Brief Summary
This lecture provides a comprehensive overview of the SEBI Act 1992 and its regulations, focusing on key aspects relevant to the CA Final exam. It covers SEBI LODR, ICDR, SAST, and PIT regulations, emphasizing important sections, amendments, and practical applications. The lecture aims to equip students with the knowledge to score well in the exam by focusing on high-weightage topics and providing clear explanations.
- SEBI Act and Regulations Overview
- Key Regulations: LODR, ICDR, SAST, PIT
- Important Sections and Amendments
- Practical Applications and Exam-Oriented Approach
Intro & Coverage
The lecture introduces a free batch for the Strategic Performance Management (SPM) course, aiming to complete the syllabus in 30-40 hours. The focus will be on the SEBI Act and Regulations, a significant chapter with a weightage of 15-20 marks. The course will cover the SEBI Act and four key regulations: LODR, ICDR, SAST, and PIT, with a practical approach to help students score at least 50 marks in the subject. The speaker clarifies that while the content will be taught thoroughly, the approach will differ from audit classes, focusing on efficient coverage rather than repeated revisions.
SEBI LODR (Listing obligation & Disclosure requirement)
The lecture begins with SEBI LODR, emphasizing its importance and scoring potential. LODR applies to companies with listed securities, including equity shares, non-convertible debentures, IDRs, perpetual debt instruments, securitized debt instruments, mutual funds, and preference shares. A recent amendment regarding market capitalization is explained: Recognised Stock Exchanges will create a list of entities based on average market capitalization between July 1 and December 31 each calendar year. The provisions apply from the next financial year, starting April 1. Once a regulation applies, it remains applicable for three years unless the company falls out of the top bracket for three consecutive years. The lecture then discusses board of director requirements, including the need for an optimum combination of executive and non-executive directors, with at least 50% being non-executive. A woman director is mandatory, and the number of independent directors depends on whether the chairperson is an executive director or related to promoters. Top 2000 listed companies must have at least six directors, and the top 1000 must have an independent woman director. The age limit for non-executive directors is 75 years, with exceptions for special resolutions. Board meetings must occur at least four times a year, with a maximum gap of 120 days between meetings. The quorum is 1/3 or three directors, whichever is higher, including at least one independent director. A director can hold a maximum of seven directorships in listed companies and seven independent directorships, but if they are an MD or WTD, they can only be an independent director in three companies.
The lecture addresses the responsibilities of listed companies regarding their subsidiaries, differentiating between material and non-material subsidiaries. A material subsidiary is defined as one with income or net worth exceeding 20% of the consolidated income or net worth of the listed entity. For material subsidiaries, one independent director from the listed company must also be on the subsidiary's board. Selling shares in a material subsidiary requires a special resolution, unless mandated by a court or part of an IBC resolution plan. Disposing of assets worth 20% or more of the material subsidiary's total assets also requires a special resolution. For all unlisted subsidiaries, the audit committee of the listed company must review the financials, board meeting minutes must be available, and significant transactions (exceeding 10% of revenue, expenses, or assets) must be reported to the listed company. A director cannot be a member of more than ten committees or chair more than five, considering only audit and stakeholder committees across public companies. The lecture then compares the requirements for audit, nomination and remuneration, and stakeholder relationship committees under the Companies Act and SEBI LODR, highlighting differences in composition, independence, and meeting frequency.
The lecture concludes with a discussion on quarterly and annual compliance requirements for listed companies. Quarterly, companies must submit a corporate governance report, investor complaint statement, and shareholding pattern within 21 days of the quarter's end. The shareholding pattern must also be submitted one day before listing. Any capital restructuring causing a change of more than 2% in paid-up share capital must be reported within 10 days. Companies must disclose the use of funds raised through public or rights issues quarterly, along with any deviations. Quarterly financial statements must be filed within 45 days, and annual statements within 60 days of the year-end. Annual reports must be dispatched to shareholders and submitted to the stock exchange. Any changes to the annual report must be reported within 48 hours of the meeting. Prior intimation to the stock exchange is required two working days before board meetings for matters like buybacks, delisting, and fundraising. A compliance officer, typically the company secretary, ensures regulatory compliance. Websites must be updated within two working days of any data change.
SEBI ICDR (Issue of Capital & Disclosure requirement)
The lecture transitions to SEBI ICDR, focusing on the regulations for issuing capital and disclosure requirements. It begins by outlining various methods companies use to raise capital, including IPOs, FPOs, private placements, and offer-for-sale (OFS). IPOs are for unlisted companies becoming listed, while FPOs are for already listed companies seeking additional capital. OFS involves existing shareholders selling their shares to the public. Other methods include rights issues, composite issues (combining public and rights issues), bonus issues, and private placements, which are limited to 200 people in a financial year. The lecture then defines key terms such as fixed price offerings and book-building processes, where companies issue a Red Herring Prospectus (RHP) without specifying the issue price or number of shares, determining these factors based on investor demand within a price range. The final prospectus is issued after the price discovery. Other terms defined include convertible debt instruments, which can be converted into equity, and green shoe options, allowing companies to issue an additional 20% of shares within 30 days of listing to stabilize the price.
The lecture specifies the applicability of ICDR regulations to various scenarios, including IPOs, FPOs, preferential issues, bonus issues, listings on the Innovator Growth Platform, and rights issues exceeding ₹50 crore. It then discusses the eligibility criteria for companies issuing IPOs, including financial metrics such as net tangible assets of at least ₹3 crore, with monetary assets not exceeding 50% of net tangible assets. The company must also have an average operating profit of ₹15 crore and a net worth of ₹1 crore over the preceding three financial years. If a company's name has changed within the last year, at least 50% of its revenue must come from the new name. If these financial criteria are not met, the company can opt for a book-building process, allocating at least 75% of the issue to Qualified Institutional Buyers (QIBs). The lecture also addresses the issuance of Superior Rights Equity Shares, which grant promoters or directors enhanced voting rights. To issue ordinary shares, companies with Superior Rights Equity Shares must meet specific conditions, including having a technology-based business, a net worth of less than ₹1000 crore for the superior rights holders, and passing a special resolution. The superior rights shares must have been issued at least three months before filing the Red Herring Prospectus, and the voting rights must be between 2:1 and 10:1 compared to ordinary shares.
The lecture outlines general conditions for IPOs, including obtaining stock exchange approvals, entering agreements with depositories, and converting promoters' existing securities into dematerialized form. Any existing partly paid-up shares must be fully paid up or forfeited. Companies must also demonstrate firm arrangements for at least 75% of the IPO's funds. The lecture specifies that a maximum of 25% of the IPO proceeds can be used for general corporate purposes, and no more than 35% can be used for general corporate purposes plus unidentified acquisitions. These caps do not apply if the acquisitions are already identified in the prospectus. For offer-for-sale (OFS) issues, existing shareholders must have held the shares for at least one year and the shares must be fully paid up. Shareholders with more than 20% pre-issue holding can offer up to 50% of their shares, while those with less than 20% can offer only 10%. The lecture then discusses the issuance of convertible debt instruments and warrants, stating that companies cannot have outstanding convertible securities unless they are ESOPs or have already been converted. Convertible debt instruments must have credit ratings, a debenture trustee, and a debenture redemption reserve. The lecture also covers green shoe options, allowing companies to issue an additional 20% of shares within 30 days of listing to stabilize prices.
The lecture addresses the process for issuing IPOs, including filing a draft offer document with SEBI, obtaining observations within 30 days, and filing the final offer document with the ROC. A public announcement must be made within two days of filing with SEBI, allowing 21 days for public comments. The announcement must be in English, Hindi, and regional newspapers. The lecture also covers pricing regulations, stating that the cap price must be between 105% and 120% of the floor price. If a Red Herring Prospectus is issued without price details, the floor price must be announced at least two working days before the issue opens. Differential pricing is allowed for retail investors, existing shareholders, and employees, with a maximum discount of 10%. The lecture then discusses allocation quotas, stating that retail investors must receive at least 35%, NIIs at least 15%, and QIBs up to 50%, with 5% reserved for mutual funds. If these quotas are not met, the funds must be refunded. The IPO must remain open for 3 to 10 working days, with a possible extension of 3 days under certain conditions. The minimum application size is between ₹10,000 and ₹15,000, with at least 25% of the amount due at the time of application. The remaining amount must be paid within 12 months of allotment. The lecture concludes by stating that the issuer must appoint a monitoring agency for IPOs exceeding ₹100 crore to ensure proper utilization of funds.
SEBI Act 1992
The lecture transitions to the SEBI Act 1992, beginning with an overview of SEBI's establishment in 1988 and its legal status from 1992. The primary objectives of SEBI are to protect the interests of investors in securities, develop the securities market, and regulate it. SEBI is a body corporate with its head office in Nariman Point, Mumbai. The constitution of SEBI includes a chairman appointed by the Central Government, two members from the Ministry, one member from the RBI, and five members nominated by the Central Government, with three being whole-time members. The chairman and whole-time members hold office for five years and are eligible for reappointment, with a maximum age limit of 65 years. The Central Government can terminate the chairman and five members with three months' notice or salary in lieu thereof. Other members can resign by giving three months' notice to the Central Government. The Central Government can remove any member if they are of unsound mind, insolvent, convicted of moral turpitude, or abuse their position to the detriment of public interest, after giving them a reasonable opportunity to be heard.
The lecture outlines the procedures for SEBI board meetings, stating that the board can establish its own rules. If the chairman is absent, the members present can appoint a chairman for the meeting. Decisions are based on majority votes, with the chairman having a second or casting vote in case of a tie. A SEBI member with a pecuniary interest in a company cannot participate in meetings related to that company. Vacancies or defects in the constitution of the board do not invalidate its proceedings. The lecture then discusses SEBI's powers and functions, including regulating stock exchanges, brokers, mutual funds, and other intermediaries, educating investors, and preventing fraudulent practices. SEBI has the power to inspect listed companies and public companies seeking listing if it suspects insider trading or fraudulent activities, after giving a reasonable opportunity to be heard. During inspections and inquiries, SEBI can suspend trading, restrain individuals from accessing the securities market, suspend officers, impound proceeds from fraudulent transactions, and attach bank accounts or properties for up to 90 days. For longer attachments, SEBI must obtain approval from a special court.
The lecture defines "disgorgement fund" as money obtained through illegal activities in the stock market, which SEBI can seize and deposit into the Investor Protection and Education Fund (IPEF). The Central Government provides grants to SEBI, which are deposited into the SEBI General Fund, along with fees and other income. The SEBI General Fund is used for salaries, expenses, and fulfilling SEBI's objectives. SEBI prepares financial statements, which are audited by the Comptroller and Auditor General of India (CAG), and the audit report is presented to both houses of Parliament. The lecture then transitions to penalties, emphasizing their importance. It outlines various penalties for failing to furnish documents, non-compliance with agreements, failure to redress investor grievances, operating a collective investment scheme without registration, and non-compliance by asset management companies. The penalties generally involve a fixed amount plus a daily penalty, up to a maximum limit. For insider trading, the penalty is a minimum of ₹10 lakh, with a maximum of ₹25 crore or three times the profit made, whichever is higher.
The lecture continues with penalties for failing to make open offers, fraudulent trade practices, and tampering with SEBI's computer systems. It also discusses the process for imposing penalties, where SEBI appoints an adjudicating officer (at least a Divisional Chief Level Officer) who conducts hearings and passes orders. SEBI can enhance the penalty within three months of the adjudicating officer's order, after giving the party a reasonable opportunity to be heard. Factors determining the quantity of the penalty include the unfair advantage gained, the loss caused to investors, and the repetitive nature of the offense. Penalties are deposited into the Consolidated Fund of India. The lecture also covers settlement procedures, where parties can settle disputes with SEBI, but cannot appeal after settlement. Settlement amounts, after deducting disgorgement amounts and legal costs, are deposited into the Consolidated Fund of India. The lecture then discusses the Securities Appellate Tribunal (SAT), which hears appeals against SEBI orders. Appeals must be filed within 45 days, and SAT must dispose of the appeal within six months. SAT's orders can be appealed to the Supreme Court within 60 days on questions of law.
The lecture concludes with a discussion on the powers of the Central Government, which can supersede the SEBI board for up to six months if SEBI is not functioning properly. SEBI must submit annual reports to the Central Government within 90 days of the financial year-end. The Central Government can grant immunity from prosecution or penalties based on SEBI's recommendation, but this immunity can be withdrawn for non-compliance or false evidence. The lecture also covers the composition of offenses, stating that only compoundable offenses can be settled, and outlines the process for recovering amounts due to SEBI, which includes attaching movable and immovable property, attaching bank accounts, and arresting the defaulter. Transfers of property to a spouse or minor child without adequate consideration are deemed invalid. If a person dies during proceedings, the legal representative is liable, but only to the extent of the inherited assets.
SEBI SAST Regulation (Substantial Acquisition of Shares & takeover)
This section briefly overviews the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, focusing on the key concept of open offers. It explains that when an acquirer obtains a substantial portion of shares in a target company, they must provide an open offer to the remaining shareholders, particularly dissenting shareholders, to allow them to exit. The trigger for this open offer is generally when the acquirer's post-acquisition holding equals or exceeds 25% of the target company's shares. Additionally, even after holding 25% or more, an open offer is required if the acquirer acquires more than 5% of the shares in a single financial year.
SEBI PIT Regulation(Prohibition of Insider trading)
This section provides a concise overview of SEBI's Prohibition of Insider Trading (PIT) Regulations. It defines an insider as someone with Unpublished Price Sensitive Information (UPSI) and prohibits them from dealing in the company's securities. The lecture explains that connected persons, such as directors, employees, and those with business or professional relationships with the company, are also considered insiders. It outlines the restrictions on sharing UPSI, with exceptions for legitimate purposes, legal obligations, and duties, provided confidentiality agreements are in place. The lecture also discusses the requirement for listed companies to maintain a structured digital database (SDD) of individuals with access to UPSI. It then covers the concept of trading plans, which allow insiders to trade securities by pre-declaring their trading intentions, subject to certain conditions and compliance officer approval.
