Introduction

In the dynamic world of corporate finance and stock market operations, transparency is paramount. The Securities and Exchange Board of India (SEBI) has established a comprehensive framework to ensure that all stakeholders in the securities market have access to critical information about significant changes in company ownership. At the heart of this framework lies Regulation 29 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Scope of the Article

This article delves into the intricacies of Regulation 29, exploring its purpose, key provisions, and implications for investors and companies alike. By understanding these regulations, market participants can better navigate the complexities of share acquisitions and disposals, ensuring compliance with regulatory standards and contributing to the overall integrity of the Indian securities market.

Objectives of Regulation 29 of SEBI

Regulation 29 serves as a cornerstone in SEBI’s efforts to promote transparency and protect investor interests. Its primary objectives include:

1. Ensuring timely disclosure of significant changes in company ownership
2. Preventing market manipulation through undisclosed accumulation of shares
3. Providing investors with crucial information to make informed decisions
4. Maintaining a level playing field for all market participants

By mandating detailed disclosures for substantial acquisitions and disposals of shares, Regulation 29 helps create a more transparent and efficient market ecosystem.

Key Provisions of Regulation 29 of SEBI

Regulation 29 outlines specific scenarios under which disclosures are required. Let’s examine these provisions in detail:

Initial Acquisition Threshold

Under Regulation 29(1), any acquirer, either individually or acting in concert with others, must disclose their aggregate shareholding and voting rights when their total holdings reach or exceed 5% of the target company’s shares. This initial disclosure serves as a baseline for future reporting requirements. It’s worth noting that for companies listed on the Innovators Growth Platform, the threshold is set at 10% instead of 5%. This distinction recognizes the unique characteristics of companies in this segment and provides some flexibility in reporting requirements.

Subsequent Changes in Shareholding

Regulation 29(2) addresses situations where an entity already holds 5% or more of a company’s shares or voting rights. In such cases, any change in shareholding must be disclosed if:

1. The change results in the shareholding falling below 5%, or 
2. The change exceeds 2% of the total shareholding or voting rights in the target company

Again, for companies on the Innovators Growth Platform, these thresholds are adjusted to 10% and 5%, respectively.

Timeframe for Disclosures

Regulation 29(3) stipulates that all required disclosures must be made within two working days of:

1. Receiving intimation of share allotment 
2. The acquisition or disposal of shares or voting rights

These disclosures must be submitted to both the target company and the stock exchange where the company’s shares are listed. It’s important to note that the responsibility for making these disclosures lies solely with the acquirer, and the target company cannot make these disclosures on the acquirer’s behalf.

Treatment of Encumbrances

Regulation 29(4) addresses the treatment of shares held as encumbrances. When shares are taken by way of encumbrance, it is considered an acquisition for disclosure purposes. Conversely, when shares already held as encumbrances are released, it is treated as a disposal. However, there are exceptions to this rule. Scheduled commercial banks, public financial institutions, housing finance companies, and systemically important non-banking financial companies are exempt from this requirement when acting as pledgees in connection with securing indebtedness in the ordinary course of business.

Disclosure Formats and Requirements

To ensure uniformity and clarity in disclosures, SEBI has provided specific formats for reporting under Regulation 29. These formats, known as Annexure A and Annexure B, require detailed information about the acquisition or disposal of shares.

Annexure A: Format for Disclosures under Regulation 29(1)

This format is used for initial disclosures when an acquirer’s shareholding reaches or exceeds the 5% threshold. Key information required includes:

1. Details of the target company and acquirer
2. Names of stock exchanges where the target company’s shares are listed
3. Pre-acquisition shareholding details
4. Acquisition details
5. Post-acquisition shareholding details
6. Mode of acquisition
7. Date of acquisition or receipt of intimation
8. Equity share capital details before and after the acquisition

Annexure B: Format for Disclosures under Regulation 29(2)

This format is used for subsequent disclosures when there are changes in shareholding above the specified thresholds. It requires similar information to Annexure A, but with additional details on the disposal of shares, if applicable. Both formats require the acquirer to provide their PAN (Permanent Account Number) and specify whether they belong to the promoter or promoter group. This information helps regulators and other stakeholders better understand the nature of  the transaction and its potential impact on the company’s ownership structure.

Implications for Market Participants

Regulation 29 has far-reaching implications for various market participants:

Acquirers and Investors

For individuals or entities looking to acquire substantial stakes in listed companies, Regulation 29 mandates careful tracking of their shareholding. They must be prepared to make timely disclosures as their ownership levels approach or cross the specified thresholds. This requirement applies not only to direct share purchases but also to acquisitions through convertible instruments, warrants, or other securities that may result in future share ownership.

Investors must also be aware that even seemingly small changes in their shareholding can trigger disclosure requirements if they already hold a significant stake in the company. This necessitates a proactive approach to compliance and careful planning of investment strategies.

Target Companies

While the primary responsibility for making disclosures lies with the acquirer, target companies play a crucial role in the process. They must ensure that they have systems in place to receive and process these disclosures promptly. Companies should also be prepared to answer questions from other shareholders or market analysts regarding significant changes in their ownership structure.

Stock Exchanges and Regulators

Stock exchanges serve as the primary recipients of disclosures under Regulation 29. They must have robust systems to receive, verify, and disseminate this information to the broader market. Regulators, including SEBI, use these disclosures to monitor market trends, detect potential irregularities, and ensure overall market integrity.

Other Shareholders and Market Analysts

For existing shareholders and market analysts, disclosures made under Regulation 29 provide valuable insights into a company’s ownership dynamics. This information can influence investment decisions, as significant changes in ownership may signal potential shifts in company strategy or control.

Challenges and Considerations for Regulation 29 of SEBI

While Regulation 29 plays a crucial role in promoting market transparency, its implementation is not without challenges:

Determining Concert Party Relationships

One of the complexities in complying with Regulation 29 lies in determining when parties are acting in concert. This concept extends beyond formal agreements and can include informal understandings or relationships that result in coordinated acquisition strategies. Acquirers must carefully assess their relationships with other investors to ensure compliance with disclosure requirements.

Calculating Shareholding Percentages

Accurate calculation of shareholding percentages is essential for compliance. This can be challenging, particularly when dealing with convertible instruments or complex corporate structures. Companies and investors must have robust systems in place to track their effective ownership levels continuously.

Timing of Disclosures

The two-working-day window for making disclosures can be challenging, especially for large institutions or international investors. Entities must have efficient internal processes to ensure they can gather the necessary information and submit disclosures within the stipulated timeframe.

Cross-Border Considerations

For multinational corporations or foreign investors, complying with Regulation 29 may require coordination across different jurisdictions. They must ensure that their global investment activities are monitored and reported in accordance with Indian regulations.

Dealing with Indirect Acquisitions

In some cases, share acquisitions may occur indirectly through the purchase of holding companies or other intermediate entities. Determining when such transactions trigger disclosure requirements under Regulation 29 can be complex and may require careful legal analysis.

Best Practices for Compliance

To ensure smooth compliance with Regulation 29, market participants should consider the following best practices:

Implement Robust Monitoring Systems

Companies and large investors should implement automated systems to track their shareholdings and alert relevant personnel when disclosure thresholds are approached.

Establish Clear Internal Processes

Develop clear internal processes for gathering required information, preparing disclosures, and submitting them to the appropriate authorities within the mandated timeframe.

Conduct Regular Training

Ensure that all relevant employees are trained on the requirements of Regulation 29 and understand their role in the compliance process.

Seek Expert Advice

When dealing with complex scenarios or uncertainties, don’t hesitate to seek advice from legal experts or regulatory consultants.

Maintain Detailed Records

Keep comprehensive records of all share transactions, including the rationale behind them, to facilitate any future inquiries or audits.

Stay Informed About Regulatory Changes

Regularly monitor for updates or amendments to Regulation 29 and other relevant SEBI regulations to ensure ongoing compliance.

The Broader Context: Market Integrity and Investor Protection

Regulation 29 is part of a broader regulatory framework designed to ensure the integrity of India’s securities markets. By mandating transparency in significant share transactions, SEBI aims to:

1. Prevent insider trading and market manipulation
2. Protect minority shareholders’ interests
3. Facilitate fair price discovery in the market
4. Enhance overall investor confidence in the Indian stock market

These objectives align with global best practices in securities regulation and contribute to India’s standing as an attractive destination for both domestic and international investment.

Future Outlook for Regulation 29 of SEBI

As India’s capital markets continue to evolve, regulations like Regulation 29 will likely undergo further refinement. Potential areas for future development might include:

1. Integration with technology platforms for real-time disclosure processing
2. Harmonization with international standards to facilitate cross-border investments
3. Adjustments to thresholds or timelines based on market feedback and changing dynamics
4. Enhanced provisions for disclosure of beneficial ownership, particularly in light of complex corporate structures

Conclusion

Regulation 29 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, stands as a critical pillar in India’s securities market regulatory framework. Mandating timely and detailed disclosures of significant changes in company ownership, plays a vital role in maintaining market transparency and protecting investor interests. For acquirers and investors, compliance with Regulation 29 is not merely a legal obligation but a fundamental aspect of responsible market participation. It requires careful planning, robust systems, and a commitment to transparency. Target companies, while not directly responsible for making disclosures, must be prepared to handle the implications of ownership changes and respond to stakeholder inquiries. Stock exchanges and regulators rely on these disclosures to monitor market trends and ensure overall market integrity. As India’s capital markets continue to grow and attract global investment, the importance of regulations like Regulation 29 cannot be overstated. They provide the foundation for a fair, efficient, and trustworthy market ecosystem, ultimately benefiting all participants and contributing to the nation’s economic growth. By understanding and adhering to the provisions of Regulation 29, market participants not only ensure legal compliance but also contribute to the broader goals of market transparency and investor protection. In doing so, they play a crucial role in maintaining the health and integrity of India’s dynamic and growing securities market.

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Introduction

The Indian securities market has evolved significantly in recent years, driven by the rapid integration of cutting-edge technologies, including Artificial Intelligence (AI). A well-regulated and transparent securities market is essential for sustainable economic growth, with the secondary market reflecting the health of the economy. However, the rise of Algorithmic trading, particularly High-Frequency Trading (HFT), has introduced both opportunities and challenges to market integrity. This article explores the functioning of Algorithmic trading/HFT, strategies employed by high-frequency traders, potential threats, and the regulatory landscape governing Algorithmic trading/HFT in India.

Decoding High-Frequency Trading

HFT relies on advanced algorithms and high-speed execution capabilities to capitalize on small price movements in the market. These traders leverage low-latency networks and massive data centers to execute trades faster than human traders. Successful HFT strategies require speed, availability of data, colocation (physical location), and low-latency networks to exploit market inefficiencies effectively.

Strategies Employed Under High-Frequency Trading

HFT encompasses diverse strategies such as statistical arbitrage, market making, and order anticipation. Statistical arbitrage involves exploiting temporary pricing inefficiencies between related securities, while market making entails providing continuous buy and sell quotes for various securities to capture bid-ask spreads. Order anticipation involves detecting and front-running large institutional orders to profit from the temporary price impact.

Potential Threats of High-Frequency Trading

While HFT has increased market liquidity and efficiency, concerns about market manipulation and unfair advantages have emerged. Illegal practices such as layering, spoofing, and quote stuffing distort market prices and undermine market integrity. Moreover, HFT can amplify market volatility and contribute to extreme price movements, as evidenced by flash crashes.

SEBI Regulatory Measures

Recognizing the risks associated with HFT, SEBI has implemented regulatory measures to strengthen Algorithmic trading in India. These measures include conducting system audits, enhancing surveillance of algorithmic trading, rigorous testing and certification of trading systems, introducing economic disincentives for high daily order-to-trade ratios, and tagging algorithms for surveillance purposes. Recent circulars have addressed the issue of unregulated platforms offering algorithmic trading services, aiming to prevent mis-selling and protect investors’ interests.

Conclusion

Algorithmic trading offers the potential for faster and more efficient transactions but requires robust regulatory oversight to prevent market abuse and safeguard investor interests. SEBI’s proactive regulatory measures aim to balance innovation with market integrity, promoting transparency, fair competition, and systemic stability. By staying agile and responsive to market dynamics, SEBI can facilitate the responsible adoption of algorithmic trading while mitigating potential risks to market integrity.

The post High-Frequency Trading: Regulating under the Indian Securities Market appeared first on Bhatt & Joshi Associates.

Introduction 

The Securities Appellate Tribunal (SAT) plays a pivotal role in the Indian financial landscape, serving as an appellate authority for adjudicating disputes related to securities and regulatory matters. Recently, the Centre made significant appointments to SAT, aiming to bolster its efficacy and streamline its operations. This article explores the implications of these appointments, delving into the backgrounds of the appointees, the broader significance for the securities market, and the potential impact on case adjudication and regulatory oversight.

Background of SAT: Established under Section 15K of the Securities and Exchange Board of India Act, 1992, SAT functions as an independent statutory body responsible for hearing appeals against decisions made by regulatory authorities such as the Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA). Its jurisdiction extends to matters concerning regulatory actions, market manipulation, insider trading, and investor grievances, among others. SAT operates as a quasi-judicial tribunal, with its decisions subject to judicial review by the Supreme Court of India.

Appointment of New Members to Strengthen Securities Appellate Tribunal

The recent appointments made by the Centre to SAT include retired Justice PS Dinesh Kumar as the presiding officer and Justice Dheeraj Bhatnagar, a retired principal chief commissioner of income tax, as the technical member. These appointments come at a critical juncture when SAT’s bench strength had dwindled, leading to delays in the adjudication of cases and mounting pendency.

Justice PS Dinesh Kumar: New Presiding Officer of Securities Appellate Tribunal

Retired Justice PS Dinesh Kumar brings a wealth of legal expertise and experience to his new role as the presiding officer of SAT. With a distinguished career spanning over three decades, Justice Kumar served as the chief justice of the Karnataka High Court, where he earned accolades for his judicial acumen and commitment to upholding the rule of law. Throughout his career, Justice Kumar has presided over a wide array of cases, ranging from civil and criminal matters to constitutional and administrative law issues. His appointment underscores the importance of judicial competence and integrity in safeguarding the interests of investors and ensuring fair and impartial adjudication of disputes within the securities market.

Justice Dheeraj Bhatnagar

As the newly appointed technical member of SAT, Justice Dheeraj Bhatnagar brings to the table a unique blend of legal and technical expertise honed through his illustrious career in public service. With a background in income tax administration and financial regulation, Justice Bhatnagar’s appointment reflects the government’s commitment to appointing individuals with diverse skill sets and backgrounds to ensure comprehensive oversight of regulatory matters. Throughout his tenure as a senior bureaucrat, Justice Bhatnagar demonstrated exemplary leadership and analytical skills, contributing significantly to the formulation and implementation of policies aimed at promoting transparency, accountability, and investor protection in the financial sector.

Significance of Appointments

The appointment of Justice PS Dinesh Kumar and Justice Dheeraj Bhatnagar marks a significant milestone in strengthening SAT’s institutional framework and enhancing its capacity to fulfill its mandate effectively. With the tribunal now operating at its full sanctioned strength, there is renewed optimism regarding the expeditious disposal of cases and the delivery of justice to stakeholders within the securities market. Furthermore, the appointment of qualified and experienced individuals enhances SAT’s credibility and reinforces its role as a reliable arbiter of disputes in the financial domain. By ensuring that SAT remains adequately staffed with competent and impartial members, the government has taken a proactive step towards promoting investor confidence and market integrity.

Impact on Pendency and Case Adjudication

The prolonged vacancy in the position of presiding officer had led to a backlog of cases and delayed adjudication of important matters. With the appointment of Justice PS Dinesh Kumar, SAT is poised to address this challenge effectively and streamline its operations to reduce pendency. Justice Kumar’s vast experience in judicial administration and legal scholarship equips him with the requisite skills and knowledge to oversee SAT’s functioning and expedite the resolution of pending cases. Additionally, the appointment of Justice Dheeraj Bhatnagar as the technical member augments SAT’s capacity to handle complex technical issues and financial intricacies with greater proficiency and efficacy. His expertise in income tax matters and regulatory compliance complements Justice Kumar’s judicial prowess, enabling SAT to adjudicate cases with thoroughness and fairness.

Future Outlook for Securities Appellate Tribunal

Looking ahead, the appointment of new members to SAT sets the stage for enhanced efficiency and effectiveness in addressing legal challenges within the securities market. As the tribunal embarks on its mandate with renewed vigor, stakeholders can expect fair and expeditious resolution of disputes, thereby fostering confidence and trust in the regulatory framework governing the financial sector. By upholding the principles of transparency, accountability, and due process, SAT plays a crucial role in safeguarding investor interests and maintaining market integrity. With Justice PS Dinesh Kumar and Justice Dheeraj Bhatnagar at the helm, SAT is well-positioned to navigate the complexities of securities law and deliver justice impartially and judiciously.

Conclusion

The Centre’s decision to appoint new members to the Securities Appellate Tribunal represents a proactive step towards fortifying the legal infrastructure governing the securities market. By ensuring that SAT operates at its full capacity and with competent leadership, the government has reaffirmed its commitment to upholding the rule of law and promoting investor confidence. As SAT assumes its role as a guardian of investor rights and market integrity, it holds the promise of adjudicating disputes fairly and expeditiously, thereby contributing to the overall stability and growth of the Indian securities market. Through sustained efforts to strengthen regulatory oversight and enhance institutional capacity, SAT remains poised to uphold its mandate and uphold the highest standards of justice and accountability in the financial sector.

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Introduction

The concept of materiality serves as a cornerstone in corporate governance, particularly concerning related party transactions (RPTs), where transparency and accountability are paramount. SEBI’s Listing Obligations and Disclosure Requirements (LODR) regulations mandate listed entities to formulate policies on the materiality of RPTs, providing clear thresholds approved by the board of directors. In this study, we delve into the materiality policies adopted by companies within the Nifty50 Index (‘Nifty Group’), aiming to unravel the nuances of how ‘material modifications’ are defined and interpreted across various sectors.

Observations – Study of Materiality Policies of Nifty Group

Materiality policies – companies in the banking sector

The banking sector, known for its complex financial transactions and regulatory scrutiny, places significant emphasis on defining material modifications within RPTs. Our analysis reveals varying approaches, from qualitative assessments of deviations from the ordinary course to quantitative thresholds based on percentage adjustments in transaction values. These policies reflect the sector’s commitment to transparency and accountability in its dealings.

Materiality policies – companies in information technology services and consulting sector

The IT services and consulting sector, characterized by innovation and agility, grapples with defining material modifications amidst rapid technological advancements. Our findings showcase diverse interpretations, ranging from percentage-based thresholds to qualitative assessments of financial impacts. This sector’s nuanced approach underscores the importance of contextual relevance and business impact in determining materiality.

Materiality policies – companies in the insurance sector

The insurance sector, known for its risk management practices and regulatory oversight, adopts a conservative approach to defining material modifications within RPTs. While some companies define materiality based on significant variations in pricing, others consider deviations from approved limits as material. These policies underscore the sector’s focus on safeguarding stakeholder interests while navigating regulatory complexities.

Materiality policies – companies in the steel sector

The steel sector, characterized by its cyclical nature and capital-intensive operations, grapples with defining material modifications amidst fluctuating market dynamics. Our analysis reveals a conservative approach, with companies defining materiality based on deviations from current limits approved by audit committees. These policies reflect the sector’s commitment to ensuring transparency and accountability in RPTs.

Materiality policies – companies in the automotive sector

The automotive sector, renowned for its innovation and technological prowess, adopts a holistic approach to defining material modifications within RPTs. From financial implications to deviations from the ordinary course, these policies encompass various factors influencing materiality determinations. The sector’s emphasis on transparency and accountability underscores its commitment to ethical business practices.

Materiality policies – companies in the pharmaceutical sector

The pharmaceutical sector, subject to rigorous regulatory scrutiny and research-intensive operations, grapples with defining material modifications amidst evolving market dynamics. Our findings reveal detailed criteria, including rebuttable presumptions and exclusions, aimed at ensuring transparency and accountability in RPTs. These policies reflect the sector’s emphasis on compliance and risk management.

Unified Compliance: Nifty Group Insights

In addition to sector-specific interpretations, commonalities emerge across the Nifty Group, including exclusions for changes beyond parties’ control and emphasis on regulatory compliance. These observations underscore the overarching emphasis on transparency, accountability, and regulatory compliance within the Nifty Group.

Conclusion 

Our analysis highlights the diverse approaches adopted by companies in defining and interpreting material modifications within RPTs across sectors. While each sector grapples with unique challenges, common themes of transparency, accountability, and regulatory compliance prevail. Moving forward, continuous monitoring and periodic reviews of materiality policies will be essential to ensure alignment with changing business practices and regulatory mandates, thereby reinforcing the foundations of corporate governance and regulatory compliance.

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Part 1: Introduction

The Securities and Exchange Board of India, or SEBI for short, is a regulatory agency that was established by the government of India in the year 1992 under the acronym SEBI. Protecting the interests of investors in securities, as well as supervising and regulating the securities market, is the primary responsibility of the organisation. Additionally, it is responsible for regulating the process by which the stock market and mutual funds operate.

The Securities and Exchange Board of India (SEBI) has as its major mission the maintenance of the effective operation of the Indian Capital Market and the creation of an environment that is both transparent and secure for investors to invest their cash. This action was taken as a response to the proliferation of unethical practices in the financial sector during the tail end of the 1970s. These practices included insider trading, price manipulation, and violations of legislation governing stock exchanges. The government recognised the importance of establishing an institution to regulate the operations of the Indian Securities market and to reduce the number of unethical activities that were taking place. This was done in order to restore the faith of the general people.

In addition to its regional offices in New Delhi, Chennai, Kolkata, and Ahmedabad, the Securities and Exchange Board of India (SEBI) has its headquarters located in the Bandra Kurla Complex in Mumbai. In addition, the corporation maintains local offices in the cities of Patna, Kochi, Guwahati, Jaipur, and Chandigarh in addition to Bangalore.

The appointment of Ajay Tyagi to the position of Chairman of SEBI took place on January 10, 2017. The Securities and Exchange Board of India (SEBI) is structured in a hierarchical manner, with various divisions all being managed by their respective department heads. The organisation is managed by a single Chairman, is made up of seven boards of members, and is comprised of around twenty divisions. Several departments are included in the Securities and Exchange Board of India (SEBI), including Corporate Finance, Human Resources, Economic and Policy Analysis, Foreign Portfolio Investors and Custodians, Debt and Hybrid Securities, Information Technology, Enforcement, Investment Management, Legal Affairs, Office of International Affairs, Commodity Derivatives Market Regulation, and the National Institute of Securities Market, amongst others.

Learn more

• moneymint.com
• Samco.in
• testbook.com
• drishtiias.com
• byjus.com

Part 2: The Powers of SEBI

The Securities and Exchange Board of India (SEBI) is a powerful regulatory organisation that combines three key authorities into a single entity. These powers may be classified as quasi-executive, quasi-legislative, and quasi-judicial respectively.

Powers that are quasi-legislative SEBI is responsible for drafting regulations for the capital markets in its function as a quasi-legislative body. Specifically, this entails the formulation and approval of the by-laws that govern stock exchanges. A foundation for the operation of these exchanges is provided by the by-laws, which also ensure that they operate in a manner that is both fair and transparent.

Powers that are quasi-judicial Due to the quasi-judicial powers that it possesses, SEBI is able to issue rulings and directives. The Securities and Exchange Board of India (SEBI) is vested with the responsibility to adjudicate and render decisions on matters pertaining to the securities market. In the event that entities do not comply with its regulations, for instance, it has the ability to make them pay penalties.

Powers that are quasi-executive The implementation of the legislation that SEBI prepares is one of the quasi-executive duties that it performs. Among these are the pursuit of investigations and the implementation of enforcement actions. One example is that the Securities and Exchange Board of India (SEBI) has the authority to check the books of accounts of recognised stock exchanges and to request periodic returns. In addition to this, it is able to examine the books of financial intermediaries.

In addition, the Securities and Exchange Board of India (SEBI) have the authority to compel particular corporations to become listed on one or more stock exchanges. The purpose of this action is to ensure that the securities of these companies are accessible for trading to a greater segment of the general public, which will ultimately result in an increase in market transparency.

In addition, SEBI is responsible for the registration of brokers. Because of this, SEBI is able to keep a database of all of the active brokers in the securities market, which is an extremely important aspect. A further benefit is that it helps to ensure that only individuals who are suitable and appropriate are permitted to carry out the operations of a broker.

In conclusion, the Securities and Exchange Board of India (SEBI) possesses a wide range of capabilities that enable it to efficiently control and monitor the securities market. In the following section, we will talk about the procedure that SEBI uses to issue summonses, as well as the significance of complying with the system.

Learn more

• en.wikipedia.org
• samco.in
• moneymint.com
• sebi.gov.in

Part 3: The Process of Issuing Summons

The act of issuing a summons is an essential stage in the process of commencing legal proceedings and disseminating information to individuals regarding their participation in a case. When it comes to the Securities and Exchange Board of India (SEBI), this procedure is absolutely necessary for the protection of the securities market and the implementation of its regulations.

Basis for the Legality of Summons When it comes to civil proceedings, the Code of Civil Procedure, 1908, and the Code of Criminal Procedure, 1973, govern the issuance of summonses in India. The former applies to civil cases, while the latter applies to criminal ones. The courts, attorneys, and litigants who are involved in the case are provided with guidelines by these codes, which explain the procedural features of the issue of summonses.

Submission of a Petition or Complaint Request It is necessary to submit a petition or complaint to the court that is responsible for the matter in order to commence legal procedures. In the process of submitting the essential documents and information on the case, the petitioner or complaint, through their legal agent, provides the relevant details and documents, including the names and addresses of the individuals involved.

The examination conducted by the court The documents are reviewed by the court when it has received the petition or complaint, and it is determined whether or not they comply with the prescribed legal standards. In the event that the court makes the determination that the petition or complaint is in order, it will proceed with the issuance of the summons.

Preparation for the Summons After the court has made the decision to issue a summons, it will then compile the documents that are required. It is common practice for the summons to include information such as the name and address of the court, the names of the parties involved, the case number, as well as the date and time that the parties are needed to appear before the court.

The Act of Serving Summons In the following phase, which is of the utmost importance, the summons is served on the parties involved. In India, a summons can be issued in a number of different ways, including through personal service, registered mail, and even, in certain instances, through electronic means. The process of personal service involves delivering the summons to the individual who is the subject of the summons, whereas registered post necessitates sending the summons through the mail along with an acknowledgment of receipt.

Recognisance of the Summons Served The party is required to confirm receipt of the summons by either signing or affixing a thumb impression to the acknowledgement section of the summons document. This must be done immediately after their receipt of the summons. It is evidence that the party has been properly informed of their role in the matter, and this statement acts as evidence.

Inability to Appear in Person In the event that a party that has been summoned does not show up before the court on the date that has been indicated, the court may take appropriate actions taking into consideration the circumstances. The issuance of a bailable or non-bailable warrant, the imposition of penalties, or the continuation of the case in the absence of the party’s presence are all examples of this approach.

Procedural Compliance and Procedures After the parties have responded to the summons by appearing before the court, they will have the opportunity to present their side of the argument, evidence, and witnesses. In the course of the proceeding, the court will listen to both sides of the argument and then make conclusions based on the merits of the case as well as the applicable legal provisions.

With the legislative duty of protecting the securities market and the interests of genuine investors or participants, the Securities and Exchange Board of India (SEBI) is granted the authority to issue summonses, which includes the ability to compel the production of documents or information. It is not possible to minimise the seriousness of the Noticee’s contempt for the summonses that were issued by SEBI and their subsequent refusal to cooperate with the inquiry process.

Learn more

• lawsisto.com
• taxguru.in
• blog.taxomart.com

Part 4:  Compliance and Non-Compliance

To ensure that the securities market continues to operate without any disruptions, it is of the utmost significance that the summons issued by SEBI be complied with. The SEBI Act equips the government with the authority to conduct investigations and to collect information and documents for the purpose of conducting investigations. The Securities and Exchange Board of India (SEBI) has been given the authority to issue summonses in order to compel the production of documents or information. Keeping in view the legislative mandate of protecting the securities market and the interests of the genuine investors or participants in the securities market, the Securities and Exchange Board of India (SEBI) has been granted the authority to issue summonses.

Relevance of Obligation to Comply For the purpose of bringing an inquiry to a successful conclusion, timely filing of information is of utmost importance. If an entity does not cooperate with the inquiry, it may be detrimental to the interests of investors and the securities market. This is because any delay in the investigation may have unintended consequences. The behaviour of the Noticee, which consisted of not paying attention to the summonses that were issued by SEBI and, as a consequence, not cooperating with the investigative process, is not something that can be taken lightly.

Resulting Consequences of Failure to Comply There may be severe repercussions for those who do not comply with the summonses issued by SEBI. The behaviour of the Noticee, which consisted of not paying attention to the summonses that were issued by SEBI and, as a consequence, not cooperating with the investigative process, is not something that can be taken lightly. This is especially true in situations where the appellants were involved in offences of such a serious kind that were damaging to the interests of legitimate investors as well as to the efficient and secure operation of the securities market.

The appellants’ statements were unable to be recorded because they did not reply to the second summons that was issued and because they did not appear before the Investigating Authority when they were required to do so. This in turn has made the investigation more difficult to complete. The appellants had failed to deliver the papers and information that were requested by summonses dated 01.04.2003 and 09.04.2003 respectively, which had consequently impacted the way in which the investigation was carried out.

If the appellants comply with one of the summonses that were issued on 02.07.2001 and 26.07.2001, respectively, this does not in any way exonerate them of their responsibility to comply with the subsequent summonses that were issued on various occasions. The appellants were obligated to provide the Investigating Authority with complete cooperation and to promptly produce any and all papers, records, and information that were requested for the investigation at various points in time.

Learn more

• barandbench.com
• blog.ipleaders.in
• taxguru.in
• sebi.gov.in

Part 5:  Penalties and Judgments

If an organisation does not comply with the regulations that it has established, the Securities and Exchange Board of India (SEBI) has the authority to levy penalties against such organisation. According to the Securities and Exchange Board of India Act, any individual who fails to provide the Board with any document, return, or report is subject to a penalty of one lakh rupees for each day that such failure persists, or one crore rupees, whichever amount is less.

As a result of non-compliance, penalties In a case involving Dwitiya Trading Limited, the Securities and Exchange Board of India (SEBI) imposed a monetary penalty of Rs. 5,00,000/- (Rupees Five Lacs only) on the Noticee, Jahman Dealers Private Limited, for failing to comply with the summonses that were issued on September 27, 2019, and subsequently two reminder summonses that were issued on October 23, 2019, and November 01, 2019. It was made very clear that the Noticee was not willing to participate with the inquiry being conducted by SEBI, which is a statutory regulator. Defaults of this nature pose a significant threat to the regulatory framework. In situations like these, taking a more tolerant stance would be contrary to the meaning of section 15A (a) of the law.

Judgements of Notable Importance Several important judgements have been handed down in relation to the penalty for non-compliance with SEBI’s summons from time to time. For example, in the case of Kunnamkulam Paper Mills Ltd. v. SEBI, the appellants were directors of the firm that violated the SEBI (Disclosure and Investor Protection) Guidelines, 2000 by allotting a high number of equity shares. This was done in contravention of the guidelines. SEBI issued a directive to the appellant, directing them to return the money obtained from the investors in accordance with the problem, together with interest5. Nevertheless, the appellants did not comply with the same, which resulted in the Securities and Exchange Board of India (SEBI) initiating a criminal prosecution by means of a private complaint in accordance with Section 24 (1) read with Section 27 of the SEBI Act, 1992 (SEBI Act), 19925. As a result, the appellants were found guilty after the charge was framed for the commission of an offence under Section 24. The accused were each had to pay a fine of fifty lakhs of rupees, and if they failed to do so, they were sentenced to simple imprisonment for a term of one year.

In a different case, Manoj Gokulchand Seksaria v. State of Maharashtra, the petitioner challenged the orders that were issued by the Special Court (CBI) taking cognizance and issuing process against him in relation to the FIR that was registered by the Chief Justice of the Nation, Securities and Exchange Board of India (SEBI). The petitioner challenged these orders under Article 227 of the Constitution of India read with Section 482 of the Criminal Procedure Code. 

The First Information Reports (FIRs) were filed in response to allegations that certain brokers and individuals working for Yes Bank Limited had allotted initial public offerings (IPOs) under fictitious names in order to corner more shares that were intended for retail investors and then sell them on higher returns after the listing, thereby enriching themselves with profits that were not justified. The corporations opened demat accounts under false and benami names in order to corner the largest quota of shares that were available in initial public offerings (IPOs). 

During this time, in April of 2007, the Securities and Exchange Board of India (SEBI) released a circular that included rules for consent orders and the consideration of requests for the composition of offences. By doing so, the Securities and Exchange Board of India (SEBI) was granted the authority to combine civil and criminal proceedings that it had initiated or was investigating against a variety of parties who had been prosecuted for violating SEBI statutes. Additionally, the petitioners took advantage of the aforementioned method by using an amount of around 2.05 crores of rupees as the disgorgement amount towards the reduction of the settlement expenses. Following this, the Securities and Exchange Board of India (SEBI) issued a consent order, which resolved all of the processes that were still outstanding under Section 11-B of the SEBI Act. In light of this, the petitioner submitted a writ petition in an effort to have the criminal proceedings that were initiated on the basis of the same set of claims that were ultimately compromised overturned.

Learn more

• taxguru.in
• sebi.gov.in
• sebi.gov.in
• sebi.gov.in
• scconline.com

Part 6: Case Study

Allow me to take a look at a recent instance in which a penalty was imposed for failing to comply with a summons issued by SEBI. According to the decision that was handed down on July 23, 2021, the case is known as “Prakash Gupta vs. Securities and Exchange Board of India.”

Brief history Prakash Gupta, the appellant, was charged with committing an offence in accordance with Section 24 (1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “SEBI Act”). Additionally, the appellant requested that the offence be compounded in accordance with Section 24A. The application, on the other hand, was denied by the Additional Sessions Judge, who upheld the objection of the Securities and Exchange Board of India, which stated that the offence could not be compounded without the board’s agreement.

The Decision of the High Court During the revision process, the High Court of Delhi upheld the order that was issued by the Trial Judge. It was decided by the High Court that the trial had progressed to the point where the last arguments were being presented, and that the plea for compounding could not be granted without the approval of SEBI.

Decision Made by the Supreme Court In its decision, the Supreme Court of India separated the case into many categories for the purpose of analysis. These sections included the appeal, the initial public offering (IPO), the investigation conducted by SEBI and the criminal complaint, the motion for compounding, the representations made by counsel, and the analysis.

It was brought to the attention of the Supreme Court that the appellant is currently facing charges for an offence that is outlined in Section 24 (1) of the Securities and Exchange Board of India Act, 1992 (often known as the “SEBI Act”). Additionally, the appellant requested that the offence be compounded in accordance with Section 24A. The application was denied by the Additional Sessions Judge in a judgement dated November 15, 2018, and the objection of the Securities and Exchange Board of India, which said that the offence could not be compounded without the board’s agreement, was upheld.

The conclusion is that this case serves as a reminder of the significance of complying with the restrictions that are set forth by SEBI, as well as the severe penalties that can arise from failing to comply with these regulations. In addition to this, it emphasises the role that the judicial system plays in maintaining the honesty of the securities market and safeguarding the interests of investors.

Learn more

• indiankanoon.org
• taxguru.in
• main.sci.gov.in
• main.sci.gov.in

Part 7: Conclusion

In this article, we have discussed the powers and responsibilities of the Securities and Exchange Board of India (SEBI), as well as the procedure of issuing summonses and the consequences of non-compliance, which include penalties and judgements linked to the matter.

When it comes to ensuring that the securities market continues to operate in an honest manner, SEBI, as a regulatory organisation, plays a significant role. Because of its capabilities, which range from quasi-legislative to quasi-judicial to quasi-executive, it is able to regulate and monitor the market in an efficient manner.

One of the most essential tools that SEBI uses to ensure compliance with its regulations is the practice of issuing summonses. In order to ensure that the securities market continues to operate efficiently, it is imperative that these summonses be complied with. The failure to comply with regulations can result in serious consequences, including significant fines.

We gained an understanding of how failure to comply with the laws set forth by the Securities and Exchange Board of India (SEBI) might result in legal procedures and penalties by examining the case study titled “Prakash Gupta vs. SEBI.” By serving as a reminder of the significance of compliance and the role that SEBI plays in protecting the interests of investors, this case serves important purposes.

One cannot exaggerate the significance of the Securities and Exchange Board of India’s (SEBI) involvement in preserving the integrity of the securities market. It is not only a legal requirement, but also a prerequisite for the market to operate in a manner that is both fair and transparent, and compliance with its norms is required.

Download Booklet on SEBI Regulations in India – Market Compliance & Investor Protection

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Introduction:

Addressing stock exchanges necessitates the crucial implementation of Enhanced Surveillance Measures to oversee and regulate trading activities. These protective measures ensure the fairness and transparency of trades, simultaneously identifying and thwarting market manipulation, insider trading, and other fraudulent practices. Surveillance measures play a pivotal role in safeguarding market integrity, investor interests, and overall market stability. Detecting and preventing fraudulent activities not only safeguard these aspects but also promote transparent and ethical trading practices.

To enhance market integrity and safeguard investor interests, SEBI (Securities and Exchange Board of India) and stock exchanges continuously introduce diverse surveillance measures. Firstly, they aim to inform and caution investors dealing with such securities. By raising awareness, investors are encouraged to approach these securities with heightened caution, conducting thorough research for informed investment decisions. Secondly, the measures prompt market participants to exercise necessary caution when engaging with these securities. The implementation of surveillance measures contributes to fostering a responsible and knowledgeable trading environment, motivating market players to remain vigilant and proactive in their trading activities.

In addition to existing measures like Additional Surveillance Measures (ASM) and Graded Surveillance Measures (GSM), SEBI and stock exchanges have decided to roll out the Enhanced Surveillance Measure (ESM) framework. This framework is exclusively designed for Micro-Small Companies listed on the main board with a market capitalization of less than ₹500 crores. It came into effect on June 5, 2023, as per NSE Circular no. NSE/SURV/56948 dated June 02, 2023, and BSE Notice No. 20230602-44 dated June 02, 2023.

Shortlisting Criteria for Enhanced Surveillance Measures Framework:

In the Enhanced Surveillance Measure (ESM) framework, specific criteria are employed to select stocks. The shortlisting process comprises two stages:

ESM Stage I:

The shortlisting criteria are met if either of the following conditions is satisfied:

High-Low Price Variation (computed based on corporate action adjusted prices) over a period of 3 months, 6 months, or 12 months equals or exceeds 1 standard deviation of the High-Low variation of all Micro-Small Cap Companies. The minimum thresholds are as follows:

3 months: > 75%
6 months: > 100%
12 months: > 150%
Close-to-Close Price Variation (computed based on corporate action adjusted prices) over a period of 3 months, 6 months, or 12 months equals or exceeds 1 standard deviation of the Close-to-Close Price variation of all Micro-Small Cap Companies as defined above. The minimum thresholds are as follows:

3 months: > 50%
6 months: > 75%
12 months: > 100%

ESM Stage II:

Securities already in Stage I must satisfy the following conditions:
In 5 consecutive trading days: The Close-to-Close Variation is equal to or exceeds 15%.
On a monthly basis: The Close-to-Close Variation is equal to or exceeds 30%.

Nevertheless, there is no cause for concern among Public Sector Enterprises, Public Sector Banks, or Securities offering derivative products, as they are specifically exempted from the ESM framework.

Micro-Small Companies listed on the main board of the stock exchange with a market capitalization of less than ₹ 500 crores.

Impact of Scrips Entering the Enhanced Surveillance Measures Framework:

Securities meeting the Enhanced Surveillance Measure (ESM) criteria may experience changes, including a transfer from the Rolling Settlement segment to the Trade-for-Trade (TFT) segment. The effects differ based on the stage within the Enhanced Surveillance Measures framework:

ESM STAGE I:

For securities in this stage, the applicable margin becomes 100% from T+2 day. Additionally, trade settlement is conducted under a price band of either 5% or 2% if the scrip is already in the 2% band.

ESM STAGE II:

Securities in this stage undergo trade settlement under a 2% price band. Furthermore, trading is permitted once a week with a Periodic Call Auction. Starting July 24, 2023, the applicable margin for these securities becomes 100%, and trade settlement is conducted under a 2% price band on all trading days during Periodic Call Auction, as per NSE Circular no. NSE/SURV/57609 and BSE Notice no. 20230718-46 dated July 18, 2023.

Once a security enters the Enhanced Surveillance Measures framework, it remains there for a minimum of 90 calendar days. However, if a security is in Stage II, it stays in Stage II for a minimum of 1 month. After this month, during the weekly stage review, if the close-to-close price variation is less than 8% within that period, it can move to Stage I of the framework. Securities completing 90 calendar days in the framework (meeting the condition) become eligible for a stage-wise exit, provided they do not meet the entry criteria specified in the Shortlisting criteria for Stage I.

Various Concerns Regarding Entry into ESM Framework:

Entering the Enhanced Surveillance Measure (ESM) framework can pose several challenges for companies, raising substantial concerns:

Trading Restrictions:

Companies in the ESM face restrictions on trading, including trade settlement under stricter conditions and narrower price bands. These limitations can impede trading liquidity, potentially impacting price volatility, and creating challenges for investors.

Negative Market Perception:

Despite exchanges emphasizing that ESM inclusion is solely due to market surveillance, it may still lead to negative perceptions among investors. Being in the ESM could raise concerns about a company’s financial health, governance practices, or compliance issues, affecting investor confidence and the company’s market reputation.

Limited Access to Capital:

Companies in the ESM may find it more difficult to raise funds through capital markets. Negative perceptions, coupled with trading restrictions and heightened regulatory scrutiny, can discourage investors, hindering the company’s ability to attract necessary investments and limiting access to capital for growth and financial stability.

Extended Duration in ESM:

Once a security enters the ESM framework, it remains there for a minimum of 90 calendar days, approximately 60 to 62 trading days. If it moves to Stage II, an additional month, roughly 20 trading days, is added. This extended period lacks mechanisms for expediting the process.

Fairness and Liquidity Concerns:

Questions arise about the fairness of restricting trading and reducing liquidity for companies that have paid listing fees for an entire year. While exchanges argue that these measures are essential for investor protection, the narrowed price band and movement to the TFT segment significantly reduce liquidity for these companies.

Stringency of Measures:

The introduction of stringent measures under ESM raises questions, considering the existence of Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM). The impact on liquidity and the necessity of such measures are subjects of scrutiny.

Legal Challenges:

Companies affected by the ESM framework might challenge its validity. For instance, M/s. Mercury EV-Tech Ltd, currently in ESM Stage II, has challenged the framework at the Hon’ble Securities Appellate Tribunal (SAT). This legal challenge reflects the concerns and impacts on trading volumes experienced by companies within the ESM framework.

In summary, the ESM framework brings about potential drawbacks for companies, ranging from trading restrictions and negative market perceptions to challenges in accessing capital and liquidity concerns. These issues warrant a careful evaluation of the framework’s impact on the overall market ecosystem and the companies involved.

Conclusion: Striking a Balance with Enhanced Surveillance Measure (ESM):

In summary, the implementation of the Enhanced Surveillance Measure (ESM) introduces a complex dynamic for companies listed on stock exchanges, encompassing both advantages and disadvantages.

Positive Aspects:

On the positive side, the ESM plays a crucial role in promoting fair and transparent trading practices. Its active detection of market manipulation and protection of investor interests underscores its significance. The heightened regulatory scrutiny accompanying the ESM contributes to market integrity, ensuring a level playing field for all participants.

Potential Drawbacks:

However, the ESM brings forth notable challenges for companies under its purview. Trading restrictions, a key challenge, can impact liquidity due to narrower price bands and stricter trade settlement conditions. These constraints may disrupt trading ease and potentially influence price volatility. Such restrictions can contribute to negative perceptions among investors, raising concerns about the financial health, governance practices, or compliance of the affected companies.

Balancing Act for Regulators and Exchanges:

For regulatory bodies and exchanges, achieving a delicate balance between effective market surveillance and providing growth opportunities for companies is paramount. Striking this balance ensures the maintenance of investor protection without unnecessarily hindering a company’s ability to raise funds, expand operations, and foster sustainable growth.

Proactive Management for Companies:

Companies operating under the Enhanced Surveillance Measures should proactively manage their reputation and engage with investors to address concerns, thereby maintaining trust in the market. The ripple effect of negative perceptions stemming from ESM inclusion emphasizes the need for transparent communication and strategic efforts to regain investor confidence.

In conclusion, the ESM is a tool with a dual nature, serving as a guardian of market integrity while presenting challenges for the companies it encompasses. The ongoing evaluation and fine-tuning of this framework are essential to strike an optimal balance, ensuring the coexistence of robust market surveillance and a conducive environment for corporate growth.

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