Securities Contracts (Regulation) Act, 1956 – Securities Laws and Capital Markets Important Questions

Securities Contracts (Regulation) Act, 1956 – Securities Laws and Capital Markets Important Questions

Question 1.
What are the objects of the Securities Contracts (Regulation) Act, 1956?
Answer:
Objects of the Securities Contracts (Regulation) Act, 1956 are as follows:

  • To provide for the regulation of stock exchanges.
  • To provide for the regulation of transactions in securities.
  • To prevent undesirable speculation in securities.
  • To regulate the buying and selling of securities outside the limits of stock exchanges.
  • To provide for ancillary matters e.g. promoting a healthy stock market.

Question 2.
Industrial Finance Corporation of India (IFCI), established under the Industrial Finance Corporation Act, 1948 having its registered office at Mumbai issued 8% Redeemable Bonds redeemable after 7 years. These bonds were issued directly to the members of the public and not through the mechanism of stock exchanges.
You are required to state with reference to the provisions of the Securities Contracts (Regulation) Act, 1956, whether such direct issue of bonds by the IFCI is not violating the provisions of the said Act.
Answer:
As per section 28(1) of the Securities Contracts (Regulation) Act, 1956, the provisions of the Act shall not apply to corporations set up by a special law.

As stated in the question Industrial Finance Corporation of India is a corporation set up under the Industrial Finance Corporation Act, 1948 Le. under a special statute enacted by the Parliament. Therefore, this Corporation does not need any permission from a stock exchange to issue any bonds or other securities. Accordingly, it has not violated the provisions of the Securities Contracts (Regulation) Act, 1956. The nature and tenure of the bonds are immaterial

Question 3.
Write a short note on Spot Delivery Contract [June 2012 (3 Marks)]
Answer:
Spot delivery contract means a contract which provides for:

  • Actual delivery of securities and the payment of a price either on the same day or on the next day.
  • Transfer of the securities by the depository from the account of one beneficial owner to another beneficial owner.

Question 4.
Write a short note on Spot Delivery Contract [Dec. 2014 (3 Marks)]
Answer:
Spot delivery contract means a contract which provides for:

  • Actual delivery of securities and the payment of a price either on the same day or on the next day.
  • Transfer of the securities by the depository from the account of one beneficial owner to another beneficial owner.

Question 5.
“Derivatives are contracts which derive their value from the value of one or more of other assets.” Comment. [June 2014 (5 Marks)]
Answer:
A derivative includes:

  • A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security and
  • A contract that derives its value from the prices or index of prices of underlying securities.
    A derivative is a financial contract that derives its value from the performance {2 of another entity such as an asset, index, or interest rate, called the “underlying”.

Derivatives include a variety of financial contracts, including futures, forwards, swaps, options.

Question 6.
Working of City Stock Exchange Association Ltd. is not being carried on by its Governing Board in the public interest. On receipt of representations from various Investors and Investors’ Association, the Central Government I is thinking to withdraw the recognition granted to the said Stock Exchange.
You are required to state the circumstances and procedure for withdrawal of I such recognition as per the provisions of Securities Contracts (Regulation) Act, 1956 in this regard. Also, state the effect of such withdrawal on the contracts outstanding on the date of withdrawal.
Answer:
Withdrawal of recognition [Section 5]: The Central Government may withdraw recognition granted to a stock exchange in the public interest.

The Central Government may serve on the governing body of the stock exchange a written notice that it is considering the withdrawal of the recognition | for the reasons stated in the notice.

After giving an opportunity to be heard to the governing body, the Central Government may withdraw the recognition by notification in the Official Gazette.

Such withdrawal shall not affect the validity of any contract entered into or made before the date of the notification.

The Central Government may, after consultation with the stock exchange, make provisions for the due performance of any contracts outstanding on that date by issuing a notification.

Note: Powers of Central Government u/s 8 have been concurrently delegated to SEBI.

Question 7.
The governing body of the City Stock Exchange Association Ltd. is desirous of putting various restrictions on the voting rights of its members to be exercised in a meeting and on their right to appoint a proxy. You are required to state whether the same is permissible. Also, state the role of the Central Government in this respect.
Answer:
Power of recognized stock exchange to make rules restricting voting rights, etc. [Section 7A]: Normally, voting rights are proportional to the shareholding of a member.

However, in the case of recognized rules can provide the following matters:

  • Restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting.
  • Regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only.
  • Restriction on the right of a member to appoint another person as his f proxy to attend and vote at a meeting.
  • Such incidental, consequential, and supplementary matters may be necessary to give effect to any of the matters specified in clauses (a) to (c).

Rules can be amended only with the approval of the Central Government/ SEBI. In approving the rules, the Central Government may make modifications therein as it thinks fit. On publication of amended rules as approved by | the Central Government the rules shall be deemed to have been validly made.

Practically, stock exchanges are asked to amend the rules as per SEBI guidelines, or SEBI itself can make the rules as per provisions of section 8.

Question 8.
State the powers of SEBI to amend the bye-laws of a recognized stock exchange.
Answer:
Power of SEBI to make or amend bye-laws of recognized stock exchanges [Section 10]:

  • SEBI is empowered to make or amend bye-laws of recognized stock exchanges on request from the stock exchange or on its own motion, after consultation with the governing body of the stock exchange.
  • The bye-laws or amended by-laws shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognized stock exchange is situated.
  • The bye-laws or amendments become effective as if made or amended by the stock exchange itself.
  • If the governing body objects to any bye-laws made or amended by SEBI, it should apply to SEBI within 2 months of publication of the bye-laws in Gazette.
  • SEBI will give the opportunity of hearing and then may revise the bye-laws.
  • The revised by-laws will be published in Official Gazette.
  • The bye-laws or amendments become effective only after publication in Official Gazette.

Question 9.
RSE Stock Exchange Ltd., a recognized stock exchange is involved in the trading of shares of Son Ltd. The SEBI on receiving a complaint from a group of investors enquired and found that trading of shares of Son Ltd. is being conducted in a manner detrimental to the interest of the general investors. In order to curb the same, the SEBI wants to issue some directions to RSE Stock Exchange Ltd. Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, discuss whether the SEBI has the power to issue such directions. Can such directions be given to an individual who made some profit in any transaction in contravention of any provision of the Securities Contracts (Regulation) Act, 1956?
Answer:
Power to issue directions [Section 12A]: SEBI is empowered to issue direction for the following reasons:

  • In the interest of investors, or orderly development of securities market.
  • To prevent the affairs of any recognized stock exchange or clearing corporation which are being conducted in a manner detrimental to the interests of investors or the securities market.
  • To secure the proper management of any stock exchange or clearing corporation or agency or another person.

Such directions can be issue to:

  • Any stock exchange or clearing corporation or agency or class of persons associated with the securities market.
  • Any company whose securities are listed or proposed to be listed.
  • As per the Explanation given in the section, it is declared that power to issue directions shall include and always be deemed to have been included the power to direct any person, who made a profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

So, accordingly, the directions can be given to an individual who had made some profit in any transaction in contravention of any provisions of the Securities Contracts (Regulation) Act, 1956.

Question 10.
“Demutualization of stock exchanges is to convert the traditional stock exchanges into a company”. Comment. [Dec. 2010 (3 Marks)]
Answer:
Historically, most of the stock exchanges, except NSE & OTCEI were formed as ‘mutual organization’ i.e. formed by trading members for their common benefit. The disadvantage of such an organization is that it primarily work for the interests of members and those of investors. The office bearers will have access to inside information, which can be misused by them. There is no transparency and no professional approach. Moreover, they cannot raise large funds for modernization or up-gradation by offering equity shares to others.

In view of the above shortcomings of ‘mutual stock exchanges’, a policy decision was taken by the Government of India for the corporatization of the stock exchange. Corporatization means the stock exchange should be organized as a company.

Thus, the process of converting ‘mutual stock exchanges’ into a company form of organization is known as ‘Demutualization of Stock Exchanges’.

Corporatization [Section 2(aa)]: Corporatisation means the succession of a recognized stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860, by another stock exchange, being a company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such in¬dividuals or society.

Demutualization [Section 2(ab)]: Demutualisation means the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the SEBI.

Corporatization and demutualization of stock exchanges [Section 4A]: Every stock exchange shall be corporatized and demutualized before the appointed date.

Procedure for corporatization and demutualization [Section 4B]:
Submission of the scheme: All recognized stock exchanges shall submit a scheme for corporatization and demutualization for its approval within the time specified by the SEBI. However, stock exchanges, which had already been corporatized and demutualized, shall not be required to submit the scheme.

Approval of scheme: On receipt of the scheme, the SEBI may approve the scheme with or without modification.

Publication of scheme: The scheme so approved shall be published immediately by the SEBI in the Official Gazette and in two daily newspapers circulating in India.

Imposition of restriction: While approving the scheme, SEBI may make an order restricting:

  • Voting rights of shareholders who are also stock brokers.
  • Rights of shareholders to appoint representatives on the governing board of the stock exchange.
  • A maximum number of representatives of the stockbrokers of the recognized stock exchange to be appointed on the governing board of the recognized stock exchange, which shall not exceed 1 /4th of the total strength of the governing board.

Rejection of scheme: Where the SEBI is satisfied that it would not be in the interest of the trade and also in the public interest to approve the scheme, it may, by an order, reject the scheme. Such order of rejection shall be published by it in the Official Gazette.

However, the SEBI shall give a reasonable opportunity of being heard before | passing an order rejecting the scheme.

Effects of publication: On the publication of the scheme in the Official Gazette it shall have full effect.

Compliance: Every recognized stock exchange shall ensure that at least 51 % of its equity share capital is held, within 12 months from the date of publication of the order, by the public other than shareholders having trading rights. How- 4 ever, the SEBI may extend the said period by another 12 months on sufficient cause being shown to it.

Question 11.
What is meant by the demutualization of stock exchanges? Explain the purpose of demutualization. [June 2015 (5 Marks)]
Answer:
Historically, most of the stock exchanges, except NSE & OTCEI were formed as ‘mutual organization’ i.e. formed by trading members for their common benefit. The disadvantage of such an organization is that they primarily work for the interests of members and those of investors. The office bearers will have access to inside information, which can be misused by them. There is no transparency and no professional approach. Moreover, they cannot raise large funds for modernization or up-gradation by offering equity shares to others.

In view of the above shortcomings of ‘mutual stock exchanges’, a policy decision was taken by the Government of India for the corporatization of the stock exchange. Corporatization means the stock exchange should be organized as a company.

Thus, the process of converting ‘mutual stock exchanges’ into a company form of organization is known as ‘Demutualization of Stock Exchanges’.

Corporatization [Section 2(aa)]: Corporatisation means the succession of a recognized stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860, by another stock exchange, being a company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such in¬dividuals or society.

Demutualization [Section 2(ab)]: Demutualisation means the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the SEBI.

Corporatization and demutualization of stock exchanges [Section 4A]: Every stock exchange shall be corporatized and demutualized before the appointed date.

Procedure for corporatization and demutualization [Section 4B]:
Submission of the scheme: All recognized stock exchanges shall submit a scheme for corporatization and demutualization for its approval within the time specified by the SEBI. However, stock exchanges, which had already been corporatized and demutualized, shall not be required to submit the scheme.

Approval of scheme: On receipt of the scheme, the SEBI may approve the scheme with or without modification.

Publication of scheme: The scheme so approved shall be published immediately by the SEBI in the Official Gazette and in two daily newspapers circulating in India.

Imposition of restriction: While approving the scheme, SEBI may make an order restricting:

  • Voting rights of shareholders who are also stock brokers.
  • Rights of shareholders to appoint representatives on the governing board of the stock exchange.
  • A maximum number of representatives of the stockbrokers of the recognized stock exchange to be appointed on the governing board of the recognized stock exchange, which shall not exceed 1 /4th of the total strength of the governing board.

Rejection of scheme: Where the SEBI is satisfied that it would not be in the interest of the trade and also in the public interest to approve the scheme, it may, by an order, reject the scheme. Such order of rejection shall be published by it in the Official Gazette.

However, the SEBI shall give a reasonable opportunity of being heard before | passing an order rejecting the scheme.

Effects of publication: On the publication of the scheme in the Official Gazette it shall have full effect.

Compliance: Every recognized stock exchange shall ensure that at least 51 % of its equity share capital is held, within 12 months from the date of publication of the order, by the public other than shareholders having trading rights. How- 4 ever, the SEBI may extend the said period by another 12 months on sufficient cause being shown to it.

Question 12.
The recognized stock exchange has powers to make rules for restricting voting rights. Comment. [June 2016 (4 Marks)]
Answer:
Power of recognized stock exchange to make rules restricting voting rights, etc. [Section 7A]: Normally, voting rights are proportional to the shareholding of a member. However, in the case of recognized rules can provide the following matters:

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

Rules can be amended only with the approval of the Central Government/ SEBI. In approving the rules, the Central Government may make modifications therein as it thinks fit. On publication of amended rules as approved by the Central Government the rules shall be deemed to have been validly made.

Practically, stock exchanges are asked to amend the rules as per SEBI guidelines, or SEBI itself can make the rules as per provisions of section 8.

Note: The powers of Central Government u/s 8 have been concurrently delegated to SEBI.

Question 13.
Delhi Stock Exchange wants to establish an additional trading floor. Explain briefly the meaning and procedure for establishing an additional trading floor.
Answer:
Additional trading floor [Section 13A]: A stock exchange may establish an additional trading floor with the prior approval of the SEBI in accordance with the terms and conditions stipulated by the SEBI.

Additional trading floor means a trading ring or trading facility offered by a recognized stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor.

Note: Earlier, the trading in the stock exchange was with the physical presence of brokers on the trading floor of a stock exchange. Now, all stock exchanges have screen-based trading. Further, the brokers can have terminals at any place in India and hence the concept of ‘trading floor’ no more exists.

Question 14.
M/s Goyanka & Co., which is a member of a recognized stock exchange desire to buy and sell shares of Crossroads Company Limited on their own count as well as on behalf of investors. Advise M/s Goyanka & Co. whether there are any restrictions for dealing in securities on their own count under the provisions of the Securities Contracts (Regulation) Act, 1956.
Answer:
Members may not act as principals in certain circumstances [Section 15]:
A broker can act on a principal basis with other members of the stock exchange. However, a member of the stock exchange shall not enter into any contract in respect of securities, as a principal with any person other than a member of the recognized stock exchange. He can do so only if he has secured the consent or authority of such person. He should disclose in the note, memorandum, or agreement of sale or purchase that he is acting as a principal. If the consent or authority of such other person was not obtained in writing, the member shall secure written confirmation within 3 days from the date of the contract.

However, such written consent of such person is not necessary for a closing outstanding contract entered into by such person in accordance with the bye-laws, if the member discloses in the note, memorandum, or agreement of sale or purchase in respect of such closing out that he is acting as a principal.

Penalty [Section 23(2)]: Penalty up to ? 1,000 can be imposed for non-compliance of section 15.

Note: Acting as a principal means selling securities belonging to himself, or purchasing in his own name.

Question 15.
Explain provisions of the Securities Contracts (Regulation) Act, 1956 relating to the listing of securities. Can the stock exchange refuse to list? What are the powers of the Securities Appellate Tribunal (SAT) in this regard?
Answer:
Conditions for listing [Section 21]: Where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.

Right of appeal to SAT against refusal to list securities of public companies [Section 22]:

  • Where a recognized stock exchange refuses to list the securities of any public company, it shall furnish the reasons for such refusal.
  • The time period for filing an appeal is 15 days from the date of refusal. However, SAT may extend such period not exceeding 1 month on sufficient cause being shown.
  • Every appeal to SAT shall be in the prescribed form along with the prescribed fee.
  • SAT may vary or set aside the decision of the stock exchange.
  • If an application is not disposed of by the stock exchange within the specified time, on appeal, SAT may grant or refuse the permission.
  • The appeal should be decided by the SAT expeditiously and possibly within 6 months.
  • SAT shall send a copy of every order made by it to the SEBI and parties to the appeal.

Procedure and powers of SAT [Section 22B]: The SAT is not bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice.

SAT has powers of Civil Court in respect of:

  • Summoning and enforcing the attendance of any person and examining him on oath.
  • Requiring the discovery and production of documents.
  • Receiving evidence on affidavits.
  • Issuing commissions for the examination of witnesses or documents.
  • Reviewing its decisions.
  • Dismissing an application for default or deciding it ex parte.
  • Setting aside any order of dismissal of any application for default or any order passed by it ex parte.
  • Any other matter which may be prescribed.

Every proceeding before SAT shall be deemed to be a judicial proceeding within the meaning of the Indian Penal Code, 1860, and the SAT shall be deemed to be a Civil Court.

Right to legal representation [Section 22C]: The appellant may either appear in person or authorize one or more CA or CS or CMA or legal practitioners or any of its officers to present his or its case before the SAT.

Limitation [Section 22D]: Provisions of the Limitation Act, 1963 shall apply to an appeal made to SAT.

Civil court not to have jurisdiction [Section 22E]: Civil court shall not have jurisdiction to entertain any suit or proceeding in respect of any matter which SAT is empowered to determine.

Appeal to Supreme Court [Section 22F]: Any person aggrieved by any decision or order of the SAT may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the SAT on any question of law arising out of such order.

The Supreme Court may extend the period by 60 days on sufficient cause being shown.

Question 16.
The shares of Run fast Ltd. were listed on Delhi Stock Exchange. The stock exchange delisted the shares of the company. The aggrieved company approaches you as a Company Secretary in Practice to know the remedy available to the company. Give your suggestions to the company keeping in view the provisions of the Securities Contracts (Regulation) Act, 1956. [Dec. 2014 (10 Marks)]
Answer:
Delisting of securities [Section 21 A]: A recognized stock exchange may delist the securities of the company on any of the ground or grounds prescribed under the Act.

The recognized stock exchange shall record reasons for delisting the securities of the company and shall give a reasonable opportunity of being heard to the company.

Appeal: A listed company or an aggrieved investor may file an appeal before the SAT within 15 days from the date of delisting of securities. However, on sufficient cause being shown, SAT may extend the period further by 1 month.

The provisions of sections 22B to 22E shall apply to such appeal.

Question 17.
You are the Company Secretary of Vision Ltd., whose shares were listed on the Delhi Stock Exchange. The stock exchange delists the shares of the company. Give your suggestions to the company regarding the remedy available keeping in view the provisions of the Securities Contracts (Regulation) Act, 1956. [Dec. 2016 (6 Marks)]
Answer:
Delisting of securities [Section 21 A]: A recognized stock exchange may delist the securities of the company on any of the ground or grounds prescribed under the Act.

The recognized stock exchange shall record reasons for delisting the securities of the company and shall give a reasonable opportunity of being heard to the company.

Appeal: A listed company or an aggrieved investor may file an appeal before the SAT within 15 days from the date of delisting of securities. However, on sufficient cause being shown, SAT may extend the period further by 1 month.

The provisions of sections 22B to 22E shall apply to such appeal.

Question 18.
RPS Ltd. got its shares listed on a Stock Exchange. It has been regularly paying the listing fees. Certain information about the shareholding pattern was asked by the Stock Exchange, which the company could not supply in the prescribed time. It was then given a further opportunity to furnish the desired information along with supporting documents, but in vain, as the company did not maintain any record. What are the penalties leviable against the company under the Securities Contracts (Regulation) Act, 1956 for the failure to furnish the information?
Answer:
Penalty for failure to furnish information, return [Section 23A(a)]: Any person, who fails to furnish any information, document, books, returns or report to a recognized stock exchange, within the time specified in the listing agreement or conditions or bye-laws of the recognized stock exchange, he shall be liable to a penalty of ₹ 1 lakh for each day during which such failure [ continues or ₹ 1 Crore, whichever is less for each such failure.

Penalty for failure to maintain books of the account [Section 23A(b)]: Any person, % who is required to maintain books of account or records, as per the listing § agreement or conditions, or bye-laws of a recognized stock exchange, fails top maintain the same, he shall be liable to a penalty of ₹ 1 lakh for each day during gs which such failure continues or ₹ 1 Crore, whichever is less.

Therefore, in the given case, RPS Ltd. is liable u/s23A of the Securities Contracts (Regulation) Act, 1956 as it could not supply the certain information asked by the stock exchange and abo did not maintain any record.

Question 19.
XYZ, a recognized stock exchange fails to comply with certain directions issued by the Securities and Exchange Board of India, and the adjudicating officer initiated proceedings for the purpose of imposing a penalty. The stock exchange seeks your advice on whether it is possible to go for settlement of the proceedings. Advise explaining the relevant provisions of the Securities Contracts (Regulation) Act, 1956?
Answer:
Settlement of administrative and civil proceedings [Section 23-A]:
1. Filing of application to the SEBI: Any person against whom any of the following procedures have been initiated or may be initiated may hie an application in writing to the SEBI proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.

  • Defaults u/s 12A (i.e. failure to observe directions issued by the SEBI)
  • Defaults u/s 23-A (i.e. failure to observe the order passed in adjust eating proceedings)

2. SEBI may consider the matter for the settlement: The SEBI may, after taking into consideration the nature, gravity, and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the SEBI in accordance with the regulations made under the SEBI Act, 1992.

3. Procedure to be followed as prescribed under the SEBI Act: For the purposes of settlement, the procedure as specified by the SEBI under the SEBI Act, 1992 shall apply.

4. No appeal to order: No appeal shall lie u/s 23L against any order passed by the SEBI or the adjudicating officer, as the case may be, under this section.

5. Settlement Amounts: All settlement amounts, excluding the disgorgement amount and legal costs, realized under the Act shall be credited to the Consolidated Fund of India.

Question 20.
Mr. Patel has transferred his shares of a listed company registered in his name to Mr. Mehta. Mr. Mehta has failed to get the shares registered in his name before the company declared and paid the dividend on the shares.
Examine with reference to the provisions of the Securities Contracts (Regulation) Act, 1956, whether Mr. Patel is entitled to retain the dividend even though he has transferred the shares before the declaration of the dividend.
Answer:
Section 27(1) of the Securities Contracts (Regulation) Act, 1956 provides that the holder of security can legally receive and retain any dividend declared by the company even if he has transferred the security for valuable consideration. However, the transferor of security cannot receive a dividend if the transfer deed with all other documents are lodged with the company within 15 days of the date on which the dividend became due.

Further according to Section 27(2)(a), a company can pay any dividend, which has become due to any person whose name is for the time being registered in the books of the company as the holder of the security.

In view of the above Mr, Patel is entitled to retain the dividend received by him if the transferee Mr. Mehta has not lodged the transfer deed with the company within 15 days of the date on which the dividend became due.

However, section 27(1) will not affect the right of the transferee to enforce his rights if any against the transferor or any other person if the company refuses to register, the transfer of security in the name of the transferee. [Section 27(2)(6)]

Question 21.
Mr. Bansal holds certain securities on 31st March 2016, issued in his favor under the “Collective Investment Scheme (CIS).” For consideration, Mr. Bansal transferred the said securities in favor of another person. One month after the date on which the income on these securities became due, the transferee lodged the instrument of transfer. Decide in the light of the provisions of the Securities Contracts (Regulation) Act, 1956.
(i) Whether in the given case Mr. Bansal is entitled to receive and retain the income on these securities for the financial year ended 31st March 2016?
(ii) What would be your answer in case the transferee lodged the instrument of transfer 10 days after the date on which the income on these securities became due?
Answer:
Section 27A( 1) of the Securities Contracts (Regulation) Act, 1956 provides that the holder of a security of CIS can legally receive and retain any income in respect of units issued by the CIS even if he has transferred the security of CIS for valuable consideration. However, the transferor of security cannot receive income if the transfer deeds with all other documents are lodged with the company within 15 days of the date on which the income became due.

However, a CIS can pay income of units which has become due to any person whose name is for the time being registered in the books of the CIS as the holder of the security. [Section 27A(2)(a)]

In view of the above:
1. Mr. Bansal is entitled to retain the income received by him as the transferee has lodged an instrument for transfer one month after the date on which the income became due.

2. The answer in the second case would differ. The holder i.e. Mr. Bansal, cannot receive and retain the income since the instrument for transfer was lodged with the company within the statutory period of 15 days by the transferee. Accordingly, the transferee would be entitled to receive the income on these securities.

However, section 27A (1) will not affect the right of the transferee to enforce his rights if any against the transferor or any other person if the CIS refuses to register, the transfer of security in the name of the transferee. [Section 27A(2)(b)]

Question 22.
List out the consequences of violation of the listing agreement. [Dec. 2006 (4 Marks)]
Answer:
Suspension or withdrawal of admission to dealings in securities on stock exchange [Rule 19(5)]:

  1. A recognized stock exchange may suspend or withdraw the admission to dealings in the securities of a company for non-compliance of listing conditions or for any other reason.
  2. Reasons for suspension have to be recorded in writing, which in the opinion of the stock exchange justifies such action.
  3. A reasonable opportunity to be heard has to be given to the company against the proposed action.
  4. Where a recognized stock exchange has withdrawn admission to dealings in any security, or where suspension of admission to dealings has continued for a period exceeding 3 months, the company may prefer an appeal to the SAT.
  5. The SAT may, after giving the stock exchange an opportunity of being heard, vary or set aside the decision of the stock exchange.
  6. Recognized stock exchanges may either at their own discretion or shall in accordance with the orders of the SAT restore or re-admit to dealings [ any securities suspended or withdrawn from the list.

Question 23.
Briefly explain the provisions relating to continuous listing requirements as enshrined under the Securities Contracts (Regulation) Rules, 1957. [Dec. 2013 (5 Marks)]
Answer:
Continuous Listing Requirement [Rule 19A]: Every listed company shall maintain a public shareholding of at least 25%. This requirement is not applicable j to the public sector company.

Any listed company which has public shareholding below 25%, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2014, shall increase its public shareholding to at least 25%, within a period of 3 years.

Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall in the manner specified by the SEBI.

Where the public shareholding in a listed company falls below 25% in consequence of the Securities Contracts (Regulation) (Amendment) Rules, 2015, such company shall increase its public shareholding to at least 25% in the manner specified by the SEBI within a period of 3 years from the date of notification of:
(a) The Depository Receipts Scheme, 2014 in cases where the public shareholding falls below 25% as a result of such scheme;
(b) The SEBI (Share Based Employee Benefits) Regulations, 2014 in cases where the public shareholding falls below 25%, as a result of such regulations.

Question 24.
What are the provisions for continuous listing requirements under Securities Contracts (Regulation) Rules, 1957? List any six methods for achieving minimum public shareholding by a listed company. [Dec. 2018 (5 Marks)]
Answer:
Continuous Listing Requirement [Rule 19A]: Every listed company shall maintain a public shareholding of at least 25%. This requirement is not applicable to the public sector company.

Any listed company which has public shareholding below 25%, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2014, shall increase its public shareholding to at least 25%, within a period of 3 years.

Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall in the manner specified by the SEBI.

Where the public shareholding in a listed company falls below 25% in consequence of the Securities Contracts (Regulation) (Amendment) Rules, 2015, such company shall increase its public shareholding to at least 25% in the manner specified by the SEBI within a period of 3 years from the date of notification of:
(a) The Depository Receipts Scheme, 2014 in cases where the public shareholding falls below 25% as a result of such scheme;
(b) The SEBI (Share Based Employee Benefits) Regulations, 2014 in cases where the public shareholding falls below 25%, as a result of such regulations.

Various methods for raising public shareholding by a listed company are given below:

  • Initial Public Offer (IPO)
  • Further public offer (FPO)
  • Offer to public
  • The right issue to the public other than promoters of the company.
  • Bonus issue to public other than promoters of the company.
  • Buyback of shares from shareholders other than public shareholders.

Question 25.
Stock exchange on its own can delist any security thereon. Explain how recognized stock exchange delists any securities listed thereon under the Securities Contracts (Regulation) Rules, 1957. [June 2019 (5 Marks)]
Answer:
Delisting of securities [Rule 21]: A recognized stock exchange may, without prejudice to any other action that may be taken under the Act or under any other law for the time being in force, delist any securities listed thereon on any of the following grounds in accordance with the regulations made by the Securities and Exchange Board of India, namely:
1. The company has incurred losses during the preceding three consecutive years and it has a negative net worth.

2. Trading in the securities of the company has remained suspended for a period of more than 6 months.

3. The securities of the company have remained infrequently traded during the preceding 3 years.

4. The company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than ₹ 1 Crore or imprisonment of not less than 3 years.

5. The addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act, 2013.

6. Shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange. However, no securities shall be delisted unless the company concerned has been given a reasonable opportunity of being heard

Securities Laws and Capital Markets Questions and Answers

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