Securities and Exchange Board of India Act, 1992 and SEBI (LODR) Regulations, 2015 – CA Final Law Study Material

Securities and Exchange Board of India Act, 1992 and SEBI (LODR) Regulations, 2015 – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Securities and Exchange Board of India Act, 1992 and SEBI (LODR) Regulations, 2015 – CA Final Law Study Material

Part A – “The Securities And Exchange Board Of India Act, 1992”
Basics of SEBI Act, 1992

Question 1.
Explain briefly the purpose of establishing SEBI.
Answer:
Purpose of establishing SEBI:
Preamble to the SEBI Act reads as under: “An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”

The prime objective of the SEBI Act,1992 are:

Protecting the interests of the investors in securities;
Promoting the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.

In additions, SEBI is entrusted for the following purposes:
(a) To promote fair dealings by the issuers of securities and ensure a market place where they can raise funds at a relatively low cost.
(b) To provide a degree of protection to the investors and safeguard their rights and interests so that there is a steady flow of savings into the market.
(c) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc., with a view to making them competitive and professional.

Question 2.
On completion of 60 years of age as on 31 st March 2017, Mr. Jain retired as Professor from a university. From 1st April 2017, he was appointed as Chairman of the SEBI for a period of 3 years. Under the, provisions of the SEBI Act, 1992, decide whether he can be re-appointed on the same post after expiry of the original tenure? Also state whether it could be possible for him to relinquish the office before expiry of his tenure? [Nov. 17 (4 Marks), RTP-May 18]
Answer:
Appointment of Chairman:

As per Sec. 5 of the SEBI Act, 1992 read with Rule 3 of SEBI (Terms and Conditions of Chairman and Members) Rules, 1992, the Chairman may hold office for a period of 5 years subject to the maximum age limit of 65 years and can be re-appointed by the C.G.

In the present case, Mr. Jain retired as professor from a university on completion of 60 years of age as on 31st March, 2017 and appointed as Chairman of SEBI from 1st April, 2017 for a period of 3 years.

Conclusion: Mr. Jain can be reappointed after expiry of the original tenure of 3 years, but only upto 65 years of age i.e. upto 31st March, 2022 (i.e. only for two years).

Right to Relinquish the office: The Chairman shall have the right to relinquish office at any time before the expiry of their tenure by giving a notice of 3 months in writing to the C.G.

Question 3.
A group of complainants have alleged that Mr. M, a Member of the SEBI has pecuniary interest in some of the cases that came up before the Board and that he misused his position and therefore, he should be removed from his office. The complainants seek your advise. Advise.
Or
Mr. Moral, a member of SEBI was engaged in conducting of inquiries and Audit of various stock exchanges. A group of complainants suspected that Mr. Moral, have taken bribe in the conduct of inquiries and Audit of slock exchanges. Therefore, he should be removed from his office. Examine with reference to the SEBI Act the rationality of the complainants on removal of Mr. Moral as per the SEBI Act, 1992.
Answer:
Removal of Member of the SEBI:
As per Sec. 6 of the Securities and Exchange Board of India Act, 1992, the C.G. shall have the power to remove a member appointed to the Board, if he:

is, or at any time has been adjudicated as insolvent;
is of unsound mind and stands so declared by a competent court;
has been convicted of an offence which, in the opinion of the Central Government, involves a moral turpitude.
has, in the opinion of the C.G. so abused his position as to render his continuance in office detrimental to the public interest.

Before removing a member, he will be given a reasonable opportunity of being heard in the matter.
In the present case, a group of complainants have alleged that Mr. M, a member of the SEBI has pecuniary interest in some of the cases that came up before the Board and he misused his position and therefore, he should be removed from his office.

Conclusion: Compliant may be lodged with the Central Govt. Central govt, may remove Mr. M after giving him an opportunity of being heard.

Question 4.
Mr. Z (Member of SEBI) due to his severe accident was in financial debt availed for his treatment. He was deranged and was in mental stress. This effected on the performance of his duties in a responsible manner. A group of complainants have alleged that Mr. Z is not normal in his behaviour and rendering of his services in office may be detrimental to the public interest and so should be removed from his office. Advise in the given situation, the tenability of maintenance of complaint against Mr. Z. ‘ [MTP-March 19]
Answer:
Removal of Member of the SEBI:

As per Sec. 6 of the Securities and Exchange Board of India Act, 1992, the C.G. shall have the power to remove a member appointed to the Board, if he:

is, or at any time has been adjudicated as insolvent;
is of unsound mind and stands so declared by a competent court;
has been convicted of an offence which, in the opinion of the Central Government, involves a moral turpitude.
has, in the opinion of the C.G. so abused his position as to render his continuance in office detrimental to the public interest.

Before removing a member, he will be given a reasonable opportunity of being heard in the matter.

In the instant case, a group of complainants have alleged that Mr. Z, is not normal in his behaviour, and in rendering of his services in office. He was in a mental distress due financial debt owed for his treatment. This all may be unfavourable to the public interest and so should be removed from his office.

The Central Government may remove Mr. Z from his office after giving him a reasonable opportunity of being heard in the matter only when Mr. Z is so declared of unsound mind by a competent court.
Conclusion: As the incompetency of Mr. Z is not so declared by the court, so complaint for removal of Mr. Z is not tenable.

Question 5.
Securities and Exchange Board of India (SEBI) has undertaken inspection of books of account and . records of LR Ltd., a listed public company. Specify the measures which may be taken by SEBI under the SEBI Act, 1992 to protect the interest of investors and securities market, on completion of such inquiry. [May 16, Nov. 18-Old Syllabus (4 Marks), RTP – May 19, MTP-Oct. 20]
Answer:
Measures to be taken by SEBI to protect the interest of investors:
As per Sec. 11(4) of the SEBI Act, 1992, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:

(a) suspend the trading of any security in a recognised stock exchange;
(b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self-regulatory organization from holding such position;
(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation;
(e) attach, for a period not exceeding 90 days, bank accounts or other property of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder:

Provided that the Board shall, within 90 days of the said attachment, obtain confirmation of the said attachment from the Special Court, established u/s 26A, having jurisdiction and on such confirmation, such attachment shall continue during the pendency of the aforesaid proceedings and on conclusion of the said proceedings, the provisions of Sec. 28A shall apply:

Provided further that only property, bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached.

(f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation.
Before or after passing such orders, SEB4 must give an opportunity of hearing to such intermediaries or persons concerned.

Question 6.
Explain briefly the powers of SEBI under the SEBI Act, 1992 to seize the records of a stock broker or other intermediaries associated with securities market.
Answer:
Powers to SEBI to seize the records of stock broker or other intermediaries:

Section 11C of the SEBI Act, 1992 deals with the powers of SEBI to order the investigation of affairs of persons associated with the securities market by a person specified in the order known as Investigating Authority. Investigating Authority may seize the records of the such persons whose affairs are being investigated by following the below mentioned procedure:

(a) Application to Magistrate: Investigating Authority may make an application to the Magistrate or Judge of such designated court in Mumbai, as may be notified by the C.G. for an order for the seizure of such books, registers, other documents and record, if he has reasonable ground to believe that the books, registers, other documents and record of, or relating to, any intermediary or any person associated with securities market in any manner, may be destroyed, mutilated, altered, falsified or secreted.

(b) Assistance of Police Officer: The Investigating Authority may requisition the services of any police officer or any officer of the C.G., or of both, to assist him with respect to impounding of documents and it shall be the duty of every such officer to comply with such requisition.

(c) Order by Magistrate: After considering the application and hearing the Investigating Authority, if necessary, the Magistrate or Judge of the Designated Court may, by order, authorise the Investigating Authority:

to enter, with such assistance, as may be required, the place or places where such books, registers, documents and record are kept;
to search that place or those places in the manner specified in the order; and
to seize books, registers, other documents and record, it considers necessary for the purposes of the investigation.

(d) Period for which documents are to be kept: The Investigating Authority shall keep in its custody the books etc. for such period not later than the conclusion of the investigation as it considers necessary and inform the Magistrate or Judge of the Designated Court of such return. Investigating Authority may, before returning such books etc. place identification marks on them or any part thereof.

Question 7.
Point out the circumstances where under the following powers may be exercised by the SEBI:

(i) Prohibiting a company from issuing or publishing any document or advertisement soliciting money from public for the issue of securities.
(ii) Pass cease and desist order in relation to any listed company.
What remedies are available to the companies against such orders under the Securities and Exchange Board of India Act, 1992? [May 11 (8 Marks)]
Answer:
Order to prohibit issue of prospectus soliciting money for issue of securities:
As per Sec. 11A of SEBI Act, 1992, the Board may for the protection of investors, by general or special orders, prohibit any company from issuing prospectus, any offer document or advertisement soliciting money from the public for the issue of securities or specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued.

Cease and Desist Order: As per Sec. 11D, if the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation.

However, the Board shall not pass such order, in respect of any listed public company or a public company (other than the intermediaries specified u/s 12) which intends to get its securities listed on any recognised stock exchange unless the Board has reasonable grounds to believe that such company has indulged in insider trading or market manipulation.

Remedies available against such orders:

Aggrieved person may appeal against orders of SEBI made under SEBI Act, 1992, rules or regulations to the Securities Appellate Tribunal (SAT) under Section 15T of the said Act. Such appeal should be filed within 45 days from the date on which a copy of the order of SEBI is received by the company.

If the company is aggrieved by the order of SAT, further appeal against the order of SAT can be made to the Supreme Court within 60 days from the date of communication of the order of SAT on any question of law arising out of such order.

The appeal lies only on question of law. As far as facts are concerned, decision of the SAT is final. Further Section 20A of the said Act bars jurisdiction of Civil Court in respect of orders issued by the SEBI.

Question 8.
(i) Mr. Ganesh has been appointed as the Investigating Authority by Securities and Exchange Board of India to investigate the affairs of a listed company on the reasoning that the transactions in securities are being dealt in a manner detrimental to the investors.

The Investigating Officer has taken over charge and the custody of books and documents after due approval of the Magistrate. He is unable to complete the investigation within 180 days. The Board of Directors of the company filed an application with SEBI to return the books and documents. Discuss the validity of the request of the Board of Directors of the company.

During the investigation, one of the directors of the company had refused to answer the questions and produce the books and documents. What is the punishment that can be imposed on him under the provisions of the SEBI Act, 1992?

(ii) What do you understand by the term “Cease and proceedings”? Can such a proceeding be initiated against any listed public company for the violation of insider trading. [Nov. 20 – Old Syllabus (6 Marks)]
Answer:
(i) Custody of Books etc. by Investigating Authority:
As per Sec. 11 of SEBI Act, 1992, the Investigating Authority may keep in its custody any books, registers, other documents and record produced for 6 months and thereafter shall return the same to any intermediary or any person associated with securities market by whom or on whose behalf the books, registers, other documents and record are produced.
The Investigating Authority may call for any book, register, other document and record if they are needed again.

Conclusion: Considering the provisions of Sec. 11, it can be concluded that Request of the Board of Directors to return the books and documents is valid.

Punishment over the director for non-furnishing of information:
In case of any refusal to answer the questions or to produce the books and documents, director shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to ₹ 1 crore, or with both, and also, with a further fine this may extend to ₹ 5 lakh for every day after the first during which the failure or refusal continues.

(ii) Cease and Desist Order:
As per Sec. 11D, if the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation.

However, the Board shall not pass such order in respect of any listed public company or a public company (other than the intermediaries specified u/s 12) which intends to get its securities listed on any recognised stock exchange unless the Board has reasonable grounds to believe that such company has indulged in insider trading or market manipulation.

Conclusion: Cease and Desist proceedings can be initiated against any listed public company for the violation of insider trading.

Question 9.
What are the ways in which any person may be prohibited on the use of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control?
Answer:
Ways in which a person may be prohibited on the use of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control
As per Sec. 12A of SEBI Act, 1992, no person shall directly or indirectly:

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made there under;

(f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.

Question 10.
Mr. Raman an investor is not satisfied with the dealings of stock broker who is registered with Delhi Stock Exchange. Mr. Raman approaches you to guide him regarding the avenues available to him for making a complaint against the stockbroker under the SEBI Act, 1992 and also the grounds on which complaint can be made. Comment. [MTP-Oct.18]
Or
A group of investors are upset with the functioning of two leading stock brokers of Calcutta Stock Exchange and want to make a complaint to SEBI for intervention and redressal of their grievances.
Explain briefly the purpose of establishing SEBI and what type of defaults by the stock brokers come within the purview of SEBI Act, 1992. [MTP-April 18]
Answer:
Purpose of establishing SEBI:
Preamble to the SEBI Act reads as under: “An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”

The prime objective of the SEBI Act, 1992 are:

Protecting the interests of the investors in securities;
Promoting the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.

Types of defaults comes within the purview of SEBI Act, 1992:
As per Sec. 15F of SEBI Act, 1992, the following defaults by stock brokers come within the purview of SEBI Act:

(a) failure on the part of the stock broker to issue contract notes in the form and in the manner specified by the Stock Exchange.
(b) failure on the part of the broker to deliver any security or to make payment of the amount due to the investor in the manner or within the period specified in the regulations.
(c) collection of charges by way of brokerage in excess of the brokerage as specified in the regulations.

Question 11.
State the provisions made u/s 15G of the SEBI Act, 1992 in connection with penalty for insider trading.
Or
On the complaint of Mr. Kamlcsh Gupta, after enquiry SEBI finds that Mr. P. Mehta a Chief Executive Officer of the Company, on the basis of unpublished price sensitive information, has indulged in the trading of the securities of that company. Explain, on the basis of the said finding, what action SEBI can take against Mr. P. Mehta under the Securities and Exchange Board of India Act, 1992. [MTP-Oct.18, RTP-May 20]
Answer:
Penalty for Insider Trading:
Sec. 15G of the SEBI Act, 1992 deals with penalty for Insider Trading. Accordingly, if any insider who

(a) either on his own behalf or on behalf of any other person, deals in securities of a body corporate 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 cause 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,
he shall be liable to a penalty which shall not be less than ₹ 10 lakh but which may extend to ₹ 25 crore or 3 times the amount of profits made out of insider trading, whichever is higher.

Question 12.
Mr. R, an investor is not satisfied with the dealings of his stock broker who is registered with Chennai Stock Exchange. Mr. R approaches you to guide him regarding the avenues available to him for making a complaint against the stock broker under Securities and Exchange Board of India Act, 1992 and also the grounds on which such complaint can be made. You are required to briefly explain the answer to his queries.
Answer:
Grounds on which complaint can be made as to dealings of stock broker:
As per Sec. 15F of SEBI Act, 1992, the following defaults by stock brokers come within the purview of SEBI Act:

(a) failure on the part of the stock broker to issue contract notes in the form and in the manner Specified by the Stock Exchange.
(b) failure on the part of the broker to deliver any security or to make payment of the amount due to the investor in the manner or Within the period specified in the regulations.
(c) collection of charges by way of brokerage in excess of the brokerage as specified in the regulations.

Question 13.
SEBI received a complaint from an investor that he has not received the payment due to him from registered stockbrokers. Explain the action that can be taken by SEBI against the stockbroker under the provisions of SEBI Act, 1992 and the factors that will be taken into account while taking such action.
Or
State the factors that must be taken into account by the adjudicating officer while determining the quantum of penalty in cases of violation of provisions of SEBI Act, 1992.
Answer:
Penalty for default in case of stock brokers:
As per Sec. 15F of SEBI Act, 1992, if any person who, is registered, as a stock broker under this Act:

(a) fails to issue contract notes in the form and in the manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 crore for which the contract note was required to be issued by that broker;

(b) fails to deliver any security or fails to make payment of the amount due to the investor in the manner or within the period specified in the regulations, he shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues;

(c) charges an amount of brokerage which is in excess of the brokerage specified in the regulations, he shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to 5 times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.

Factors to be taken into account while adjudicating quantum of penalty:
As per Sec. 15J of SEBI Act, 1992, while adjudging quantum of penalty u/s 151 or Sec. 11 or Sec. 12, the Board or the adjudicating officer shall have due regard to the following factors, namely:

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result
of the defaults.
(b) the amount of loss to an investor or group of investors as a result of the default.
(c) the repetitive nature of the default.

Question 14.
SEBI received complaints from some investors alleging that ABC Ltd. and some brokers are indulging in price manipulation in the shares of ABC Ltd. Explain the powers that can be exercised by SEBI under the Securities and Exchange Board of India Act, 1992 in case the allegations are found to be correct. [MTP-April 18]
Answer:
Powers of SEBI in relation to complaints of price manipulations:
Price manipulation in the shares of ABC Ltd. can be considered as fraudulent and unfair trade practices relating to securities market. In such situations, SEBI may exercise the powers u/s 11(4) of SEBI Act, 1992.

to suspend the trading of securities of ABC Ltd. in a recognized stock exchange.
restrain ABC Ltd. from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities market.

Such orders may be issued for reasons to be recorded in writing. However, either before or after passing such orders SEBI must give an opportunity of hearing to company and brokers concerned.

SEBI may also appoint an adjudicating officer who may levy penalty u/s 15HA after holding an enquiry in the prescribed manner. As per Sec. 15HA if any person indulges in fraudulent and unfair trade practices relating to securities, he shall be leviable to a penalty which shall not be less than ₹ 5 lakh but which may extend to ₹ 25 crore or 3 times the amount of profits made out of such practices, whichever is higher.

Prohibition on manipulation and deceptive practices:
As per Sec.12A, no person shall directly or indirectly indulge in following:
(a) use any manipulative or deceptive device in connection with purchase, sale or securities listed
(b) employ any scheme or device to defraud in connection with dealing in securities which are listed
(c) engage in an act which would operate as fraud or deceit upon any person in connection with dealing in securities which are listed.

Question 15.
Mr. Z was appointed as the presiding officer of the Securities Appellate Tribunal (SAT) for a term of five years. Considering his good performances during the tenure of his service, it was proposed by the competent authority to re-appoint him for another term. During reappointment he has completed good 69 years of age. Examine in the light of the SEBI Act, 1992, the eligibility of his appointment/ reappointment as a presiding officer in the Securities Appellate Tribunal.
Answer:
Eligibility for appointment/Reappointment as a presiding officer in the SAT:

As per Sec. 15N of SEBI Act, 1992, the Presiding Officer or every Judicial or Technical Member of the SAT shall hold office for a term of 5 years from the date on which he enters upon his office and shall be eligible for reappointment for another term of maximum 5 years. However, no Presiding Officer or the Judicial or Technical Member shall hold office after he has attained the age of 70 years.

In the present case, Mr. Z was appointed as the presiding officer of the Securities Appellate Tribunal (SAT) for a term of five years. Considering his good performances during the tenure of his service, it was proposed by the competent authority to re-appoint him for another term. During reappointment he has completed good 69 years of age.
Conclusion: Mr. Z can be re-appointed but only for one year, i.e. upto age of 70 years.

Question 16.
Clever who is registered as an Intermediary fails to enter into an agreement with his client and hence penalized by SEBI under section 15B of the SEBI Act. Advise Mr. Clever as to what remedies are available to him against the order of SEBI.
Answer:
Remedies against SEBI order (Appeal to SAT):

As per Sec. 15T of the SEBI Act, 1992 provides that any person aggrieved by an order of the Board made, under this Act or the rules or regulations made there under may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

Such appeal shall be filed within a period of 45 days from the date on which a copy of the order made by the Board is received and it shall be in such form and be accompanied by such fee as may be prescribed.

However, the Tribunal may entertain an appeal after the expiry of the said period if it is satisfied that there was sufficient cause for not filing it within the said period.
The Tribunal may, after giving the parties an opportunity of being heard, pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.
Hence, Mr. clever may prefer appeal to SAT.

Further Appeal to the Supreme Court:

Sec. 15Z of the SEBI Act, 1992 provides that any person aggrieved by any decision or order of
the Securities Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order to him on any question of fact or law arising out of such order.

The Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.

Question 17.
Mr. DB is a member of RPA Ltd. He obtains an order against the company for redressal of his grievance against the company. But the company fails to redress the grievance of Mr. DB within the time fixed by SEBI. The Board thereafter imposed penalty u/s 15C of SEBI Act, 1992. RPA Ltd. seeks your advice whether it has any remedy against the orders of SEBI. Advise
Or
SEBI issued an order against A Ltd. for redressal of grievance of one of its members. On failure of part of the company, the Board impose penalty upon the company u/s 15C of SEBI Act, 1992. The company seeks your advice whether it has any remedy against the order of the Board. Advice.
Answer:
Remedies against SEBI order (Appeal to SAT):

However, the Tribunal may entertain an appeal after the expiry of the said period if it is satisfied that there was sufficient cause for not filing it within the said period.
The Tribunal may, after giving the parties an opportunity of being heard, pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.
Hence, Mr. clever may prefer appeal to SAT.

Further Appeal to the Supreme Court:

Question 18.
What is the required qualification for the appointment of:
(i) The Presiding Officer
(ii) Member of the Securities Appellate Tribunal as per the provisions of the Securities and Exchange Board of India (SEBI) Act, 1992? [May 15 (4 Marks))
Answer:
Qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal:
Sec. 15M of the SEBI Act, 1992, set out the qualification for appointment as Presiding Officer or Member of Securities Appellate Tribunal.

Qualification of presiding Officer: A person shall not be qualified for appointment as the Presiding Officer of Securities Appellate Tribunal unless he –

a Judge of the Supreme Court or
a Chief Justice of a High Court or
a Judge of High Court for at least 7 years.

Qualification for Appointment as Judicial Member: A person shall not be qualified for appointment as the judicial member unless he is, or has been, a Judge of High Court for at least 5 years.

Qualification for Appointment as Technical Member: A person shall not be qualified for appointment as the technical member unless he:

(a) is, or has been, a Secretary or an Additional Secretary in the Ministry or Department of the C.G. or any equivalent post in the C.G. or a S.G.; or
(b) is a person of proven ability, integrity and standing having special knowledge and professional experience, of not less than fifteen years, in financial sector including securities market or pension funds or commodity derivatives or insurance.

Question 19.
Mr. S, a member of MN Ltd., obtained an order from the Securities and Exchange Board of India (SEBI) against the company. But the company failed to redress the grievance of Mr. S within the time fixed. Consequently, SEBI imposed penalty on the company. The company, however, did not pay the penalty also. State how the penalty can be recovered from the company? [Nov. 15 (4 Marks)]
Answer:
Recovery of Penalty:
As per Sec. 28A of the SEBI Act, 1992, if a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction o”f the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the Board, the Recovery Officer may draw up under his signature a statement/certificate in the specified form specifying the amount due from the person and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:

(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties.
The Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising the powers.

Question 20.
Mr. Ravi Failed to pay the penalty imposed by the Adjudicating Officer for an offence committed under Securities and Exchange Board of India Act, 1992. After the penalty has become due, Mr. Ravi, otherwise than for adequate consideration, transferred his residential property to his sister and the fixed deposits with Banks in favour of his minor son. The minor son has become major and deposits continue to be held by his son.
With reference to the provisions of SEBI Act, 1992 discuss,

(i) Whether the residential property and fixed deposits with Banks can be attached by the Recovery Officer for the purpose of recovering the penalty?
(ii) Whether the Recovery Officer can seek assistance of local district administration for attaching the property? [Nov. 18-New Syllabus (6 Marks)]
Answer:
Recovery of Penalty:

As per Sec. 28A of the SEBI Act, 1992, if a person fails to pay the penalty imposed by the adjudicating officer, the Recovery Officer may draw up under his signature a statement/certificate in the specified form specifying the amount due from the person and shall proceed to recover from such person the amount specified in the certificate by a number of modes including therein is the
(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;

For this purpose, the person’s movable or immovable property or monies held in bank accounts shall include any property or monies held in bank accounts which has been transferred directly or indirectly on or after the date when the amount specified in certificate had become due, by the person to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid.

As far as movable or immovable property or monies held in bank accounts so transferred, to his minor child or his son’s minor child is concerned, it shall, even after the date of attainment of majority by such minor child or son’s minor child, as the case may be, continue to be included in the person’s movable or immovable property or monies held in bank accounts for recovering any amount due from the person under this Act.

Conclusion: Residential property shall not be attached by the Recovery Officer for the purpose of recovering the penalty, as it has been transferred by Mr. Ravi to his sister and said transfer has not been covered in the section.
The Fixed deposits with Bank can be attached by the Recovery Officer for the purpose of recovering the penalty.

Assistance of Local District Administration:
Sec. 28A(2) of the SEBI Act, 1992 provides that the Recovery Officer shall be empowered to seek the assistance of the local district administration while exercising the powers.

Part B “Sebi (Listing Obligations And Disclosure Requirements) Regulations, 2015”
Common obligations of listed entities

Question 21.
List the common obligations of listed entities assigned under the SEBI (LODR) Regulations, 2015. [MTP-Aug. 18]
Answer:
Common obligations of listed entities assigned under the SEBI (LODR) Regulations, 2015:
a. General obligation of compliance (Regulation 5)
The listed entity shall ensure that key managerial personnel, directors, promoters or any other person dealing with the listed entity, complies with responsibilities or obligations, if any, assigned to them under these regulations.

b. Compliance Officer and his Obligations (Regulation 6)
A listed entity shall appoint a qualified Company Secretary as the Compliance Officer. The compliance officer of the listed entity shall be responsible for-

(a) ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
(b) co-ordination with and reporting to the Board, recognised stock exchange (s) and depositories with respect to compliance with rules, regulations and other directives of these authorities in manner as specified from time to time.
(c) ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity under these regulations.
(d) monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors.

c. Share Transfer Agent (Regulation 7)
The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.

Question 22.
List the quarterly compliances for a listed entity under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015?
Answer:
Quarterly compliances for a listed entity under the SEBI (LODR) Regulations, 2015:

1. Grievance Redressal Mechanism – Reg. 13(3): The listed entity shall file with the recognized stock exchange(s) on a quarterly basis, within 21 days from the end of each quarter, a statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved at the end of the quarter.

2. Other Corporate Governance Requirements – Reg. 27(2): The listed entity shall submit quarterly compliance report on corporate governance in the format as specified by the Board from time to time to the recognized stock exchange(s), within 15 days from close of quarter.

3. Holding of Specified Securities and Shareholding Pattern – Reg. 31(1): The listed entity shall submit to the stock exchange a statement showing holding of securities and shareholding pattern separately for each class of securities, in the format specified by the Board from time to time within the following timelines:

(a) One day prior to listing of its securities on the stock exchange(s);
(b) On a quarterly basis, within 21 days from the end of each quarter; and
(c) Within 10 days of any capital restructuring of the listed entity resulting in a change exceeding 2% of the total paid-up share capital.

4. Statement of Deviation – Reg. 32(1): The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc.:

(a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;

(b) Indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilization of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilization of funds.

Such statement(s) shall be continued to be given till such time the issue proceeds have been fully utilised or the purpose for which these proceeds were raised has been achieved.

5. Financial Results – Reg. 33(3): The listed entity shall submit quarterly and year-to-date standalone financial results to the stock exchange within 45 days of end of each quarter, other than the last quarter.

Question 23.
State the main features of the Qualified and Independent Audit Committee set up under regulation 18 of SEBI (LODR) Regulations, 2015.
Answer:
Features of Qualified and Independent Audit Committee as per Regulation 18 of SEBI (LODR) Regulations, 2015:

(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members of audit committee shall be independent directors.
(b) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(e) The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives, to be present at the meetings of the committee.
(f) The Company Secretary shall act as the secretary to the committee.

Question 24.
Dishonest Limited, a company incorporated in India has six members in its Audit Committee. Due to recessionary conditions in India the revenue of the company is going down and there is slow down in other activities of the company. Therefore, it was expected that there would not be significant work for members of the Audit Committee.

Considering the overall recession in the company and the economy, the members of the Committee decided unanimously to meet once in a year only on March 31, 2018. They reviewed monthly information system of the Company and found no errors. As an auditor of Dishonest Limited Would you consider the decision taken by the Audit committee is in line with SEBI (LODR) Regulations, 2015?
Answer:
Validity of Audit committee decisions w.r.t. meetings and review area:

Regulation 18 of SEBI (LODR) Regulations, 2015, among other things, requires the followings:

The audit committee should meet at least 4 times in a year and not more than 4 months shall elapse between two meetings.
Audit committee should mandatorily review certain areas like management discussion and analysis, statement of significant related party transactions, letters of internal control weaknesses, internal audit reports etc.

In the present case, members of audit committee decided to meet only once in a year and review only the monthly information system which does not meet the requirement of regulation 18 of SEBI (LODR) Regulations, 2015 as stated above.

Conclusion: Decision taken by audit committee to conduct meeting once in a year and review of only monthly information system is not in line with the requirements of Regulation 18 of SEBI (LODR) Regulations, 2015.

Question 25.
Write short notes on: Power of Audit Committee as stipulated under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Answer:
Power of Audit Committee:
As per SEBI (LODR) Regulations, 2015, the audit committee may exercise following powers, in addition to others:

To investigate any activity within its terms of reference.
To seek information from any employee.
To obtain outside legal or other professional advice.
To secure attendance of outsiders with relevant expertise.

Question 26.
M/s All-in-one limited is a large – sized listed Indian company with focus on design and delivery of custom made information Technology applications for various business entities in India and abroad. The management wants to know whether they are required to constitute Risk Management committee as per LODR, 2015 and if so, required, what should be its composition? Advise.
Answer:
Requirement and Composition of Risk Management Committee:
As per Regulation 21 of SEBI (LODR) Regulations, 2015 requires the board of directors of companies to constitute a Risk Management Committee.

Composition of Risk Management Committee:

(a) The majority of members of Risk Management Committee shall consist of members of the board of directors.
(b) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.
(c) The risk management committee shall meet atleast once in a year.
(d) The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
(e) The provisions of this regulation shall be applicable to top 100 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

Question 27.
PQR Ltd., is a listed entity with its subsidiary, Twig Ltd. State the Corporate Governance requirements with respect to the subsidiary of Listed Entity as per the SEBI (LODR) Regulations, 2015. [MTP-March 18, Oct. 19, May 20]
Answer:
Management of Subsidiary Companies:
Regulation 24 ofSEBI (LODR) Regulations, 2015 provide the following:

(1) At least one independent director on the board, of the listed entity shall be a director on the board of an unlisted material subsidiary, incorporated in India.

(2) The audit committee of the listed entity shall also review the F.S. in particular, the investments made by the unlisted subsidiary.

(3) The minutes of the meetings of the board of the unlisted subsidiary shall be placed at the meeting of the board of directors of the listed entity.

(4) The management of the unlisted subsidiary shall periodically bring to the notice of the board of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.

(5) A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal.

(6) Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal.

Question 28.
State the types and functions of the various committees constituted under the SEBI (LODR) Regulations, 2015. [RTP-Nov. 18]
Answer:
Types & Functions of Various committees constituted under the SEBI (LODR) Regulations:

(i) Audit Committee (Regulation 18):
Features of Qualified and Independent Audit Committee as per Regulation 18 of SEBI (LODR) Regulations, 2015:

The Company Secretary shall act as the secretary to the committee.
Nomination and Remuneration Committee (Regulation 19):

The Board of directors shall constitute the nomination and remuneration committee as follows:

The committee shall comprise of at least 3 directors;
All directors of the committee shall be Non-Executive Directors; and
At least 50% of the directors shall be independent directors.

The Chairperson of the nomination and remuneration committee shall be an independent director.

The chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee and shall not chair such Committee.

The nomination and remuneration committee shall meet at least once in a year.

(iii) Stakeholders Relationship Committee (Regulation 20):

The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into the mechanism of redressal of grievances of shareholders, debenture holders and other security holders.
The chairperson of this committee shall be a non-executive director.
At least three directors, with at least one being an independent director, shall be members of the Committee.
The Chairperson of the Stakeholders Relationship Committee shall be present at the annual general meetings to answer queries of the security holders.
The stakeholders relationship committee shall meet at least once in a year.

(iv) Risk Management Committee:
Requirement and Composition of Risk Management Committee:

As per Regulation 21 of SEBI (LODR) Regulations, 2015 requires the board of directors of companies to constitute a Risk Management Committee.

Composition of Risk Management Committee:
(a) The majority of members of Risk Management Committee shall consist of members of the board of directors.
(b) The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.
(c) The risk management committee shall meet atleast once in a year.
(d) The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
(e) The provisions of this regulation shall be applicable to top 100 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

Question 29.
The composition of Audit Committee of M/s MKBTC Limited, unlisted Public Company, as on 31-32020 comprised of 7 Directors including 4 Independent Directors. The majority of the members of the Audit Committee has the ability to read and understand the financial statements but none of them has accounting or related financial management expertise. The Company listed its Securities in a recognized Stock Exchange in the month of August 2020. Referring to the regulations of Securities and Exchange Board of India [Listing Obligations and Disclosure Requirements] Regulations 2015, decide whether the existing Audit Committee can continue after listing of its Securities? [Nov. 19 – New Syllabus (4 Marks), RTP-Nov. 20]
Answer:
Features of Qualified and Independent Audit Committee as per
Regulation 18 of SEBI (LODR) Regulations, 2015 deals with the requirements of audit committee in case of a listed entity. With respect of composition of audit committee, following requirements exist:

(a) The audit committee shall have minimum 3 directors as members. 2/3rd of the members of audit committee shall be independent directors. In case of a listed entity having outstanding superior rights (SR) equity shares, the audit committee shall comprise of only independent directors.

(b) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

(c) The Chairperson of the Audit Committee shall be an independent director.
In the present case, audit committee comprises of 7 Directors including 4 Independent Directors. The majority of the members of the Audit Committee has the ability to read and understand the financial statements but none of them has accounting or related financial management expertise.

Conclusion: Existing Audit Committee is not qualified under the provisions of Regulation 18 of SEBI [LODR] Regulations, 2015 due to following:
(a) 2/3rd of members (i.e, 5) need to be independent directors.
(b) All members of audit committee shall be financially literate.
(c) At least one member shall have accounting or related financial management expertise.

Question 30.
As at 01.04.2020, the composition of the Board of Directors of M/s. Apex Ltd., an unlisted, Public Limited Company comprised of 7 directors as under:

S. No.	Name	Designation
01	Mr. X	Executive Chairman (Executive and Non-Independent)
02	Mr. Y	Managing Director and CEO (Executive and Non-Independent)
03	Mrs. Z	Women Director (Non-Independent)
04	Mr. A	Independent
05	Mr. B	Independent
06	Mr. C	Independent
07	Mr. D	Independent

As at 01.04.2020, the construction of the Audit Committee comprised of the following Directors:

Name	Designation
Mr. Y	Chairman
Mr. X	Member
Mrs. Z	Member
Mr. Y	Member

The majority of the members of the Audit Committee have the ability to read and understand the financial statements but none of them have accounting or related financial management expertise. During January, 2021, the Company went for an Initial Public Issue (IPO) and got its shares listed on a recognized Stock Exchange.

Referring to SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015:
(i) State, how a qualified and an independent Audit Committee should be constituted?
(ii) Whether the present constitution of the Audit Committee is in order and whether it can continue post listing of its securities in the Stock Exchange? [Nov. 20 – New Syllabus (4 Marks)]
Answer:
Composition of Audit Committee
(i) Constitution of qualified and independent Audit Committee:

Features of Qualified and Independent Audit Committee as per Regulation 18 of SEBI (LODR) Regulations, 2015:
(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members of audit committee shall be independent directors.
(b) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(e) The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives, to be present at the meetings of the committee.
(f) The Company Secretary shall act as the secretary to the committee.

(ii) Constitution of present audit committee is not in order due to various reasons:

(a) None of the members of audit committee is independent director, whereas atleast 2/3rd members need to be independent directors.
(b) Chairperson of the audit committee is not an independent director.
(c) All members of the audit committee do not have the ability to read and understand the financial statements.
(d) No member of the audit committee has accounting or related financial management expertise.
Conclusion: Present Constitution is not in order and cannot continue post listing of securities.

Securities and Exchange Board of India Act, 1992 and SEBI (LODR) Regulations, 2015 – CA Final Law Study Material

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