SECURITIES LAWS & PRACTICE
Q. 1. Distinguish between the following: [June 2009, 4x3= 12]
(a) French Auction and Dutch Auction:
Multiple/Variable Price based or French Auction procedure is used in auctions of Government dated securities and treasury bills.
Under this method, all bids equal to or above the cut-off price are accepted.
However, the bidder has to obtain the treasury bills at the price quoted by him.
This method is followed in the case of 364 days treasury bills and is valid only for competitive bidders.
Uniform Price Based or Dutch Auction procedure is used in auctions of Government dated securities.
Under this method, all the bids equal to or above the cut-off price are accepted at the cut-off level.
However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.
This method is applicable in the case of 91 days treasury bills only.
The system of Dutch auction has been done away with by the RBI w.e.f. 8-12-2002 for the 91 day treasury T Bill.
(b) Cut off yield and Cut off price:
Cut off yield is the rate at which bids are accepted.
Bids at yields higher than the cut-off yield is rejected and those lower than the cut-off are accepted.
The cut-off yield is set as the coupon rate for the security. Since this auction is a multiple price auction.
Cut off price is the minimum price accepted for the security.
Bids at prices lower than the cut-off are
rejected and at higher than the cut-off are accepted.
Coupon rate for the security remains unchanged.
Price based auctions lead to finer price discovery than yield based auctions.
Q. 2. Certain securities are not available to a company for buy-back. Explain.
Answer: [June 2009, 4x1 = 4]
Securities not available for Buy-Back:
1. Securities in Lock-in-Period: In case of a listed company…,
securities issued to promoters or to a group or to employees
subject to lock-in-period as per SEBI (DIP) Guidelines, 2000
are not available for buy-back until the lock-in period expires. [Regulation 19(5)].
2. Non-transferable Securities: Securities which are under lien or pledge or restricted by any Court for transfer or which are statutorily cannot be transferred are not available for buy-back [Regulation 19(5)]
3. Disputed Securities kept in Abeyance: Securities which are under dispute and have been kept in abeyance under Section 206A or in respect of which transfer or transmission has not been effected, are not available for buy-back.
Q. 3. Explain the procedure for grant of registration certificate to venture capital fund by SEBI and effect of refusal to grant the registration. [June 2009, 4x1= 4]
Grant of Registration Certificate: After the satisfaction of the SEBI in respect of applicant’s eligibility to form a venture capital fund (whether a company, or a trust, or a body corporate),
--- the SEBI should send an intimation to the applicant for the payment of specified registration fee.
--- After the receiving the registration fee, the SEBI will issue the Certificate of Registration.
--- The venture capital fund should abide by the provisions of the Act.
Effect of Refusal to Grand Certificate:
The decision of the SEBI to reject the application should be communicated to the applicant within 30 days.
Any company or trust or a body corporate whose application for grant of certificate has been rejected by SEBI should on and from the date of the receipt of the communication ceases to carry on any activity as a venture capital fund.
SEBI in the interest of the investors has the right to appoint any person to take charge of records, documents, securities or disposal of investments relating to its activities as a venture capital fund.
Q. 4. Explain the term ‘demat’. State the benefits of demat securities. [June 2009,= 3m]
Dematerialisation is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in his account in electronic form at the request of the investor.
An investor will have to first open an A/c with a Depository Participant and then request for the
dematerialization of his share certificates through the Depository Participant.
Dematerialisation of shares is optional and an investor can still hold shares in physical form.
Benefits of Demat Securities: He/she has to demat the shares if he/she wishes to sell the same through the Stock Exchanges.
Similarly, if an investor purchases shares from the Stock Exchange, he/she will get delivery of the shares in demat form.
Q. 5. What action lies against SEBI registered intermediaries in case of default/violation under the SEBI Act, 1992 ?
Answer: [June 2009, 4x1 = 4]
Procedure for Action in Case of Default/Violation:
Any registered intermediary shall be liable for any one or more of the following actions:
(i) Monetary penalty under Chapeter VIA of the Act.
(ii) Penalties as specified under SEBI (Procedure for Holding Enquiry by enquiry Officer and Imposing Penalty) Regulations, 2002 including suspension or cancellation of certificate of registration.
(iii) Prosecution under Section 24 of the Act.
Q. 6. Briefly discuss the guidelines for issue of commercial paper. [June 2009, 4x1 = 4]
A corporate would be eligible to issue Commercial Paper provided:
(a) the tangible networth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore;
(b) company has been sanctioned working capital limit by bank/s or all-India financial institutions; and
(c) the borrowal account of the company is classified as a Standard Asset by the financing banks/ or institutions.
Q. 7. Discuss the regulatory framework governing primary market intermediaries.
1. Merchant Bankers : SEBI (Merchant Bankers) Regulations, 1993.
2. Registrar and ShareTransfer Agents: SEBI (RTA & STA) Regulations, 1993.
3. Underwriters : SEBI (Underwriters) Regulations, 1993.
4. Bankers to an Issue : SEBI (Bankers to an Issue) Regulations, 1994.
5. Debenture Trustees : SEBI (Debenture Trustees) Regulations, 1993.
Q. 8. Indian Depository Receipt (IDR) & eligibility criteria for issue of IDRs ?
Indian Depository Receipt means
any instrument in the form of a depository receipt
created by Domestic Depository in India
against the underlying equity shares of issuing company.
Eligibility Conditions on an Issuing company for Issue of IDRs:
(i) Its pre-issue paid-up capital and free reserves are atleast US$ 100 millions and it has had an average turnover of US$ 500 million during the 3 financial years preceding the issue;
(ii) It has been making profits for at least 5 years preceding the issue and has been declaring dividend of not less than 10% each year;
(iii) Its pre-issue debt equity ratio is not more than 2:1;
(iv) It should fulfill the eligibility criteria laid down by SEBI from time to time.
Q. 9. Write a note on ‘due diligence’ in the process of public issue of securities.
A SEBI registered Merchant Banker is appointed to manage the issue.
A MOU is entered into between the company and the Lead Merchant Banker specifying the rights, obligations, liabilities relating to the issue.
The merchant banker in the due diligence shall satisfy himself about all aspects of offering, veracity and accuracy of the disclosure in the offer document.
A Due Diligence Certificate is required to be submitted to SEBI along with draft prospectus.
The Lead Manager is also required to submit such applications at the time of submitting the
prospectus to the ROC, before opening the issue and before the issue is closed.
Q. 10. State the powers and functions of the ‘Ombudsman’ under the SEBI (Ombudsman) Regulations, 2003. [June 2009, 5x1 = 5]
(or) Explain the eligibility criteria for appointment of an ‘Ombudsman’ under the SEBI Regulations. What are the functions of an Ombudsman ? [June 2008, 4x1 = 4]
Answer: [June 2007, 5x1 = 5]
Eligibility Criteria for Appointment of an Ombudsman:
(a) a citizen of India;
(b) of high moral integrity;
(c) not below the age of 45 years; and
(d) either a retired District Judge or
qualified to be appointed as a District Judge or
having at least 10 years of experience of service in any regulatory body or
having special knowledge and experience in law, finance, corporate matters, economics, management or administration or
having experience in dealing with matters relating to investor protection for a period of not less than 10 years.
Powers and Functions of Ombudsman:
1. To receive complaints specified in Regulation 13 against any intermediary or a listed company or both;
2. To consider such complaints and facilitate resolution thereof by amicable settlement;
3. To approve a friendly or amicable settlement of the dispute between the parties;
4. To adjudicate such complaints in the event of failure of settlement thereof by friendly or amicable settlement.
Conclusion: The Ombudsman is required to draw up an annual budget for his office in consultation with the Board and shall incur expenditure within the approved budget and submit an annual report to the SEBI within 3 months of the close of each financial year containing general review of activities of his office.
Q. 11. What do you understand by ‘offering circular’ for Euro-issue ? Mention any five aspects which should be covered in the offering circular. [June 2009, 5]
Offering Circular is a mirror through which the prospective investors can access vital information regarding the company in order to form their investment strategies. It is to be prepared very carefully giving true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business promotion activities, track record of promoters and the company, ability to trade the securities on Euro Capital Market.
The Offering Circular for Euro-issue offering should typically cover the following contents:
(i) Background of the company and its promoters, date of incorporation, objects, past performance, production, sales and distribution network, future plans, etc.
(ii) Capital structure of the company – existing, proposed and consolidated.
(iii) Deployment of issue proceeds.
(iv) Financial data indicating track record of consistent profitability of the Co.
(v) Investment considerations.
(vi) Description of shares.
Q. 12. What are the disclosures in the Directors’ Report as per
the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999?
Disclosure in the Director’s Report:
(a) Options granted. b) Pricing formula.
(b) Options vested. d) Options exercised.
(c) Total number of shares arising as a result of exercise of option.
(d) Options lapsed.
(e) Variation of terms of options.
(f) Money realized by exercise of options.
(g) Total number of options in force.
(h) Employee-wise details of options granted to
a. Senior managerial personnel;
b. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year;
c. Identified employees who were granted option, during any one year equal to or exceeding 1% of the issued capital of the company at the time of grant;
(i) Diluted Earnings Per Share (EPS) pursuant to issue of shares.
Q. 13. Explain the procedure of bidding in book building issue. [June 2009, 5x1= 5]
Procedure for bidding:
1. Bid shall be open for atleast 3 days and not more than 7 working days, which may be extended to a maximum of 10 working days in case of price band is revised.
2. Advertisement contains the following:
(a) date of opening and closing date of bidding (not less than 5 days).
(b) names and addresses of syndicate members as well as the bidding terminals for accepting the bids
(c) method and process of bidding.
3. Bidding shall be permitted only if an electronically linked transparent facility is used.
4. Number of bidding centres:
a. In case of 75% book building process, atleast 4 centres (4 metropolitan cities) and at such places where the S.E’s are located in the region at which the Registered office is situated
b. In case of 100% book building process, the bidding centers shall be at all the places, where the recognized stock exchanges are situated.
5. Individual as well as Qualified Institutional Buyers (QIBs) shall place their bids only through the brokers who shall have the right to vet the bids. Proof of DP ID and Client ID shall also be submitted alongwith the application.
6. During the period the issue is open for bidding, the applicants may approach the brokers to place an order for bidding for the securities.
7. The investors shall have the right to revise their bids provided that QIBs shall not be allowed to withdraw their bids after the closure of the bidding.
8. At the end of each day of the bidding period the demand shall be shown graphically on the terminals for information of the syndicate members as well as the investors.
9. The identities of the QIB’s making the bidding, shall not be made public.
10. The data pertaining to an issue shall be displayed at the site of the S.E’s for a period of atleast 3 days after closure of bids.
Q. 14. APPROVALS required from various AUTHORITIES IN ISSUANCE OF GDRS AND FCCBS. and the documentation required therefor. [Dec. 08, 5m, June 07, 4m, June 09, 5M]
(A) Approval from Board of Directors: A board resolution is to be passed to approve the raising of finance by issue of GDRs/FCCBs. The resolution should indicate therein specific purposes for which funds are required, quantum of the issue, country in which issue is to be launched, time of the issue etc.
(B) Approval of Shareholders: A special resolution u/s 81(1A) of the Companies Act, 1956 is required to be passed at the general meeting. Approvals required under Secs. 94, 16 and 31 of the Companies Act, 1956 if required. Form No.23 along with requisite filing fee is to be filed with ROC of the State.
(C) Approval of Ministry of Finance – “In Principle and Final”
1. In case of FCCB issue exceeding US $ 100 Million approval is required.
2. Form issue of ADR/GDRs under Automatic Route approval is not required.
3. The GOI if satisfied issue an in principal approval granting Permission to the Company.
4. On Completion of finalization of issue structure Company should obtain Final Approval.
5. FIPB approval may be required for giving Final Approval.
6. Both In principal and Final Approval are valid for 3 Months
(D) Approval of Department of Company Affairs:
(a) Approval is required from Dept. of Company Affairs under Sec. 81(3)(b) where the convertible bonds are being issued.
(b) Approval as to compliance of Sec. 187C, non-applicability of provisions relating to prospectus and Sec. 108 for transfer of shares are also sought for.
(E) Approval of Reserve Bank of India:
1. RBI granted general permission to make an international offering of rupee denominated equity shares of the company by way of issue of ADR/GDR.
2. FCCB under automatic Route requires no RBI Approval.
3. FCCB issue which exceeds USD 50 million but does not exceed 100 million need to apply to RBI.
(F) In-principle consent of Stock Exchanges for listing of underlying shares
(G) In-principle consent of Financial Institutions
Q. 15. “SEBI expects the investors to make investments with their eyes and ears open.” Comment. [June 2009, 5x1 = 5]
Q. 16. Discuss the end use of external commercial borrowings under approval route.
nswer: [June 2009, 5x1 = 5]
Permitted end use of External Commercial Borrowings:
1. ECB can be raised only for investment such as import of capital goods, new projects, in real sector - modernization/expansion of existing production units, in industrial sector – small and medium enterprises (SME) and infrastructure sector.
(Infrastructure sector is defined as power, telecommunication, railways, road including bridges, sea port and airport, industrial parks, water supply, sanitation and sewage projects).
2. ECB proceeds can be utilized for overseas direct investment in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) subject to the guidelines prescribed.
3. Utilisation of ECB proceeds is permitted in the first stage of acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.
End use not Permitted:
(a) For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate.
(b) In real estate sector.
(c) For working capital, general corporate purpose and repayment of existing Rupee loans.
Q. 17. Discuss the various formalities to be complied with for the issue of bonus shares under the SEBI (Disclosure and Investor Protection) Guidelines, 2000.
Answer: [June 2009, 10x1=10]
SEBI (DIP) Guidelines, 2000 for ISSUE OF BONUS SHARES:
1. Rights of FCD/PCD holders.
2. Out of Free Reserves.
3. Revaluation Reserves
4. Bonus Issue not to be in lieu of Dividend.
5. Fully Paid Shares.
6. No default in respect of Fixed Deposits/Debentures
7. Statutory Dues of the Employees.
8. Implementation of Proposal within Six Months.
9. Provision in Articles of Association.
10. Authorised Capital
Q. 18. Write short notes on the following:
(i) Securities Lending: They are regulated by SEBI.
Under this scheme, a person with idle shares can lend them to another who does not have the shares to fulfill his obligation under a trade finalized by him.
There will be no direct contract between the borrower and lender of securities.
There is an intermediary who guarantees the scheme of lending and make good the loss to the lender, if any.
The borrower has to give collateral securities for his borrowings.
Securities lending is a recognized method for earning fees on idle shares and any income generated is exempted from Indian from Capital Gains.
(ii) Fungibility: As per Sec. 9 of the Depositories Act, 1996, Securities in depositories shall be in fungiable form.
When physical shares are dematerialized, it results into lost of their distinctive identity number and that is called “fungibility”.
In fungibility, investor has no right to obtain the exact certificate, that he has surrendered at the time of entry into depository.
So fungibility, add more liquidity to securities and they become interchangeable, held in depository form.
(iii) Custodian of Securities: Custodian of securities means any person who carries on or proposes to carry on the business of providing custodial services.
The term “custodial services” in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes:
(i) maintaining accounts of securities of a client;
(ii) collecting the benefits of rights accruing to the client in respect of securities;
(iii) keeping the client informed of the actions taken or to be taken by the issuer of securities; and
(iv) maintaining and reconciling records of the services referred to points (i) to (iii).
Q. 19. Distinguish between the following:
(i) ‘Primary market’ and ‘secondary market’.
(ii) Close ended Schemes and Open ended Schemes:
S.No. Open – ended Scheme Close – ended Scheme
1. When there is no fixed corpus or units and units are available for subscription throughout the year, then it is called “open ended scheme”, these units don’t have fixed maturity. Investor can conveniently buy and sell the units at NAV related prices. When there is fixed number of units resulting into fixed – corpus and units are available for subscription, only during a specified period, then it is called “close ended scheme”.
2. There is no listing of units in open ended scheme. There is listing of units on stock exchange for buying and selling.
3. There is only on price is available i.e., NAV. There are the values available i.e.,
- NAV and
- Market value
4.
Highly liquid
Mostly liquid
(iii) Disaster Bonds and Dual Convertible Bonds:
Disaster Bonds Dual Convertible Bonds
It is a debt instrument in which rate of interest is not fixed.
The rate of interest or return to investor will depend upon the risk or occurrence of casualty or disaster.
Here the investor gets higher return if the disaster doesn’t happen, but when disaster happen, the return will be lower. A dual convertible bond is convertible into either equity shares or fixed interest rate debentures/preference shares at the option of the lender.
The investor will exercise the conversion option, by seeing the prospect of the company.
The fixed interest rate debenture may have certain additional features including higher rate of interest distinct from the original debt instrument.
Q. 20. “Capital market intermediaries are a vital link between the SEBI and investors in a public issue.” Comment. [Dec. 2008, 5x1 = 5]
Role of an Intermediary:
(i) As a link between Issuer & Investor: The intermediary works as a bridge between the public (investors) and issuer company. It enhances the confidence of the investor by educating them and facilitating to invest in convenient manner.
(ii) As a spoke person of SEBI: The intermediary also works as a representative of SEBI and help the issuer company to meet out its obligation, without violating the guidelines of SEBI.
Conclusion: It is therefore necessary to ensure good governance of the intermediaries and also to have constant monitoring and surveillance on the acts of the intermediaries.
SEBI has issued regulations in respect of each intermediary to ensure proper services to be rendered by them to the investors and the capital market as per Sec. 11 of the SEBI Act.
SEBI has also issued Regulations, 2008, to put in place a comprehensive framework which provided for all intermediaries to register and regulate, the permanent registration, multiple activities registration form, fit and proper person criteria, suspension and cancellation of certificate of registration.
Q. 21. What are the obligations of a capital market intermediary under the Prevention of Money Laundering Act, 2002 ? [Dec. 2008, 5x1 = 5],
anti-money laundering measures taken under the SEBI guidelines. [Dec. 2007, 4x1 = 4]
Obligations of Intermediaries under Prevention of Money Laundering Act, 2002: U/S 12 of PMLAct, 2002, there are certain obligations casted on an intermediary to:
1. General Obligations:
a. Every I’ shall maintain a record of all transactions of which nature &value are prescribed.
b. Furnish information of transactions to the Director within such time as may be prescribed.
c. Verify and maintain records of the identity of all its clients in such a manner as may be prescribed.
2. Cash Transaction Report:
a. All cash transactions of the value of more than Rs.10 lakhs, or its equivalent tin foreign currency;
b. All series of cash transactions, which has been deliberately valued below Rs.10 lakhs which are integrally connected to each other and where such series of transactions take place within a month to defeat the provisions of prevention of money launding Act.
3. Suspicious Transaction Report: Every intermediary is required to furnish details of suspicious transactions, as early as possible.
Q. 22. Clauses of Listing Agreement: [Dec. 2008, 5x1 = 5]
1. Clause 13: Notification of any attachment or prohibiting orders against transfer of securities.
2. Clause 16: Book closure or Record date
– At least once in a year the books should be closed.
- Gap between two book closures and or record dates would be at least 30 days.
3. Clause 19: Convening of Board for decision on Dividend, Bonus, Rights, Convertible debentures, buy-back of securities.
4. Clause 31: Further Issue of Securities and other documents to be Forwarded – To forward the Stock Exchange 6 copies of Annual Reports, Notices, Resolutions and Circulars relating to new issue of capital, including notices under Secs. 391 or 394 read with Sec. 391 of the Companies Act, 1956. Copies of all proceedings of EGMs/AGMs along with notices and explanatory statements etc.
5. Clause 32: Preparation of cash flow statement in accordance with AS-3 and related party transactions in accordance with AS-18.
6. Clause 35: Shareholding pattern containing details of promoters’ holdings and non-promoter holdings.
7. Clause 41: Preparation and submission of quarterly financial statements.
8. Clause 47: Appointment of Company Secretary as compliance officer – Correspondence with SEBI, Stock Exchanges and ROC, etc.
9. Clause 49: Corporate Governance and its compliances
a. Board of directors and composition;
b. Audit committee and its composition;
c. Mandatory review of certain information by audit committee;
d. CEO/ certification
e. Report on corporate governance CFO.
10. Clause 50: Adoption of Accounting Standards as per norms stipulated by ICAI.
11. Clause 51: EDIFAR – to be filed/uploaded on Stock Exchanges/SEBI websites.
12. Clause 52: Corporate filing and dissemination system (CFDS).
Q. 23. “Depository system is a boon to capital market and investors, both.” Elucidate the statement and bring out the advantages of the dematerialisation of securities. [Dec. 2008, 5x1 = 5]
Answer:
Depository: Depositories gave a new dimension for conducting transactions in the capital market – primary as well as secondary in a more efficient and effective manner and in a paperless form. In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.
Advantages of Dematerialization of Securities:
1. Elimination of bad deliveries.
2. Elimination of all risks associated with physical certificates.
3. Immediate transfer and registration of securities.
4. Faster disbursement of non-cash corporate benefits like rights, bonus, etc.
5. Reduction in brokerage for trading in dematerialized securities.
6. Reduction in handling of huge volumes of paper and periodic status reports to investors.
7. Elimination of problems related to change of address of investor transmission etc.
Q. 24. Define ‘NAV’ and ‘offer price’. If Rahul invests Rs.10,000 in a scheme that charges 2% front end load at an NAV of Rs.10 per unit, what shall be the public offier price ? [Dec. 2008, 5x1 = 5]
Answer:
Net Asset Value: It stands for “Net Assets Value”. If NAV is more than the face value of Rs.10/-, there is an appreciation for the investment. If the NAV is less than the face value, it indicates depreciation of the investment. It is computed as follows:
NAV = Market of Investment+Current Assets – Current Liabilities/No. of O/S units
Offer Price: It means public offier price, i.e., money payable by an investor for buying a unit of scheme of mutual fund.
Public offer price = Net Asset Value/(1 – Front end load)
Example:
Public Offier Price = Rs.10 .
(1 - 0.02)
= Rs.10.20.
Q. 25. What are the pre-requisites for ‘option trading’ ? Explain the issues connected with option trading. [Dec. 2008, 5x1 = 5]
Answer:
The most important pre-requisite for option trading is proper infrastructure and writers of options. The successful functioning of option trading require following pre-requisites:
1. Standardization of the term of Contract.
2. Careful section of underlying Securities.
3. Appointment of second marker maker.
4. Setting up efficient option clearing house.
5. Creation of a central market.
Conclusion: There are legislative measures in the USA and European countries to check abuses of option trading without undermining its usefulness. In India sentiment call away the market and the volume could go upto the unsustainable level. As such checks and balances have to be provided to bring the market back to normal.
Q. 26. Explain the concept of ‘collective investment scheme’. State briefly the obligations of trustees. [Dec. 2008, 5x1 = 5]
[June 2007, 5x1 =5]
Answer:
Collective Investment Scheme: As per Sec. 11AA of the SEBI Act, 1992, CIS means any scheme or arrangement made or offered by any company under which the contributions or payments made by the investors by whatever name called are pooled and utilized solely for the purposes of the scheme or arrangement.
Obligations of Trustee: Here trustee means Debenture Trustee registered as per the SEBI (Debenture Trustee) Regulations, 1993.
1. Ensuring that collective investment management company has necessary office infrastructure.
2. It has appointed all key personnel including managers for the scheme and submitted their bio-data which shall contain the educational qualifications and past experience in the areas relevant for fulfilling the objectives of the scheme;
3. Taken adequate steps to ensure that the interest of investors of one scheme are not compromised with the object of promoting the interest of investors of any other scheme.
4. Maintained minimum networth on a continuous basis and has informed SEBI immediately on any shortfall.
5. Convening a meeting of the unit holders, if their interest effecting any change in the features of the unit.
Conclusion: The trustee should review on a quarterly basis every year all activities carried out by the Collective Investment Management Company. The trustee should also report to SEBI any breach of these regulations and has had, or is likely to have a materially adverse effect on the interests of unit holders as soon as they become aware of the breach.
Q. 27. What is ‘initial public offering’ (IPO) grading ? Explain the procedure for IPO grading. [Dec. 2008, 5x1 = 5]
Answer:
Initial Public Offiering (IPO): Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
Initial Public Offering Grading is a service aimed at facilitating the assessment of Equity shares which are being offered by a company to public at large. In India such grading is assigned on a five point scale with a higher score indicating stronger fundamental. Credit rating agencies registered with the SEBI carry out IPO grading. The grading does not have any ongoing validity. The company first appoints grading agencies and mandates it for grading exercise. The agency will follows the process outlined below:
1. Gathering of information from the company.
2. Discussions with the company’s management and visit the company’s operating locations.
3. Preparation of analytical assessment report.
4. Present analysis to committee comprising top official of company and grading agency.
5. Communication of the grade to the company along with the assessment report.
Q. 28. What is ‘green shoe option’ ? Explain its significance. [Dec. 2008, 5x1 = 5]
(or) [Dec. 2007, 2x4 = 8]
(or) [Dec. 2006, 5x1 = 5]
Answer:
Green Shoe Option: It means an option in which the issuer company allocates the excess shares than included in the public issue and operating a post-listing price stabilizing mechanism in accordance with SEBI (DIP) Guidelines, 2000. Simply, Green Shoe Option is used when there is oversubscription of shares and company is permitted to allow additional shares (permitted upto 15%).
The company desirous of availing this option should in the resolution at the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘Stabilizing Agent’ at the end of the stabilization period. The company should appoint one of the merchant bankers or or book runners among the issue management team as Stabilizing Agent who will be responsible for the price stabilization process, if required. The Stabilizing Agent shall enter into an agreement with the issuer company prior to filing of offer document with SEBI, clearly stating that all the terms and conditions relating to this option including fees charged/expenses to be incurred by the Stabilizing Agent for this purpose.
Q. 29. Explain the procedure adopted for approval of ‘basis of allotment’ by the stock exchanges. [Dec. 2008, 5x1 = 5]
Answer:
Basis of Allotment by the Stock Exchanges:
(i) Responsible Persons: In case of public issue of securities, the Executive Director/Managing Director of the designated Stock Exchange alongwith the post issue lead merchant banker and the Registrar to the issue is responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with guidelines.
(ii) Drawal of Lots: In case of over subscription, drawal of lots will be done in the presence of public representative of the concerned stock-exchange, lead merchant banker and Registrar to the issue.
(iii) Time Limit for Commencement of Trading: That listed company would ensure the necessary formalities for listing and commencement of trading at all stock-exchanges, where the securities are to be listed have been taking within 7 working days of finalization of basis of allotment.
Q. 30. What is meant by the following in a public issue:
(i) Subscription list
(ii) Issue opening date
(iii) Mandatory collection centre ? [Dec. 2008, 3x3 = 9]
Answer:
(i) Subscription List: Subscription list for public issue must be kept open for atleast 3 working days and not more than 10 working days and the operation of subscription list be disclosed in the prospectus. The public issue made by an infrastructure company, may be kept open for a maximum period of 21 working days. Rights issue should be kept open for atleast 15 days and not more than 30 days.
(ii) Issue Opening Date: The issue must open within 3 months from the date of issuance of the observance letter by SEBI. However, if there is no observance letter, it must be issued within 3 months from 31st day from the date of filing of draft offer document with SEBI.
(iii) Mandatory Collection Center:
(a) It means minimum number of collections centers in case of public issue i.e., at 4 metropolitan centers viz., Mumbai, Delhi, Kolkata & Chennai as well as such other place, where the registered office of the company is situated.
(b) All the mandatory collection centers must have bankers to issue.
(c) The issuer company may appoint “Authorized Collection Agent” as additional facility for collection of application.
(d) If the facility of mandatory collection center is not available at any place, then the investor can send application to Registrars to the issue directly by registered post, along with acknowledgment due.
Q. 31. What is the ‘investor education and protection fund’ (IEPF) ? Briefly explain its activities as stipulated under the IEPF Rules. [Dec. 2008, 5x1 = 5]
[Dec. 2007, 4x1 = 4]
Answer:
Investor Education & Protection Fund: A fund established by the Central Govt. under Sec. 205C of the Companies Act, 1956 for the Promotion of investors awareness and Protection of interest of investors.
Activities of Investor Education & Protection Fund: The Central Govt. has formed IEPF (Awareness & Protection of Investors) Rules, 2001, specifies the following activities:
1. Education programme through media;
2. Organizing seminars;
3. Proposals for registration of voluntary associations, engaged in investor education and protection activities;
4. Proposals for projects for investor education and protection;
5. Coordinating with institutions engaged in investor education, aware and protection activities.
Q. 32. What do you understand by ‘fast track issues’ ? Explain in brief the provisions related to fast track issues. [Dec. 2008, 6x1 = 6]
Answer:
Fast Track Issues: As per this scheme, listed companies are relaxed from filing of draft offer document with SEBI and stock exchanges. The listed issuer company can bring public issue by filing: (a) a copy of red herring prospectus or (b) a prospectus duly registered with Registrar of Companies.
Accordingly, the provisions relating to filing of offer documents are not applicable to public issue of securities by a listed issuer company or a rights issue of securities by a listed issuer company where the aggregate value of such securities including premium if any exceeds Rs.50 lacs if the following conditions are satisfied:
Cndn 1: Min. Listing Period: The shares of the company have been listed on any stock exchange having nationwide terminals for a period of minimum 3 years, immediately preceding the reference date;
Cndn 2: Grievances Redressed: The company has redressed at least 95% of the total shareholders grievances or complaints.
Cndn 3: Compliance with Listing Agreement: The company has complied with the listing agreement for a period of atleast 3 years;
Cndn 4: No prosecution: The SEBI has not issued any prosecution or show cause notice.
Cndn 5: The entire shareholding of the promoter group is held in dematerialized form as on the reference date;
Q. 33. Write short notes on the following:
(i) FCCB: (Foreign Current Convertible Bonds) It means an unsecured bonds, issued by an Indian Company, subscribed by a non-resident in foreign currency and which can be converted (wholly or partly) into equity shares of issuer company on later date. In other words, FCCB is a method of raising funds from abroad by an Indian company against its own ordinary shares.
(ii) Overseas Depository Bank: It means a bank authorized by the issuing company to issue global depository receipts against issue of ordinary shares or FCCBs of the issuing company.
(iii) Prohibition of certain dealings in Securities under the SEBI Regulations: Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations prohibits certain dealings in securities and provides that no person shall directly or indirect:
(a) buy, sell or deal in securities in a fraudulent manner;
(b) use or employ any manipulative or deceptive device or contrivance in connection with issue, purchase or sale of any security in contravention of the provisions of the Act or rules or regulations made thereunder;
(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act, or rules or regulations made thereunder;
Q. 34. Requirements for making investment in Indian Depository Receipts (IDRs) ?
The issuing company cannot raise funds in India by issuing IDRs unless it has obtained prior permission from the SEBI atleast 90 days prior to the opening date of the issue in the notified manner along with a non-refundable fee of US $ 10,000.
Requirements for making Investment in Indian Depository Receipts (IDRs): As per Chapeter VIA of SEBI (DIP) Guidelines, 2000 following are the requirements for investment in IDRs:
1. NRI’s and FIIs can’t purchase or possess IDRs, unless special permission of the RBI;
2. Investments by Indian companies in IDRs shall exceed the investment limits as prescribed under applicable laws;
3. Automatic fungibility of IDRs is not permitted;
4. In every issue of IDR
a. At least 50% of the IDRs issued shall be subscribed by the QIBs.
b. Balance 50% shall be available for non-institutional investors.
5. The minimum application amount in IDR issue shall be Rs.20,00,000/-
6. Each category of investor shall also follow the procedure specified in prospectus.
Q. 35. Write short notes on the following: [June 2008, 3x5 = 15]
(i) Concurrent Auditor of Depository Participants: It applies to all Depository Participants (DPs) associated with NSDL, w.e.f. 1st August, 2006. The concurrent Auditor should conduct the audit in respect of all accounts opened, delivery of institution slips (DIS) issued during the day by the next working day. The concurrent auditor report should be submitted to NSDL, on a quarterly basis in a hard copy form. The report must clearly indicate any deviation and/or non-compliance, in the specified area of scope of audit.
(ii) Asset Securitization: It is a process by which non-liquid financial assets are transferred into securities. In other words, securitization is a mode of financing, in which securities are issued on the basis of a package of assets called Asset Pool.
Advantages:
(a) It converts non-liquid financial assets into liquid financial assets;
(b) It helps the company to trim its Balance Sheet;
(c) the credit rating of company is enhanced;
(d) It facilitates better Balance Sheet management as assets are transferred off Balance Sheet facilitating satisfaction of capital adequacy norms.
(iii) Demutualisation of Stock Exchange:
It means a process of conversion of a stock-exchange from a “Mutually owned” association to a company “Owned by shareholders”. Simply, in demutualization, there is change into legal-structure of an exchange i.e., from a mutual form to a business-corporation form.
(a) There is segregation of ownership, management and trading rights of members.
(b) Composition of Board of Directors will be as:
(i) 3/4th of total number, representing public interest;
(ii) 1/4th of total number, representing broker directors;
(c) The shareholding will be divided as follows:
(i) 51% of shares to the public;
(ii) 49% of shares to the trading member;
(iv) Tracking Stocks: When the value of a particular stocks depends upon the financial performance of a specific-business unit or operating division of a company, instead of operations of the company as a whole, then it is called tracking-stocks.
Features of Tracking Stocks:
(a) It is a method for measurement of performance of a company;
(b) It separates the efficient units with inefficient ones resulting into improvement or a fair comparison;
(c) It is a new concept and till date it has been not made operational.
(v) Voluntary Delisting of Securities:
Case 1: If the Company seeks to delist from all the SEs – Exit opportunity to be given
Case 2: In case, the Company seeks to delist from BSE and NSE - Exit opportunity to be given
Case 3: In case, the Company seeks to delist from BSE or NSE and from DSE - Exit opportunity need not be given
Case 4: In case, the Company seeks to delist from DSE, - Exit opportunity need not be given
Procedure for Exit Opportunity:
• Prior approval of Board of directors in its meeting
• Special resolution through postal ballot
• The votes cast by public shareholders should be in the ratio of 2:1
• Make an application to stock exchange for in principle approval
• An Audit report under Regulation 55A of depositories regulations shall accompany application for in principle approval
Q. 36. Distinguish between the following:
(i) ‘European option’ and ‘American option’. [Dec. 2006, 2x1 = 2]
(ii) ‘Buy and hold’ and ‘buy and trade’.
(iii) ‘Commercial bills’ and ‘commercial papers’. [Dec. 2006, 2x1 = 2]
Answer: [June 2008, 4x3 = 12]
S.No. American Option European Option
1. Meaning: When option holders can exercise option at any time or even before expiration of maturity period, then it is called American Option. Meaning: When option can be exercised only at the maturity period, then it is called European option.
2. The option holder has to pay comparatively higher rate of premium. Lower premium
3. They are traded on stock exchange only. They are traded on over the counter market.
S.No. Buy & Hold Buy & Trade
1. When an investor buys any securities, purely for long term investment purpose and keep it till maturity, then it is called buy and hold strategy. So there is only one exist-route i.e., redemption of security. When an investor buys any security, not for investment purpose, but actively trading purpose and making profit by actively dealing in it, then it is called buy and trade strategy.
2. In this option, the invested amount of investor can be released only on maturity. No blockage of fund and amount invested can be released by trading in it.
3. In the form of interest/dividend or difference between redemption-price and issue price. The investor can get benefits from trading in addition to benefits of interest or dividend.
S.No. Commercial Bill Commercial Paper
These are basically negotiable instruments accepted by buyers for goods or services obtained by them on credit. The most common method is that the seller who gets the accepted bills of exchange discounts it with the Bank or financial institution or a bill discounting house and collects the money (less the interest charged for the discounting). To be freely negotiable and marketable, the bills should be of first class bills i.e., those accepted by Companies having reputation. Alternatively, the bills accepted by Companies should be co-accepted by Banks as a Kind of guarantee. Commercial Paper is an unsecured money market instrument issued in the form of a promissory Note. It was introduced to enable highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors. Guidelines for issue of CP are presently by various directives issued by the RBI.
Q. 37. “On line trading of corporate securities has originated the depository services in the capital markets.” Comment. [June 2008, 4x1 = 4]
Answer:
Depository: Depositories gave a new dimension for conducting transactions in the capital market – primary as well as secondary in a more efficient and effective manner and in a paperless form. In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.
Q. 38. Explain the rationality of ‘fund of funds’ in the Indian financial market.
Answer: [June 2008, 4x1 = 4]
A fund of funds scheme shall be subject to the following investment restrictions:
• A fund of funds scheme shall not invest in any other fund of funds scheme;
• A fund of funds scheme shall not invest its assets other than in schemes of mutual funds, except to the extent of funds required for meeting the liquidity requirements for the purpose of repurchases or redemptions, as disclosed in the offer document of fund of funds scheme.
Q. 39. State the composition of ‘remuneration committee’ as provided under Clause 49 of the listing agreement. [June 2008, 4x1 = 4]
Answer:
Remuneration Committee under Clause 49 of Listing Agreement: The Board may setup a remuneration committee may comprise of atleast 3 directors, all of whom should be non-executive directors, the Chairman of committee being an independent director to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. All the members of the remuneration committee could be present at the meeting and the Chairman of the remuneration committee could be present at the AGM to answer the queries of shareholders.
Q. 40. Explain the accounting ratios which are required to be disclosed under the heading ‘basis for issue price’ in an offer document for an issue under book building process. [June 2008, 4x1 = 4]
Answer:
The following accounting ratios shall be given under the basis for issue price for each of the accounting periods for which the financial information is given:
1. EPS, pre-issue, for the last three years (as adjusted for changes in capital).
2. P/E pre-issue.
3. Average return on net-worth in the last three years.
4. Net-Asset value per share based on last balance sheet.
Q. 41. Briefly explain the developments in commodity futures market.
Answer: [June 2008, 4x1 = 4]
Commodity futures markets or treating commodity as underlying assets and trading in the securities are long felt need which get Governments permission in 2004. Before 2004, there was restriction in respect of commodity trading, due to wrong perception that it will result in unnecessary hoarding of essential goods in greed of upper price-movement.
Present all goods and products of agriculture, mineral and fossil origin are allowed for future trading. There are four commodity exchanges where trading in commodity is done under the control of Govt. of India as per Forwards Contracts (Regulation) Act, 1952.
Q. 42. Explain ‘unique identification number’ (UIN) and
criteria to determine specified intermediaries, specified listed companies and specified investors. [June 2008, 4x1 = 4]
Unique Identification Number (UIN): UIN means the Identification Number generated in the Central Database for and allotted to each applicant. SEBI (Central Database of Market Participants) Regulations, 2003 requires every specified intermediary, specified listed company and specified investor to make an application for allot of UIN for itself and for its related persons.
Criteria to determine Specified Intermediaries, Specified Listed Companies and Specified Investors:
1. With regard to intermediaries or other entities – their kind and the nature of functions performed by them, their networth and other similar factors;
2. With regard to listed companies or companies which intend to get securities listed – their paid-up capital, the number of their public shareholers, the volume of trading in their securities, the proposed issue size and other similar factors; and
3. With regard to investors – The quantum of investment made by them in the securities of any listed company or their volume of trading in securities in a particular financial year.
Q. 43. Discuss briefly the SEBI Guidelines on insider trading. [June 2008, 4x1 = 4]
Insider Trading: It means buying or selling or dealing in the Securities of a listed company by a director, officer an employee of the firm or by any other person such as internal auditor, statutory audit, agent, adviser analyst etc. who has knowledge of unpublished price sensitive information.
Prohibition on Insider Trading is made under SEBI (Prohibition of Insider Trading) Regulations, 1992 defines the term relative in the following manner:
(a) They are members of a HUF; or
(b) They are husband and wife; or
(c) All such family members including relatives from upwards to downwards.
Every listed company is required to prescribe a threshold limit for dealing in the securities of that Company.
All directors, officers, designated employees and connected persons would need to obtain pre-clearance from the company for dealing in securities above the threshold limit.
Regulations also prescribes disclosure of interest or holding to be made by directors, officers and substantial shareholders in case of listed companies.
Inspection and Investigation mechanism for Insider Trading:
(i) The Board can make necessary inquiries to form a prima facie opinion about the violation of the regulations of SEBI (Prohibition of Insider Trading) Regulations, 1992.
(ii) For the purpose of enquiry, the Board can appoint one or more officers, provided that before inspection, the Board will give reasonable notice to the insider.
Duties of the Insider on Inspection/Investigation as per Regulation 7:
1. Production of Books, A/c and other documents.
2. Facilitate reasonable access to the premises.
3. Furnishing information.
Penalty for Insider Trading as per Regulation 15G:
(a) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or
(b) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(c) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information.
Penalty: (a) Three times of the amount of profit made out of insider trading, or
(b) Rs.25 crores, whichever is higher
Q. 44. Mention the terms and conditions on which
non-banking finance companies (NBFCs) can accept public deposits…
under directions issued by the Reserve Bank of India.
Q. 45. List out briefly the general grievances of investors against the companies.
Or General Grievances of Investors: [June 2008, 4x1 = 4]
Q. 46. What are the duties of debenture trustees under the SEBI (Debenture Trustees) Regulations, 1993 ? [June 2008, 4x1 = 4, June 2006, 2x1 = 2]
Answer:
Duties of Debenture Trustees:
1. Call for periodic report from the body corporate.
2. Take possession of trust properly in accordance with the provisions of the trust deed.
3. Enforces security in the interest of the debenture holders.
4. Do such acts as necessary in the security becomes enforceable.
5. Debenture certificates have been dispatched to the debenture holders.
6. Exercise due diligence to ensure compliance by the body corporate with the provisions of the Companies Act, 1956, the list agreement of the stock exchange and the trust deed.
7. To take appropriate measure for protecting the interest of the debenture holders as soon as any breach of trust deed or law comes to his notice.
8. To ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the D.B.H.
9. Inform SEBI immediately of any breach of trust deed or law comes to his notice.
10. Debenture trustee may inspect books of A/c, records, registers of body corporate and the trust properly to the extent necessary for discharging its obligations.
Q. 47. What is ‘margin trading facility’ ? [June 2008, 4x1 = 4, Dec. 2008, 6x1 = 6]
Essential requirements for providing margin trading facility to the members by a S.E.
Margin Trading Facility: “It is a facility in which investors buy stocks with the help of stock-brokers, without having full-consideration. Here the client (investors) deposits minimum amount which his stock-broker, who purchases shares. Here broker himself can advance the balance amount to meet full settlement of obligations”. Margin trading aims to curb speculative dealing in securities, which otherwise result into volatility in the prices of securities.
Requirements for Margin Trading Facility: If a member i.e., stock-broker wants to avail margin trading facility he has to deposit certain minimum amount with stock-exchange which of two types:
1. Daily Margin: Here the stock-broker has to deposit a fixed % of the value of transacted on forward basis both in respect of purchase and sale.
2. Carry Over Margin: When a stock-broker without squaring up outstanding deals, intends to carry-over then, he has to deposit additional margin, referred as carry over margin.
Q. 48.Whether electronic-holding of securities can be converted into physical form. Also state whether instructions for delivery of securities can be given to a depository participant via internet. [June 2008 4x1 = 4]
The investor at his volition can get physical-shares instead of electronic shares, held by him with depository. This process is called rematerialization of securities. The process of rematerialization can be summarized as investor:
1. Submit rematerialization request form to Depository Participant.
2. Depository Participant intimates the Depository.
3. Depository intimates to the Issuer Company.
4. Issuer Company confirms the Depository and issue “Physical Share Certificates”.
5. Depository debits the investors a/c.
Yes, the investor can give instructions about delivery of securities to the depository participant through internet but to avail this facility, he must have User ID and Password.
Q. 49. Define ‘persons acting in concert’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. [June 2008, 4x1 = 4]
1. Persons who for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding, directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.
2. The following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established:
a. A company, its holding company or subsidiary of such company;
b. A company with any of its directors or any person entrusted with the mgmt.;
c. Directors of companies (holding & subsidiary) and their associates;
d. Mutual fund with sponsor or trustee or asset management company;
e. Foreign institutional investors with sub-accounts;
f. Merchant Bankers with their clients as acquirer;
g. Portfolio managers with their clients as acquirer;
h. Venture capital funds with sponsors.
Q. 50. “Treasury bills are an effective cash management product.” Elucidate.
Treasury bill is a powerful instrument in the money market.” Do you agree? Comment.
Treasury Bills: Treasury Bills are money market instruments to finance the short term requirements of the Government of India.
These are discounted securities and thus are issued at a discount to face value.
In short, the lowest risk category instruments are the treasury Bills.
Based on the Bids received at the auctions, RBI decides the cut off yield and accepts all bids below this yield.
Treasury Bills-An Effective Cash Management Product:
1. T.B.s are very useful instruments to deploy short term surpluses depending upon the availability and requirement.
2. Banks do not pay any interest on fixed deposits of less than 15 days, or balances maintained in current accounts, whereas T.B.s can be purchased for any number of days depending on the requirements.
3. Since every week there is a 92 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds.
Q. 51. Distinguish between the following:
(i) ‘Employee stock option scheme’ and ‘employee stock purchase scheme’.
S.No. Employee Stock Option Scheme Employee Stock Purchase Scheme
1. “employee stock option scheme (ESOS)” means a scheme under which a company grants employee stock option. "employee stock purchase scheme (ESPS)" means a scheme under which the company offers shares to employees as part of a public issue or otherwise.
(ii) Compulsory Delisting:
A recognized Stock Exchange may, by order, delist any equity shares of a company on any ground prescribed in the rules made u/s 21A of the Securities Contracts (Regulation) Act, 1956.
Provided that no order shall be made under this sub regulation unless the company concerned has been given a reasonable opportunity of being heard.
The decision regarding compulsory delisting shall be taken by a panel to be constituted by the RSE consisting of:
1. two directors of the RSE (one of whom shall be a public representative);
2. one representative of the investors;
3. one representative of the MCA or ROC and
4. the Executive Director or Secretary of the RSE.
Before making an order, the recognized Stock Exchange shall give a notice in one English national daily with wide circulation and one regional language newspaper of the region where the concerned recognized Stock Exchange is located.
The recognized Stock Exchange shall while passing any order, consider the representations, if any, made by the company as also any representations received in response to the notice given.
The provisions of Chapter IV (Exit Opportunity) shall not be applicable to a compulsory delisting made by a recognized Stock Exchange under this Chapter.
• RSE = Recognized Stock Exchange
Q. 52. “Permanent Account Number (PAN) is the sole identification number for all transactions in the securities market.” Elucidate. [Dec. 2008, 4x1 = 4]
Q. 53. Highlight the provisions of clause 40A and 40B of the listing agreement pertaining to continued listing of shares and takeover offers.
Answer: [Dec. 2008, 6x1 = 6]
Conditions for Continued Listing and Takeover Offer (Clause 40A & Clause 40B):
a. To maintain on a continuous basis, public shareholding of atleast 25% of total number of issued shares;
b. To maintain on a continuous basis, public shareholding of atleast 10% where the company offers or has in the past offered a particular class of shares to the public to the extent of atleast 10%;
c. To maintain on a continuous basis, public shareholding of atleast 10% if the number of O/S listed shares of any class of the company are 2 crore or more and the market capitalization of such company in respect of shares of such class is Rs.1000 crores or morel
d. To increase public shareholding to 25% or 10%, as the case may be within such period as may be approved by the specified Stock Exchange but not exceeding 2 years if the public shareholding is less than 25% or 10% as the case may be;
e. Not to dilute in any way its public shareholding or not to make any allotment of its shares to its promoters or entities belonging to its promoter group except for supervening extraordinary events;
f. Not to make any offer to buyback its shares for the purpose of making sponsored issuance of depository receipts or take any other step including issuance of depository receipts, if it results in reducing the public shareholding below the minimum level of 25% or 10% as the case may be;
Q. 54. “Best protection is the self-protection.” Elucidate this statement with emphasis on the checks that an investor should exercise before deciding to invest in securities. [Dec. 2008, 4x1 = 4]
Q. 55. Describe briefly the code of conduct for a portfolio manager as laid down by the SEBI. [Dec. 2008, 4x1 = 4]
Answer:
Requirements for Registration of a Portfolio Manager: A person intending to work as a portfolio manager must get registered with SEBI complying with following norms under Regulation 6 of SEBI (Portfolio Managers) Regulations, 1993:
a. Body – Corporate:
b. Necessary Infrastructure:
c. Qualification for Principal – Officer:
d. Qualification for employee:
e. Capital Adequacy Requirements: Min. Networth Rs.50 lakhs.
f. No Litigation:
g. No Conviction:
h. Fit & proper person:
i. Interest of Investors
Code Of Conduct for a Portfolio Manager:
1. The money should be deployed as soon as possible for that purpose for which it is received and money due and payable to a client should be paid forthwith.
2. Shall not make any exaggerated statement to the client either about the qualification or the capability to render services.
3. Shall not disclose to any clients, or press any confidential information about his client.
4. Shall in the interest of the client take adequate steps for registration of the transfer of the clients securities and for claiming and receiving dividends, interest payments and other rights accruing to the client.
5. Shall endeavor to ensure that the investors are provided with true and adequate information.
6. Shall not be a party to creation of false market in securities or price rigging or manipulation of securities or passing of price sensitive information.
7. Shall enter into any transaction in securities of companies on the basis of unpublished price sensitive information.
8. A portfolio manager or any his employees shall not render any investment advice about any security in the publicly accessible media, unless a disclosure of his long or short position in the security has been made.
9. In case an employee of the portfolio manager is rendering such advice, he shall also disclose his interest and of the employer including their long or short position in the said security
Q. 56. ‘Exchange Traded Funds’ ? Explain their advantages & disadvantages.
ETFs are a new variety of mutual funds that first became available in 1993. ETFs have from rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as mere “tax efficient” than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distribution of realized and taxable capital gains than most mutual funds. ETF represents investment by a mutual fund, into basket of security of a listed company, which are traded on stock exchange.
Advantages of Exchange Traded Funds:
1. It can be bought and sold throughout the trading day, allowing for intraday trading.
2. It can be traded on stock exchange either below “Net Assets Value” or more than “Net Assets Value”.
Q. 57. RTA - Role in the primary and secondary market. [Dec. 2008, 4x1 = 4]
Registrar Transfer Agent (RTA) means the person appointed by a body corporate or any person or group of persons to carry on the following activities:
(i) collecting applications of investors in respect of an issue;
(ii) keeping a proper record of applications and monies received;
(iii) assisting body corporate in determining the basis of allotment, finalizing the list of persons entitled to allotment of securities and processing certificates and other related documents in respect of an issue;
Share Transfer Agent (STA): STA means
(i) any person who on behalf of any body corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities;
(ii) the department, by whatever name called, of a body corporate performing the activities as share transfer agents if at any time the total number of holders of its securities exceeds Rs.1 lakh.
Role played by RTA and STA in Primary and Secondary Market: Apart from rendering service to newly formed companies, they also render service to the existing companies in servicing the share capital contributed by the investors.
The system of share transfers gives liquidity to the investment helps the investors to easily acquire or dispose off shares in the secondary market.
The RTA and STA who have the necessary expertise, trained staff, reliable infrastructure and SEBI license render service to the corporate by undertaking and executing the transfer and transmission work relating to the companies shares and securities.
Q. 58. Explain the SEBI guidelines on pricing of equity shares by an issuer company. Answer: [Dec. 2008, 4x1 = 4]
SEBI Guidelines for Pricing of Equity Shares:
1. All listed companies who equity shares are listed on a stock exchange and unlisted companies desirous of getting its securities listed on a recognized stock exchange pursuant to a public issue, may freely price its equity shares or any securities.
2. An infrastructure company is also free to price its equity shares subject to compliance with disclosure norms specified by SEBI from time to time.
3. Banks can also freely price their initial public issues subject to prior approval from RBI.
4. Provided that the difference between the price at which the securities are issued to retail investors/shareholders and the price at which the net offer is made to other categories of public is not more than 10% of the price at which securities are offered to other categories of public.
5. The issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the offer documents filed with the Board and actual price can be determined at a later date.
Q. 59. Critically examine the role of SEBI in the regulation of capital market in India. [Dec. 2008, 4x1 = 4]
Answer:
Role of SEBI in Capital Market in India: When SEBI Act, 1992 was enacted, the long felt need of good market regulator was fulfilled, which can be witnessed with the growing securities market of the country. In this regards, SEBI plays a vital role and functions which can be summarized as per Sec. 11 of SEBI Act, 1992 as follows:
(A) Primary Functions (Sec. 11(1)): The major function of SEBI includes:
1. Protection of interest of investors in securities.
2. Promotion and development of securities market.
(B) Other Functions (Sec. 11(2)): These functions can be called as ancillary functions and SEBI performs these for achievement of primary functions.
1. Regulating the business in stock exchanges and any other securities market.
2. Requiring compulsory registration and then regulating the working of various intermediaries.
3. Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds.
4. Registering and regulating the working of depositories, depositories participants, custodian of securities, credit rating agencies, etc.
5. Prohibiting fraudulent and unfair trade practices.
6. Prohibiting insider trading in securities.
7. Promoting and regulating self regulatory organization.
8. Regulating substantial acquisition of shares and takeover of companies.
9. Levying fees or other charges for carrying out the purpose of this section.
(C) Delegated Functions: SEBI must perform the delegated functions by Central Govt. from time to time as under the provisions of:
Securities Contracts (Regulation) Act, 1956.
Any other laws.
Q. 60.Distinguish:
Listed Securities Permitted Securities
Definition When securities are admitted for dealing on stock exchange, on the basis of compliance with all the listing requirements, then it is called Listing securities. When securities listed on one or more stock exchanges, are permitted to be traded on those exchanges, where they are not listed, are called permitted securities.
Grounds for Trading These securities are traded on stock-exchange because these are listed on that stock exchange after complying with the listing agreement. These securities are listed on one or more stock exchange but also get permission for trading these are not listed.
Nature
Listing of securities are mandatory u/s 73 of the Companies Act, 1956.
It is not mandatory for taking permission for trading on one or more stock exchange.
Q. 61. Write short notes on the following:
(i) Rolling Settlement: A system of netting or finalization of stock-exchange transactions on a daily basis, in other words in a rolling settlement system, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligation for the day.
Pay-in and Pay-out of both funds and securities is completed on the same day.
At present trades in securities at the 2 working day (excluding Saturdays, Sundays, Bank and Exchange trading holidays) which comes between the settlement period.
However, with straight through processing (STP), now settlement period has shrinked to T+1.
Significance of Rolling Settlement System:
i. In rolling settlement system, risks become manageable and transactions costs are less in the long run since margins are not more necessary.
ii. It is globally accepted settlement system because it creates a safer market by reducing risk.
iii. Price – volatility, default etc., will be minimized.
iv. It enables both the trader and investors to rate funds more quickly.
(ii) Whistle Blower Policy: A company may establish “Whistle Blower Policy” for its employees to enable them to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.
The policy should provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases.
Once established, the existence of the mechanism of Whistle Blower policy should appropriately be communicated within the organization. Whistle Blower Policy is also one of the non-mandatory requirements of the revised Clause 49 of the Listing agreement.
(iii) Money Market Mutual Funds (MMMFs): MMMFs means those funds which are invested in short term debt securities, in the money market like Certificates of Deposits, Commercial paper, Government Treasury Bills, etc. Owing to their large size, the funds normally get a higher yield on such short term investments than an individual investor.
These schemes are ideal for corporate and individual investors, as a means to park their surplus funds, for short periods.
Features:
1. Return in the schemes of such funds may fluctuate, depending upon the interest rate, prevailing in the market.
2. MMMFs are exclusively governed by the SEBI (Mutual Fund) Regulations, 1996.
(iv) Straight Through Processing (STP): STP is a mechanism, that automates the end to end processing of transactions of financial instruments. It electronically captures and process the transactions from order originating point to final settlement. Simply, STP streamlines the process of trade execution and settlement and avoids manual entry and re-entry of the details of the same trade by different market intermediaries and participants. STP service is regulated by SEBI (STP Centralized Hub and STP Service Providers) Guidelines, 2004.
Advantages of STP:
1. Minimization of human errors because it automates the processing.
2. Shorter settlement cycle i.e., (T+1).
3. Greater transparency with clear audit trail;
4. Timely settlement of trades and instructions.
5. Reduction in brokerage charges etc.
Q. 62. Distinguish between the following:
(i) ‘On-line surveillance’ and ‘off-line surveillance’.
Answer:
(i) ‘On-line Surveillance’: On line real time surveillance is a system which has main objectives of detecting potential market abuses at a nascent stage to reduce the ability of the market participants to unduly influence the price and volumes of the scripts traded at the Exchange, improve the risk management system and strengthen the self regulatory mechanism at the Exchange. It is capable of generating on line alerts based on certain parameters like price and volume variations in scripts etc. It provides measure of abnormal behaviour, and happens, when a metric behaves significantly differently from its benchmark.
‘Off-line Surveillance’: The Off-line surveillance system comprises of the various reports based on different parameters and scrutiny thereof:
(a) High – Low difference in prices;
(b) Change in prices over a week/fortnight/month.
(c) Trading in infrequently traded scripts.
(d) Scripts hitting New High/Low.
(ii) ‘Money at call’ and ‘money at short notice’.
Money at call Money at short notice
outright money for maturity of or upto 14 days.
Money for higher maturity is known as inter-bank deposits. The participants are banks and all India financial institutions as permitted by RBI. The market is an over-the-telephone market.
Non-bank participants act as lenders only. Banks borrow for a variety of reasons to maintain their CRR, to meet heavy payments, to adjust their maturity mismatch etc.
Consequently, depending upon supply, interest rates show wide fluctuations.
Corporate treasury management is not as sophisticated as in industrialized countries and through the cash credit system transfer their liquidity management to their banker who in turn resorts to the call money market.
(iii) Dematerialisation and Immobilisation:
S.No. Dematerialisation Immobilisation
1. In dematerialization, model of depository, the physical scripts are converted into e-records. In immobilization model of depository, the physical scripts remains in existence as it isdepository system also.
2. In this model, the surrendered physical certificates are not withdrawn but the investor can ask for fresh-share certificate. In this model the original share certificates, can be withdrawn, as it is lodged in depository method is.
3. This model is simple and cast effective. This is not popular in India because it is complex and expensive.
Q. 63. ‘foreign currency convertible bond’ (FCCB) ? Explain its important features.
FCCB: It means an unsecured bonds, issued by an Indian Company, subscribed by a non-resident in foreign currency and which can be converted (wholly or partly) into equity shares of issuer company on later date. In other words, FCCB is a method of raising funds from abroad by an Indian company against its own ordinary shares. FCCBs are regulated by FCCB and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993.
Features of FCCB:
(a) Convertible.
(b) Coupon Rate.
(c) Listing.
(d) Unsecured Debt.
(e) Economical
Q. 64. What is meant by ‘custodian of securities’ ? Explain the capital adequacy norms laid down by SEBI for registration as a custodian.[Dec. 2007, 4x1 = 4]
Answer:
Custodian of Securities: Custodian of securities means any person who carries on or proposes to carry on the business of providing custodial services. The term “custodial services” in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes:
(i) maintaining accounts of securities of a client;
(ii) collecting the benefits of rights accruing to the client in respect of securities;
(iii) keeping the client informed of the actions taken or to be taken by the issuer of securities; and
(iv) maintaining and reconciling records of the services referred to points (i) to (iii).
Capital Adequacy Norms for Custodian: As per Regulation 8(1) of SEBI (Custodian of Securities) Regulations, 1996, the applicant, who wants to function as custodian must have a net-worth of minimum of Rs.50 crores.
Q. 65. “Investment in mutual funds is risky.” Comment ? [Dec. 2007, 4x1 = 4]
Answer:
Investment in mutual funds is less riskier than investing in securities of one or two corporates, as mutual funds invests in a number of companies across a broad cross-section of industries and sectors. However investment in mutual funds is more riskier than investment in zero risk securities such as government securities. Mutual funds may face the following risks, leading to non-satisfactory performance:
(A) Risk involved in Mutual Funds:
1. Excessive diversification of portfolio, may lose focus on the securities of key segments.
2. There may be too much focus on Blue-chips securities which are high priced, but which do not offer more than average return.
3. Large payments of brokerage and commission due to necessity of effecting high turnover.
4. Poor planning of investments with minimum return.
5. Un-researched forecast on income, profits and government policies.
6. Sometimes lack of transparency in functioning.
7. Delay in refunds on maturity.
8. Failing to identify clearly, the risk of the scheme distinct from risk of the market.
(B) Benefits involved in Mutual Funds:
1. Security and reduced risk.
2. Expert advice is available for professional management.
3. Diversification of portfolio for best returns.
4. Automatic re-investment of returns.
5. Best selection and timing of investment, through professional approach.
6. Liquidity of investment.
7. Adequate transparency and periodic disclosures.
Q. 66. Venture Cap (India) Ltd., a company listed at NSE and BSE, intends to de-list its securities. As a Company Secretary of the company, prepare a brief note on the SEBI guidelines for voluntary de-listing of securities of the company from all stock exchanges. [Dec. 2007, 8x1 = 8]
To Date: 31-12-2009
Board of Directors, XYZ Co. Ltd.
Subject: Voluntary Delisting Procedure
As desired, the procedure for the voluntary delisting from all the stock exchanges is enumerated below:
1. Under the provisions of SEBI Delisting Guidelines, 2003 a prior approval of shareholders of the company shall be obtained by a special resolution passed at the general meeting.
2. The promoter shall appoint a merchant banker registered with SEBI, who is not an associate of the promoter.
3. An exit price shall be determined for the securities in accordance with the book building process described in Schedule II of Delisting Guidelines, 2003.
4. The offer price shall have a floor price which will be the average of 26 weeks traded price quoted on the stock exchange where the shares of the co. are most frequently traded during preceding 26 weeks.
5. A public announcement shall be made, in newspapers containing information specified in Schedule I of Delisting Guidelines, 2003.
6. If the quantity eligible for acquiring securities at the final price offered does not result in public shareholding falling below required level of public holding for continuous listing, the company shall remain listed.
7. The paid up share capital shall not be extinguished as in the case of buyback of securities.
8. Within 2 working days from the date of determination of final price in the book building process:
a) Public announcement shall be made in the newspapers of the final price and whether or not the promoter or the acquirer has accepted or not;
b) It shall be communicated to exchange or exchanges from which delisting is sought to be made, the final price discovered and whether or not the promoter has accepted the price.
9. If the offer price so determined is not acceptable:
a) An application shall be made to the exchange for delisting of securities, and
b) It shall be ensured that public shareholding is brought upto the minimum level specified under the listing conditions within a period of 6 months from the date of such decision either by issue of new shares by the co. or by the promoter making an offer for sale of his holdings.
10. Make application to the exchange(delisting exchange) from where it is proposed to delist its shares.
11. Additional conditions as may be specified by the concerned stock exchanges shall be complied with.
12. In the event of securities being delisted, the acquirer shall allow a further period of 6 months for any of the remaining shareholders to tender securities at the same price.
Submitted please,
Your’s sincerely,
XYZ, Company Secretary.
Q. 67. Comment on the role of stock-brokers and sub-brokers in Indian stock market. [Dec. 2007, 4x1 = 4]
Answer:
Stock Broker: Stock-broker means a person or body corporate, holding membership of a recognized stock exchange, engaged in buying and selling securities for clients against brokerage.
Sub-Broker: A sub-broker is one who works along with the main broker and is not directly registered with the stock exchange as a member. He acts on behalf of the stock broker as an agent or otherwise for assign the investors in buying, selling or dealing in securities through such stock brokers.
Role of Stock brokers and Sub brokers: A stock broker and sub-broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter into a transaction. When executing an order the stock broker may on behalf of his client buy or sell securities from his own account i.e., as principal or act as an agent and issues necessary contract note indicating whether the transaction has been entered into by him as a principal or as an agent for another.
Q. 68. What do you understand by ‘non-banking finance companies’ (NBFCs) ? State their investment norms as laid down under the Reserve Bank of India Act, 1934. [Dec. 2007, 4x1 = 4]
(or) Explain the investment norms applicable to NBFCs. [June 2006, 4x1 = 4]
Answer:
NBFCs: Under Section 45-I of the RBI Act, 1934, a Non-banking Non-financial company is defined as:
(i) A financial institution which is a company;
(ii) A non-banking institution which is a company and which has its principal business the receiving of deposits under any scheme or arrangement or in any other manner, or lending in any manner;
(iii) Such other non-banking institutions or class of such institutions as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette specify.
Investment Norms:
1. The provisions of Section 45B of the RBI (Amendment) Act, 1997 stipulated the requirement of maintenance of assets in the approved securities whose market value shall not be less than 5% or such higher percentage not exceeding 25% as the RBI may specify the deposits outstanding at the end of the last working day of the second preceding quarter.
2. Every NBFC shall create reserve fund and transfer therein atleast 20% of its net profit every year.
3. NBFCs are required to maintain liquid assets equivalent to 10% of their deposit liabilities in specified approved securities.
4. Similarly norms have been prescribed considering the nature and types of NBFCs including loan and investment companies, leasing and hire-purchase companies, residuary non-banking companies etc.
Q. 69. As a Company Secretary in practice, how would you conduct securities audit in a listed company ? [Dec. 2007, 4x1 = 4]
Answer:
Securities Audit: Securities audit is a mechanism relieving the company and its directors from the consequences of unintended no-compliance by timely corrective actions. The securities audit shall be conducted by a company secretary in practice encompassing compliance of all rules, regulations, guidelines in relation to issue of securities, issue of certificates, in relation to all transactions of company’s securities, physical verification of relevant records and documents and also entering qualifications, if any. The company shall be at the option to either take a comprehensive securities audit or a transaction specific audit such as Audit under Public Issue, Takeover Code, Insider Trading Regulations or Buy-back of securities Regulations.
Q. 70. Describe in brief the important measures for investors’ protection in Indian capital market. [Dec. 2007, 4x1 = 4]
Answer:
Overall measures by Central Government:
Measures by SEBI in the Primary Market:
Measures by SEBI in the Secondary Market:
Q. 71. “Every credit rating agency is required to abide by the code of conduct as per the SEBI Regulations.”
Comment and discuss briefly the code of conduct for credit rating agencies.
Code of Conduct for Credit Rating Agencies: Every credit rating agency is required to abide by the Code of Conduct as per SEBI (Credit Rating Agencies) Regulations, 1999.
1) They should observe high standards of integrity and fairness in all its dealings with its clients.
2) Fulfill its obligations in an ethical manner, render at all time high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment.
3) Avoid any conflict of interest of any member of its rating committee participating in the rating analysis.
4) Not indulge in unfair competition nor they wean away client of any other rating agency on assurance of higher rating.
5) Not make any exaggerated statement, whether oral or written to the client either about its qualification or its capability to render service.
6) Endeavour to ensure that all professional dealings are effected in a prompt and efficient manner.
7) Not divulge to other clients, press or any other party any confidential information about its client, which has come to its knowledge, without making disclosure to the concerned person of the rated company/client.
8) Not make any untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI or to public or to stock exchange.
9) Should not generally and particularly in respect of issue of securities rated by it be a party to creation of false market or passing of price sensitive information to brokers, members of the stock exchanges, other players in the capital market or to any other person.
10) Take any other action which is unethical or unfair to the investors.
Q. 72. Explain briefly the following concepts under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:
(i) Acquirer.
(ii) Control. [Dec. 2007, 2x2 = 4]
Answer:
(i) Acquirer: According to takeover code, acquirer means any person who directly or indirectly cooperating by acquiring or agreeing to acquire shares or voting rights in the target company or gaining control over the target company either by himself or with any person acting in concert with the acquirer.
(ii) Control has been defined in clause © of Regulation (2) of SEBI (SAST) Regulations, 1997 and includes the right to appoint majority of the directors to control the management or policy decisions exercisable by a person or person acting individually or in concert, directly or indirectly including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
Q. 73. Explain briefly the following terms of primary capital market:
(i) Qualified Institutions Buyers (QIBs) means
1. Public financial institution as defined in Section 4A of Co. Act. 1956;
2. Scheduled commercial banks;
3. Mutual funds;
4. Foreign institutional investor registered with SEBI;
5. Multilateral and bilateral development financial institutions;
6. Venture capital funds registered with SEBI;
7. Foreign venture capital investors registered with SEBI;
8. State industrial development corporations;
9. Insurance companies registered with the Insurance Regulator and Development Authority (IRDA);
10. Provident funds with minimum corpus of Rs.25 crores;
11. Pension funds with minimum corpus of Rs.25 crores.
(ii) Shelf Prospectus:
(iii) Unique Client Code: All brokers are required to provide a unique ID to every investor. It was made mandatory for all brokers to use unique client codes for all clients. For this purpose brokers are requird to collect and maintain in their back office the Permanent Account Number (PAN) by IT Department for all their clients which will form part of client code.
Q. 74. Comment briefly on the following statements:
(i) Put not your trust in money, put your money in trust.
(ii) The process of financial reforms is still in progress and are likely to bring in even more drastic changes to make the markets healthier and stronger.
Answer: [Dec. 2007, 3x2 = 6]
(i) The small investors, who generally lack expertise to invest on their own in the securities market have reinforced the saving “put not your trust in money, but put your money in trust”.
1. They prefer some kind of collective instrument vehicles like mutual funds, which pool their marginal resources, invest in securities, and distribute the returns therefore among them on cooperative principles.
2. The investors benefits in terms of reduced risk and higher returns, arising from professional expertise of funds managers employed by mutual funds.
(ii) Financial reforms have brought about many changes which has have removed the shackles of control and have promoted free flow of investments, state of the art technologies and procedures which are in operation in the other developed markets. The process of financial reforms is still in progress and is likely to bring in even more drastic changes to make the markets healthier and stronger. India’s approach to financial sector reforms, in general, and to the management of external sector, in particular has served the country well, in terms of aiding growth, avoiding crisis, enhancing efficiency and imparting resilience to the system.
Q. 75. What is ‘escrow account’ ? Discuss the provisions of escrow account as per the SEBI Takeover Code. [June 2006, 4x1 = 4]
(or) Explain briefly the provisions related to ‘escrow account’ in order to make offer for buy-back of shares by an Indian company. [Dec. 2007, 5x1 = 5]
Answer:
Escrow Account: It means a security deposit for meeting out obligations under takeover code.
SEBI Takeover Code:
1. The Regulation 28 of SEBI Takeover Regulations require cash deposit in an escrow account before the public announcement (buy-back offer) and forfeiture thereof if the acquirer fails to discharge his obligations under the offer. The escrow amount is to be calculated as under:
a) For consideration payable under the public offer upto and includes Rs.100 crores and 10% thereafter.
b) For offers which are subject to minimum level of acceptance, and the acquirer does not want to acquire a minimum of 20% then 50% of the consideration payable under the public offer in cash is required to be deposited in the escrow account.
2. Where a company opts to deposit cash in an escrow account, it should empower the merchant banker to instruct the bank to issue a banker’s cheque or DD for the amount lying to the credit of the escrow account in his favour. [Regulation 10(4)].
3. Apart from cash, the escrow account may consist of bank guarantee in favour of the merchant bank or deposit of acceptable securities with the appropriate margin, with the merchant banker. The escrow account can also be maintained as a combination of both. [Regulation 10(3)]. The discretion in respect of acceptance securities and appropriate margin shall be exercised by the merchant banker.
4. Where the escrow account opened by the company consists of bank guarantee, it should be in favour of the merchant banker and should remain valid for 30 days after the closure of the offer. [Regulation 10(5)]. The bank guarantee should not be returned by the merchant banker till the completion of all obligations under the Regulations. [Regulation 10(7)]
5. At the time of opening of the account, the company should deposit with the bank, in cash, a sum of atleast 1% of the total consideration payable as security for fulfillment of obligations under the Regulations. [Regulation 10(8)].
Q. 76. “Listing of securities with stock exchanges is a matter of great importance for companies and investors.” Comment on this statement and list out the benefits of listing for the companies and investors. [Dec. 2007, 5x1 = 5]
Answer:
Benefits of Listing to Companies:
1. Tax concessions
2. Increase in Goodwill
3. Easy availability of loan
4. No threat of takeover
Benefits of Listing to Investors:
1. Liquid in investments
2. Tracking price trend
3. Availability of sufficient information
Q. 77. Write notes on the following:
(i) Carrot and stick bond
(ii) Basket trading system [June 2007, 5x5 = 25]
Answer:
(i) Carrot and Stick Bond: It is another variation of convertible debentures redeemable at premium. The carrot is the lower than normal conversion premium i.e., the premium over the present market price of the equity shares is fixed at a reasonable level so that the price of the equity shares need not increase significantly to make conversion practical. The stick is the issuer’s right to call the issue at a specified premium if the price of the equity shares is traded above a specified percentage of the conversion price.
(ii) Basket Trading System: It is a special trading system, available on the BSE, which facilitates the creation of Sensex linked portfolio and also linked market prices of the underlying securities of Sensex in the cash segment and futures on Sensex.
Features of Basket Trading system:
1. Facility available on BSE only.
2. Uses of this system available to both investors as well as its member brokers.
3. In this system, the investors through the member brokers of the exchange are able to buy or sell all 30 scripts of Sensex in one go or in the proportion of their respective weights in the Sensex.
4. The investors can also create their own baskets, by deleting certain scripts from 30 scripts in the Sensex.
Q. 78. “The financial markets have two major components — the money market and the capital market.” Discuss. [June 2007, 5x1 = 5]
Answer:
1. Money Market: The money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Money market instruments are generally financial claims that have law default risk maturities under one year and high marketability.
2. Capital Market: It is a market for financial investments that are direct or indirect claims to capital. It is rider than securities market and embraces all forms of lending and borrowing, whether as not evidenced by the creation of a negotiable financial instrument. The capital market comprises the complex of institutions and the term of funds are pooled and made available to business government and individuals. The capital market also encompasses the process by which securities already outstanding are transferred.
Q. 79. How the proceeds of external commercial borrowings (ECB) can be utilised as per norms ? [June 2007, 5x1 = 5] Answer: Refer Q.No.16.
Q. 80. Organise Infotech Ltd., an existing listed company, wants to make a bonus issue of shares. The Chief Executive Officer (CEO) of your company wants to know about pre-requisites for bonus issue. As the Company Secretary, prepare a note on the SEBI guidelines applicable in this regard. Answer: Refer Q.No.17.
Q. 81. (a) Describe objectives constituting SEBI & state composition of SEBI Board.
(b) State the requirements for monitoring of ratings by a credit ratingagency.
Answer: [June 2007, 4x3 = 12]
(a) Composition of the SEBI Board: As per Sec. 4(1) of SEBI Act, 1992, the Board shall have the following members:
(i) A Chairman, who will be appointed by the Central Government.
(ii) Two members amongst the officials of the ministry of Central Govt., nominated by the Central Govt.
(iii) One member from amongst the officials of RBI, nominated by RBI.
(iv) Five other member of whom at least 3 shall be whole time members to be appointed by the Central Government.
(b) Requirements for monitoring of Rating by Credit Rating Agency:
(i) Confidentiality: The analysts and rating committee are required to maintain such information in strict confidence and not to use the same for any other purpose.
(ii) Speculative Grades: Below the investment grade. CRA’s don’t recommend this grade to the investors or to the market.
(iii) Surveillance: The rating is subjected to continuous surveillance during the life time of the instrument. The surveillance frequency range between quarterly, half yearly or yearly.
(iv) Credit Watch: When an event/deviation has been taken place which creates an impact on the debt servicing capacity of the company, The CRA put the company under credit watch and will come out with a specific review.
Q. 82. Distinguish between the following:
(i) ‘Leverage funds’ and ‘hedge funds’.
(ii) ‘Futures’ and ‘options’.
(iii) ‘Income oriented schemes’ and ‘growth oriented schemes’.
Answer: [June 2007, 4x3 = 12]
S.No. Leverage Funds Hedge Funds
1. Leverage funds are also known as borrowed funds. Hedge funds are not borrowed funds, they are used for speculative trading.
2. Leverage funds increase the size of portfolio. Hedge funds doesn’t increases the portfolio size and value.
3. Leverage funds are less risky. Hedge funds are more risky.
4. Leverage funds tend to indulge in speculative trading and risky investments. Hedge funds employ their funds for speculative trading i.e., for buying shares whose price are likely to rise and for selling shares whose prices are likely to fall.
S.No. Option Future
1. In future contract both parties i.e., buyer and seller are under obligation to buy & sell securities. The option holder gets only right and obligation is on the option-vendor.
2. There is no specific type of future-contract. It is of two types:
(a) Call-option: Right to buy or not buy.
(b) Put-option: Right to sell or not sell.
S.No. Income Oriented Scheme Growth Oriented Scheme
1. Under this scheme, fund is in rested in fixed income securities like Govt. Bonds, Debentures, etc. Under this scheme fund is invested in equities.
2. This scheme offers, fixed income to the investors. This scheme provide capital appreciation to the investors.
3. This scheme is suitable for investors seeking, capital stability and regular income. Investor, having a long term outlook seeking growth over period of time.
Q. 83. “Derivatives are contracts, which derive their values from the value of one or more of other assets.” Comment. [June 2007, 4x1 = 4]
Answer:
Derivatives: Derivative can be defined as a contract, which value depends upon one or more other assets called underlying assets. Here underlying assets may be anything, ranging from commodity to a stock market index. Derivatives can also be defined as a security derived from a debt instrument, shares, loans, whether secured or unsecured, risk instrument or contract for differences or any other form of security.
Presently there are four types of derivatives which is commonly traded i.e.,
1. Futures
2. Forward
3. Options
4. Swaps
Derivatives work as a temporary facility for hedging of price risk of inventory holding a financial/commercial transaction over a certain period. It adds liquidity but the gain of one person result into loss of another person, so it is also called Zero – sum game.
Q. 84. State major functions of the ‘central listing authority’. [June 2007, 4x1 = 4]
Answer:
Central listing authority is a self regulatory authority for regulating the listing of security of a company is regulated by SEBI (Central Listing Authority) Regulations, 2003.
Functions of Central Listing Authority: Regulation 8 of SEBI (CLA) Regulations, 2003.
1. Primary Function: The main function of CLA includes receiving and processing applications for letter precedent to listing from applications.
2. Recommendatory Function: The authority gives recommendation to SEBI for the following matter:
a. Protection of interest of investors in securities.
b. Development and regulation of securities market.
c. Improvement in listing agreement, listing conditions and
d. Disclosures to be made in offer documents.
3. Derogatory Function: The authority shall perform any other functions, as may be delegated by the SEBI from time to time.
Q. 85. What is ‘bailout takeover’ ? State the procedure for bailout takeover as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. [June 2007, 4x1 = 4]
Answer:
Bail-out Takeover: Bailout takeover means substantial acquisition of shares in a financially weak company not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a public financial institution or a scheduled bank.
Procedure for Bailout Takeover:
1. The rehabilitations scheme specially provides for the details of any change in management. The scheme may also provide for outright purchase of shares, exchange of shares and combination of both.
2. Before giving effect to any scheme of rehabilitation the lead institution is required to invite offers for acquisition of shares from at least 3 parties.
3. After receipt of the offers, the lead institution selects one of the parties having regard to the managerial competence, adequacy of financial resources and technical capability of the person acquiring shares to rehabilitate the financially weak company.
4. The lead institution provides necessary information to any person intending to make an offer to acquire shares about the financially weak company and particularly in relation to its present management, technology, range of products manufactured, shareholding pattern, financial holding and performance and assets and liabilities of such company for a period covering 5 years from the date of the offer as also the minimum financial and other commitments expected from the person acquiring shares for such rehabilitation.
Q. 86. How would you fix the price in preferential issue of shares in a listed company
Preferential Issue of Shares: It means of equity shares or fully convertible debentures (PCDs) or etc., to any selected group of persons like – existing shareholders, promoters, on private placement basis. A preferential issue of shares cannot be made less than the higher of the following two prices:
a) The average of the weekly high and low of quoted on the stock exchange during the 6 months preceding the relevant date; or
b) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during 2 weeks, preceding the relevant date.
Note: The special resolution passed u/s 81(1A) of the Companies Act, 1956 must clearly specify the relevant date on the basis of which price of the resultant shares shall be calculated. The relevant date means 30 days prior to the date on which the general meeting of shareholders is held, as per Sec. 81(1A).
Q. 87. What do you understand by ‘independent directors’ in the context of corporate governance ? [June 2007, 4x1 = 4]
Answer:
Independent Director: Independent director shall mean non-executive director of the Co
a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company.
b) Is not related to promoters or persons occupying top management positions at the Board level.
c) Has not been an executive of the company in the immediately preceding 3 financial years.
d) Is not a partner or an executive during the preceding 3 financial years:
i. Statutory audit firm or internal audit firm associated with the company;
ii. Legal firm or consulting firm that have a material association with the company.
e) Is not a material supplier, service provider or customer or a lesser or a lessee.
f) Is not a substantial shareholder of the company i.e., owning 2% or more of shares.
The clause also provides ;that Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors.
Q. 88. What do you mean by the following money market instruments ?
(i) Certificate of Deposits: Certificates of Deposit is a negotiable money market instrument and issued in dematerialised form or as a usance Promissory Note, for funds deposited at a Bank or other eligible financial institution for a specified time period.
(ii) Inter-corporate Deposits: An Inter-corporate Deposit is an unsecured loan extended by one Corporate to another. This market allows funds surplus Corporates to lend to other Corporates. Also the better rated Corporates can borrow from the Banking system and lend in this market. As the Cost of funds for a Corporate is much higher than a Bank, the rates in this market are higher than those in the other markets. Inter-corporate Deposit are unsecured, and hence the risk inherent is high.
(iii) Gilt-edged (Govt.) Securities:
1. These are the securities issued by Governments such as Central and State Govts, Semi-Government Authorities, City Corporations, Municipalities, Port Trust, State Electricity Boards, Metropolitan Authorities, Housing Boards & Large Financial Institutions.
2. They are held by RBI and are eligible to be reckoned for the purpose of SLR of the Banks.
3. Being a security issued by the sovereign Government, they are considered the most secured financial instruments which guaranteed both safety of the Capital and income.
4. The rate of interest is lower but it is payable half yearly.
5. They are not auctioned, their issues are notified a few days before opening for subscription and offer is kept open for two to three days.
6. The Government has a right to retain excess subscription upto 10% over and above the notified limit.
7. The Process of issue and redemption of bill rated securities is a continuous one.
8. Because of their continuous availability they are called tap-stocks.
9. Switching means purchasing one security against the sale of another security instead of outright sale of the new one. These are called as Open Operations in the secondary Market.
10. When RBI refunds cash or issues new securities it is called Primary Market Operations in Government Securities.
Q. 89. You are the Company Secretary of Golden Biotech Ltd. The Board of directors of the company is contemplating buy-back of securities of the company through purchase in open market at stock exchange. State the law and procedure for buy-back as laid down under the SEBI Regulations.
Answer: [June 2007, 8x1 = 8]
The law and procedure for buy-back of securities by a listed company, in open market at stock exchange is regulated by SEBI (Buy-back of securities) Regulations, 1998.
1. Determination of Maximum Price
2. Prohibition from Buy-Back
3. Appointment of Merchant Banker
4. Public Announcement
5. Filing of copy of Public Announcement
6. Electronic Trading Facility
7. Order Matching Mechanism
8. Daily Basis Information
9. Identity of Company
10. Extinguishments of Security Certificate
Q. 90. Explain the term ‘price sensitive information’. Which information is considered to be price sensitive ? [June 2007, 4x1 = 4]
Answer:
Price Sensitive Information Regulation 2(Na) of SEBI (Prohibition of Insider Trading) Regulations 1992]: Price sensitive information means any information which is directly or indirectly related to a company and which will materially affect the price of securities of company, when published by it. The following information shall be deemed to be price sensitive for the purpose of Insider Trading:
1. Periodical financial results of the company like Quaterly, Half yearly or Annual results.
2. Proposal for declaration of dividends – whether petering and final.
3. Issue of securities or buy-back of securities.
4. Expansion plans of the factor as well as execution of new project.
5. Amalgamation, mergers or takeovers.
6. Sale, disposal etc., of the whole or substantial parts of the undertaking.
7. Any material changes in policies, plans or operations of the company.
Apart from above information – the Listing Agreements also treats certain events and informations as Price Sensitive Information:
(a) Change in general character or nature of business.
(b) Disruptive of operative due to natural calamity.
(c) Revisions in credit rating.
(d) Litigation/dispute with a material impact.
(e) Any other information having bearing upon the operator performance of the company.
,
Q. 91. When does a stock broker become liable for prosecution by SEBI ?
Explain relevant provisions in SEBI Act, 1992 and the Regulations [June 2007, 4x1 = 4]
Answer:
Stock-Broker or Sub-Broker regulated by SEBI Act, 1992 as well as SEBI (Stock-broker and sub-broker) Regulations, 1992, lists the following activities, which will be treated as offence under Section 24 of the SEBI Act, 1992:
1. Dealing in securities without getting registration certificate from the SEBI Board.
2. Dealing in securities in violation of Securities Contract (Regulation) Act, 1956.
3. Market manipulation of securities or index.
4. In dealing in insider trading in violation of SEBI (Prohibitions for Insider Trading) Regulations, 1992.
5. Violating the SEBI (Prohibition for Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 2003.
6. Failure without reasonable cause:
a. To produce any books, registers, records or other documents;
b. To appear before any investigating authority personally;
c. To sign the notes of any examination taken down by the investigating authority;
7. Failure to pay penalty proposed by the adjudicating officer etc.
Q. 92. (a) Rights & Responsibilities of Members as per SEBI’s Investors Education Guide:
(A) As Individual Shareholder:
1. To receive share certificates on allotment or transfer.
2. To receive copies of notices for various general meetings and attend them either personally or through proxies to vote.
3. To receive copies of abridged annual report, balance sheet, profit and loss A/c and auditor’s report.
4. To receive dividends declared.
5. To receive other corporate benefits such as rights issue, bonus issue, etc.
6. To apply to the CLB to call or direct the calling of AGM of the company.
7. To inspect minutes books of the general meetings and to take copies thereof.
8. To proceed against the company by way of civil or criminal proceedings.
9. To apply for the winding up of the company.
10. To receive the residual proceeds on winding-up.
(B) As Group of Shareholders:
1. To requisition on an EGM.
2. To demand a poll on any resolution.
3. To apply to CLB to investigate the affairs of the company.
4. To apply to CLB for relief in cases of oppression and mismanagement.
(C) Responsibilities of Members: Besides the above rights, members also
have certain responsibilities to be discharged.
1. To remain informed.
2. To be vigilant.
3. To participate and vote in general meetings.
4. To exercise rights as an individual and also as a group.
*****
Q:92(b) What are the provisions in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 regarding minimum number of shares to be acquired under the takeover offer ?
Anser: Minimum No. of Shares to be Acquired: Regulation 21 of SEBI (SAST) Regulations, 1997 prescribes the following criteria:
1. The public offer made by acquirer of the target company should be for a minimum of 20% of the voting capital of the company.
2. If the acquisition results in the public shareholding in the target company being reduced below the minimum level required as per the Listing Agreement, the acquirer shall take necessary steps to facilitate compliance within the period mentioned therein.
3. Sub-regulation (2A) of Regulation 11 of the minimum size of the public offer shall be the lesser of the following:
a. 20% of the voting capital of the company; or
b. such other lesser % of the voting capital of the company assuming full subscription to the offer, enable the acquirer together with the persons acting in concert with him, to increase his holding to the maximum level possible, which is consistent with the target company meeting the requirements of minimum public shareholding laid down in the Listing Agreement.
4. Where the number of shares offered for sale by shareholders are more than the shares agreed to be acquired by the person making the offer, such person is required to accept the offers on a proportional basis in consultation with merchant banker taking care that the basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable lots.
5. For the purpose of computing percentage, the voting rights as at the expiration of 15 days after the closure of the public offer is reckoned.
Q:92(c) Outline the main legislations governing securities market in India.
1. SEBI Act, 1992:
2. Securities Contract (Regulation) Act, 1956: It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities.
3. Depositors Act, 1996:
4. Companies Act, 1956:
Q. 93. Write notes on the following:
Answer: [Dec. 2006, 5x4 = 16]
(i) Proportionate Allotment: Securities are proportionately allotted in case of oversubscription. As per SEBI (DIP) Guidelines, 2000 the allotment shall be on a proportionate basis within the specified categories rounded off to the nearest integer subject to a minimum allotment being equal to the minimum application size as fixed and disclosed by the issuer. The proportionate allotments of securities in an issue that is oversubscribed should be subject to the reservation for retail individual investors as:
1. A minimum 50% of the net offer of securities to the public shall initially be made available for allotment for retail individual investors, as the case may be.
2. The balance net offer of securities to the public shall be made available for allotment to:
a) Individual applicants other than retail individual investors, and
b) Other investors including corporate bodies/institutions irrespective of the number of shares, debentures, etc., applied for.
3. The unsubscribed portion of the net offer to any one of the categories specified in (1) or (2) above shall may be made available for allotment to applicants in the other category, if so required.
(ii) Index Futures: An index future means a future contract based on an index i.e., the underlying asset. Here futures mean a future contract i.e., a standardized contract to buy or sell a specificity security at a future date at an agreed price.
Features of Index Futures:
a) In index futures, there is no understanding security or a stock but only index.
b) Index futures are settled in cash, be cause there is nothing to be delivered to the buyer of index future.
c) In index future, the permitted indexes or indices are at present only BSE – Sensex and NSE – Nifty.
(iii) Private Equity Fund: Private Equity Fund (PEF) is an unregistered investment in which money is pooled for a dedicated investment. The investors/contributors in PEF belong to high networth individuals and families, pension funds endowments, banks and insurance companies.
Features of Private Equity Fund:
There is commitment by investor to contribute a fix amount.
It is organized for long term.
There is a distribution of cash as sale of portfolio investment.
If offers long term capital gain reducing the tax burden of investor.
It is catering the need of high networthy investors.
Q. 94. Distinguish between the following:
(i) ‘Depository’ and ‘custodian’. [Dec. 2006, 2x1 = 2]
Q. 95. Define ‘par value of shares’. Explain the terms and conditions related to denomination of the shares. [Dec. 2006, 4x1 = 4]
Answer:
Par Value of Shares: Par value of shares means face value of securities. The disclosure about the par value of shares is required to be made in the advertisement, offer documents and in application forms in identical font size as that of issue price or price band.
Denomination of Shares: The companies which have already issued shares in the denomination of Rs.10/- or Rs.100/- may change the standard denomination of the shares by splitting or consolidating the existing shares. The companies proposing to issue shares in any denomination or changing the standard denomination are required to comply with the following requirements as per SEBI (DIP) Guidelines, 2000:
1. In case of IPO by an unlisted company:
a) If the issue price is Rs.500 or more, the issuer company shall have a discretion to fix the face value below Rs.10 per share subject to minimum of Rs.1/- per share;
b) If the issue price is less than Rs.100 pre share, the face value shall be Rs.10/- per share.
2. The fresh share shall not be issued in the denomination of decimal of a rupee;
3. The existing shares shall not be altered to a denomination of decimal of a rupee;
4. At any given time there shall be only one denomination for the shares of the company;
5. The companies seeking to change the standard denomination may do so after amending the MOA and AOA, if required;
6. The company shall adhere to the disclosure and accounting norms specified by SEBI from time to time.
Q. 96. What is ‘audit committee’ ? Prepare a Board note explaining the provisions of clause 49 of the listing agreement related to audit committees.
Answer: [Dec. 2006, 8x1 = 8]
Date: 31-12-2009
To: Board of Directors,
XYZ Ltd.
From XYZ, Company Secretary
Subject: Audit Committee
Clause 49 of the Listing Agreement requires every listed company to setup a qualified and independent audit Committee giving the terms of reference.
Section 292 of the Companies Act, 1956 requires every public company having a paid up capital of Rs.5 crores or more to constitute a Committee of the Board, known as Audit Committee.
The Audit Committee shall have minimum 3 directors as members. 2/3 of the members of the audit committee shall be independent directors.
All members of the Committee shall be finally literate and at least 1 member shall have accounting or financial management expertise.
The Chairman of Audit Committee shall be an independent director and shall be present at AGM to answer shareholder queries.
The Audit Committee may invite such of the executives as it consider appropriate (particularly HODs) to be present in meetings of the Committee.
The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the Audit Committee.
The Audit Committee should meet at least 4 times in a year and the gap between 2 meetings shall not be more than 4 months.
The Company Secretary shall act as a Secretary to the Committee.
The quorum shall be either 2 members or 1/3rd of the members of the Audit Committee, which is higher but there should be a minimum of 2 independent directors present.
The powers of the Audit Committee should include power to investigate any activity, power to seek information from any employee, to obtain outside legal or other professional advice etc.
The role of Audit Committee includes oversight of the company’s financial reporting process and disclosure of its financial information to ensure that financial statements are correct, sufficient and credible recommending to the Board for appointment, reappointment, replacement or eremoval of statutory auditor and fixation of audit fees, reviewing with management the annual financial statements before submission to BOD for approval, review with the management adequacy of internal control systems, review adequacy of internal audit function.
Submitted please.
XYZ, Company Secretary
Q. 97. List out the consequences of violation of listing agreement.
Answer: [Dec. 2006, 4x1 = 4]
Listing agreement i.e., an agreement between an issuer company whose shares are permitted to be traded on the stock exchange and the stock exchange, is a Legally Binding Contract. This contract gives rise to legal obligation in respect of both parties and they are bound to comply with the terms and condition of the aid listing agreement. If the company fails to comply with the requirements of listing agreement, then the stock exchange may (a) suspend or (b) withdraw the permission to dealings in securities of the company or a body corporate. However for this purpose, the stock exchange has to give: (a) Reasons for suspension or withdrawal in permission for dealing in securities in writing and (b) An opportunity to the concerned company or body corporate for being heard, asking the reasons “as to why the permission for dealing is not cancelled”.
Rights of a Company/Board Corporate: Within 3 months from the date of suspension or withdrawal of dealing in securities of respected company/body corporate, may appeal to the SEBI. SEBI will give an opportunity to the stock exchange of being heard and then take the decision. The decision of the SEBI is bound to be followed by the stock exchange as well as the company/body corporate. The stock exchange either at its own discretion or as per order of the SEBI Restore or Re-admit of dealing in securities of the issuer company/body corporate.
Q. 98. State the penal provisions for merchant bankers upon violation of SEBI norms on issue of securities. [Dec. 2006, 4x1 = 4]
Answer:
In case of violations by Merchant Bankers, SEBI may suspend or cancel the Certificate of Registration of any Merchant Banker if it fails to exercise due diligence or fails to comply with the obligations entrusted under SEBI (DIP) Guidelines, 2000 or who is alleged to have violated any of these guidelines. SEBI (DIP) Guidelines, 2003 provides that Penalty points may be imposed on the merchant banker for violation of any of the provisions of operational guidelines. The Merchant Banker, on whom penalty point of 4 or more has been imposed, may be restrained from filing any offer document or associating or managing any issues for a particular period. The Board may initiate action under the SEBI (Merchant Banker) Regulations, 1993 against the Merchant Bankers irrespective of whether any penalty point is imposed or not. However, imposition of penalty point is not a condition precedent for initiation of proceeding against the Merchant Banker under the SEBI (Merchant Banker) Regulations 1993.
Q. 99. (a) Comment on changing scenario of the Indian financial system during the post-liberalisation period.
(a) Indian financial system had remarkable shift during post liberalization period. Since 1991 the scenario has change significantly with the intention of economic and financial forms by the government. New financial services such as mutual funds, credit rating, venture capital, etc. had emerged in the Indian financial system. The reforms, several other components of economic policy including liberalization and deregulation of domestic investment. Opening up of key infrastructure areas reserved for public sector for private sector participation, opening up the economy to foreign competition by reducing protective barriers such as import controls and high tariff, encouraging and also as a source of non- debt finance for investment, reform of the public sector to import greater efficiency of operations and reform of the tax system to create a structure with moderate rate of tax. At present, the Indian financial system comprises an impressive network of banks and financial institutions and a wide range of financial instruments. There is no doubt that there has been a considerable widening and deepening of the Indian financial system in the last decade.
(b) Company Secretary of Fellow Systems Ltd., a listed company. Your M.D wants you to prepare a Board note on the requirements for a rights issue of shares. Briefly outline the various requirements of the SEBI guidelines for the rights issue and list out the major steps involved in the rights issue. [Dec. 2006, 8x2 = 16]
To: Date: 31-12-2009
The Board of Directors,
XYZ Ltd.
From: XYZ, Company Secretary,
Subject: Rights Issue
Section 81(1) of the Companies Act, 1956 to be offered to the existing shareholders of the company through a letter of offer.
A listed company cannot make any issue of security through a rights issue where the aggregate value of securities including premium, if any, exceeds Rs.50 lakhs, unless it has filed a letter of offer with the Board, through an eligible Merchant Banker, atleast 21 days prior to the filing of letter of offer with Regional Stock Exchange.
In case the aggregate value of the securities offered is less than Rs.50 lakhs, it should be ensured that a letter of offer is prepared in accordance with disclosure requirements of SEBI guidelines and the same is filed with SEBI for information and for being put on SEBI website.
The various steps involved for issue of rights share are enumerated below:
Check whether the rights issue is within the authorized share capital of the company. If not, steps should be taken to increase the authorized share capital.
In case of a listed company, notify the stock exchange, date of Board Meeting at which the rights issue is proposed to be considered at least 2 days in advance of the meeting.
Rights issue shall be kept open for atleast 30 days and not more than 60 days.
Convene the Board meeting and place before it the proposal for rights issue.
The Board should decide on the matters relating to quantum of issue proportion of rights shares; alteration of share capital; and offering shares to persons other than existing share holders in terms of Section 81(1A).
Immediately after the Board Meeting, notify the stock exchange about particulars of Board’s decision.
Forward 6 sets of letter of offer to concerned Stock Exchange.
Despatch letters of offer to shareholders by registered post.
Check that an advertisement giving date of completion of dispatch of letter of offer has been released in an English National daily having a wide circulation and one regional language newspaper of the region in which the registered office of the company is situated.
Make arrangement with bankers for acceptance of share application forms.
Prepare a scheme of allotment in consultation with the Stock Exchange.
Convene Board Meeting and make allotment of shares.
File return of allotment with ROC within 30 days of allotment.
Make an application to SE where the company’s shares are listed for permission of listing of new shares.
Check that a 3 day and 50 day monitoring report has been sent to SEBI.
Submitted please.
XYZ, Company Secretary.
Q.100. (a) Discuss the norms for entry of nonbanking finance companies (NBFCs) into insurance business.
(b) What is the role and importance of stock market index in the Indian capital market ?
(c) State the regulatory measures to promote investors’ confidence in the Indian capital market.
(d) What is ‘placement memorandum’ ? List out its essential contents.
Answer: [Dec. 2006, 4x4 = 16]
(a) Before entering into insurance business, NBFCs are required to obtain prior approval of the IRDA and RBI. It has now been decided that NBFCs registered with RBI may take up insurance agency business on fee basis and without risk participation, without the approval of RBI subject to the following conditions:
The NBFCs should obtain requisite permission from IRDA and comply with the IRDA regulations for acting as composite corporate agent.
The NBFCs should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the NBFC.
As the participation by a NBFC’s customer in insurance products is purely on a voluntary basis. There should be no ‘linkage’ either direct or indirect between the provision of financial services offered by the NBFC to its customers and use of the insurance products.
The premium should be paid by the insured directly to the insurance company without routing through the NBFC. The risks, if any, involved in insurance agency should not get transferred to the business of the NBFC.
(b) Stock Market Index: Since the prices of most of the securities tend to travel up and down together, indexes are used to reflect the overall movement of stock prices. It may be called as a “Standard Base” through which the movement of trends in market is measured. Every stock exchange has its own specific market index like for BSE, it is Sensex and for NSE it is Nifty.
Role and Importance of Stock Market Index: As we have seen, that stock market index is used to track the sentiments of investors in the market, because index reflex the movement in the prices of the securities. The criterion for selection is basically adequate representation of various industrial groups and market capitalization. So, it works as an important information source. Investor can check his investment and accordingly buy or sell to have maximum gain or profit or shield himself from the loss. So, stock market index works as an indicator of the economy’s trend.
(c) Measures to Promote Investors Confidence in the Capital Market: In order to promote investors confidence in Indian Capital Market provisions have been incorporated in different legislations such as Companies Act, Securities Contract (Regulation) Act, 1956, Consumer Protection Act, Depositors Act, Listing Agreements of the Stock exchanges supplemented by many guidelines, circulars and Press Notes issued by the Ministry of Finance, Ministry of Company Affairs and SEBI from time to time. SEBI has been constantly reviewing and re-appraising its existing policies and programmes, formulating new policies and regulations, to foster developments in securities market and implementing them to ensure growth of the market with efficiency, integrity for accessing the securities market. Substantial acquisition of takeover of shares was regulated and regulations for foreign institutional investors were liberalized. SEBI launched prosecution against companies apart from serving show cause notices, inspections and investigations. All the regulatory measures have led to the enhanced investor confidence in the Indian Capital Market.
(d) Placement Memorandum: Placement memorandum is a document containing details of the terms and conditions subject to which monies are proposed to be raised from investors. The Venture Capital Fund is required to file Placement Memorandum with SEBI.
Conditions to be satisfied for Placement Memorandum:
Cndn 1: It should be issued for private circulation only after the expiry of 21 days of its submission to SEBI.
Cndn 2: Any amendment made by the SEBI, should be incorporated in “placement memorandum” before gradation to investors.
Contents of Placement Memorandum:
Details of the trustees/trustee company and the directors/chief executives of the venture capital fund.
Details of securities that is being offered.
Details of investments that is proposed to be made.
Details of Director of the company.
Investment strategy of the fund.
Tax implications those are likely to apply to investors.
Manner of subscription to the security that is to be issued.
Manner of distribution of benefits, accruing to investors in the security.
The details about performance of the fund, if any, managed by the Fund Manager.
Details of Asset Management Company, if any and fees to be paid to such a company.
Q.101. Explain briefly the investment criteria for a foreign venture capital investor.
Answer: [Dec. 2006, 4x1 = 4]
Investment Criteria for a Foreign Venture Capital Investor:
It should make investments in the any one Venture Capital Undertaking not more than 25% of the funds committed for investments to India and subject to foll. Conditions:
Cndn 1: Atleast 75% of the investible funds should be invested in unlisted equity shares or equity linked instruments.
Cndn 2: Not more than 25% of the investible funds may be invested by way of:
(a) subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock in period of one year;
(b) debt or debt instrument of a venture capital undertaking in which the foreign venture capital investor has already made an investment by way of equity.
Q.102. What is the concept of ‘takeover’ ? Explain briefly the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 related to takeover of control and management of a listed company.
Answer: [Dec. 2006, 8x1 = 8]
Takeover: Takeover has been defined as a business transaction whereby an individual or a group of individuals of a company acquires control over the assets of a company either directly by becoming owner of those assets or indirectly by obtaining control of the management of the company.
Regulatory Framework of Takeover: The regulatory framework of take over of a listed company is mainly controlled by SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. The provisions of the said regulations relating to the management and take over of a listed company are enumerated below:
1. The acquirer is required to appoint a merchant banker.
2. Minimum offer of 20% of the voting capital of the company is required to be made.
3. Public announcement is to be made by the merchant banker
a) Not later than 4 working days of entering into an agreement for acquisition of shares or voting rights;
b) In case of acquisition of control over a company, public announcement shall be made not later than 4 working days after any such change/changes are decided to be made as would result in the acquisition of control over the target Co.;
c) In case of indirect acquisition or change of control, public announcement shall be made within 3 months of completion of the acquisition/change of control.
4. Simultaneously with the publication of public announcement in newspaper, copy of public announcement is required to be sent to SEBI, all the stock exchanges and to the target company.
5. Within 14 days from the public announcement, draft letter of offer, fees of Rs.50,000/- and due diligence certificate are required to be filed with SEBI.
6. Within 14 days from the public announcement, the acquirer is required to send a copy of the draft of offer to target company and all the stock exchanges.
7. Letter of offer shall be dispatched to the shareholders not earlier than 21 days from its submission to SEBI.
8. Offer should open not later than 55th day from the date of public announcement and remain open for a period of 20 days.
9. Shareholders can withdrawn acceptance tendered by him upto 3 working days prior to the date of closure of offer.
10. The acquirer shall within a period of 30 days from the date of closure of the offer, complete all procedure relating to the offer including payment of consideration to the shareholders who have accepted the offer and for this purpose a special account shall be opened with a banker to an issue within 21 days from the date of closure of the offer.
11. The unclaimed balance lying to the credit of the said account at the end of 3 years from the date of deposit thereof is required to be transferred to the Investor Protection Fund of the regional stock exchange of the target company.
12. Once the offer formalities are completed, the acquirer shall make a public announcement in all the newspapers.
13. Simultaneously with publication of public announcement in newspaper, a hard and soft copy of the same shall be submitted to SEBI.
14. Merchant banker is required to send 45 days report to SEBI.
15. Public offer made, can be withdrawn subject to condition specified in Regulation 27.
Q.103. (a) Define ‘independent director’. What are the provisions in clause 49 of the listing agreement related to independence of a director ?
(b) Discuss the duties of a ‘compliance officer’ in a listed company.S-12, s-151
Answer: [Dec. 2006, 4x4 = 16]
(a) Independent Director:
Clause 49 provides that Board should have optimum combination of executive and non-executive directors shall not be less than 50% of the Board consisting non-executive directors. If the Board has a non-executive Chairman then at least 1/3rd of the Board should consist of independent directors and in case of an executive Chairman, at least half of the Board should consist of Independent directors. Clause 49 provides that all fees/compensation, if any paid to independent directors, shall be fixed by the Board of Directors and require previous approval of shareholders in general meeting. 2/3rd of the numbers of Audit Committee shall be Independent directors and the Chairman of the Committee shall also be an independent director.
(b) Duties of a Compliance Officer: He is required to report to the Managing Director/Chief Executive Officer/Committee of Directors subject to the overall supervision of the Board of Directors of the company. He should suggest any improvements required in the policies, procedures, etc., to ensure effective implementation of the code of conduct.
(i) Monitoring of Share Transfer Process:
(ii) Liasioning:
(iii) Preservance of Price Sensitive Information:
(iv) Ensurance Compliance with Code of Conduct:
(v) In case of Public Issue:
(vi) In case of Intermediaries:
Q.104. Write notes on the following:
(i) Securities Appellate Tribunal (SAT)
(ii) Asset management company
(iii) Promoters quota
(iv) Market capitalisation
(v) Depository participants [June 2006, 5x5 = 25]
Answer:
(i) Securities Appellate Tribunal (SAT): The Central Government, by any notification may establish an appellate tribunal known as Securities Appellate Tribunal (SAT) to exercise the jurisdiction, powers and authority conferred on such tribunal under the SEBI Act, 1992. SAT shall consist of one person known as presiding officer to be appointed by Central Government. The Central Government shall appoint such staff, as it may deem fit, in the SAT. Any aggrieved person may refer an appeal to a SAT having jurisdiction in the matter. On receipt of an the SAT, after giving the parties opportunities to be hard, may pass such order, as it thinks fit. The SAT is not bound by the Code of Civil Procedure, 1908 but is guided by the principle of natural justice and has the powers to regulate its own proceedings.
(ii) Asset Management Company: Under SEBI (Mutual Funds) Regulations, 1996 every mutual fund is required to have an Asset Management Company (AMC) incorporated under the Companies Act, 1956 to manage the funds of the mutual fund. The AMC should be approved by SEBI and should enter into an agreement with the trustees of the mutual fund to formulate schemes, raise money against units, invest the funds in accrued securities and after meeting the permissible costs as per norms, distribute income to the share holders of the funds. AMC is responsible for operations of Mutual Funds. It has to take all reasonable steps and exercise due diligence to ensure that the investments of the funds or any scheme is not contrary to the provisions of these regulations and trust deed.
(iii) Promoter’s Quota: “Promoters quota” means the shares kept reserved for allotment to promoters in case of issue of shares by listed companies. The SEBI (DIP) Guidelines, 2000 stipulates the minimum promoter’s contribution in unlisted company is 20% of post issue capital. The minimum individual promoters contribution is for natural person is Rs.25,000 and for other than natural person like firm and body corporate is Rs.1,00,000/-. The rationale behind prescribing the lock-in-period on promoters’ quota shares is to restrict the promoters from selling their stake in the company after inducing the public to invest this money and to ensure that the promoters take serious efforts to make the project successful for which public money is raised by issue of shares.
(iv) Market Capitalization: Market capitalization is referred to be strength of the stock exchange. It is arrived at by multiplying the current market price with the number of shares issued and outstanding. During post liberalization period, market capitalization of Indian stock exchanges has increased significantly. The market capitalization of NSE and BSE as at the end of March 2005 amounted to Rs.15,855,853 million and Rs.16,984,280 million respectively.
(v) Depository Participants: Depository participant means a middleman or link between the investor/security holder and the depository. It can also be called of a branch, where the investor open Demat A/c for keeping securities in e-form.
Eligibility for Depository Participant: As per SEBI (Depository and Participant) Regulations, 1996, following persons can work as depository, subject to registration from SEBI:
(a) Public financial institutions;
(b) Scheduled commercial banks;
(c) Foreign banks;
(d) Clearing corporations;
(e) Stock – brokers.
Functions of Depository Participant:
(a) Opening of demat A/c to facilitate the investor to keep securities in e-form;
(b) Working as an agent of depository as well as customer interface of depository;
(c) Settlement of electronic–trading with clients & stock-exchange;
(d) Crediting the benefits in the customer’s A/c.
Q.105. Distinguish between the following:
(i) ‘Money market’ and ‘capital market’.
(ii) ‘Advertisement’ and ‘statement in lieu of advertisement’.
Answer: [June 2006, 2x3 = 6]
S.No. Capital Market Money Market
1. The fund raised in capital market is long term and medium term in nature. The fund raised in money market in short term.
2. It is regulated by SEBI. It is regulated by RBI.
3. In capital market there is higher default risk, in comparison to money market. There is no default risk because the market players are either Govt. itself or highly rated companies.
4. General for more than 1 year. Generally for 1 year.
5. Instruments are Shares, Debentures, etc. Instruments are Certificate of Deposits, Commercial Paper, Government Treasury Bills, etc.
(ii) Advertisement and Statement in lieu of Advertisement: Every miscellaneous non-banking company inviting deposits is required to comply with the provisions relating to advertisement under Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977.
However, where a company intends to accept deposits without inviting or allowing or causing any other person to invite such deposits, it shall before accepting deposits, deliver to the Regional Office of the Department of Supervision of the Reserve Bank, within whose jurisdiction its registered office is situated, for registration, a statement in lieu of advertisement containing all the particulars required to be included in the advertisement pursuant to the Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977 duly signed in the manner provided in the aforesaid Rules.
Q.106. Discuss the role of securities market in economic growth.
Answer: [June 2006, 5x1 = 5]
Securities market plays an important role in economic development of any country. It works like a catalyst by providing long term and short term fund to the company and for productive purpose. The usefulness and importance of securities market can be checked by considering following points:
1. It motivates the general public to make more savings in rewards of interest/dividend.
2. It helps the Indian companies to raise money from abroad;
3. It helps to mobilize unproductive fund to productive fund.
4. It reduces cost of borrowing of capital for the companies.
Conclusion: Thus, the savings and capital accumulation and formation respond favourably to developments in securities market. The Securities Market provides a bridge between ultimate savers and ultimate investors and creates the opportunity to put the savings at the disposal of enterprising, thus promising to raise the total level of investment and growth.
Q.107. “Buy-back of shares is a corporate financial strategy.” Comment.
Answer: [June 2006, 5x1 = 5]
Buy-Back: Strategy is a competitive plan intended to achieve certain purpose and buy-back is a part of financial plan for dealing with capital restructuring and is prevalent globally with the underlying objective of realigning the capital structure. Buy-back is a process whereby a company purchases its own shares or other specified securities from the holders thereof:
1. To improve earnings per share.
2. To improve return on capital, return on networth and to enhance the long-term shareholder value.
3. To provide an additional exit route to shareholders when shares are under valued or are thinly traded.
4. To enhance consolidation of stake in the company.
5. To prevent unwelcome takeover bids.
6. To reduce the number of shares issued and return surplus cash to shareholders.
7. To achieve optimum capital structure.
8. To support share price during periods of sluggish market conditions.
9. To service the equity more efficiency.
Q.108. Global Systems Ltd., an existing listed company, wants to make a bonus issue of equity shares. As the Company Secretary of Global Systems Ltd., prepare a note on the SEBI guidelines as applicable in this regard.
Answer: [June 2006, 6x1 = 6]
Date: 31-12-2009
To, The Board of Directors,
XYZ Ltd.
From: XYZ Company Secretary,
Subject: Guidelines for Bonus Issue of shares
As desired, the procedure for guidelines for bonus issue of share as per SEBI (DIP) Guidelines, 2000 is enumerated below:
Q.109. What are the contents covered in the offering circular for euro-issue offerings ? [June 2006, 4x1 = 4]
Answer:
The Offering Circular for Euro-issue offering should typically cover the following contents:
(i) Background of the company and its promoters, date of incorporation, objects, past performance, production, sales and distribution network, future plans, etc.
(ii) Capital structure of the company – existing, proposed and consolidated.
(iii) Deployment of issue proceeds.
(iv) Financial data indicating track record of consistent profitability of the Co.
(v) Investment considerations.
(vi) Description of shares.
(vii) Market price of securities.
(viii) Dividend and capitalization.
(ix) Securities regulations and exchange control.
(x) Tax aspects indicating analysis of Tax consequence under Indian law.
(xi) Status of approval required to be obtained from GOI.
(xii) Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert’s opinion.
(xiii) Report of statutory auditor.
(xiv) Subscription and sale.
(xv) Transfer restrictions in respect of instruments.
(xvi) Legal matters, etc.
(xvii) Other general information not forming part of any of the above.
Q.110. What is the eligibility criteria for voluntary delisting of securities ?
Answer: [June 2006, 4x1 = 4]
Voluntary Delisting: The SEBI (Delisting of Securities) Guidelines, 2003 issued with the objective to protect the interest of investors in the securities market, also deals with Voluntary delisting.
Eligibility criteria for voluntary delisting as per the Guidelines include the following:
1. Minimum Listing Period: The shares of the company have been listed on any stock exchange having nationwide terminals for a period of minimum 3 years, immediately preceding the reference date.
2. No Pending Conversion: A company, which has any convertible instrument outstanding, shall not be permitted to delist its equity shares, till the exercise of such conversion options.
3. Delisting of One or All: A company may delist one or all of its class of securities. However, if the equity shares of a company are delisted, the fixed income securities may continue to remain listed on the stock exchange.
4. Exit – Price: An exit price is required to be determined in accordance with the book building process described in the Delisting Guidelines.
Q.111. State the main recommendations of Narasimhan Committee regarding development of Indian capital market. [June 2006, 4x1 = 4]
Answer:
A high level committee under the Chairmanship of Shri M. Narasimhan was set-up by the Government of India, to examine different aspects of Indian Capital Market.
Observations and Recommendations:
1. The committee observed that the growth of the newer forms of financial institutions is an indication of the growing volume and diversification of the capital market.
2. For the business to grow on sound lines, a framework of regulations is however necessary as a measure of investor protection.
3. The committee believes that the present measure of control on the capital market requires urgent review.
4. SEBI should be involved in prior sanction of new capital issued in respect of companies whose scripts are listed on the stock exchanges.
5. The committee also recommended for opening up of the capital market for foreign portfolio investments.
6. The committee also recommended capital adequacy of 8% for Indian banks.
Q.112. Define and state the functions of the following:
(i) Lead manager
(ii) Banker to an issue
(iii) Underwriter. [June 2006, 2x2 = 6]
Answer:
(i) Lead Manager: All public issues are required to be managed by at least 1 merchant banker functioning as lead manager. Legal manager undertakes activities relating to management of an issue of capital, investment advice and act as manager, consultant and advisor to the issue.
(ii) Bankers to Issue: Bankers to issue carries on the activities relating to acceptance of application and application monies, acceptance of allotment or call monies, refund of application monies and payment of dividend or interest warrants. Bankers to an issue is under obligation to maintain records on applications received with date, amount received and name of investors, time taken to forward the applications to issue/its register. He enters into an agreement with the issuer on matters connected to number of collection centres, time for forwarding prescribed details, etc.
(iv) Underwriter: Underwriter facilitates raising of capital by assuming to take up unsubscribed portion upto a specified limit. Underwriter enters into an arrangement with company to subscribe to the securities of the company when the existing shareholders of the company or the public do not subscribe to the securities offered to them.
Q.113. You are the Company Secretary of Swift IT Solutions Ltd., which is a
newly listed company, and your managing director wants you to prepare a note on the
requirements relating to publication of quarterly financial results. Briefly outline the
various requirements of clause 41 of the listing agreement in this regard.
Answer:
Date: 31-12-2009
To, Board of Directors,
XYZ Ltd.
From: XYZ, Company Secretary.
Subject: Requirements of clause 41 of the Listing Agreement
This is one of the most important requirements of the listing agreement.
The stock exchange have from time to time amended clause 41 of the listing agreement pertaining to the publishing of financial results.
For the last quarter of the financial year, if the company intimates in advance to the Stock Exchange(s) that it will publish audited results within a period of 3 months from the end of the last quarter of the financial year, unaudited results for the last quarter need not be published/given to the stock exchange(s).
In addition to the above, the company must prepare half yearly results in the same proforma and the same must be approved the BOD and must be subject to a limited review by the auditors of the company.
The copy of the review report must be submitted to stock exchanges within 2 months after the close of the half year.
If the sum total of the first and second quarterly unaudited results of any items given in the same proforma format varies by 20% or more from the respective half yearly results as determined after the limited review by the auditors, the company must send a statement as approved by the BOD explaining reasons thereof to the exchanges along with the review report.
To comply with requirements of publishing quarterly results, following action has to be taken:
1. Intimate to Stock Exchanges at least 7 days in advance about the date of Board Meetings.
2. Along with the intimation, a press release has to be issued immediately in at least one national newspaper and one regional language newspaper about the date of the Board Meeting.
3. Send by fax within 15 minutes of the conclusion of the Board Meeting the financial results to the stock exchange.
4. Publish within 48 hours of the conclusion of the Board Meeting in at least one English daily newspaper have wide circulation in whole India and one regional language newspaper of the region in which the registered office of the company is situated.
5. After publishing the results, send a copy of the published results to stock exchanges.
Submitted please. Your’s sincerely,XYZ, Company Secretary
Q.114. What do you understand by the following in relation to venture funds:
Answer: [June 2006, 2x3 = 6]
(i) Incubators: A hardcore technocrat who works with an entrepreneur to develop a business idea, and prepares a Company for subsequent rounds of growth and funding. E-Ventures, Infinity are examples of incubators in India.
(ii) Angle Investors: An angel is an experienced industry-bred individual with high networth. Typically, an angel investor would invest only in his chosen field of technology, take active participation in day-to-day running of the company, invest small sums in the range of US $ 1-3 million and does not insist on detailed business plans sanction.
(iii) Private Equity Players: They are established investment bankers. They typically invest into proven/established businesses. They have “financial partners” approach and invest between US $ 5-100 million.
Q.115. Why should an investor prefer to invest in government securities ?
Discuss the benefits. [June 2006, 4x1 = 4]
Answer:
Government securities (G-secs) are sovereign securities which are issued by the RBI on behalf of Government of India, in lieu of the Central Government’s market borrowing programme.
The term Government Securities includes, Central Government Securities, State Government Securities and Treasury Bills.
Being risk free securities, they set the benchmark for the interest rates of the other money market instruments. Investing in Government Securities provide the following benefits:
(i) No tax deducted at source;
(ii) Additional Income Tax benefit u/s 80L of the IT Act, 1961for individuals;
(iii) Qualities for SLR purpose.
(iv) Zero default risk being sovereign paper.
(v) Highly liquid.
(vi) Transparency in transactions and simplified settlement procedures through CDSL/NSDL.
Q.116. What are the requirements for registration of Foreign Institutional Investors (FIIs)? [June 2006, 4x1 = 4]
Answer:
"Foreign Institutional Investor" means an institution established or incorporated outside India which proposes to make investment in India in securities; No person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the SEBI Board.
Procedure & Grant of Registration of sub-accounts: A Foreign Institutional Investor shall seek from the Board, registration of each sub-account on whose behalf he proposes to make investments in India:
1. The applicant’s track record, professional competence, financial soundness, experience, general reputation of fairness and integrity.
2. Whether the applicant is regulated by an appropriate foreign regulatory authority.
3. Whether the applicant has been granted permission under FEMA for making investments in India as FII.
4. The applicant is an institution established outside India.
5. The applicant is a broad based fund or proprietary fund or a foreign corporate; or individual.
6. The Foreign Institutional Investor through whom the application for registration is made to the Board holds a certificate of registration as Foreign Institutional Investor.
7. The Foreign Institutional Investor through whom an application for registration of sub-account is made, is authorised to invest on behalf of the sub-account.
Note: NRI or Overseas Corporate Body registered with RBI cannot invest as sub-account or as Foreign Institutional Investor.
Q.117. Highlight the provisions of revised clause 49 of the listing agreement.
Answer: [June 2006, 12x1=12]
One of the most important clauses of listing agreement relating to corporate governance is “Clause 49”. The unique features or requirement of Clause 49 is summarized as follows:
(1) Board of Directors:
1. The Board should have optimum combination of both Executive and Non-executive directors, shall not be less than 50% of the Board consist of Independent Directors.
2. In case the Board has a non-executive Chairman, then atleast 1/3rd of the Board should consist of Independent Directors. In case the Board has an executive Chairman, then half of the Board should be consisting of Independent Directors.
3.
(2) Audit Committee:
(3) Remuneration Committee of (Executives & Non-executives)
(4) Board Procedure:
1. Board meeting shall be held at least 4 times in a year and the gap between two Board Meetings shall be more than 4 months.
2. Minimum information like annual operating plans and budgets and updates, quarterly results, minutes of meeting of audit committee.
(5) Management Discussion & Analysis Report: It focuses on management strategy.
(6) Shareholders: Information to shareholders to be given about appointment of new directors, on quarterly results and presentations made by the company to analysis.
(7) Report on Corporate Governance: The annual report shall contain a separate section on Corporate Governance with a detailed compliance report on Corporate Governance. It should contain information on composition and category of BOD, attendance of each Director, Composition of Committees, disclosures on materially significant related party transactions, means of communication etc.
(8) Compliance: The company should obtain a certificate either from the auditors or practicing company secretary of the company regarding the compliance of the conditions of corporate governance and annexed it to the director’s report which is sent to all the shareholders of the company. The certificate should be sent to the Stock Exchanges alongwith the annual report. This certificate is necessary otherwise this will lead to violation of the requirements of Listing Agreement.
Q.118. Explain the following terms of the secondary market:
(i) Forward trading (ii) Kerb trading (iii) Odd-lot trading.
Answer: [June 2006, 2x3 = 6]
(i) Forward Trading: Forward trading relates to carrying over the transactions/settlement to the next settlement period. If an investor sells shares and wants to carry forward, he gets profits when the shares price falls and loose if rises. To carry forward his short position, he has to pay a backwardalism charge or undha bandla for borrowing the share certificate. He has to enter into a contract to resell the shares to the lender at the next settlement period and pay interest rate.
(ii) Kerb Trading: Transactions are often carried out in the tock exchange after official trading hours too, even though such trading among the members is not strictly legal. Such unauthorized trading carried out outside the official hours is known as kerb trading.
(iii) Odd-lot Trading: Anything less than the standard unit of trading is odd lot. Thus, when the securities are not in marketable lots, they are known as odd lots. Odd lots have limited liquidity and are traded at a discount in the market. However, in case of computerized trading system in demat form, trading lot lost its relevance.
Q.119. What are the common grievances of investors in India ? State investors’ grievances redressal authorities in India. [June 2006, 4x1 = 4]
Answer:
In case of violation of Provisions of Listing Agreement, complaints can be filed with:
1. Stock Exchanges, or
2. District Forum or State Commission or National Commission under Consumer Protection Act.
3. In case of Listed Companies, investors can forward their Complaints to the Company and SEBI. The SEBI can take up the matter with the companies.
Q.120. “Corporate Governance is the application of best management practices.” Comment. [June 2009, 4x1 = 4]
Answer:
At present, all the list company are required to comply with various requirements of Clause 49 to ensure good corporate governance. The various matters covered under corporate governance as per clause 49 includes:
a. Board of directors and composition;
b. Audit committee and its composition;
c. Mandatory review of certain information by audit committee;
d. CEO/ certification
e. Report on corporate governance CFO.
In the coming future, the investors are becoming more and more educated and aware about their rights and duties of the company, so companies are now forced to follow good corporate governance, which is increasing the significance of the corporate – governance.
Q. 9. What is ‘price stabilization fund’ ? [June 2009, 5x1 = 5]
14 chapter
(c) “Quality of Corporate Governance is a function of certain factors.” Explain. [June 2007, 4x3 = 12]
(c) State briefly the requirements for bidding process related to public issue of equity shares. [June 2007, 4x1 = 4]
All the best ... RAGHU
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