INVESTMENT

HISTORICAL BACKGROUND OF SECURITIES AND INVESTMENT LAW

Beginning of Securities market

The earliest stock exchange was set up in Amsterdam in 1602 and it was involved in buying and
selling of shares for Dutch East India Company. Prior to this, brokers existed in France dealing with
government securities. It must be noted that the first real stock exchange started in Philadelphia in
the United States during the late 18th century. Later, the New York Stock Exchange became popular
and Wall Street became the hotspot of brokerage activities. Earlier stockbrokers were largely
unorganised, but later most of them joined hands to form institutions and organisations. Security
Trading in India goes back to the 18th century when East India Company began trading in loan
securities.

Derivatives market have been functioning in India in some form or the other for a long time.
Corporate shares with the stock of Bank and Cotton presses started being traded in the 1830s in
Mumbai with Bombay Cotton Trade Association being the first to start future trading in 1875 in the
arena of commodities trading and by the early 1900s, India had one of the world’s largest futures
industry. Going back to 1850s the roots of stock exchanges in India sprouting when 22 stockbrokers
began trading opposite the Town Hall of Bombay under a banyan tree. The tree is still present in the
area and is known as Horniman Circle.

This trading continued till a shift to banyan trees at the Meadows Street Junction, which is now
known as Mahatma Gandhi Road, a decade later. The shift was an ongoing one and number of
brokers gradually increased finally settling in 1874 at what is known as Dalal Street. The group of 318
people came together to form “Native Shares and Stock Brokers Association” and the membership
fee was Re 1. This association is now known as Bombay Stock Exchange (BSE) and in 1965 it was
given permanent recognition by the Government of India under the Securities Contracts (Regulation)
Act (SCRA), 1956. BSE is also the oldest stock exchange in Asia and it is been 144 years since it has
been formed. Following its formation, Ahmedabad stock exchange came into operation in 1894
trading in shares of textile mills. Another development in the history of stock exchanges began with
the Calcutta stock exchange opening up in 1908 and began trading shares of plantations and jute
mills. It was followed by Madras Stock Exchange starting in 1920.

Post-independence Era and Reforms in the market

There were a series of reforms in the stock market between 1993 and 1996 which further lead to the
development of exchange-traded equity derivatives markets in India.
There was a certain element of the trading system called “Badla” involving some elements of
forwards trading which had been in existence for decades. This practice led to the growth of
undesirable market practices and to check this development it was prohibited off and on till it was
banned in 2001. In the 1980s stockbroking services were restricted only to the wealthy class who
could afford them. With the spread of the Internet, stockbroking became accessible.

In the 1990s stock market witnessed a steady increase in stock market crises. An aspect of these
crises was market manipulation on the secondary market. Following are the incidents which
prompted the development of the stock market:-

1992: Harshad Mehta – The first “stock market scam” was one which involved both the GOI bond
and equity markets in India. Thereafter, manipulation was based on inefficiencies in the settlement
system in GOI bond market transactions. Inflation came about in the equity markets and the market
index went up by 143% between September 1991 and April 1992 and the amount involved in the
crises was Rs 54 billion.

The above instances have had a disruptive effect on the market that is(i) pricing efficiency (ii)
intermediation between households investing in shares and firms financing projects by issuing
shares which were resolved by reform measures by the government.

In the post-independence era, the BSE dominated the volume of trading. However, the low level of
transparency and undependable clearing and settlement systems, apart from other macro factors,
increased the need for a financial market regulator, and the SEBI was born in 1988 as a non-
statutory body. Later it was made a statutory body in 1992.

Thereafter, in 1952 cash settlement and options trading were prohibited by the government and
derivatives trading shifted to informal forwards market. At present, the government allows for
markets based pricing mechanism and shows less scepticism towards derivatives trading. The
prohibition on futures trading of many commodities was lifted starting in the early 2000s and
national electronic exchanges were created. In the 1980s stockbroking services were used only by a
wealthy class who could afford them. With the rise of the Internet, stockbroking services became
accessible to even the common man. Major organisations became involved in stockbroking activities.
Although in the wake of Harshad Mehta scam in 1992, there was a pressing need for another stock
exchange large enough to compete with BSE and bring transparency to the stock market. It leads to
the development of the National Stock Exchange (NSE). It was incorporated in 1992, became
recognised as a stock exchange in 1993, and trading began on it in 1994. It was the first stock
exchange on which trading was conducted electronically. In response to this competition, BSE also
introduced an electronic trading system known as BSE Online Trading (BOLT) in 1995.

Thereafter, BSE launched its own sensitivity index, the Sensex, known at present as the S&P BSE
Sensex, in 1986 with 1978-79 as the base year. This is an index of 30 companies and is a benchmark
stock index, measuring the overall performance of the exchange. Equity derivatives were introduced
by the exchange in 2000. Index options launched in June 2001, stock options in July 2001, and stock
futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001.

Its competitor, NSE launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in
1996. It comprises of 50 stocks and functions as a performance measure of the exchange. In terms of
electronic screen-based trading and derivatives, it has left behind its competitor BSE by introducing
first of its kind products and services.

Stock exchanges at present

After incorporation of BSE and NSE, 23 stock exchanges were added not including the BSE. At
present, there are 23 approved stock exchanges in India out of which 6 are functional:-

1. BSE Ltd

2. Calcutta Stock Exchange

3. India International Exchange (India INX)

4. Metropolitan Stock Exchange

5. NSE

6. NSE IFSC Ltd

Thus, from the times when buyers and sellers had to assemble at stock exchanges for trading till the
present times when the dawn of IT has made the operations at stock exchanges electronic hence
making stock markets paperless. Trading facilities can be accessed from home or office on phone or
Internet. Therefore, with new products and services, rampant growth in stock trading can be
foreseen.

CONCEPT OF SECRUITY INVESTMENT LAW

Securities are investment products representing small fractional interests or rights over a business
enterprise or a pool of assets. Transactions in securities are regulated by three major legislation in
India viz. Securities Contract (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992
and Companies Act, 2013. To promote transparency and prevent unfair practices after liberalization
these are introduced as proper regulation is needed to identify market failure and imperfection
( importance of sebi and dip guidelines) The Securities and Exchange Board of India (SEBI) is the
regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock
Exchanges in India. SEBI’s primary functions include protecting investor interests, promoting and
regulating the Indian securities markets. All financial intermediaries permitted by their respective
regulators to participate in the Indian securities markets are governed by SEBI regulations, whether
domestic or foreign. Foreign Portfolio Investors are required to register with DDPs in order to
participate in the Indian securities markets. And Guidelines for Disclosures and Investor Protection –
SEBI were provided to protect investors and make timely disclosure of material information

Liberalisation does not mean scrapping of all codes and statutes. It rather means replacement of one
set by another set of more liberal code / statute, which influence or prescribe the way the private
sector agents should carry out their activities. In the context of securities market, the regulations are
necessary for The correction of identified market imperfections and failures, Signaling minimum
standards of quality enhances confidence in markets, Substantial economies of scale to be derived
from collective regulation and supervision of issuers and intermediaries. As investment contracts are
long-term in nature and often involve a fiduciary role in a principal-agent relationship, there is need
for continuous monitoring. In the absence of regulation and supervision by a specialist agency, which
offers certain minimum standards, investors are required to spend time, effort and resources in
investigating and monitoring issuers and intermediariesWith these objectives, it was considered
necessary to create a statutory agency, which would ensure fair play in the market, develop fair
market practices, prescribe and monitor conduct of issuers and intermediaries so that the securities
market enables efficient allocation of resources. The enactment of the SEBI Act, 1992 was an
attempt in this direction
The term ‘investment’ can be described in various ways as per different principles and theories.
Typically, the application of assets or money with the expectation that it would generate or
appreciate more income in future is known as investment.

Securities: the concepts and kinds

Investment securities are securities that are tradable like financial assets such as equities or fixed
instruments of income. These are purchased in order to be held for investment. Being in contrast to
securities, which are purchased by a broker-dealer or any other intermediary considered for a quick
resale which are trading account securities.

Equity securities generally refer to stocks that are shared to be purchased in the company whereas
debt securities which are also known as income securities, referring to bonds generally, they are
actually what they sound like: investments in debt.

The term ‘Securities’ under Section 2(81) of the Companies Act, 2013 has been defined to mean
‘securities’ as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA).

Under section 2(h) of SCRA, the term ‘securities’ include the following:

Shares, scrips, stocks, bonds, debentures, debenture stocks etc. in or of any incorporated company
or another body corporate.

Derivatives.

Units issued by any Collective Investment Scheme to the investors in such scheme.

Security receipt as defined in Section 2(zg) of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002.

Units or any other such instruments issued to the investors under any Mutual fund scheme.

Government Securities

Such other instruments, rights or interest therein shall be declared by the government to be
securities be declared by the government to be securities.

The SCRA recognises securities issued by a body corporate as well as the government. A company
may also issue its securities at a higher price than their normal value if the market already exists.
Stock exchanges are authorised under Section 9(m) of SCRA to make provisions in their bye-laws to
list securities on the stock exchange.
Listing means including any security for the purpose of trading in a recognised stock exchange, i.e.
admission of securities of any incorporated company, Central and State Governments, Quasi
Governmental and other financial institutions/corporations, municipalities, electricity, housing
boards, etc.

In Sahara India Real Estate v. Securities & Exchange Board Of India, one of the issues of the case
was whether the hybrid Optionally Fully Convertible Debentures of the company fall within the
definition of "securities" within the meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI
with the jurisdiction to investigate and adjudicate. It was held that although the OFCDs issued by the
two companies are in the nature of ‘hybrid’ instruments, it does not cease to be a "Security" within
the meaning of Companies Act, SEBI Act and SCRA. It says although the definition of "Securities"
under section 2(h) of SCRA does not contain the term "hybrid instruments", the definition provided
in the Act is an inclusive one and covers all "Marketable securities".

Concept: Security is a tradable financial asset. The term commonly refers to any form of financial
instrument, but its legal definition varies by jurisdiction. Securities are broadly categorized into debt
securities (e.g., banknotes, bonds and debentures) equity securities (e.g., common stocks). Security,
in a financial context, is a certificate or other financial instrument that has monetary value and can
be traded. Securities are generally classified as either equity securities, such as stocks or debt
securities, such as bonds and debentures.

Kinds: Debt Securities, a Fancy Name for Bonds

When a business borrows to grow, first it will borrow using traditional means; the banks. Banks don’t
want to take too much risk, so they will only lend so much to anyone’s business. The business then
must go to the capital markets and issue debt security which is called a bond. When you buy a bond,
you are lending your money to a company, and they owe it back to you. They must also pay you
interest.

Equity Securities, a Fancy Name for Stocks

When a business takes on additional owners to grow, it can either find private investors, or it can go
to the capital markets and issue securities in the form of publicly-traded stock.

When you buy a stock, you become the owner of the company, and as the company makes a profit,
you will participate in that profit in one of two ways. Either the company will pay a dividend, which
you will receive, or they will use their profits to grow the business further, and, if all goes well, you
should subsequently see your stock rise in value. These stocks and bonds are called securities and
makeup what investors call “the market.”

Derivative Securities, a Complicated Form of Investment

With derivative securities, instead of owning something outright, like shares of a stock, you own the
right to trade other financial securities at pre-agreed upon terms. Options contracts are a form of
derivative security. They give you the right to buy or sell shares of existing security at a specific price,
by a specified date in the future. You pay for this right, and the price you pay is called the
“premium.” Think of it as an insurance premium.

Securities can be broadly categorized into debt securities, equity securities and derivatives where
the debt securities include banknotes, bonds, and debentures, equity securities include common
stocks and derivatives involve forwards, futures options and swaps.

SHARE CAPITAL

Section 2(47) of the Companies Act, 2013 defines Shares as “A share in the company includes stock
until it has been explicitly distinguished between the stock and the share either implicitly or
explicitly”. Shares can be taken as goods according to the Sales of Goods Act, 1930, they are also
considered as movable property abide by the limitations of the articles of the association of the
company.( section 82 of companies act 2013) Though the real meaning of Capital is cumbersome,
under The Act, it means that the value of the assets contributed to the company by those who
subscribe for its shares. The real thing which would matter is the value because assets will change in
the form of course of business.

Share Capital is the amount of money that a company receives by the sale of its shares. The
company uses this amount of money as the capital of the company to commence business and gain
profits in its business. This capital is also used to acquire movable and immovable properties that are
required for running the business. Bucha F. Guzdar v. Commissioner of Income Tax, Bombay,1955
ITR SC 271.

THE USAGE OF SHARE- CAPITAL UNDER COMPANIES ACT

The Share-Capital under Companies Act, 2013 is significantly used in memorandum of association in
which a company limited by shares or by guarantee must state in its memorandum of association,
the amount of share-capital and the division thereof into shares of fixed amount. State of Karnataka
and Ors. v. Selvi J. Jayalalitha and Ors., Criminal Appeal Nos.304-307 of 2017.
It is used in Articles of Association when a company with unlimited liability and having share capital
must state its authorized capital in its articles of association. Vodafone International Holdings B.V. v.
Union of India (UOI) and Ors., 2010 TAXMAN BOM 193 100.

Finally, it is used in Prospectus, The amount of capital and the number of shares in which the capital
is dividend must be stated in the prospectus, the statement in lieu of prospectus and the annual
return of the company.

Types Of Shares

Now that you know share definition, you must understand that broadly share can be of two types:

Equity shares

Preference shares

Equity Shares Meaning

These are also known as ordinary shares, and it comprises the bulk of the shares being issued by a
particular company. Equity shares are transferable and traded actively by investors in stock markets.
As an equity shareholder, you are not only entitled to voting rights on company issues, but also have
the right to receive dividends. However, the dividends - issued from the profits of the company - are
not fixed. You must also note that equity shareholders are subject to the maximum risk - owing to
market volatility and other factors affecting stock markets - as per their amount of investment. The
types of shares in this category can be classified on the basis of:

Classification Of Equity Shares On The Basis Of Share Capital

Equity financing or share capital is the amount raised by a particular company by issuing shares. A
company can increase its share capital by additional Initial Public Offerings (IPOs). Here is a look at
the classification of equity shares on the basis of share capital:

Authorised Share Capital: Every company, in its Memorandum of Associations, requires to prescribe
the maximum amount of capital that can be raised by issuing equity shares. The limit, however, can
be increased by paying additional fees and after completion of certain legal procedures.

Issued Share Capital: This implies the specified portion of the company’s capital, which has been
offered to investors through issuance of equity shares. For example, if the nominal value of one
stock is Rs 200 and the company issues 20,000 equity shares, the issued share capital will be Rs 40
lakh.

Subscribed Share Capital: The portion of the issued capital, which has been subscribed by investors is
known as subscribed share capital.

Paid-Up Capital: The amount of money paid by investors for holding the company’s stocks is known
as paid-up capital. As investors pay the entire amount at once, subscribed and paid-up capital refer
to the same amount.

Classification Of Equity Shares On The Basis Of Definition

Here is a look at the equity share classification on the basis of definition:

Bonus Shares: Bonus share definition implies those additional stocks which are issued to existing
shareholders free-of-cost, or as a bonus.

Rights Shares: Right shares meaning is that a company can provide new shares to its existing
shareholders - at a particular price and within a specific time-period - before being offered for
trading in stock markets.

Sweat Equity Shares: If as an employee of the company, you have made a significant contribution,
the company can reward you by issuing sweat equity shares.

Voting And Non-Voting Shares: Although the majority of shares carry voting rights, the company can
make an exception and issue differential or zero voting rights to shareholders.

Classification Of Equity Shares On The Basis Of Returns

On the basis of returns, here is a look at the types of shares:

Dividend Shares: A company can choose to pay dividends in the form of issuing new shares, on a
pro-rata basis.

Growth Shares: These types of shares are associated with companies that have extraordinary growth
rates. While such companies might not provide dividends, the value of their stocks increase rapidly,
thereby providing capital gains to investors.

Value Shares: These types of shares are traded in stock markets at prices lower than their intrinsic
value. Investors can expect the prices to appreciate over a period of time, thus providing them with
a better share price.
Preference Shares Meaning

These are among the next types of shares issued by a company. Preferential shareholders receive
preference in receiving profits of a company as compared to ordinary shareholders. Also, in the
event of liquidation of a particular company, the preferential shareholders are paid off before
ordinary shareholders. Here is a look at the different types of shares in this category:

Cumulative And Non-Cumulative Preference Shares Meaning: In the case of cumulative preference
shares, if a particular company doesn’t declare an annual dividend, the benefit is carried forward to
the next financial year. Non-cumulative preference shares don't provide for receiving outstanding
dividends benefits.

Participating/Non-Participating Preference Share Definition: Participating preference shares allow

shareholders to receive surplus profits, after payment of dividends by the company. This is over and
above the receipt of dividends. Non-participating preference shares carry no such benefits, apart
from the regular receipt of dividends.

Convertible/Non-Convertible Preference Shares Meaning: Convertible preference shares can be

converted into equity shares, after meeting the requisite stipulations by the company’s Article of
Association (AoA), while non-convertible preference shares carry no such benefits.

Redeemable/Irredeemable Preference Share Definition: A company can repurchase or claim

redeemable preference share at a fixed price and time. These types of shares are sans any maturity
date. Irredeemable preference shares, on the other hand, have no such conditions.

KINDS OF SHARE CAPITAL

Section 86 of the Companies Act, 2013 deals with the kinds of Share Capital. The Share-Capital of a
company limited by share is of two kinds.

Equity share Capital:

Every company requires substantial working capital to keep their business smooth. This capital is
used when a company faces financial restrictions to keep its regular operations active. More often,
companies use their equity shares to raise the required capital known as equity share capital. The
share Capital which is not limited by shares is called an Equity Share Capital.

Preference Share Capital:

Preference shares are the shares which promise the holder a fixed dividend, whose payment takes
priority over that of ordinary share dividends. Capital raised by the issue of preference shares is
called preference share capital. A preferential Share-capital is that part of the capital of a company
that carries preferential rights to be paid a fixed amount and on a winding up, or upon repayment of
capital, to be repaid the capital paid up.

ALTERATION OF THE SHARE-CAPITAL.

Section 61 of the Companies Act, 2013 deals with the Alteration of Share-capital. It is mandatory for
a company limited by the shares or by guarantee, and having a share capital, to have ‘a capital’
clause in its memorandum of association that states the authorized or nominal capital of the
company and its division into shares of the specified value.[11]

A company can alter a share capital without confirming it to the Company Law Tribunal by passing
an ordinary resolution. The company has a share capital has converted any of its shares into stock
and has given notice of the conversion to the registrar, all the provisions of the act which are
applicable shall cease to apply so much the share capital converted into the stick.[12] Alteration can
be done in the following ways:

It may increase its share Capital by such amount as it thinks expedient by issuing new shares.

It may consolidate and divide all or any of its share capital into shares of larger amounts than it’s
existing shares.

It may cancel the which are not taken or agreed not to be taken by any person.[13]

REDUCTION OF SHARE CAPITAL

Section 66 of the Companies Act, 2013 deals with the reduction of Share Capital. A company limited
by shares or guarantee which has share capital can reduce the share capital in any manner by a
special resolution.( Section 66, The companies Act, 2013.) The reduction can be made through by
passing a special resolution and having a share capital. For a company to reduce its share capital, it
needs to pass a special resolution. It may also pass an application to the National Company Law
Tribunal for confirmation after passing the resolution.

Reduction occurs due to various reasons. If a company has suffered a loss in its business, it might try
to improve its image by reducing its capital and writing- the loss in its final accounts. Over-
capitalization is not good for business. If a company has more capital than that is required for its
operation, it can reduce its share capital for optimum utilization. Finally, reduction may also occur
when a company’s fixed assets have been over-valued, they can be valued appropriately by a
reduction in the capital of the company.[15]

Debentures- meaning , feature and kinds

According to Section 2(30) of the Companies Act 2013, the company has the authority to issue bonds
or debentures, which are debt instruments that can be both secured and unsecured by establishing
a fee on the company’s assets. Debentures are a form of long-term unsecured bond that a company
may issue if it agrees to repay it at a specified future date. The company normally pays interest to
debenture holders at the end of each year before maturity, but if it is unable to pay either the
interest or the principal amount of the loan, the creditors of the company have the right to request
the competent authority that the company be liquidated to recover their money by selling the
company’s properties.

The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. A
debenture is a written instrument acknowledging a debt under the common seal of the company. It
contains a contract for repayment of principal after a specified period or at intervals or the option of
the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly
on fixed dates. According to section 2(12) of The Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds, and any other securities of a company whether constituting a charge
on the assets of the company or not.

Characteristics of Debentures

1. It is in the form of a certificate of indebtedness of the company and issued by the company itself.
It generally creates a charge on the assets/ undertaking of the company. There is usually a specific
date of redemption.

2. The debenture holders are creditors to the company and they do not have any claim of ownership
of the company, unlike shareholders.

3. As the debenture holders are not the owner of the company so they are not entitled to the
administration and management of the company.

4. The debenture holder need not be concerned with the profits or loss of the company, they have a
fixed rate of interest on the principal amount which they get every year irrespective of the financial
condition of the company.
5. Debentures usually have a charge on the assets of the company, which means that if the company
goes into liquidation and is not able to repay the amount, the debenture holders can also sell the
property of the company through the legal process under the applicable law to recover the money of
the debenture holders.

6. There is an undertaking given by the company to repay debenture holders the principal amount
along with the interest at the stated time.

7. The debenture holders cannot claim the privilege to vote in any meeting of the company.

8. When the company is in winding up, the priority of the company is to repay the debenture holders
of the company as per the applicable law hence, there is no risk involved of loss of money of the
debenture holders.

Kinds of debentures

Different Types of Debentures:

Based on Security

Secured Debentures: Secured debentures are that kind of debentures where a charge is being
established on the properties or assets of the enterprise for the purpose of any payment. The charge
might be either floating or fixed. The fixed charge is established against those assets which come
under the enterprise’s possession for the purpose to use in activities not meant for sale whereas
floating charge comprises of all assets excluding those accredited to the secured creditors. A fixed
charge is established on a particular asset whereas a floating charge is on the general assets of the
enterprise.

Unsecured Debentures: They do not have a particular charge on the assets of the enterprise.
However, a floating charge may be established on these debentures by default. Usually, these types
of debentures are not circulated.

Based on Tenure

Redeemable Debentures: These debentures are those debentures that are due on the cessation of
the time frame either in a lump-sum or in instalments during the lifetime of the enterprise.
Debentures can be reclaimed either at a premium or at par.

Irredeemable Debentures: These debentures are also called as Perpetual Debentures as the
company doesn’t give any attempt for the repayment of money acquired or borrowed by circulating
such debentures. These debentures are repayable on the closing up of an enterprise or on the expiry
(cessation) of a long period.

Based on Convertibility

Non-Convertible Debentures- This form of debenture can’t be converted into equity or preference
shares. These debentures are typically repaid only after they reach their maturity date, which is
normally 10 or 20 years. These instruments keep their debt status and can’t be converted into stock
of the company.

Partly Convertible Debentures – These partly convertible debentures will be converted into equity
shares at the issuer’s discretion in the future. The conversion ratio is set by the issuer. The ratio is
normally determined when the debentures are subscribed. If a debenture holder converts any of his
debentures into equity, he becomes a shareholder for those converted shares and his rights are
amended accordingly. Thus, convertible debentures are debentures that can be converted by the
debenture holder as agreed upon after a set period of time.

Fully Convertible Debentures – These are debentures that can be exchanged into equity or
preference shares at a fixed rate of exchange after a set period of time. If a debenture holder
converts his debentures into shares, he ceases to be the company’s creditor and becomes a member
as an additional shareholder. Thus, convertible debentures are debentures that can be converted by
the debenture holder after a set period of time. The rate at which the debenture is exchanged is
determined at the time of issue of such debentures. Only interest is paid to the debenture holder
before the conversion, after which the rights exercised are the same as those of a shareholder. The
approval of the shareholders of the company is required prior to the issuance of convertible
debentures.

Optionally Convertible Debentures- The debenture holder has the option/ability to convert his or
her debentures into stock. The issuer determines the price of conversion, which was agreed upon by
all parties at the time of the issue of such debentures

Based on Coupon Rate Point of view

Specific Coupon Rate Debentures: Such debentures are circulated with a mentioned rate of interest,
and it is known as the coupon rate.

Zero-Coupon Rate Debentures: These debentures don’t normally carry a particular rate of interest.
In order to restore the investors, such type of debentures are circulated at a considerable discount
and the difference between the nominal value and the circulated price is treated as the amount of
interest associated to the duration of the debentures.

Based on Registration

Registered Debentures: These debentures are such debentures within which all details comprising
addresses, names and particulars of holding of the debenture holders are filed in a register kept by
the enterprise. Such debentures can be moved only by performing a normal transfer deed.

Bearer Debentures: These debentures are debentures which can be transferred by way of delivery
and the company does not keep any record of the debenture holders Interest on debentures is paid
to a person who produces the interest coupon attached to such debentures.

CHARGES:

A charge has been defined under the Section 2 (16) of the Companies Act, 2013 as (i) a lien or an
interest or (ii) charges created on the assets or property of a company, or,(iii) identified undertakings
or both as security and includes a mortgage

From Section 77 to 87 of the chapter VI of the Companies Act, 2013 provides concerning the
registration of charges besides being governed by the Companies (Registration of Charges) Rules,
2014. In Dublin City Distillery Co v Degrey ( 1914 AC 823), it was held that charge includes a lien and
equitable charge.

Types of charge

They are principally two types of charges –

Fixed charge: A charge which is identifiable with specific and clear asset/property at the time of
creation of charge.

The Company cannot transfer such identified and defined property unless the charge holder
(creditor) is paid off his dues.

Floating Charge: It covers the floating and circulating nature of properties of a company, like sundry
debtors, stock in trade etc.

The nature of the property charged may change from time to time.

The floating charge crystallizes into fixed charge if the Company crystallizes or the undertaking
ceases to be a going concern.
In Maturi U. Rao v. Pendyala (A.I.R 1970 A.P 225) , it was held that when floating charge crystallizes,
it converts into fixed charge and the same restrictions as applicable to fixed charge shall apply on it
as well.

Every company is duty bound under the provisions of Section 77(1) of the Act for creating a charge.
Further, all types of charges together with the instruments duly signed by the company/charge-
holder needs to be filed with the Registrar of Companies within 30 days of the creation of that
particular charge. The charge can be created-

(i) inside or outside India

(ii) On its assets/properties or its undertakings

(iii) could be tangible or intangible

(iv) located in or outside India.

No charge created by a company shall be taken into account by the liquidator or any other creditor
unless it is duly registered but shall not prejudice any contract or obligation for the repayment of the
money secured by a charge. Ref: ONGC Ltd v official liquidator of Ambica Mills Co Ltd (2006)

Section 78: Application for registration of charge Section 78 provides the right to the Charge holder
to apply for charge creation subject to the fulfilment of following condition: Company does not fill
the form within the time period prescribed under the section 77(1) i.e, 30 days from charge creation.
The registrar will register the charge after giving notice of 14 days to the company.

Section 80 of Companies Act 2013 states as and when a charge is created on any of its assets or any
of its instruments/undertakings it is to be presumed that the succeeding person obtaining any of its
assets or undertakings has full knowledge of charge registered. The registrar shall preserve a register
containing the particulars of the charge registered for every company as required under Section 81
of Companies Act 2013.

It was impending upon every company creating a charge with the Registrar inside 30 days of its
creation, to record the details of the charge signed by the company and the charge-holder along
with the instruments, if any. On an application by the company, the Registrar may permit such
registration to be done within a window of 300 days of such creation on disbursement of extra fees
as may be prescribed.

Dividends under the companies act

As per Section 2(35) of Companies Act, 2013 defines the term as including any interim dividend.
Dividend is basically the share of profit distributed among shareholders. Ordinary meaning of
dividend is a share of profits, whether at a fixed rate or otherwise, allocated to holders of shares in a
company. Dividend can be paid on Equity or preference shares both. The word “Dividend” has origin
from the Latin word “Dividendum”. It means a thing to be divided.

Dividend is said to be a final dividend if it is declared at the annual general meeting of the company.
Final dividend once declared becomes a debt enforceable against the company.- final dividend

An interim dividend is a dividend payment made before a company's annual general meeting and
before the release of final financial statements. This declared dividend usually accompanies the
company's interim financial statements and are paid out monthly or quarterly.

Preference shares (preferred stock) are company stock with dividends that are paid to shareholders
before common stock dividends are paid out. ... Preference shares are ideal for risk-averse investors
and they are callable (the issuer can redeem them at any time).
SCRA

Dahiben Umedbhai Patel v. Norman James Hamilton & Others[9], the Bombay High Court had
observed that for the application of the Act is not limited merely to securities which are listed, but
also to securities not listed in any stock exchange. All that is requires is that there must be
marketability. Marketability was noted to imply ease of selling and includes any security which is
capable of being sold in the market.

Brooke Bond India Limited v U.B. Limited and Others [1992(2)BomCR429] (Brooke Bond Case), in
which the Bombay High Court held that "the sale of shares, whatever be their number, even if it
amounts to a transfer of the controlling interest of a company, cannot be equated to the sale of any
part of the undertaking". This case has subsequently been referred to in various other judgements .
where shares of an unlisted public limited company were involved, the Court held that since the
subject-matter of the agreement was shares of an unlisted company, the SCRA had no application to
them, and therefore, the contractwas not violative of the SCRA.

The Calcutta High Court in the case of B. K. Holdings (P.) Ltd. v. Prem Chand Jute Mills, (1983)

; has taken a contrary view that shares of an unlisted public limited company are “securities” within
the meaning of section 2(i) of the SCRA, and therefore, the SCRA would applywhere the same
proposition has been upheld.
SEBI 3 MAIN POWERS- QUASI JUDICIAL POWER- Quasi-Judicial: SEBI has the authority to deliver
judgements related to fraud and other unethical practices in terms of the securities market. This
helps to ensure fairness, transparency, and accountability in the securities market.

QUASI EXECUTIVE POWER- Quasi-Executive: SEBI is empowered to implement the regulations and
judgements made and to take legal action against the violators. It is also authorised to inspect Books
of accounts and other documents if it comes across any violation of the regulations.

QUASI LEGISLATIVE POWER- SEBI reserves the right to frame rules and regulations to protect the
interests of the investors. Some of its regulations consist of insider trading regulations, listing
obligations, and disclosure requirements. These have been formulated to keep malpractices at bay.
Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate
Tribunal and the Supreme Court of India.

ACHIEVEMENTS OF SEBI-

The following are some of the significant achievements of the SEBI.

Issuance of guidelines for merchant banks.

A complete ban on Forward Trading.

Registration of multiple investor associations.

Issuance of guidelines on Insider Trading and so.

Formulation of the takeover code.

Registration of mediators associated with the stock exchange.

Formulating the code for mutual funds that require them to publish balance sheets.
Sebi act
Section 11c- power of sebi to investigate

Penalty of insider trading

Sebi settlement of administrative and civil proceedings regulation act 2014

In 2007 and for the very first time, the Securities and Exchange Board of India (SEBI) introduced a
settlement mechanism for violation of securities laws in India, vide its circular. The object of the said
circular was to allow, in certain cases, a settlement of a violation of securities laws, by a consensus
between the offender and SEBI, whereby both parties would derive benefit therefrom and would
serve the interests of the market.

Subsequently, in 2012, SEBI issued another circular clarifying that certain serious offences (inter alia,
insider trading, serious fraudulent and unfair trade practices and front running) would fall outside
the purview of the said settlement mechanism. With a view to introduce the certainty of legal
enforceability in the settlement mechanism, which was set in motion by way of a circular, SEBI
framed a new regime in 2014 – the SEBI (Settlement of Administrative and Civil Proceedings)
Regulations 2014 (‘2014 Regulations’). However, the mechanism under the 2014 Regulations was
very stringent in terms of the offences that could be settled and suffered from lack of clarity and
predictability in determination of an application for settlement.

In order to combat the pitfalls in the 2014 Regulations, SEBI set up a High-Level Committee under
the chairmanship of Justice Anil R Dave, which, in its report published on 10 August 2018, suggested
revisions in the 2014 Regulations for the purpose of improving the existing mechanism. On receipt of
public comments on this, SEBI approved the framing of the SEBI (Settlement Proceedings)
Regulations 2018 (‘Settlement Regulations’) which replaced the 2014 Regulations with effect from 1
January 2019.

SEBI in exercise of the powers conferred under Section 15JB of the Securities and Exchange Board of
India Act, 1992, Section 23JA of the Securities Contracts (Regulation) Act, 1956 and Section 19-IA of
the Depositories Act, 1996 r/w Section 30 of the Securities and Exchange Board of India Act, 1992,
Section 31 of the Securities Contracts (Regulation) Act, 1956 and Section 25 of the Depositories Act,
1996, the Securities and Exchange Board of India made the following regulations, w.e.f. 27th
December, 2017, to further amend the Securities and Exchange Board of India (Settlement of
Administrative and Civil Proceedings) Regulations, 2014. In the Securities and Exchange Board of
India (Settlement of Administrative and Civil Proceedings) Regulations, 2014. In keeping with the
objective to give even lesser wriggle room, from previous regime which enabled SEBI to condone any
delay beyond 60 days from the date of service of its notices to capping it at 120 days (subject to
additional costs), under the present regime, the 60 day timelines is now sacrosanct
she is reading sections: https://www.sebi.gov.in/legal/regulations/dec-2017/securities-and-
exchange-board-of-india-settlement-of-administrative-and-civil-proceedings-regulations-2014-
last-amended-on-december-27-2017-_37185.html

Section 5, 6,7,8,9,10,11

SEBI INSIDER TRADING

Insider trading refers to trading of shares by an ‘insider’ based on unpublished price sensitive
information (UPSI). It involves buying or selling shares of a listed company using information that can
materially impact the stock price, but has not been made public yet. The key words here are ‘insider’
and ‘UPSI’.

SEBI regulations define an ‘insider’ as someone who is a connected person or has access to UPSI. A
connected person can be anyone who during the six months preceding the insider trade has been
associated with the company in some way. This could be a company director or employee or their
close relatives, or a legal counsel or banker to the company or even an official of the stock exchanges
or trustees or employees of an asset management company who interacted with the company.

UPSI includes but is not restricted to information relating to a company’s quarterly results, merger
and acquisition deals, major capacity expansion or shutdown plans or any such significant activities
that have not been disseminated to the public at large. When insiders use the UPSI they possess to
conduct trades, they can be taken to task by the regulator.

For instance, a company manager informs his father about a yet-to-be-announced business deal and
the latter passes on this information to his friends who buy the company’s shares. Then, the
manager, his father and his friends can be booked for violation of insider trading norms. In India,
insider trades are regulated by SEBI under its 2015 Insider Trading Regulations. SEBI can impose fines
and debar individuals/entities from trading in the market if found in violation of these rules.

Note that while trading on UPSI in illegal, all insider trading is not barred. By virtue of their position,
many senior company personnel will always possess material information and yet periodically trade
in shares, say by selling their ESOPs, etc., for personal needs. If such trades are disclosed to the stock
exchanges as per SEBI rules, it isn’t illegal. But a company must notify the exchanges within a few
days about the trading details of the promoter/member of the promoter group or a director if
securities worth ₹10 lakh plus are traded.
Insider trading hurts the integrity of capital markets. In stock markets, symmetric information levels
the playing field as it allows investors to pit their interpretation and analysis of events against each
other. But trading on UPSI gives insiders an unfair advantage over regular investors. Unsuspecting
retail investors, many of whom may have spent time and effort in selecting stocks for investing may
end up at the losing end of a trade. If investors, both regular retail investors as also foreign investors,
suspect insider trading to be rampant, they lose faith in the stock market. To strengthen retail
participation in the stock market, insider trading must be dealt with firmly.

If insiders are exploiting their knowledge to make profitable trades, then retail investors like you and
me don’t stand a chance of making any money in the markets. All the time and effort put into
understanding a company or short-listing stocks will be laid to waste when insiders come in and
swoop down just in time to pocket all gains because of their access to company- and stock-specific
information. If you have friends or family working in listed companies, you must take extra care not
to use any insider information you may come by.

History and Development of Insider Trading Laws In India

The history of Insider Trading in India relates back to the 1940’s with the formulation of government
committees such as the Thomas Committee of 1948, which evaluated inter alia, the regulations in
the US on short swing profits under Section 16 of the Securities Exchange Act, 1934. Thereafter,
provisions relating to Insider Trading were incorporated in the Companies Act, 1956 under Sections
307 and 308, which required shareholding disclosures by the directors and managers of a company.

Due to inadequate provisions of enforcement in the companies Act, 1956, the Sachar Committee in
1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 proposed
recommendations for a separate statute regulating Insider Trading.

India’s encounter with insider trading was first seen in the 1940s. The Thomas Committee Report in
1948 cited instances of directors, agents, officers, auditors possessing strategic information
regarding economic conditions of the company regarding the size of the dividends to be declared, or
of the issue of bonus shares or the awaiting conclusion of a favorable contract prior to public
disclosure.[2]

Thus, Sections 307 and 308 were incorporated in the Companies Act of 1956. Section 307 provided
for maintenance of a register by the companies to record the directors’ shareholdings in the
company. Section 308 prescribed to the duty of the directors and persons deemed to be the
directors to make disclosure of their shareholdings in the company. Thereafter, by the Companies
Amendment Act, 1960 had extended this requirement to the shareholdings of a company’s
managers as well. However, these provisions could not curb this practice of insider trading due to
which the directors or managing agents making unfair use of inside information could go scot free.
The absence of specific regulations in this aspect despite the recommendations of the Thomas
Committee was a major deterrent.

In 1979, the Sachar Committee said in its report that directors, auditors, company secretaries etc.
may have some price sensitive information that could be used to manipulate stock prices which may
cause financial misfortunes to the investing public. The companies recommended amendments to
Companies Act 1956 to restrict or prohibit the dealings of the employees. This Committee opined
that Sections 307 and 308 of the Companies Act were insufficient to curb insider trading.[3]

The Patel Committee in 1986 defined Insider Trading as “Trading in the shares of a company by the
person who are in the management of the company or are close to them on the basis of undisclosed
price sensitive information regarding the working of the company, which they possess but which is
not available to others”. The Patel Committee also recommended that the Securities Contract
(Regulation) Act (“SCRA”), 1956 may be amended to make exchanges curb insider trading and unfair
insider trading and unfair stock deals. Section 21 of the SCRA mandated compliance of the
conditions prescribed under the listing agreement between the company and the stock exchange.
Each stock exchange can formulate its own terms and conditions of the listing agreement.

The concept of Insider Trading in India started fermenting in the 80’s and 90’s and came to be known
and observed extensively in the Indian Securities market. The rapidly advancing Indian Securities
market needed a more comprehensive legislation to regulate the practice of Insider Trading, thus
resulting in the formulation of the SEBI (Insider Trading) Regulations in the year 1992, which were
amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like
Hindustan Levers Ltd. vs. SEBI8, Rakesh Agarwal vs. SEBI9, etc. to remove the lacunae existing in the
Regulations of 1992. The amendment in 2002 came to be known as the SEBI ([Prohibition of] Insider
Trading) Regulations, 1992.

The Abid Hussain Committee in 1989 recommended that insider trading be convicted under civil and
criminal laws and also that SEBI formulate the regulation and governing codes to prevent unfair
deals. The recommendations of the various committees and the needs of rapidly advancing
securities market gave way to the formulation of a comprehensive legislation known as the SEBI
(Insider Trading) Regulations, 1992 which after subsequent amendment in 2002 to plug certain
loopholes revealed in the cases of Hindustan Lever Ltd. v. SEBI[4] and Rakesh Agarwal v. SEBI[5],
came to be known as SEBI ([Prohibition of] Insider Trading) Regulations, 1992 and which prohibited
fraudulent practice and a person involved in insider trading to be held guilty for such malpractice.[6]

Recently, the Securities and Exchange Board of India (SEBI) panel in 2013, headed by former Chief
justice of India N. K. Sodhi suggested that trades by promoters, employees, directors and their
immediate relatives would need to be disclosed internally to the company. The Justice Sodhi
Committee on Insider Trading Regulations made a range of recommendations to the legal
framework for prohibition of insider trading in India and focused on making this area of regulation
more predictable, precise and clear by suggesting a combination of principles-based regulations and
rules that are backed by principles. The Committee also suggested that each regulatory provision
may be backed by a note on legislative intent.[7] As on date, SEBI, the market watchdog, regulates
insider trading through the SEBI Act and the Insider Trading Regulations.

The Patel Committee in India in 1986 defined insider trading as “the trading in the shares of a
company by the person who are in the management of the company or are close to them on the
basis of undisclosed “price sensitive information” regarding the working of the company, which they
possess but which is not available to others”[8]

SEBI had amended the definition of ‘insider’ under Regulation 2(e) in 2008 vide the SEBI (Prohibition
of Insider Trading) (Amendment) Regulations, 2008. In the present statute, Regulation 2(e) of SEBI
([Prohibition of] Insider Trading) Regulations, 1992 defines an “insider” as any person who,

is or was connected[9] with the company or is deemed to have been connected with the company
and is reasonably expected to have access to unpublished price sensitive information in respect of
securities of a company, or, has received or has had access to such unpublished price sensitive
information[10].

Trading which is generally read under the wide ambit of dealing in securities has been defined under
Regulation 2(d) which says “dealing in securities” means an act of subscribing, buying, selling or
agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent;

Finally, in terms of definitions, the Justice Sodhi Committee seeks to clearly define the expression
“trading” in order to distinguish it from the wider expression “dealing”. “Trading” means the
acquisition and disposal of securities. Hence, creating a security over the shares of a company would
not amount to “trading” in those securities.

In simple terms, Insider trading can be defined as a malpractice wherein trade of a company’s
securities is undertaken by people who by virtue of their work have access to the otherwise non
public information which can be crucial for making investment decisions. When insiders, e.g. key
employees or executives who have access to the strategic information about the company, use the
same for trading in the company’s stocks or securities, it is called insider trading and is highly
discouraged by the Securities and Exchange Board of India to promote fair trading in the market for
the benefit of the common investor.[11]

The rationale behind the prohibition of insider trading is “the obvious need and understandable
concern about the damage to public confidence which insider dealing is likely to cause and the clear
intention to prevent, so far as possible, what amounts to cheating when those with inside
knowledge use that knowledge to make a profit in their dealings with others.”[12]

INSIDER TRADING: RULES AND REGULATIONS IN INDIA

The Securities and Exchange Board of India, (“SEBI”), by powers vested on it through Section 30 of
the Securities and Exchange Board of India Act, 1992, has come up with the Securities and Exchange
Board (Prohibition of Insider Trading) Regulations, 1992, emphasizing on the prohibition on dealing,
communicating or counseling on matters relating to insider trading.

The provision[13] clearly states that no insider shall— either on his own behalf or on behalf of any
other person, deal in securities of a company listed on any stock exchange when in possession of any
unpublished price sensitive information; or, communicate or[14] counsel or procure directly or
indirectly any unpublished price sensitive information to any person who while in possession of such
unpublished price sensitive information shall not deal in securities[15]:

Provided that, nothing contained above shall be applicable to any communication required in the
ordinary course of business or profession or employment or under any law[16].

The provision also states that no company shall deal in the securities of another company or
associate of that other company while in possession of any unpublished price sensitive
information[17]. Any insider who deals in securities in contravention of the provisions of regulation 3
or 3A shall be guilty of insider trading[18]. The power of investigation vests with the Board, which
can elect one or a number of members to look into the book of accounts and take suo moto
cognizance of any complaint received on behalf of or against an insider[19].
All listed companies and organizations associated with securities market, including other
intermediaries[20], are mandated to frame a code of internal procedures and conduct in
correspondence to the Model Code.[21]

Section 195, 196 of companies actOmitted by the Companies (Amendment) Act, 2017, w.e.f.
09.02.2018[S.O. 630(E) dated 09.02.2018], the Section:

“195. (1) No person including any director or key managerial personnel of a company shall enter into
insider trading:

Provided that nothing contained in this sub-section shall apply to any communication required in the
ordinary course of business or profession or employment or under any law.

Explanation.—For the purposes of this section,—

(a) “insider trading” means—

(i) an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company either as
principal or agent if such director or key managerial personnel or any other officer of the company is
reasonably expected to have access to any non-public price sensitive information in respect of
securities of company; or

(ii) an act of counselling about procuring or communicating directly or indirectly any non-public
price-sensitive information to any person;

(b) “price-sensitive information” means any information which relates, directly or indirectly, to a
company and which if published is likely to materially affect the price of securities of the company.

(2) If any person contravenes the provisions of this section, he shall be punishable with
imprisonment for a term which may extend to five years or with fine which shall not be less than five
lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits
made out of insider trading, whichever is higher, or with both.”

Section 458 clause 1-Section 458: Delegation by Central Government of its powers and functions.

*458. (1) The Central Government may, by notification, and subject to such conditions, limitations
and restrictions as may be specified therein, delegate any of its powers or functions under this Act
other than the power to make rules to such authority or officer as may be specified in the
notification:

(2) A copy of every notification issued under sub-section (1) shall, as soon as may be after it is issued,
be laid before each House of Parliament.

https://blog.ipleaders.in/insider-trading-in-india-regulations-and-controlling-authority/

Prohibition of insider trading 2015: act definitions, regulation 3 , regulation 4, regulation 5 to start

Its roadmap for how to trade.

To be affected or number of securities
Disclosure by certain persons

Code of fair disclosure and conduct

Schedule A and Schedule B

Securities and Exchange Board of India (SEBI) vide its notification dt: 26 April 2021 has amended
Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [PIT
2015/PIT regulations]. Vide this amendment SEBI has omitted Regulation 7(1)(a) of PIT 2015.
Prior to amendment Regulation 7(1)(a) of PIT 2015 read as follows, “Every promoter, member of the
promoter group, key managerial personnel and director of every company whose securities are
listed on any recognised stock exchange shall disclose his holding of securities of the company as on
the date of these regulations taking effect, to the company within thirty days of these regulations
taking effect;

Regulation 7(1)(a) of PIT 2015 warranted disclosure by to company within thirty days of PIT 2015
coming into effect. This disclosure was to be given by Promoter, Promoter Group, key managerial
personnel and director of every company whose securities are listed on stock exchange. This
disclosure was relevant when PIT 2015 came into effect. Now compliance under this Regualtion 7(1)
(a) of PIT 2015 are no more warranted. Omission of Regulation 7(1)(a) of PIT 2015 does not trigger
any actionable on the part of listed companies.

The PIT Amendment, approved by SEBI at its board meeting held on June 25, 2020, include the
following key changes:

 Enhancement of the structured digital database towards seeking and storing additional
details of persons sharing unpublished price sensitive information (“UPSI”)
 Automation of shareholding disclosures and change in reporting authority for making
disclosures of PIT violations by listed entities, market intermediaries and fiduciaries.
 Introduction for additional transactional mechanisms as an exception to trading window
restrictions.

Rakesh Agrawal vs. SEBI

In 1996, Rakesh Agrawal, managing director of ABS Industries Ltd., signed a deal with Bayer AG, a
German business, which agreed to purchase 51% of ABS Industries Ltd.’s shares. Following UPSI’s
announcement of the acquisition, the accused sold a significant portion of his ABS Industries
ownership, which he owned through his brother-in-law, Mr. I. P. Kedia. Considering Mr. Kedia to be
a well-connected individual, SEBI held that Mr. Rakesh Agrawal was guilty of insider trading and
directed him to deposit Rs. 34 lakhs with Investor Protection Funds of Stock Exchange, Mumbai and
NSE (in equal proportion i.e. Rs.17 lakhs in each exchange) to pay any investor who may make a
claim afterwards.

On appeal to the Securities Appellate Tribunal (SAT), it was concluded that even if Mr. Agrawal had
traded securities while in possession of UPSI, he was not guilty of insider trading because his actions
were in the best interests of the company (as Bayer AG was not willing to acquire the company
unless it could obtain a minimum of 51% of the shares) and there was no intention to make a profit.

Further, SAT decided that in order to penalise an insider for violating the Regulations, it must be
proven that the insider benefited unfairly from the trade. The tribunal also rejected SEBI’s argument
that insider trading jurisprudence is founded on the concept of ‘disclose or abstain’, and that an
insider in possession of UPSI cannot trade in a company’s stocks until he reveals the UPSI. After
revisiting the entire jurisprudence of insider trading on requirement of Mens Rea under Indian legal
system, the tribunal held that: “Taking into consideration the very objective of the SEBI Regulations
prohibiting the insider trading, the intention/motive of the insider has to be taken cognizance of. It is
true that the regulation does not specifically bring in mens rea as an ingredient of insider trading.
But that does not mean that the motive need be ignored.”

Hindustan Lever Limited vs. SEBI

Hindustan Lever Ltd. (“HLL”) bought 8 lakh shares of Brook Bond Lipton India Ltd. (“BBLIL”) from
Public Investment Institution, Unit Trust of India (“UTI”) two weeks prior to the public
announcement of the merger of two companies, i.e., HLL and BBLIL. SEBI, suspecting insider trading,
issued a Show Cause Notice (“SCN”) to the Chairman, all Executive Directors, the Company Secretary
and the then Chairman of HLL.

London-based Unilever was the parent company of HLL and BBLIL, and were operating under the
same management. SEBI determined that HLL and its directors were insiders because they had prior
knowledge of the merger. SEBI further determined that HLL was in the possession of UPSI as
mentioned under Section 2(k) of the 1992 Regulations, which included any information regarding
amalgamation/mergers/takeovers that “is not widely known or published by such company for
general information, but which if published or known, is likely to substantially impact the price of
securities of that company in the market”.

Observations made by SAT

The issue before SAT was whether HLL was an insider and the information held by the HLL
constituted UPSI. The SAT concurred with the SEBI order that the information accessible to HLL in
regard to the merger went beyond self-generated information, i.e., information derived from the
company’s own decision-making. In addition, SAT stated that the presence of directors who were
common to both HLL and BBLIL, as well as a common parent company in Unilever, indicated that
they (i.e., HLL and BBLIL) were effectively managed together. As a result, HLL could be classified as
an insider under the 1992 Regulations, and it was reasonable to assume that HLL was privy to the
BBLIL board’s decision-making on the merger issue.

SAT observed that even in the merger of two healthy companies, there are synergistic possibilities
that might lead to price sensitivity for either company, on the subject of whether the information
shared with HLL constituted UPSI. As a result, SAT concurred with SEBI’s judgment that merger
information was price sensitive (albeit not “unpublished”).

The outcome of the decision

This decision of the SAT led to an amendment in the definition of “unpublished” under Section 2(k)
which stated, “Unpublished” means information which is not published by the company or its agents
and is not specific in nature.” Explanation — Speculative reports in print or electronic media shall not
be considered as published information”.

By the same Amendment, SEBI also introduced a new provision, Section 2(ha) which defined “price
sensitive information” to include any information relating to an amalgamation, merger or takeover
as deemed price sensitive information, regardless of whether such information actually has any
affect the price of the securities in the market. However, the amendments did not definitively and
expressly define “generally available information” and then 2015 regulations finally came out
defining what constitutes UPSI by stating “generally available information” under Section 2(1)(e)
which stated, “generally available information” means information that is accessible to the public on
a non-discriminatory basis;”.

WhatsApp Leak Case

This case involved Shruti Vora in the Institutional Sales Department of Antique Stock Broking Ltd.,
circulating the price sensitive information of companies like Wipro, Ambuja Cement, Mindtree, Bajaj
Auto etc., through several WhatsApp groups. SEBI conducted a preliminary investigation and
directed search and seizure operations for 26 entities of the Market Chatter WhatsApp Group,
confiscating around 190 devices, documents, and other items. Furthermore, SEBI fined Shruti Vora
for sending WhatsApp messages containing UPSI relating to the financial results of the
aforementioned companies. Besides, analysts from other brokerages, Parthiv Dalal and Neeraj
Kumar Agarwal, were also fined.

The contentions set forth by the accused was the concept of “Heard on Street” (“HOS”) which is a
common practice among traders, market analysts, institutional investors etc. The accused further
argued that unsubstantiated information is widely shared and even big journals in the US and news
agencies like CNBC, Reuters, Bloomberg and Twitter handles share HOS.

SEBI’s insider trading charges against employees of a few stockbroking firms who had ‘forward(ed)
as received’ WhatsApp messages regarding unpublished quarterly reports of leading companies
were set aside by SAT, who reasoned that SEBI couldn’t find the origin of the messages and was only
pursuing those who forwarded them. SAT relied on the fact that generally available information
would not be seen as UPSI, and therefore the person just forwarding it would not be considered an
“insider”. However, the information may only be labelled as a UPSI if the person receiving it was
aware that it was a UPSI, and SEBI has to establish “preponderance of probability” under the
circumstances.

The case of Kishore Biyani

Kishore Biyani is the Founder & CEO of Future Group, (brick-and-mortar retailers) and is also the
founder of retail businesses such as Pantaloon Retail and Big Bazaar.

SEBI initiated an investigation in the scrip of Future Retail Limited (“FRL”) to ascertain whether
certain persons/entities had traded in the scrips of FRL during the period March 10, 2017 to April 20,
2017 on the basis of UPSI, in contravention of the provisions of the SEBI Act, 1992 and SEBI PIT
Regulations, 2015.

What was considered UPSI by SEBI in this case?

Composite Scheme of Arrangement between Future Retail Limited and Bluerock eServices Private
Limited and Praxis Home Retail Private Limited and their shareholders in 2017 was the concerned
UPSI in this matter. It resulted in the demerger of certain business from Future Retail and was
expected to have a positive impact on Future Retail’s share price. Future Corporate Resources and
FCRL Employee Welfare Trust purchased FRL shares before the scheme of arrangement was publicly
announced, and these trades were carried out by involved entities who were aware of the scheme
and thus found to have traded while in possession of UPSI, according to SEBI. As per SEBI’s order
these trades were authorized by Kishore Biyani and Anil Biyani.

SEBI barred the noticees from accessing FRL stocks for 2 years and ordered Future Corporate
Resources, Kishore Biyani, and Anil Biyani to jointly disgorge a sum of over Rs 17.78 crore, with
interest at a rate of 12% per year from April 20, 2020 to the date of actual payment. However, the
SAT has stayed the SEBI’s order that had barred Future Group CEO Kishore Biyani from accessing the
securities market and directed to deposit Rs 11 crore as an “interim measure”. The case is pending
before the SAT.

Infosys and Insider Trading

During an investigation around July 2020 by SEBI, there were few entities (Capital One, Tesora
Capital etc.) that were found to be involved in trading in the scrips of Infosys (“INFY”), while in the
possession of the UPSI, prior to the public corporate announcement. The scrip was in the Future and
Option segment (“F&O Segment”) and is a part of SENSEX and NIFTY.

What was UPSI in this case?

INFY’s audited financial statements for the quarter ended June 30, 2020 were released on July 15,
2020 to the BSE and NSE. Basic financial elements of the P&L and Balance Sheet (“BS”), as well as
significant financial and operational factors that contributed to different aspects of the P&L and BS,
were included in the results which altogether constituted UPSI.

The Partners of Capital One and Tesora Capital traded in the F&O segment of INFY scrips prior to the
corporate announcement and soon after the announcement, squared off their positions such that
net positions were zero and which allowed them to make an illegal gain of Rs 3.06 crores. Along with
these entities, Senior Corporate Counsel and Senior Principal, Corporate Accounting Group of INFY
were found to be involved in the said transaction. SEBI order stated that these two employees of
INFY were in constant touch with each other during June 29, 2021 till July 15, 2021 which led to
passing of UPSI with one another and later with the other partners of Capital One and Tesora
Capital, implicated here.

SEBI in its order has impounded the illegal gains as mentioned above and further restricted the
entities from accessing the securities market till further orders. The matter is pending before SEBI.

Closing thoughts

On May 21, SEBI fined Rs 1 crore on Indiabulls Venture former non-executive director, Pia Johnson,
and her husband Mehul Johnson for violating PIT Regulations by trading the firm’s scrip using USPI. A
month back, ed-tech firm Aptech was fined Rs 1 crore for violating insider trading norms. Insider
trading cases seem to be surging up as many large corporations such as SpiceJet, Sun Pharma, Future
Group etc., seem to be violating the insider trading laws. SEBI still has to go a long way in
strengthening the governance of Insider Trading laws as it lacks behind in many ways such as lack of
technological expertise wherein it is very difficult for SEBI to catch the offender. Even if SEBI is
successful in identifying the offender, establishing insider trading cases is challenging due to the fact
that these accusations are usually dependent on circumstantial evidence, making them tough to
prove. SEBI does not have the authority or power to tap phones.

The challenge with existing Indian laws is that they do not have extraterritorial application. Under
the current regulations, no inquiry or punishment may be imposed on any foreign national who has
committed the offence of insider trading. There are also instances when, despite the fact that an
inquiry has been initiated in India, certain evidence is situated outside the country. Additionally,
there is no mechanism for obtaining transnational support or assistance in this regard.

Another challenge is the possibility of getting a consent order. Insider trading cases that are resolved
with modest fines convey the impression that insider trading is not a serious crime. However, this is
not the case, hence, it must be avoided to ensure that insider trading is not normalised.

https://blog.ipleaders.in/five-landmark-cases-insider-trading/

Sebi vs. Sameer c arora

Samir C. Arora v. SEBI

The case relates to SEBI’s charges of insider trading against Samir Arora, a top fund manager in the
late ‘90s. A decade ago, SEBI barred Samir Arora-the, former fund manager of Alliance Capital
Management, from the securities market for five years, but within months, the order was set aside
by the Securities Appellate Tribunal (SAT). In 2004, SEBI moved the Supreme Court challenging the
SAT decision. On April 2, the apex court, in its final order, set aside SEBI’s appeal on the grounds that
Arora has not been trading during the period he was banned from participating in the Indian stock
market. Senior counsel C A Sundaram who appeared for Arora told the court that for all these years,
the order passed by SEBI was not given effect to and Arora now operates his business from
Singapore and, in these circumstances, there is nothing that deserves to be decided on merits in the
appeal.

Issues: Whether Shri Samir C. Arora is guilty of violating the provisions of Regulation 3 of SEBI
(Prohibition of Insider Trading) Regulations, 1992?

Decision Of SAT: “In respect of the third charge of insider trading we have come to the conclusion
that even the price-sensitive information which the appellant is alleged to have somehow accessed
did not turn out to be correct information because the merger was not announced on May 12, 2003.
The information which finally turns out to be false or at least uncertain cannot even be labelled as
information.

Supreme Court: Having regard to the fact that the Samir Arora has not traded in the Indian market
for the period August 2003 to July 2005, we are satisfied that at this distance of time, there is no
justifiable reason to interfere with the impugned order,” said a division bench comprising Justices
RM Lodha and Shiva Kriti Singh.

India bulls insider trading case

Markets regulator Sebi on Friday slapped a total fine of Rs 1.05 crore on Indiabulls Venture, its
former non-executive director, her husband and the firm's company secretary for contravening
insider trading norms. The firm is currently known as Dhani Services.

The former non-executive director, Pia Johnson, and her husband, Mehul Johnson, violated the
Prohibition of Insider Trading (PIT) norms by trading in firm's scrip while in possession of
unpublished price-sensitive informa tion information (UPSI) when the trading window ought to have
been closed. Mehul was also an employee of Indiabulls Real Estate Ltd (IREL) and has association
with Indibulls Group companies.

Pia and Mehul made collective gains of Rs 69.09 lakh. The investigation period is January-November
2017. For violation of insider trading norms, Pia and Mehul Johnson are facing a fine of Rs 25 lakh
each.

In March 2017, the company told the NSE that Indiabulls Distribution Services Ltd, a wholly-owned
subsidiary of Indiabulls Venture, had signed a definitive agreement to sell its 100 per cent stake in
India Land and Properties Ltd, at a consideration of Rs 685 crore, to Indiabulls Indiabulls
Infrastructure Ltd, a wholly-owned subsidiary of IREL.

Together, Pia and Mehul bought 8.44 lakh shares of the company during February-March 2017.

Through another order, Sebi levied a fine of Rs 50 lakh on Indiabulls Venture and Rs 5 lakh on its
company secretary Lalit Sharma, as the company failed to fulfil the responsibility to notify the period
of closure of trading window while Sharma failed to monitor adherence to the same. By not notifying
the trading window and not closing the trading window during the UPSI period, they violated norms
specified under PIT regulations pertaining to minimum standards for code of conduct to regulate,
monitor and report trading by insiders.
"The laxity and carelessness shown by the Noticees No. 1 and 2 as found in this case has put the
investors in dis-advantage position in comparison to 'insiders' and the same cannot be in the interest
of securities market," Sebi said referr .. referring to the firm and company secretary.

Separately, Sebi advised MSS Securities Pvt Ltd to be more careful in future with respect to the
dealings in the securities market. The regulator also advised it to adopt due diligent measures such
as checks and balances in terms of adequate systems and procedures in its operations to avoid any
regulatory lapse. The firm was formerly known as Malini Sanghvi Securities Pvt Ltd.

Sebi had conducted investigation after receivin .. a complaint from Tata Finance Ltd which alleged
violation of several market norms by the stock broker.

PENALTY FOR INSIDER TRADING

AS PER THE SECTION 15G AND 24 OF THE SEBI ACT, INSIDER, WHO VIOLATE THE 2015 REGULATIONS,
ARE LIABLE TO A PENALTY THAT MAY BE IMPOSED BY SEBI OF RS.25 CRORES OR 3 TIMES THE
AMOUNT OF PROFIT MADE OUT OF THE INSIDER TRADING, WHICHEVER IS HIGHER AND SHALL ALSO
PUNISHABLE WITH IMPRISONMENT FOR A TERM EXTENDING TO 10 YEARS OR A FINE UP TO 25
CRORES OR BOTH.

AS PER SECTION 11(C) (6) OF THE SEBI ACT, IF ANY PERSON WITHOUT JUSTIFIABLE REASON, REFUSE
TO CO-OPERATE IN ANY INVESTIGATION BY SEBI WITH RESPECT TO INSIDER TRADING, THEN HE
SHALL BE PUNISHABLE WITH AN IMPRISONMENT FOR A TERM EXTENDING UP TO ONE YEAR, OR
WITH FINE UP TO RS. 1 CRORE OR WITH BOTH, AND ALSO WITH FURTHER FINE UP TO RS. 5 LAKH
FOR EVERY DAY OF SUCH NON CO-OPERATION.

AS PER SECTION 11(4) (B) OF SEBI ACT, SEBI IS ALSO EMPOWERED TO PASS DIRECTIONS TO SUCH
INSIDER NOT TO DEAL IN THE CONCERNED SECURITIES IN ANY PARTICULAR MANNER AND/OR
PROHIBIT HIM FROM DISPOSING OF THE CONCERNED SECURITIES AND /OR DECLARING THE
CONCERNED TRANSACTION(S) OF SECURITIES AS NULL AND VOID, RESTRAINING THE INSIDER FROM
COMMUNICATING OR COUNSELLING ANY PERSON TO DEAL IN SECURITIES.

AS PER SECTION 195 OF THE COMPANIES ACT, 2013 ANY INSIDER CONTRAVENES THE PROVISIONS
OF THIS SECTION, HE/SHE SHALL BE PUNISHABLE WITH IMPRISONMENT FOR A TERM WHICH MAY
EXTEND TO FIVE YEARS OR WITH FINE WHICH SHALL NOT BE LESS THAN FIVE LAKHS RUPEES BUT
WHICH MAY EXTEND TO TWENTY FIVE CRORE RUPEES OR THREE TIME THE AMOUNT OF PROFITS
MADE OUT OF INSIDER TRADING, WHICHEVER IS HIGHER, OR WITH BOTH.