India: Securities Laws

SEBI Impose Penalty on Listed Companies for Non–Appointment of Woman Director

The Securities and Exchange Board of India ("SEBI") has earlier imposed additional compliance requirement in respect of Clause 49 of the Listing Agreement which mandated that the board of directors of listed entities to have an optimum combination of executive and non-executive directors with at least one woman director on the board. However, vide circular dated September 15, 2014, the time to comply the compliance requirement was extended to March 31, 2015. Now, SEBI has advised stock exchange to penalize the companies (who has not complied with this requirement) by imposing penalty to the extent of INR 50,000 to INR 142,000 plus INR 5,000 per day from October 2015 till the date when they comply with the provision. In case of non-compliance beyond September 30, 2015, SEBI may take action against non-compliant companies, their promoters, directors or issue direction in accordance with law.

SEBI Grants Time to Companies of Non-Operational Stock Exchanges to Obtain Listing

SEBI has granted the time limit of 18 months to listed companies, which are currently listed on non-operational stock exchanges, to obtain listing on nationwide stock exchange subject to fulfilment of certain conditions specified under :-

(a) Nationwide listing is permitted only for classes of securities that are already listed on non-operational stock exchanges subject to condition that those exclusively listed companies should not have undergone any material changes in their shareholding pattern.
(b) The exclusively listed companies which were filing returns for the last two financial years with the Registrar of Companies will be treated as compliant companies and requirement of no objection certificate from non-operational stock exchanges will not be insisted upon by the nationwide stock exchange.
(c) If promoter and directors of listed companies have failed to provide trading platform or existing opportunity to the shareholders even after extended time of eighteen months, then they have to undergo stricter scrutiny with regard to association with securities market.
(d) Nationwide stock exchanges are required to have dedicated cell for processing applications of exclusively listed companies and expedite the disposal of such application not later than two months from the date of receipt of such application.

SEBI Releases Discussion Paper on Overseas Investments by Venture Capital Funds ("VCF") and Alternative Investment Funds ("AIF")

SEBI received representations from the industry that there had been a major shift of Indian entrepreneurs from India. So there is a need to allow higher overseas investment by VCFs more than existing 10 percent limit. Therefore, SEBI has proposed to increase investment limits of alternative investment funds (AIFs) and venture capital funds in foreign countries that have an Indian connection with an aim to prevent Indian entrepreneurs to shift their business to foreign countries. SEBI has floated a consultation paper allowing AIFs and VCFs to invest up to 25 percent of their investment funds.

Notification of SEBI (Prohibition of Insider Trading) Regulations, 2015.

SEBI has notified the Prohibition of Insider Trading Regulations, 2015 replacing two-decade old framework. SEBI has tightened the insider trading norms by widening the definition of an insider to cover any person who is a "connected person" or in possession of or having access to unpublished price-sensitive information. "Connected Person" is defined as any person who is or has during the period of six months prior to committing of concerned act been associated with a company in any capacity, including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relation or by being a director, officer or employee. It also covers person's holding any position that allows access to unpublished price-sensitive information.

Under new insider trading norms in cases of connected persons, the onus of establishing that they were not in possession of unpublished price sensitive information shall be on such connected persons. However, if the person who has been alleged with insider trading violations is not connected with the company, then the onus of proving the same would be on SEBI.

SEBI Notifies Revised Delisting Norms

In order to make delisting more effective, SEBI has notified revised regulations for delisting process through the reverse book-building route that would make the delisting easier for companies. Under the revised delisting norms the timeline for completing the process has been reduced. It provides for relaxation of rules on a case-to-case basis.
The key features for revised regulations are as under:

1) Timeline for completing the delisting process has been reduced to 76 working days from 17 calendar days.
2) Now stock exchanges would be given five working days' time to give their in-principle approval for delisting.
3) Delisting would be considered successful only if at least 25 percent of the public shareholders participate in the reverse book building process.
4) To ensure that a delisting plan has been decided in a fair manner, company's board would have to approve of it only after due diligence process.
5) Further, company's board would have to certify that the company is in compliance with applicable security laws and that it would be in the interest of the shareholders.
6) Companies having paid-up capital of not more than INR 100 million and net worth that does not exceed INR 250 million as on the last day of the previous financial year are exempted from following the Reverse Book Building process.
7) The exemption would be available only if there is no trading in the shares of the company in the last one year from the date of the board's resolution authorizing the company to go in for delisting and trading of shares of the company has not been suspended for any non-compliance during the same period.

SEBI Fixes Cap on Application Money

SEBI vide notification has amended the Issue of Capital and Disclosure Requirements Regulation wherein the tenure of warrants issued along with public issue/rights issue has been extended to 18 months from the date of public/right. Earlier the tenure was 12 months. Besides extending tenure of warrants a condition has been stipulated that price/conversion formula of warrants shall be determined upfront and at least 25 % of the consideration amount should be received upfront. It has also been clarified that in case warrant holder does not exercise option to take equity shares against any of the warrants held by him, consideration paid on them shall be forfeited by the issuer company.

SEBI Announces Guidelines for International Financial Services Centres

SEBI has issued SEBI (International Financial Services Centres) Guidelines, 2015 to facilitate and regulate financial services relating to securities market in an International Financial Services Centre ("IFSC") set-up under section 18(1) of the Special Economic Zones Act, 2005. The salient features of the said guidelines are as under:

1) Any entity desirous of operating in an IFSC shall have to take prior approval from SEBI.
2) Any recognized entity desirous operating in IFSC as an intermediary, may form a company to provide such financial services relating to securities market, as are permitted by SEBI.
3) Any recognized domestic or foreign stock exchange is allowed to establish its subsidiary provided it holds at least 51 percent of shareholding in the venture.
4) Stock exchanges are required to have a minimum net worth of INR 250 million to begin their operations. However, such entities would be required to raise their net worth to INR 1 billion within 3 years from the start of their operations.
5) In case of clearing operations, the initial minimum net worth requirement is INR 500 million, which need to be increased to INR 3 billion within three years of its establishment.
6) Domestic companies intending to raise capital, in a currency other than Indian Rupee, in an IFSC shall have to comply with the provisions of the Foreign Currency Depository Receipts Scheme, 2014.
7) Entities operating in IFSC can issue debt securities subject to certain conditions. Such debt securities should be listed in any one or more stock exchanges in IFSC.

Angel Broking Private Limited v. SEBI

Angel Broking Private Limited ("ABPL"/ "Appellant") has filed this appeal against order of Adjudicating Officer (AO), SEBI, for imposition of penalty of INR 1 million under Section 15HA of Securities and Exchange Board of India Act, 1992 for violation of Regulation 3(a), 4(1) and 4(2)(a), (b), (e) and (g) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ("PFUTP Regulations") and also violation of Regulation 7 read with Clause A(1), A(3), A(4) and A(5) of Code of Conduct for Stock Brokers under Securities and Exchange Board of India (Stock-Brokers and Sub-Brokers) Regulations, 1992.

SEBI investigated trading in scrip of Sterling Green Wood Limited ("SGWL") for the period from November 6, 2009 to December 2, 2009 (hereinafter referred as Investigation Period), and observed that during this period price of scrip of SGWL has been increased from INR 19.80 to INR 42.50. It has been also observed that ABPL was holding more than 1 percent shares of SGWL as on September 30, 2009.

It was alleged that ABPL consciously executed self-trades for its client and hence ABPL connived with its client for self-trades. Accordingly, a Show Cause Notice was issued by AO to the Appellant and it was found that Appellant had executed 4 Self-trades in scrip of SGWL, which constituted 7.45 percent of total buy and 10.20 percent of total sale of SGWL scrip. So, the buying shares at higher price and selling same at lower price by the Appellant were not normal trades and in violation of regulations 3 and 4 of PFUTP Regulations.

In view of above, ABPL and its client have been held violative of regulation 3(a), 4(1) and 4(2) (a), (b), (e) and (g) of PFUTP Regulations and ABPL held violative in addition to regulation 7 read with Clauses A (1), A (3), A (4) and A (5) of Code of Conduct of Stock-Brokers, as specified in Schedule II of Stock-Broker Regulations.

Further, regarding quantum of penalty and considering 15(J) of SEBI Act, into consideration, it was held that disproportionate gains or unfair advantage by an entity and the consequent losses suffered by the investors, are difficult to quantify, but since Appellant has executed self-trades which do not result in change of beneficial ownership, created false volumes and manipulated price of SGWL scrip and thus sent wrong signals to gullible investors about trading in scrip and hence considering that self-trades have 13 serious consequences and is serious violation on 4 occasions on November 30, 2009 and December 1, 2009 and since ABPL was previously also held to violative of Stock-Brokers Regulations and PFUTP Regulations; exemplary penalty needs to be imposed on Appellant.

Thus, it was held that the Adjudicating Officer is justified in holding that self-trades were executed with ulterior motives. Therefore, quantum of penalty imposed upon Appellant based on facts on record, mitigating factors and past conduct of Appellant cannot be faulted. Accordingly, the appeal could not succeed.

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