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CS Executive Guideline Answers SECURITIES LAWS & CAPITAL MARKETS

CS Executive Guideline Answers SECURITIES LAWS & CAPITAL MARKETS

CS Executive Guideline Answers Securities Laws & Capital Markets: This excellent blog gives you complete knowledge, improve your skills in preparing and answering for SECURITIES LAWS & CAPITAL MARKETS in CS Executive.

This blog contains model answers for SECURITIES LAWS & CAPITAL MARKETS given by expert faculty of CS Executive.

We hope that these CS Executive guideline answers will assist the students in preparing for the Institute’s examinations.

CS Executive Guideline Answers Securities Laws & Capital Markets

CS Executive Guideline Answers Securities Laws & Capital Markets

CS Executive Guideline Answers SECURITIES LAWS & CAPITAL MARKETS Part – I

Question 1

(a). A Mutual fund has shown Net Asset Value (NAV) of `60 at the commencement of the year. At the end of the year NAV increases to `12.50. Meanwhile, the Fund distributes `0.75 as dividend and `0.85 as capital gains.

  • Calculate the fund’s return during the
  • Had these distributions been re-invested at an average NAV of `20, what is the return for 400 units ? (5 marks)

Answer 1(a):-

Change in NAV price (`12.50 – `11.60) = `0.90

Increase in price `0.90 + Dividend received `0.75 + Capital gain distributed `0.85 =`2.50

  • Holding period return = `50/`11.60 =21.55 %
  • When dividend and capital gains are reinvested into additional units of the Fund :

Return per unit : dividend + capital gain = `0.75 + `0.85 = `1.60 Hence, total return received for 400 units = `1.60 x 400 = `640

Additional units that can be purchased = `640/12.20 = 52.46 units

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

Answer 1(b):-

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

  • Within 15 days from the date on which the reasons for such refusal are furnished to it, or
  • Where the stock exchange has omitted or failed to dispose of, within the time specified in section 40 of the Companies Act, 2013, the application for permission for the shares or debentures to be dealt with on the stock exchange, within fifteen days from the date of expiry of the specified time or within such further period, not exceeding one month as the Securities Appellate Tribunal may, on sufficient cause being shown, allow appeal to the SAT having jurisdiction in the matter against such refusal, omission or failure, the Securities Appellate Tribunal may, after giving the stock exchange, an opportunity of being heard, –
    • vary or set aside the decision of the stock exchange; or
    • where the stock exchange has omitted or failed to dispose of the application within the specified time, grant or refuse the permission,

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

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

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

(c)After the Initial Public Offer, the equity capital of promoters group holding in a listed company is `140 crore. The post issue equity capital of the company is `600 crore. The promoters group holding includes (acquired during previous year) :

  • `20 crore equity capital allotted in consideration of transfer of Technical knowhow by the
  • `10 crore equity capital pledged with

Whether the promoters group is satisfying minimum promoters contribution requirement as per SEBI regulation ? Explain.        (5 marks)

Answer 1(c):-

As per regulation 14 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the promoters of the issuer shall hold at least twenty per cent of the post-issue capital.

Further as per regulation 15 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, for the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:

  • specified securities acquired during the preceding three years, if it is acquired for consideration other than cash and revaluation of assets or capitalization of’ intangible assets is involved in such transaction;
  • specified securities pledged with any creditor.

In the present case, `20 crore equity capital acquired in consideration of transfer of technical know-how will not be eligible for promoters contribution, further `10 crore equity capital was pledged with bank will also not eligible for promoters contribution.

The net promoters contribution after deduction of `30 crore (`20 crore & `10 crore) will be `110 crore (`140 crore – `30 crore), which is below then the prescribed limit i.e, 20% of post issued capital (`600 x 20%= `120 crore), Therefore, promoters are not satisfying minimum promoters contribution requirements as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

(d)Yale is a nominee director on the Board of a listed On the proposal of ESOP in the Board meeting, he objected about his exclusion from this scheme. State the prior conditions to be fulfilled for a nominee directors under the SEBI regulations for ESOP eligibility. (5 marks)

Answer 1(d):-

ESOP (Employees Stock Option Plan):

As per regulation 4 of SEBI (Share Based Employee Benefits) Regulations, 2014, an employee shall be eligible to participate in the schemes of the company and where such employee is a director nominated by an institution as its representative on the board of directors of the company;-

  • The contract or agreement entered into between the institution nominating its employee as the director of a company, and the director so appointed shall, inter alia, specify the following:-
    • whether the grants by the company under its scheme(s) can be accepted by the said employee in his capacity as director of the company:
    • that grant if made to the director, shall not be renounced in favour of the nominating institution; and
    • the conditions subject to which fees, commission, other incentives, etc. can be accepted by the director from the company
  • the institution nominating its employee as a director of a company shall file a copy of’ the contract or agreement with the said company, which shall in turn file the copy with all the stock exchanges on which its shares are listed.
  • the director so appointed shall furnish a copy of the contract or agreement at the first board meeting of the company attended by him after his nomination

In the current problem, if the above conditions have been satisfied, Yale is eligible for ESOP and company cannot exclude him on the proposal of ESOP.

Question 2

(a). Neo Engineering is in the list of top 1000 listed entity on the basis of market capitalization. Based on the changes made in SEBI LODR, what would be the composition of the Board as on 1st April, 2019 and 1st April, 2020 ? Explain. (4 marks)

Answer 2(a):-

As per the Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended, the composition of board of directors of the listed entity shall have optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the board of directors shall comprise of non-executive directors, provided that;

  • Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors or the top 1000 listed entities shall have at least one independent woman director by April 1,2020.
  • The board of directors of the top 1000 listed entities w.e.f. April 1. 2019 shall comprise of not less than six directors.
  • With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –
    • be a non-executive director;
    • not be related to the Managing Director or the Chief Executive Officers as per the definition of the term “relative” defined under the Companies Act, 2013

However this requirement shall not be applicable to the listed companies which do not have identifiable promoters as per the shareholding pattern filed with the stock exchange.

The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.

However, the participation of directors by video conferencing or by other audio- visual means shall also be counted for the purposes of such quorum.

(b). “A recognized stock exchange may frame rules/amend rules made by it to provide for all or any of the matters specified therein.” Describe (4 marks)

Answer 2(b):-

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

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

  • the opening and closing of markets and the regulation of the hours of trade;
  • a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;
  • the regulation or prohibition of blank transfers;
  • the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;
  • the regulation, or prohibition of budlas or carry-over facilities;
  • the fixing, altering or postponing of days for settlements;
  • the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities;
  • the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities;
  • the method and procedure for the settlement of claims or disputes, including settlement by arbitration;
  • the levy and recovery of fees, fines and penalties;
  • the regulation of the course of business between parties to contracts in any capacity;
  • the fixing of a scale of brokerage and other charges;
  • the emergencies in trade which may arise, whether as a result of pool or syndicated operations or concerning or otherwise, and the exercise of powers in such emergencies including the power to fix maximum and minimum prices for securities;
  • the making, comparing, settling and closing of bargains;
  • the regulation of dealings by members for their own account;
  • the separation of the functions of jobbers and brokers;
  • the limitations on the volume of trade done by any individual member in exceptional circumstances;
  • the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may

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

  • the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;
  • the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital of the stock exchange;
  • the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange; and
  • such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in clauses (a) (b) and (c).

Powers have been delegated concurrently to SEBI also.

(c). Who can be a Compliance Officer under SEBI (PIT) Regulation, 2015 ? Will an Engineering graduate from a top engineering college with 5 years of experience working as Chief Technical Officer (CTO) be a Compliance Officer ? Discuss. (4 marks)

Answer 2(c):-

According to the Regulation 2(c) of SEBI (Prohibition of Insider Trading) Regulations, 2015 “Compliance Officer'” means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be.

Explanation – For the purpose of this regulation, “financially literate” shall mean a person who has the ability to read and understand basic financial statements i.e. balance sheet, profit and Loss account, and statement of cash flows

As per the explanations, a person can be compliance officer only if he understands the basic financial statement. An engineer graduate who has experience of working as Chief Technology Officer can neither understand the basic financial statement i.e. balance sheet, profit and loss account, and statement of cash flows nor capable of understanding legal and regulatory compliance. Hence he is not eligible for appointment as compliance officer.

(d). SEBI Complaints Redress System (SCORES) has been established to resolve the grievances of the What is the procedure for redressal of investor grievances using SCORES platform ? State the revised features. (4 marks)

Answer 2(d):-

Revised procedure for redressal of investor grievances using SCORES platform is as under:

  • Investors who wish to lodge a complaint on SCORES are requested to register themselves on scores.gov.in by clicking on “Register here” While filing the registration form, details like Name of the investor, PAN, Contact details, Email id, Aadhaar card number (optional), KYC ID (optional) etc. may be provided for effective communication and speedy redressal of the grievances. Upon successful registration, a unique user id and a password shall be communicated to the investor through an acknowledgement email / SMS.
  • An investor shall use login credentials for lodging complaint on SCORES (”Login for registered user” section).
  • The complainant may use SCORES to submit the grievance directly to companies/ intermediaries and the complaint shall be forwarded to the entity for The entity is required to redress the grievance within 30 days, failing which the complaint shall be registered in SCORES
  • Presently, the limitation period for filing an arbitration reference with stock exchanges is three year. In line with the same and in order to enhance case, speed & accuracy in redressal of investor grievance, the investor may lodge a complaint on SCORES within three years from the date of cause of complaint, where;
    • Investor has approached the listed company or registered intermediary for redressal of the complaint and,
    • The concerned listed company or registered intermediary rejected the complaint or,
    • The complainant does not receive any communication from the listed company or intermediary concerned or,
    • The complainant is not satisfied with the reply given to him or redressal action taken by the listed company or an intermediary

To enhance investor satisfaction on complaint redressal, SEBI has already put in place a ‘Complaint Review facility’ under SCORES wherein an investor if unsatisfied with the redressal may within 15 days from the date of closure of his complaint in SCORES opt for review of the complaint and the complaint shall be escalated.

(e). Lalji, aggrieved by an order passed by SEBI is desirous of making an appeal before SAT. He requested you as a consultant to prepare a note to know the appeal (4 marks)

Answer 2(e):-

In order to afford proper appellate remedies, SEBI Act, 1992 provides for the establishment of the Securities Appellate Tribunals (SAT) to consider appeals against the SEBI’s orders, or penalties.

Section 15T and 15U of SEBI Act, 1992 deal with the appeal procedure and powers of Securities Appellate Tribunal.

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

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.

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

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

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

Section 15U of SEBI Act, 1992 lays down that the Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and subject to the other provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.

Alternatively, as per Section 29 read with sections 15T and 15U of SEBI Act, 1992, the Central Government has made the Securities Appellate Tribunal (Procedure), Rules, 2000 shall also be followed.

OR (Alternate question to Q. No. 2)

Question 2A

(i). Explain the various risks involved in investing in mutual (4 marks)

Answer 2A(i):-

Risks Involved in Mutual Funds

The following events may result into non- satisfactory performance of Mutual Funds:

  • Excessive diversifications of portfolio, losing focus on the securities of the key segments;
  • Too much connection on blue-chip securities;
  • Poor planning of investment returns;
  • Un-researched forecast on income, profits and government policies;
  • Fund managers being unaccountable for poor results;
  • Failure to identify clearly the risk of the scheme as distinct from risk of the market;
  • Under performance in comparison to peers;
  • Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and

(ii). A company is planning for Initial Public Offer of its equity It has decided differential pricing for retail individual investors (RII) and QIBs and Non- Institutional Investors (NIIs). The proposed price for RII is `250 and for QIB and NII is `300. Examine the validity of proposal of the company in light of SEBI regulations. What will be your answer if company is proposing `280 to anchor investors in book building issue ? Explain. (4 marks)

Answer 2A(ii):-

As per the Regulation 30 of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, the issuer may offer its specified securities at different prices, subject to the following:

  • retail individual investors or retail individual shareholders or employees entitled for reservation made under the regulation 33 of SEBI (ICDR) Regulations 2018, may be offered specified securities at a price not lower than by more than ten percent of the price at which net offer is made to other categories of applicants, excluding anchor investors:
  • in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants

The difference between the proposed price for Retail Individual Investor (RII) and Qualified Institutional Buyer (QIB) and Non-Institutional Investors (NIIs) is more than 10%, as envisages in the regulation, hence the company cannot issue securities to RII at ` 250 per share.

If the equity shares is proposing to anchor investors at `280, it is not as per the regulation 30 of SEBI (ICDR) Regulations, 2018 as the price is lower than the other applicants i,e., QIB and FII.(assuming QIB and FII are other applicants).

(iii). An IPO is made by Rakesh Steel Ltd., which is a listed company on the stock The Managing Director of the company directs the Company Secretary to prepare details of half yearly compliance requirements as per the listing agreement. Explain the same. (4 marks)

Answer 2A(iii)

Half Yearly Compliances as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Regulation 7(3) : The listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance officer of the listed entity and the authorized representative of the share transfer agent within one month of end of each half of the financial year.

Regulation 29(1) : The listed entity shall give prior intimation to stock exchange about the meeting of the board of directors in which the proposals is due to be considered for financial results viz. quarterly, half yearly, or annual, as the case may be.

Proviso to Regulation 31(1) : listed entities which have listed their specified securities on SME Exchange, the Holding of specified securities and shareholding pattern shall be submitted on a half yearly basis within twenty one days from the end of each half year.

Regulation 32 : The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc.

  1. indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;
  1. indicating category wise variation (capital expenditure, sales and marketing, working capital ) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds.

For the purpose of this regulation, reference to “quarterly/quarter” in case of listed entity which has listed their specified securities on SME Exchange shall respectively be read as “half yearly/half year”.

Regulation 33(3)(f) : While preparing financial results, the listed entity shall also submit as part of its standalone or consolidated financial results for the half year, by way of a note, a statement of assets and liabilities as at the end of the half – year.

Regulation 33(3)(g) : The listed entity shall also submit as part of its standalone and consolidated financial results for the half year, by way of a note, statement of cash flows for the half-year.

Regulation 33(5) : For the purpose of ‘Financial Results’ (Regulation 33), any reference to “quarterly/quarter” in case of listed entity which has listed their specified securities on SME Exchange shall be respectively read as “half yearly/half year” and the requirement of submitting ‘year-to-date’ financial results shall not be applicable for a listed entity which has listed their specified securities on SME Exchange.

Regulation 40(9) : The listed entity shall ensure that the share transfer agent and/or the in-house share transfer facility, as the case may be, produces a certificate from a practising company secretary within one month of the end of each half of the financial year, certifying that all certificates have been issued within thirty days of the date of lodgement for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies.

As per Regulation 40(10) of SEBI (LODR), the listed entity shall ensure that certificate mentioned at Regulation 40 (9), shall be filed with the stock exchange(s) simultaneously.

(iv). The Managing Director of AB Ltd., a listed company wishes to implement the procedure for voluntary delisting from a few stock exchanges subject to listing of at least one stock exchange having nation wide terminals. As a Company Secretary prepare a note on your Managing Director in the light of SEBI (Delisting of Equity Shares) Regulations, (4 marks)

Answer 2A(iv):-

Procedure for voluntary delisting from few stock exchanges subject to listing at atleast one stock exchange having nation-wide terminals

As per Regulations 6 of SEBI (Delisting of Equity Shares) Regulations 2018, A company may delist its equity shares from one or more recognised stock exchanges where they are listed and continue their listing on one or more other recognised stock exchanges, subject to the provisions of these regulations and subject to the following –

(a) If after the proposed delisting from anyone or more recognised stock exchanges, the equity shares would remain listed on any recognised stock exchange which has nationwide trading terminals, no exit opportunity needs to be given to the public shareholders.

As per Regulations 7 of SEBI (Delisting of Equity Shares) Regulations 2018, the procedure for delisting in the present situation is as follows:

  • Convene a Board Meeting [Regulation 7(1)(a)] : The proposed delisting shall be approved by a resolution of the board of directors of the company in its
  • Public notice [Regulation 7(1)(b)] The company to give a public notice of the proposed deli- sting in at least one English national daily with wide circulation, one Hindi national daily with wide circulation and one regional language newspaper of the region where the concerned recognized stock exchanges are
  • Details shall mention in Public notice [Regulation 7(2)] (a) The names of the recognized stock exchanges from where the equity shares of the company are intended to be delisted. (b) The reasons for such delisting. (c) The fact of continuation of listing of equity shares on recognized stock exchange having nation wide trading
  • Application to the concerned recognized stock exchange. [Regulation 7 (1)(c)] The company shall make an application to the concerned recognized stock exchange for delisting its equity
  • Delisting order by the Exchange [Regulation 7(3)] The recognized stock exchange shall dispose of the Application of the delisting complete in all respects within a period not exceeding thirty working days from the date of receipt of such
  • Disclosure in the Annual report [Regulation 7(1)(d)] In the first Annual report which will be prepared after the delisting, include the names of the recognised stock exchanges from where the company got voluntary delisted during that year and the reason of the delisting there

(v). What are the matters that cannot be considered as complaints under SCORES? Specify (4 marks)

Answer 2A(v):-

Presently, the following types of complaints are not dealt through SCORES:

  • Complaints against the companies which are unlisted/delisted, in dissemination board of Stock Exchanges,
  • Complaints those are sub-judice e. relating to cases which are under consideration by court of law, quasi-judicial proceedings etc.
  • Complaints falling under the purview of other regulatory bodies RBI, IRDAI, PFRDA, CCI, etc., or under the purview of other ministries viz., MCA, etc.
  • Complaints against a sick company or a company where a moratorium order is passed in winding up / insolvency
  • Complaints against the companies where the name of company is struck off from ROC or a vanishing company as per list published by vi. Suspended companies, companies under liquidation / BIFR / etc

Alternate Answer:-

The matters that cannot be considered as complaints in SCORES:

  1. Complaint not pertaining to investment in securities market
  2. Anonymous Complaints (except whistle-blower complaints)
  3. Incomplete or un-specific complaints
  4. Allegations without supporting documents
  5. Suggestions or s eeking guidance/explanation
  6. Not satisfied with trading price of the shares of the
  7. Non-listing of shares of private offer
  8. Disputes arising out of private agreement with companies/intermediaries i Matter involving fake/forged documents
  9. Complaints on matters not in SEBI purview
  10. Complaints about any unregistered/un-regulated

Question 3

(a). TechNoGrow approved buy back proposal of 200000 Equity share capital in its Board meeting on 25th April, 2019. The record date was fixed on 25th June, 2019. The closing market price on NSE as on 25th April, 2019 and 25th June, 2019 was `2640.40 and `2514.05 respectively. Determine the number of equity shares which is eligible to be tendered by Small Shareholder Category (rounded off to lower whole number). (5 marks)

Answer 3(a)

In terms of proviso to the Regulation 6 of the SEBI (Buyback of Securities) Regulations, 2018, fifteen percent of the number of securities which the company proposes to buy back or number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders. Hence the total shares reserved for buyback under the offer will be:

200,000 x 15% = 30,000 shares

Further, as per regulation 2(n) of the SEBI (Buy back of Securities) Regulations, 2018 ‘small shareholder’ means a shareholder of a company, who holds shares or other specified securities whose market value, on the basis of closing price or shares or other specified securities, on the recognized stock exchange in which highest trading volume in respect of such securities, as on record date is not more than two lakh rupee.

The closing price on record date is `2514.05. The number of shares eligible for buy back under small shareholders category will be:

` 200000/2514.05 =79.55 shares

79.55 shares rounded off to lower whole number i.e 79 shares.

Hence, equity shareholders holding not more than 79 shares of TechNoGrow Ltd. shall be classified as Small Shareholders.

(b). Nalin Estates (“Target Company”) is a listed company. The promoter group shareholding in the target company is 47%. It proposes to transfer of 2% shares held by one promoter group to another promoter group.

The target company sought your advise as a practicing Company Secretary on the applicability of exemption provided under SEBI (SAST) Regulations for making compulsory open offer.         (5 marks)

Answer 3(b):-

As per Regulation 10(a)(ii) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, the following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 of the of SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 subject to fulfillment of the conditions stipulated .

Acquisition pursuant to inter se transfer of shares amongst qualifying persons, being, persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or these regulations for not less than three years prior to the proposed acquisition.

(c). A company has implemented Employee Stock Option Scheme to retain the best talent in the After one year of implementation of the scheme, the company desires to increase the vesting period from 2 year to 3 year. Is it possible for the company to vary the terms and condition of the option after implementation of the scheme under SEBI regulation. (5 marks)

Answer 3(c):-

According to the Regulation 7 of the SEBI (Share Based Employee Benefits) Regulation, 2014 the company shall not vary the terms of the schemes in any manner which may be detrimental to the interests of the employees, provided that the company shall be entitled to vary the term of the schemes to meet any regulatory requirements.

Subject to the above, the company may by special resolution in a general meeting vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the employees.

The company desires to increase the vesting period from 2 years to 3 years. This will get shares after 3 years instead of earlier 2 years and it is prejudicial to the interests of the employees.

Hence, the company cannot change the vesting period as per SEBI regulations.

Question 4

(a). Visualsight is a listed company. The promoters hold 61.50% paid up equity share capital as on 31st March, 2018. On November 2, 2018, some of the promoters who hold convertible warrants in the company converted 1500000 warrants into shares, as result of which the holding of promoters increased by 4.10%. Vihaan (“Transferor”), one of the promoters holds 18.50% of equity share capital in the company proposed to gift 1.20% equity shares of the company to immediate relative by way of Transferor. Taking into account SEBI (SAST) regulations, answer the following questions in detail :

  • Whether the proposed transfer trigger an obligation upon the Transferor for open offer ?
  • Will the transaction covered under creeping acquisition ?
  • Would the promoters be permitted to avail any exemption under the regulation? (4+2+2=8 marks)

Answer 4(a):-

  • In terms of Regulation 3(2) and 3(3) or the SEBI (SAST) Regulations, 2011, an obligation to make an open offer would arise if the acquirer (along with persons acting in concert) is already entitled to exercise 25% or more of the voting rights in an Indian listed company, and acquires additional shares or voting rights entitling it to exercise more than 5% voting rights in an Indian listed company, in a financial year. By virtue of conversion of warrants into shares, the promoter shareholding in the Company has already increased by 4.10%. Therefore. a further transfer (by way of gift) of shares constituting 1.2% of the equity share capital of the Company to an immediate relative in the same financial year would increase the gross acquisition of shares by the promoter group in excess of the 5% threshold under Regulation 3(2) of SEBI (SAST) Regulations, 2011, hence triggering the requirement to make an open
  • In terms of the explanation to Regulation 3(2) of the SAST Regulations, while calculating the limit of 5% of shares, the gross acquisition alone is to be taken into account regardless of an intermittent fall in shareholding or voting rights. Therefore, the proposed Transfer would be considered for the purpose of calculating the creeping acquisition limit of 5% under Regulation 3(2) of the SAST
  • The Transfer would qualify as an inter-se transfer between immediate relatives under Regulation 10(1)(a)(i) of the SAST Regulation subject to fulfillment of pre conditions specified therein and hence exempted from the requirement to make an open offer under the SAST In addition the disclosure requirements have been complied with.

(b). RN , has equity share capital of 20,00,000 of face value of `10 each, listed in Bombay Stock Exchange. The company has proposed for buy-back of its shares up to 25%. As a Company Secretary explain the conditions for buy-back of shares. (7 marks)

Answer 4(b)

Conditions for buy-back of securities

As per regulation (4) of SEBI (Buyback of Securities), Regulations, 2018

  • The maximum limit of any buy-back of shares shall be twenty five percent or less of the aggregate of paid-up capital and free reserves of the
  • The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and free

If a higher ratio of the debt to capital and free reserves for the company has all shares or other specified securities for buy-back shall be fully paid-up been notified under the Companies Act, 2013, the same shall prevail.

  • All shares or other specified securities for buy-back shall be fully paid up. In respect of the buy-back of equity shares in any financial year, the reference to 25% in this regulation shall be construed with respect to its total paid-up equity capital in that financial
  • A company may buy-back its shares or other specified securities by any one of the following methods:
    • from the existing share holders or other specified securities holders on a proportionate basis through the tender offer;
    • from the open market through—
      • book-building process,
      • stock exchange;
    • from odd-lot holders:

Provided that no offer of buy-back for fifteen per cent or more of the paid up capital and free reserves of the company shall be made from the open market.

  • A company shall not buy-back its shares or other specified securities so as to delist its shares or other specified securities from the stock exachange.
  • A company shall not buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private
  • A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry of buyback period of the preceding offer of buy-back, if any
  • A company shall not allow buy-back of its shares unless the consequent reduction of its share capital is
  • A company may undertake a buy-back of its own shares or other specified securities out of—
    • its free reserves;
    • the securities premium account; or
    • the proceeds of the issue of any shares or other specified securities:

Provided that no such buy-back shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Additional/ General Conditions for Buyback of Shares or Other Securities

  • The company shall not authorise any buy-back unless:
    • The buy-back is authorised by the company’s articles;
    • A special resolution has been passed at a general meeting of the company authorising the buy-back:
  • Provided that nothing contained in this clause shall apply to a case where the buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company; and such buy-back has been authorised by the board of directors by means of a resolution passed at its meeting.
  • Every buy-back shall be completed within a period of one year from the date of passing of the special resolution at general meeting, or the resolution passed by the board of directors of the company, as the case may
  • The company shall, after expiry of the buy-back period, file with the Registrar of Companies and the SEBI, a return containing such particulars relating to the buy-back within thirty days of such expiry, in the format as specified in the Companies (Share Capital and Debentures) Rules,
  • A copy of the resolution passed at the general meeting under sub-section (2) of section 68 of the Companies Act, 2013 shall be filed with the Board and the stock exchanges where the shares or other specified securities of the company are listed, within seven days from the date of passing of the

CS Executive Guideline Answers SECURITIES LAWS & CAPITAL MARKETS Part – II

Question 5

(a). The stock market of a developing countries is normally attractive for the foreign investors.

A foreign endowments fund is planning to invest in equity shares of Indian companies. State the category under which this Foreign Portfolio Investor (FPI) be covered. Will your answer be different if it is a central bank of a foreign country ?

Answer 5(a):-

As per Regulation 5 of the SEBI (Foreign Portfolio Investors), Regulations, 2014, an applicant shall seek registration as a foreign portfolio investor in one of the categories mentioned under the regulations or any other category as may be specified by the SEBI from time to time.

The foreign endowments fund will be covered under category III. This category includes foreign portfolio investor which shall include all others not eligible under Category I and II foreign portfolio investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Yes, if it is central bank of a foreign country, this will include in Category – I. The Category – I includes foreign portfolio investor which includes Government and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.

 

(b). What is Unified Payments Interface (UPI) ? How is public issue application using UPI different from public isssue application using ASBA submitted with intermediaries ?

Answer 5(b):-

Unified Payments Interface (UPI)

UPI is an instant payment system developed by the National Payments Corporation of India (NPCI), an RBI regulated entity. UPI is built over the IMPS (Immediate Payment Service) infrastructure and allows you to instantly transfer money between any two parties’ bank accounts. UPI as a payment mechanism is available for all public issues for which Red Herring Prospectus is filed after January 01, 2019.

Public issue application using UPI is a step towards digitizing the offline processes involved in the application process by moving the same online. This requires you to have to create a UPI ID and PIN using any of the UPI enabled mobile application. The UPI ID can be used for blocking of funds and making payment in the public issue process. One can accept the request to block the funds for the amount they have bid by entering their UPI PIN in the mobile application. The money shall be blocked and shall be automatically remitted to the Escrow Bank, in case of allotment. UPI in public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.

The limit for Initial Public Offer (IPO) application is 2 Lakhs per transaction on UPI.

Only retail individual investors are allowed to use UPI for payment in public issues. Qualified Institutional Buyers and High Net-worth Individuals shall continue to apply as per the existing process.

(c). Z holding equity shares in PQR Ltd. made a request to the company to issue shares with differential voting rights. Enumerate the conditions if any to be satisfied by the PQR for issue of shares with differential voting rights to Z. (5 marks each)

Answer 5(c)

Share Capital with Differential Voting Rights (DVRs)

Section 43(a)(ii) of the Companies Act, 2013, authorized equity share capital with differential rights as to dividend, voting or otherwise in accordance with rule 4 of Companies (Share Capital and Debentures) Rules, 2014 which prescribes the following conditions for issue of DVRs:

  • the articles of association of the company authorizes the issue of shares with differential rights;
  • the issue of shares is authorized by ordinary resolution passed at a general meeting of the Where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot at a general meeting;
  • the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
  • the company having consistent track record of distributable profit for the last three years;
  • the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
  • the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
  • the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or state level financial institution or scheduled bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good.

  • the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act under which such companies being regulated by sectoral regulators
  • The explanatory statement to be annexed to the notice of the general meeting in pursuance of section 102 or of a postal ballot in pursuance of section 110 of the Companies Act, 2013 shall contain the disclosures as mentioned in the rules.
  • The company shall not convert its existing share capital with voting rights into equity share capital carrying differential voting rights and vice-versa.
  • The Board of Directors shall disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the details as mentioned in the rules.
  • The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.
  • The register of members maintained under section 88 of the Companies Act, 2013, shall contain all the relevant particulars of the shares so issued along with details of the shareholders.

Question 6

Write short notes on the following :

(a). Optionally Fully Convertible Debenture

Answer 6(a):-

Optionally Fully Convertible Debenture (OFCD)

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

The Optionally Fully Convertible Debenture is a kind of debenture which can be converted into shares at the expiry of a certain period at a predetermined price, if the debt holder (investor) wishes to do so. The “securities” as defined u/s 2(81) of Companies Act, 2013 means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, and includes hybrids. Hence after analysing the above definitions of “OFCD”, “hybrid” and “securities” it could be rightly concluded that an OFCD being a hybrid security falls under the definition of “securities” as defined u/s 2 (h) of Securities Contract (Regulation) Act, 1956 and u/s 2(81) of Companies Act, 2013 as it inherits the characteristics of debentures initially and also that of the shares at a later stage if the option to convert the securities into shares being exercised by the security holder.

(b). Role of Portfolio Manager

Answer 6(b):-

Meaning of Portfolio Manager

Portfolio manager means any person who pursuant to a contract or arrangement with the client, advises or directs or undertakes on behalf of the client (whether as a

discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the clients as the case may be.

Role of Portfolio Manager

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

(c). Nifty

Answer 6(c):-

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

(d). Angel Fund

Answer 6(d):-  Angel Fund

An angel investor or angel (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a start-up business, usually in exchange for convertible debt or equity ownership. A small but increasing number of angel investors invest online through equity crowd funding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.

Angel investments are typically the earliest equity investments made in start-up companies. They commonly band together in investor networks. Often these networks are based on regional, industry in investor or academic affiliation. Angel Investors are often former entrepreneurs themselves, and typically enjoy working with companies at the earliest stages of business formation. As per the SEBI (Alternative Investment Fund) Regulations, 2012, angel fund is a sub-category of venture capital. Procurement of funds from angel investors of their further investment has to be conducted as per these regulations.

The effective Angels help entrepreneurs to shape business models, create business plans and assist in arranging resources – but without stepping into a controlling or operating role. Often Angels are entrepreneurs who have successfully built companies, or have spent a part of their career in coaching young companies.

(e). Research Analysis (3 marks each)

Answer 6(e):- Research Analysts

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

  • preparation or publication of the content of the research report; or
  • providing research report; or
  • making ‘buy/sell/hold’ recommendation; or
  • giving price target; or
  • offering an opinion concerning public offer,

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

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

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

The net worth requirements of Research Analysts are:

  • Body corporate or limited liability partnership firm – not less than `25
  • Individual or partnership firm shall have net tangible assets of value not less than `1

 

OR (Alternate question to Q. No. 6)

Question 6A

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

Answer 6A(i):-

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

A.    Preventive Surveillance

  • Stringent on boarding norms for Trading Members – Stringent net worth, back ground, viability checks while on boarding Trading Members.
  • Index circuit filters – It brings coordinated trading halt in all equity and equity derivative markets at 3 stages of the index movement, either way , at 10%, 15% and 20% based on previous day closing index value.
  • Trade Execution Range – Orders are matched and trades take place only if the trade price is within the reference price and execution
  • Order Value Limitation – Maximum Order Value limit allowed per
  • Cancel on logout – All outstanding orders are cancelled, if the enabled user logs out.
  • Kill switch – All outstanding orders of that trading member are cancelled if trading member executes kill
  • Risk reduction mode – Limits beyond which orders level risk management shall be initiated instead of trade
  • Compulsory close out – Incoming order, if it results in member crossing the margins available with the exchange, such order will be partially or fully cancelled, as the case may be, and further disallow the trading member to create fresh positions.
  • Capital adequacy check – Refers to monitoring of trading member’s performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached
  • Fixed Price Band / Dynamic Price band – Limits applied within which securities shall move; so that volatility is curbed orderliness is bought about. For non- derivative securities price band is 5%, 10% & 20%. For Derivative products an operating range of 10% is set and subsequently flexed based on market conditions.
  • Trade for Trade Settlement – The settlement of scrip’s available in this segment is done on a trade for trade basis and no netting off is
  • Periodic call auction – Shifting the security form continuous to call auction method
  • Rumour Verification – Any unannounced news about listed companies is tracked on online basis and letter seeking clarification is sent to the companies and the reply received is disseminated

B.    Post trade surveillance

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

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

Answer 6A(ii):-

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

  • Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility.
  • VaR based margining System
  • Specification of mark to Market margins
  • Specification of Intra-day trading limits and Gross Exposure Limits
  • Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges
  • Specification of time limits of payment of margins
  • Collection of margins on upfront basis
  • Index based market wide circuit breakers.
  • Automatic de-activation of trading terminals in case of breach of exposure limits.
  • VaR based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market. • Additional margins have also been specified to address the balance 1% cases
  • Collection of margins from institutional clients on T+1 basis.

(iii). What is Pension Fund and Government Pension ? State the legislations governing pension in India.

Answer 6A(iii):-  Pension Fund

Pension Fund means a fund established by an employer to facilitate and organize the investment of employees’ retirement funds which is contributed by the employer and employees. The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement. Pension funds are commonly run by some sort of financial intermediary for the company and its employees like N.P.S. scheme is managed by UTIAMC (Retirement Solutions), although or some larger corporations operate their pension funds in-house. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Pension funds play a huge role in development of the economy and it play active role in the Indian equity market. This pension fund ensures a change in their investment attitudes and in the regulatory climate, encouraging them to increase their investment levels in equities and would have a massive impact on capital market and on the economy as a whole.

Pensions broadly divided into two sectors:

  1. Formal sector Pensions
  2. Informal sector Pensions

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

Government Pension

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

Legislations governing pension in India

There are following three Acts for pensions in India.

  1. Pensions under the Employees Provident Fund & Miscellaneous Provisions Act 1952 (EPF&MP) : These include the Employees Provident Fund, Employees Pension Scheme, and Employees Deposit Linked Insurance Scheme
  2. Pensions under the Coal mines Provident Fund & Miscellaneous Provisions Act 1948 : These include Coal mines provident fund, Coal mines pension scheme & Coal mines linked insurance Scheme.
  3. Gratuity under the Payment of Gratuity Act, 1972 : There are other provident funds in India like Assam Tea Plantations Provident Fund, J&K Provident Fund, and Seamens Provident Fund

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