPARISON TO THIS EXISTING NEGATIVE PIECE OF

RBI

WITHOUT

BILL HAS A POSITIVE APPROACH. THIS CAN BE FOUND FROM THE PROVISIONS OF FEMA DEALING WITH CAPITAL ACCOUNT TRANSACTIONS WHICH ARE TO BE REGULATED. UNLIKE FERA WHICH PROVIDES THAT THESE TRANSACTIONS CANNOT BE ENTERED INTO WITHOUT PRIOR PERMISSION OF RBI, FEMA PROVIDES THAT ANY PROPOSED

PERSON MAY SELL OR DRAW FOREIGN EXCHANGE FOR SUCH TRANSACTIONS AND THEN

RBI TO REGULATE THE CLASS OR LIMITS OF SUCH CAPITAL ACCOUNT TRANSACTIONS. THUS THE BASIC PROPOSITION IN THE PROPOSED FEMA BILL IS POSITIVE. FEMA CLASSIFIES FOREIGN EXCHANGE TRANSACTIONS INTO SPECIFIES THE POWERS OF THE

CAPITAL ACCOUNT TRANSACTIONS AND CURRENT ACCOUNT TRANSACTIONS AND AMONGST THE TWO REGULATES THE FORMER MORE CLOSELY.

UNDER FEMA

RESIDENTIAL STATUS

WILL NOT DEPEND UPON THE INTENT OF THE PERSON TO RESIDE IN DEPEND UPON THE EXACT PERIOD OF HIS STAY IN

THE

PROVISIONS OF THE

FEMA BILL

INDIA.

INDIA

BUT WOULD

AIMS AT CONSOLIDATING AND AMENDING THE LAW

RELATING TO FOREIGN EXCHANGE WITH THE OBJECT OF FACILITATING EXTERNAL TRADE AND

PAYMENTS

AND

FOR

PROMOTING

FOREIGN EXCHANGE MARKETS IN

THE

ORDERLY

PAYMENT

INDIA. THE FEMA BILL

AND

AMENDMENTS

IN

RBI

TO

EMPOWERS THE

AUTHORIZE PERSONS TO DEAL IN FOREIGN SECURITIES SPECIFYING THE CONDITIONS FOR THE SAME.

IT

ALSO PROVIDES FOR A PERSON RESIDENT IN

INDIA

IN HOLDING, OWNING,

TRANSFERRING OR INVESTING IN FOREIGN SECURITY AND FOR A PERSON RESIDENT OUT SIDE

INDIA

IN HOLDING, OWNING, TRANSFERRING OR INVESTING IN

INDIAN SECURITIES.

12