chapter 3 investors legal awareness about online...

“A Study on Investors General and Legal Awareness For Online Trading in Gujarat State.”

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CHAPTER – 3

INVESTORS LEGAL AWARENESS ABOUT

ONLINE TRADING

3.1 INTRODUCTION

The Indian Capital Market is governed by various Acts, Rules and Regulations, main on

being mentioned herewith and primarily supervised by the Securities and Exchange

Board of India (SEBI) which came into being in 1988. SEBI supervises the role of the

stock exchanges like BSE, NSE, etc. and the depositories that is., CDSL & NSDL for the

overall development of capital market environment in India and also monitors and

regulate their activities. SEBI is responsible to the Government of India and comes under

the direct preview and supervision of the Ministry of Finance. As per the legal aspect of

online trading, online traders should be aware of various acts.

This section deals with legislative and regulatory provisions relevant from the viewpoint

of online traders. The four main legislations governing the securities market are:(a) the

Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions

insecurities through control over stock exchanges; (b) the Companies Act, 1956, which

sets out the code of conduct for the corporate sector in relation to issue, allotment and

transfer of securities, and disclosures to be made in public issues; (c)the SEBI Act, 1992

which establishes SEBI to protect investors and develop and regulate securities market;

and (d) the Depositories Act, 1996 which provides for electronic maintenance and

transfer of ownership of dematerialized securities.

3.2 INDIAN CONTRACT ACT, 1872

Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as

subsequently amended. It determines the circumstances in which promise made by the

http://en.wikipedia.org/wiki/Contract

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parties to a contract shall be legally binding on them. All of us enter into a number of

contracts everyday knowingly or unknowingly.

Each contract creates some right and duties upon the contracting parties. Indian contract

deals with the enforcement of these rights and duties upon the parties. The Indian

Contract Act 1872 sections 1-75 came into force on 1 September 1872. It applies to the

whole of India except the state of Jammu and Kashmir. It is not a complete and

exhaustive law on all types of contracts.

Definition:

Section 2(h) of the Act defines the term contract as "any agreement enforceable by law".

There are two essentials of this act, agreement and enforceability.

Section 2(e) defines agreement as "every promise and every set of promises, forming the

consideration for each other."

Again Section 2(b) defines promise in these words: "when the person to whom the

proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal

when accepted becomes a promise." And other words Say Agreement is Sum of Promise

and offer Essential Elements of a Valid Contract

According to Section 10, "All agreements are contracts, if they are made by the free

consent of the parties, competent to contract, for a lawful consideration with a lawful

object, and not hereby expressly to be void."

Essential elements of a valid contract are:

Essential Elements of a Contract as defined in Section 10 of the Indian Contract Act 1872

1. Agreement - Offer and Acceptance

2. Legal purpose

3. Lawful Consideration

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4. Capacity to contract

5. Consent to contract

6. Lawful object

7. Certainty

8. Possibility of Performance

9. Not expressly declared void

a. Legal formalities like Writing, Registration etc.

All the above ingredients must be satisfied in every valid contract.

b. It can be noted that all contracts are agreements, but not all agreements are

contracts.

TYPES OF CONTRACTS

I. On the basis of validity:

A. Valid contract: An agreement which has all the essential elements of a contract is

called a valid contract. A valid contract can be enforced by law.

B. Void contract [Section 2(j)]: A void contract is a contract which ceases to be

enforceable by law. A contract when originally entered into may be valid and

binding on the parties. It may subsequently become void. -- There are many

judgments which have stated that where any crime has been converted into a

"Source of Profit" or if any act to be done under any contract is opposed to

"Public Policy" under any contract—than that contract itself cannot be enforced

under the law

C. Voidable contract [Section 2(i)]: An agreement which is enforceable by law at

the option of one or more of the parties thereto, but not at the option of other or

others, is a voidable contract. If the essential element of free consent is missing in


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a contract, the law confers right on the aggrieved party either to reject the contract

or to accept it. However, the contract continues to be good and enforceable unless

it is repudiated by the aggrieved party.

D. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature

that, if permitted, would defeat the provisions of any law or is fraudulent; or

involves or implies injury to a person or property of another, or court regards it as

immoral or opposed to public policy. These agreements are punishable by law.

These are void-ab-initio. ―All illegal agreements are void agreements but all void

agreements are not illegal.‖

E. Unenforceable contract: Where a contract is good in substance but because of

some technical defect cannot be enforced by law is called unenforceable contract.

These contracts are neither void nor voidable.

II. On the basis of formation:

A. Express contract: Where the terms of the contract are expressly agreed upon in

words (written or spoken) at the time of formation, the contract is said to be

express contract.

B. Implied contract: An implied contract is one which is inferred from the acts or

conduct of the parties or from the circumstances of the cases. Where a proposal or

acceptance is made otherwise than in words, promise is said to be implied.

C. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are

strictly not contracts as there is no intention of parties to enter into a contract. It is

legal obligation which is imposed on a party who is required to perform it. A

quasi contract is based on the principle that a person shall not be allowed to enrich

himself at the expense of another.

III. On the basis of performance:

A. Executed contract: An executed contract is one in which both the parties have

performed their respective obligation.


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B. Executory contract: An executory contract is one where one or both the parties to

the contract have still to perform their obligations in future. Thus, a contract

which is partially performed or wholly unperformed is termed as executory

contract.

C. Unilateral contract: A unilateral contract is one in which only one party has to

perform his obligation at the time of the formation of the contract, the other party

having fulfilled his obligation at the time of the contract or before the contract

comes into existence.

D. Bilateral contract: A bilateral contract is one in which the obligation on both the

parties to the contract is outstanding at the time of the formation of the contract.

Bilateral contracts are also known as contracts with executory consideration

OFFER

Section 2(a) of the Indian Contract Act, 1872 defines the term "Proposal" as when

one person signifies to another his willingness to do or to abstain from doing

something with a view to obtaining the assent of the other to such an act or

abstinence, he is said to make a proposal. The person making the 'proposal' or

'offer' is called the 'promisor' or 'offeror', the person to whom the offer is made is

called the 'offeree'.

ACCEPTANCE

Acceptance means the expression of assent to whom the proposal is made in a

Contract. Acceptance may be expressed either by conduct or by implied

circumstances. However, silence cannot be prescribed as a mode of acceptance.

CONSIDERATION

Section 10 of the Indian Contract Act states Consideration as one of the essential

elements to constitute a contract. Consideration means 'something in return'.

According to section 2(d) of the Indian Contract Act, "When at the desire of the

promisor, the promisee or any other person has done or abstained from doing, or


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does or abstains from doing, or promises to do or abstain from doing something,

such act or abstinence is called a consideration for the promise."

CAPACITY TO CONTRACT

Section 11 of the Indian Contract Act provides the requirements for competency

of the parties to the contract. It says, "Every person is competent to contract, who

is of the age of majority, according to law, which he is subject to also who is of

sound mind and who is not disqualified from contracting by any law to which he

is the subject"

DISQUALIFICATIONS

1. An incorporated company cannot be part of contract.

2. A minor is also incompetent to enter into a contract subject to certain exceptions

3. Mental in capacity. Section 12 says "A person is said to be of sound mind for the

purpose of making a contract, if at the time when he makes it, he is capable of

understanding it and of forming a rational judgement to its effect upon his

interests"

1. A person who suffers from insanity at intervals can enter into a contract,

when he is of sound mind.

2. A person who suffers from insanity occasionally cannot enter into a

contract, when he is of unsound mind.

QUASI-CONTRACTS

Under special circumstances, obligations resembling those created by a contract

are imposed by law although there is no contract between the parties. Such

contracts are called Quasi-Contracts.

Sections 68 to 72 deal with Quasi-Contractual Obligations.

http://www.lawnotes.in/Minors_and_Indian_Contract_Act,_1872


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1. Claim for Necessaries supplied to a person incapable of contracting or on his

account

2. Reimbursement of person paying money due by another, in payment of which he

is interested

3. Obligation of person enjoying benefit of non-gratuitous act

4. Responsibility of finder of goods

5. Liability of person to whom money is paid, or thing delivered by mistake or under

coercion.

DISCHARGE OF CONTRACT:

A Contract may be discharged in any of the following ways

1. Discharge by Performance.

2. Discharge by Mutual Consent or Agreement

1. Novation - When a new contract is substituted for an existing contract

2. Alteration

3. Rescission

4. Remission - Accepting the lesser sum of amount than what was contracted

for

3. Discharge by subsequent illegality or impossibility

1. Destruction of Subject-matter

2. Failure of ultimate purpose

3. Death or personal incapacity of Promisor


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4. Change of Law

4. Discharge by lapse of time

5. Discharge by operation of law

6. Discharge by breach of contract

1. Anticipatory breach

2. Actual breach

3.3 THE COMPANIES ACT, 1956:

A Company is defined as a voluntary association of persons formed for the purpose of

doing business, having a distinct name and limited liability. Companies, whether public

or private, are an indispensable part of an economy. They are the modes through which a

country grows and expands worldwide. Their performance is an important parameter of a

countries economic position.

In India, the Companies Act, 1956, is the most important piece of legislation that

empowers the Central Government to regulate the formation, financing, functioning and

winding up of companies. The Act contains the mechanism regarding organizational,

financial, and managerial and all the relevant aspects of a company. It provides for the

powers and responsibilities of the directors and managers, rising of capital, holding of

company meetings, maintenance and audit of company accounts, powers of inspection,

etc. The Act applies to whole of India and to all types of companies, whether registered

under this Act or an earlier Act. But it does not apply to universities, co-operative

societies, unincorporated trading, scientific and other societies.

The Companies Act is administered by the Central Government through the Ministry of

Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public

Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies

(ROC) controls the task of incorporation of new companies and the administration of

running companies.

http://business.gov.in/outerwin.php?id=http://indiacode.nic.in/rspaging.asp?tfnm=195601

http://business.gov.in/outerwin.php?id=http://www.mca.gov.in/


http://business.gov.in/outerwin.php?id=http://www.mca.gov.in/MinistryWebsite/dca/mcaoffices/roc.html

http://business.gov.in/outerwin.php?id=http://dca.nic.in/OL_2003.htm

http://business.gov.in/outerwin.php?id=http://clb.nic.in/

http://business.gov.in/legal_aspects/list_registrars.php

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The Ministry of Corporate Affairs, earlier known as Department of Corporate Affairs

under Ministry of Finance, is primarily concerned with administration of the Companies

Act, 1956, other allied Acts and rules & regulations framed there-under mainly for

regulating the functioning of the corporate sector in accordance with law. The Ministry

has a three-tier organizational set-up:-

The Headquarters at New Delhi,

The Regional Directorates at Mumbai, Kolkata, Chennai and Noida, and

The Registrars of Companies (ROCs) in States and Union Territories.

The four Regional Directors, who are in charge of the respective regions, comprising a

number of States and Union Territories, interalia, supervise the working of the Offices of

Registrars of Companies and the Official Liquidators working in their regions. They also

maintain liaison with the respective State Governments and the Central Government in

matters relating to the administration of the Companies Act, 1956.

Registrar of Companies (ROCs) appointed under Section 609 of the Companies Act,

covering various States and Union Territories, are vested with the primary duty of

registering companies floated in the respective States and the Union Territories and

ensuring that such companies comply with the statutory requirements under the Act.

Their offices function as registry of records relating to the companies registered with

them. The powers vested with the ROCs are:-

Registration of memorandum and articles.

Registration of prospectus.

Registration of reduction of capital.

Call information or explanation.

Seizure of documents.


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Investigation into affairs of a company.

Inspection of books of accounts, etc. of companies.

To strike off defunct companies from register.

Enforcement of duty of company to make returns, etc. to Registrar.

Non-disclosure of information in certain cases.

Winding up petition by the Registrar.

According to the Act, a company means "a company formed and registered under the Act

or an existing company i.e. a company formed or registered under any of the previous

company laws". The salient features of a company are:-

Artificial legal person: a company is an artificial person in the sense that it is

created by law and lacks the attributes possessed by natural persons. It is

invisible, intangible, immortal and exists only in the contemplation of law. Hence,

it has to operate through a board of directors consisting of individuals.

Separate legal entity: a company is a distinct legal entity, different from its

members or shareholders. This implies that:- the property of the company belongs

to it and not to the members or shareholders; no member can either individually or

jointly claim any ownership rights in the assets of the company; an individual

member cannot be held liable for the wrongful acts of the company even if he/she

holds virtually the entire share capital; the members of the company can enter into

contracts with the company.

Perpetual succession: a company enjoys continuous existence and its

continuance is not affected by the death, insolvency, mental or physical incapacity

of its members. It is created by law and law alone can dissolve it.

Limited liability of members: the liability of its members is limited to the

amount remaining unpaid on the shares subscribed by them. Thus, in case of fully


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paid-up shares, the members cannot be asked to contribute any further, if the

company goes into liquidation.

Common seal: a company has a common seal, which is the signature of that

company and signifies common consent of all the members. The company's seal

is affixed on all the documents executed for and on its behalf.

Transferability of shares: the shares of a public company are freely transferable

without the permission of the company but in a manner provided in the Articles.

The shareholders may transfer their shares to another person and this does not

affect the funds of the company. But, a private company imposes restrictions on

transfer of its shares.

Separate property: all the property of the company vests in it. The company can

control, manage and hold the same in its own name. The members have no

ownership rights in the company's property, either individually or collectively. A

shareholder does not even have an insurable right in the property of the company.

The creditors of the company can have a claim only against the property of the

company and not against the property of the individual members.

Capacity to sue and being sued: a company can enforce its rights through suits

and can also be sued for breach of its statutory rights.

The basic objectives underlying the Act are:-

A minimum standard of good behavior and business honesty in company

promotion and management;

To help in the development of companies on healthy lines;

To protect the interests of the shareholders;

To safeguard the interests of the creditors;


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To equip the Government with adequate powers to intervene in the affairs of a

company in public interest and as per the procedure prescribed by law;

A fair and true disclosure of the affairs of companies in their annual published

balance sheet and profit and loss accounts;

Proper standard of accounting and auditing;

A ceiling on the share of profits payable to managements as remuneration for

services rendered;

A check on their transactions where there was a possibility of conflict of duty and

interest;

A provision for investigation into the affairs of any company managed in a

manner oppressive to minority of the shareholders or prejudicial to the interest of

the company as a whole;

Enforcement of the performance of their duties by those engaged in the

management of public companies or of private companies which are subsidiaries

of public companies by providing sanctions in the case of breach and subjecting

the latter also to the more restrictive provisions of law applicable to public

companies;

To help in the attainment of the ultimate ends of the social and economic policy

of the Government;

In response to the changing business environment, the Companies Act, 1956 has been

amended from time to time so as to provide more transparency in corporate governance

and protect the interests of small investors, depositors and debenture holders, etc. For

example, the Companies (Amendment) Act, 2006 introduced an important provision of

Director Identification Number (DIN), which is an unique Identification Number allotted

to an individual who is an existing director of a company or intends to be appointed as



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director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as

amended vide Act No 23 of 2006). The various amendments are:-

The Companies (Amendment) Act, 2000



The Companies (Second Amendment) Act, 2002

Nature and scope of the Act:

Like most of Indian acts, it also extends to the whole India except State of Jammu and

Kashmir (SECTION 3). Notwithstanding anything contained in the Act every company,

international or indigeous will work under the provisions of the Act. This Act is general

in nature and not subrogative. So if a special Legislation applies on a Company, then the

Company has to, in addition to Companies Act, must comply the special Legislation. For

example, all banking Companies in India has to comply Banking Regulation Act 1949, in

addition to the Companies Act 1956.

Provision of the Act:

The Act is 658 sections long. It contains provisions about Companies, directors of the

companies, memorandum and articles of associations, etc. This act states and discusses

every single provision requires or may need to govern a company.

3.4 SECURITIES CONTRACTS (REGULATION) ACT, 1956

The object of the Securities Contracts (Regulation) Act, 1956 is stated as, ―An Act to

prevent undesirable transactions in securities by regulating the business of dealing herein,

by providing for certain other matters connected therewith.‖

Sub-clause (i) of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act,

1956 defines the term ―Securities‖ as follows:






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―Securities‖ include – (i) shares, scripts, stocks, bonds, debentures, debenture stock or

other marketable securities of a like nature in or of any incorporated company or other

body corporate‖

The definition of the term ―securities‖ defined under the SCR Act and the applicability of

a circular issued by the Delhi Stock Exchange Limited, observed the following: The

contention that the circular did not apply to unlisted securities was duly considered and

rejected by the Special Court. The Special Court thoroughly considered the term

`securities' as defined in Section 2(h) of the Act.

The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the Act),

containing a mere 31 sections, keeps a tight vigil over all the Stock Exchanges of India

since 20th February 1957. The provisions of the Act were formerly administered by the

Central Government. However, since the enactment of The Securities and Exchange

Board of India Act, 1992 the Board established under it (SEBI) concurrently has powers

to administer almost all the provisions of the Act.

By virtue of the provisions of the Act, the business of dealing in securities cannot be

carried out without a license from SEBI. Any Stock Exchange which is desirous of being

recognized has to make an application under Section 3 of the Act to SEBI, who is

empowered to grant recognition and prescribe conditions including that of having SEBI's

representation (maximum three persons) on the Stock Exchange and prohibiting the

Stock Exchange from amending its rules without SEBI's prior approval. This recognition

can be withdrawn in the interest of the trade or public. SEBI is authorized to call for

periodical returns from the recognized Stock Exchanges and make enquiries in relation to

their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Stock

Exchanges are allowed to make rules only with the prior approval of SEBI. The Central

Government and SEBI can direct Stock Exchanges to frame rules. Recognized Stock

Exchanges are allowed to make bylaws for the regulation and control of contracts but

subject to the previous approval of SEBI and SEBI has the power to amend the said


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bylaws. The Central Government and SEBI have the power to supersede the governing

body of any recognized stock exchange and to suspend its business.

A public limited company has no obligation to have its shares listed on a recognized

Stock Exchange. But if a company intends to offer its shares or debentures to the public

for subscription by issue of a prospectus, it must, before issuing such prospectus apply to

one or more recognized stock exchanges for permission to have the shares or debentures

intended to be so offered to the public to be dealt with in each of such stock exchange in

terms of Section 73 of the Companies Act, 1956. SEBI can, however, under the

provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the

listing of securities by public Companies if it is of the opinion that it is necessary or

expedient in the interest of the trade or public. In the event of the Stock Exchange

refusing to list the securities of any public company, an appeal to SEBI is provided under

the Act. A Company as per the present provisions of law is obliged to get listed on the

regional exchange, in addition to other exchanges. (There has been a recommendation

that this restriction be removed).

A company on the grounds specified in Section 22A of the Act is entitled to refuse to

register transfer of any of its securities, notwithstanding anything contained in its articles

or Section 82 or Section 111 of the Companies Act, 1956 (See Table A).

TABLE A

GROUNDS SPECIFIED IN SECTION 22A FOR REFUSAL TO REGISTER

TRANSFER

i) The instrument of transfer is not proper

ii) It has not been duly stamped and executed

iii) The certificate relating to the security has not been delivered to the company

iv) Requirement under the law relating to the registration of such transfer has not

been complied with


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v) The transfer is in contravention of any law, rules, administrative instructions or

conditions of listing agreement

vi) The transfer is likely to result in change in the composition of the Board of

Directors, which would be prejudicial to the interest of the company or public

vii) The transfer is prohibited by order of any Court, Tribunal, or other legal authority

3.5 SECURITIES CONTRACTS (REGULATION) RULES, 1957

These rules may be called the Securities Contracts (Regulation) Rules, 1957.

Definitions

In these rules, unless the context otherwise requires,

(a) ―Form‖ means a form appended to these rules;

(b) ―The Act‖ means the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(c) ―Government company‖ means a company in which not less than fifty-one per

cent of the share capital is held by the Central Government or by any State

Government or Governments or partly by the Central Government and partly by

one or more State Governments.

Application for recognition

An application under section 3 of the Act for recognition of a stock exchange shall be

made to the Securities and Exchange Board of India in Form A.

Fees for application

There shall be paid in respect of every application under rule 3 a fee of rupees five

hundred. The amount of the fee shall be deposited in the nearest Government treasury or

the nearest branch of the State Bank of India: Provided that at Bombay, Calcutta, Madras,


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Delhi and Kanpur, the amount shall be deposited in the Reserve Bank of India. The

amount of the fee so deposited shall be credited to the receipt head ―XLVI -

Miscellaneous— Other fees, fines and forfeitures‖.

Documents to be filed along with the application and particulars it should

contain

Every application shall be accompanied by four copies of the rules (including the

memorandum and articles of association where the applicant stock exchange is an

incorporated body) and bye-laws of the stock exchange applying for recognition as

specified in section 3 of the Act and the receipt granted by the Government treasury, or as

the case may be, the State Bank of India or the Reserve Bank of India, in respect of the

amount of the fee deposited and shall contain clear particulars as to the matters specified

in the Annexure to Form A.

Power to make inquiries and call for information

Before granting recognition to a stock exchange under section 4 of the Act, the Securities

and Exchange Board of India may make such inquiries and require such further

information to be furnished, as it deems necessary, relating to the information furnished

by the stock exchange in the Annexure to its application in Form A.

Form of recognition

The recognition granted to a stock exchange shall be in Form B and be subject to the

following conditions, namely:

(a) That the recognition unless granted on a permanent basis, shall be for such period

not less than one year as may be specified in the recognition;

(b) That the stock exchange shall comply with such conditions as are or may be

Substituted for ‗Central Government‘ by Amendment Rules, 1996.


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Contracts between members of recognized stock exchange

All contracts between the members of a recognised stock exchange shall be confirmed in

writing and shall be enforced in accordance with the rules and bye-laws of the stock

exchange of which they are members.

Audit of accounts of members

Every member shall get his accounts audited by a chartered accountant whenever such

audit is required by the Securities and Exchange Board of India.

Withdrawal of recognition

The written notice referred to in section 5 of the Act shall be in Form C. Books of

account and other documents to be maintained and preserved by every

Recognized stock exchange

Every recognised stock exchange shall maintain and preserve the following books of

account and documents for a period of five years

Submission of annual report

Every recognized stock exchange shall before the 31st day of January in each year or

within such extended time as the 17[Securities and Exchange Board of India] may, from

time to time, allow, furnish the 17[Securities and Exchange Board of India] annually

with a report about its activities during the preceding calendar year.

Manner of publication of bye-laws for criticism

The bye-laws to be made, amended or revised under the Act shall be published for

criticism in accordance with the provisions of section 23 of the General Clauses Act,1897

both in the Gazette of India and Official Gazette of the State in which the principal office

of the recognised stock exchange is situate.


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3.6 SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in

the years 1995, 1999 and 2002 to meet the requirements of changing needs of

the securities market and responding to the development in the securities market.

Based on the Report of Joint Parliamentary Committee (JPC) dated December 2, 2002,

the SEBI Act was amended to address certain shortcomings in its provisions. The mission

of SEBI is to make India as one of the best securities market of the world and SEBI as

one of the most respected regulator in the world. SEBI also endeavors to achieve the

standards of IOSCO/FSAP.

In this background, the internal group constituted by SEBI consisting of its senior officers

had proposed certain amendments to the SEBI Act. The SEBI Board had constituted an

Expert Group under the Chairmanship of Mr Justice M. H .Kania (Former Chief Justice

of India) to consider the proposals. The report of the Expert Group is placed for eliciting

public comments on the recommendations. It may be noted that the Report does not

necessarily reflect the views of SEBI on the various proposals and recommendations.

SEBI would consider the comments received from various sources before taking any final

view on the recommendations.

―An Act to provide for the establishment of a Board (SEBI) to protect 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‖

OBJECTS OF SEBI ACT

1. To protect the interest of the investors securities.

2. To promote orderly and healthy growth of the securities market.

3. To regulation of the securities market and other incidental matters.

4. To Promoting the fair dealing by the issuer of securities and ensuring a market

place where they can raise funds at a relatively low cost.

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5. To Regulating and developing a code of conduct and fair practices by

intermediaries like broker, merchant banker etc with a view to making them more

competitive and professional.

6. To monitoring the activities of stock exchange, mutual funds and Merchant

bankers.

Organization Of SEBI

1. Primary Department

Policy matters related to primary market, intermediaries and self regulatory

organizations, redress of investor‘s grievances and guidance.

2. Issue Management

Registration, regulation and monitoring of the inter-mediaries and scrutiny of

offer documents.

3. Secondary Market

Policy matters related to major stock exchanges, price monitoring the market for

more trading, prevention of insider trading and broker‘s registration.

4. Institutional Investment

Mutual funds, FIIs, Mergers, Acquisition.

Function of SEBI

1. Regulating the business in stock exchange and any other securities market.

2. Registering and regulating the working of stock broker, sub-broker, share transfer

agents, bankers to the issue, trustees of trust deeds, registrars to an issue,

merchant banker, underwriter, portfolio manager, investment advisors and such

other intermediaries who may be associated with securities market in any manner.

3. Registering and regulating the working of collective investment schemes

including mutual funds


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4. Promoting and regulating self-regulating organizations.

5. Prohibiting fraudulent and unfair trade practices in the securities market.

6. Promoting investors education and training of intermediaries in securities market.

7. Prohibiting insiders trading in securities.

8. Regulating substantial acquisition of shares and take-over of companies.

9. Calling for information, undertaking inspection ,conducting enquiries and audits

of the stock exchanges, intermediaries and self – regulatory in the securities

market.

Management of SEBI

The central government has been given the power to set up SEBI by issuing a

notification. It has powers to acquire, hold and dispose of property both movable

and immovable. The head office of the SEBI is situated at mittal court, B-

wing,224 nariman point, Mumbai – 400021.

Constitution

1. Chairman to be appointed by the central government

2. Two members from amongst the officials of the ministry of the central

government dealing with finance and administration of the companies Act

1956 to be nominated by the central govt.

3. One member from amongst the officials of the reserve bank to be

nominated by the reserve bank.

4. Five other member of whom at least three shall be whole time members to

be appointed by the central govt.

Management

The general superintendence, direction, and management of affairs of the SEBI

shall cover in a board of members, which may exercise all powers and to acts and

things which may be exercised or done by the SEBI.


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1. Chairman

The chairman shall also have powers of general superintendence and direction of

the affairs of the SEBI and may also exercise all powers and do all acts and things

which may be exercise of done by the SEBI.

2. Appointment

The chairman and the members shall be appointed by the central government and

the members shall be nominated by the central govt. and reserve bank.

3. Who shall be the members?

The chairman and the others shall be persons of ability ,integrity and standing

who have shown capacity in dealing with problems relating to securities market or

have special knowledge or experience of law,, finance, economic, accountancy,

administration or in any other discipline, which in the opinion of the central

government , shall be useful to the SEBI.

Legal & Investigation Department

1. Primary Market

2. Secondary Market

3. Mutual Funds

4. Foreign Institutional Investments

3.7 SEBI (STOCK BROKERS & SUB-BROKERS) RULES, 1992

In exercise of the powers conferred by section 29 of SEBI Act, 1992, Central

Government has made SEBI (Stock-brokers and Sub-brokers) Rules, 1992.In terms of

Rule 2(e),

‗Stock-broker‘ means a member of a stock exchange. Interms of Rule 2(f), ‗Sub-broker

‗means any person not being a member of a stock exchange who acts on behalf of a

stock-broker as an agent or otherwise for assisting the investors in buying, selling,

dealing in securities through such stock broker.


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A stock-broker or sub-broker shall not buy, sell, and deal in securities, unless he holds a

certificate granted by SEBI (Rule 3).

Capital Adequacy Norms for Brokers

Each stockbroker is subject to capital adequacy requirements consisting of two

components:

(1) Base minimum capital, and

(2) Additional or optional capital related to volume of business.

The amount of base minimum capital varies from exchange to exchange. The formin

which the base minimum capital has to be maintained is also stipulated by SEBI.

Exchange may stipulate higher levels of base minimum capital at their discretion.

Conditions for grant of certificate to stock-broker (Rule 4)

SEBI may grant a certificate to a stock-broker subject to the following conditions

namely:

(a) He holds membership of any stock exchange,

(b) He shall abide by the rules, regulations and bye-laws of the stock exchange or

stock exchanges of which he is a member;

(c) In case of any change in the status and constitution, the stock broker shall obtain

prior permission of SEBI to continue to buy, sell or deal in securities in any stock

exchange;

(d) He shall pay the amount of fees for registration in the manner provided in the

regulations; and

(e) He shall take adequate steps for redressal of grievances of the investors within one

month of the date of the receipt of the complaint and keep SEBI informed about


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the number, nature and other particulars of the complaints received from such

investors.

Conditions of grant of certificate to sub-broker(Rule 5)

SEBI may grant a certificate to a sub-broker subject to the following conditions, namely:

(a) He shall pay the fees in the manner provided in the regulations,

(b) He shall take adequate steps for redressal of grievances of the investors within one

month of the date of the receipt of the complaint and keep SEBI informed about

the number, nature and other particulars of the complaints received,

(c) In case of any change in the status and constitution, the sub- broker shall obtain

prior permission of SEBI to continue to buy, sell or deal in securities in any stock

exchange, and

(d) He is authorized in writing by a stock-broker being a member of a stock exchange

for affiliating himself in buying, selling or dealing in securities.

3.8 SEBI (STOCK BROKERS & SUB-BROKERS) REGULATIONS,

1992

In terms of regulation 1(g), ‗small investor' means any investor buying or

selling securities on a cash transaction for a market value not exceeding rupees

fifty thousand in aggregate on any day as shown in a contract note issued by the stock-

broker.

Registration of Stock Broker

A stock broker applies in the prescribed format for grant of a certificate through the

stock exchange or stock exchanges, as the case may be, of which he is admitted as a

member (Regulation 3). The stock exchange forwards the application form to SEBI as

early as possible as but not later than thirty days from the date of its receipt. SEBI takes

into account for considering the grant of a certificate all matters relating to buying,


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selling, or dealing in securities and in particular the following, namely, whether the stock

broker:

(a) Is eligible to be admitted as a member of a stock exchange,

(b) Has the necessary infrastructure like adequate office space, equipment and

manpower to effectively discharge his activities,

(c) Has any past experience in the business of buying, selling or dealing insecurities,

(d) Is subjected to disciplinary proceedings under the rules, regulations and bye-laws

of a stock exchange with respect to his business as a stock-broker involving either

himself or any of his partners, directors or employees, and

(e) Is a fit and proper person. SEBI on being satisfied that the stock-broker is eligible,

grants a certificate to the stock-broker and sends intimation to that effect to the

stock exchange or stock exchanges, as the case may be. Where an application for

grant of a certificate does not fulfill the requirements, SEBI may reject the

application after giving a reasonable opportunity of being heard.

Fees by stock brokers

Every applicant eligible for grant of a certificate shall pay such fees and in such manner

as specified in Schedule III. Provided that SEBI may on sufficient cause being shown

permit the stock-broker to pay such fees at any time before the expiry of six months from

the date for which such fees become due (Regulation 10). Where a stock-broker fails to

pay the fees, SEBI may suspend the registration certificate, whereupon the stock- broker

shall cease to buy, sell or deal in securities as a stock- broker.

Appointment of Compliance Officer

Every stock broker shall appoint a compliance officer who shall be responsible for

monitoring the compliance of the Act, rules and regulations, notifications, guidelines,

instructions etc. issued by SEBI or the Central Government and for redressed of


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investors‘ grievances. The compliance officer shall immediately and independently report

to SEBI any non-compliance observed by him (Regulation18A).

Code of conduct

The stock-broker holding a certificate at all times abides by the Code of Conduct as

given here under:

I. General

1. Integrity:

A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the

conduct of all his business.

2. Exercise of Due Skill and Care:

A stock-broker, shall act with due skill, care and diligence in the conduct of all his

business.

3. Manipulation:

A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or

schemes or spread rumors with a view to distorting market equilibrium or making

personal gains.

4. Malpractices:

A stock-broker shall not create false market either singly or in concert with others or

indulge in any act detrimental to the investors' interest or which leads to interference with

the fair and smooth functioning of the market. A stock-broker shall not involve himself in

excessive speculative business in the market beyond reasonable levels not commensurate

with his financial soundness.


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5. Compliance with Statutory Requirements:

A stock-broker shall abide by all the provisions of the Act and the rules, regulations

issued by the Government, SEBI and the stock exchange from time to time as may be

applicable to him.

II. Duty to the investor

1. Execution of Orders:

A stock-broker, in his dealings with the clients and the general investing public,

shall faithfully execute the orders for buying and selling of securities at the best

available market price and not refuse to deal with a small investor merely on the

ground of the volume of business involved. A stock-broker shall promptly inform

his client about the execution or non-execution of an order, and make prompt

payment in respect of securities sold and arrange for prompt delivery of securities

purchased by clients.

2. Issue of Contract Note:

A stock-broker shall issue without delay to his client a contract note for all

transactions in the form specified by the stock exchange

3. Breach of Trust:

A stock-broker shall not disclose or discuss with any other person or make

improper use of the details of personal investments and other information of a

confidential nature of the client which he comes to know in his business

relationship.

4. Business and Commission:

(a) A stock-broker shall not encourage sales or purchases of securities with the sole

object of generating brokerage or commission.


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(b) A stock-broker shall not furnish false or misleading quotations or give any other

false or misleading advice or information to the clients with a view of inducing

him to do business in particular securities and enabling himself to earn brokerage

or commission thereby.

5. Business of Defaulting Clients:

A stock-broker shall not deal or transact business knowingly, directly or indirectly

or execute an order for a client who has failed to carry out his commitments in

relation to securities with another stock-broker.

6. Fairness to Clients:

A stock-broker, when dealing with a client, shall disclose whether he is acting as a

principal or as an agent and shall ensure at the same time that no conflict of

interest arises between him and the client. In the event of a conflict of interest, he

shall inform the client accordingly and shall not seek to gain a direct or indirect

personal advantage from the situation and shall not consider clients' interest

inferior to his own.

7. Investment Advice:

A stock-broker shall not make a recommendation to any client who might be

expected to rely thereon to acquire, dispose of, retain any securities unless he has

reasonable grounds for believing that there commendation is suitable for such a

client upon the basis of the facts, if disclosed by such a client as to his own

security holdings, financial situation and objectives of such investment. The

stock-broker should seek such information from clients, wherever he feels it

is appropriate to do so.

8. Investment Advice in publicly accessible media

(a) A stock broker or any of his employees shall not render, directly or indirectly, any

investment advice about any security in the publicly accessible media, whether

real - time or non-real-time, unless a disclosure of his interest including the


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interest of his dependent family members and the employer including their long or

short position in the said security has been made, while rendering such advice.

(b) In case, an employee of the stock broker is rendering such advice, he shall also

disclose the interest of his dependent family members and the employer

including their long or short position in the said security, while rendering such

advice.

9. Competence of Stock Broker:

A stock-broker should have adequately trained staff and arrangements to render

fair, prompt and competent services to his clients.

III. Stock-brokers vice-versa other stock-brokers

1. Conduct of Dealings:

A stock-broker shall co-operate with the other contracting party in comparing

unmatched transactions. A stock-broker shall not knowingly and willfully deliver

documents which constitute bad delivery and shall co-operate with other

contracting parties for prompt replacement of documents which are declared as

bad delivery.

2. Protection of Clients Interests:

A stock-broker shall extend fullest co-operation to other stock-brokers in

protecting the interests of his clients regarding the irrigates to dividends, bonus

shares, right shares and any other rights related to such securities.

3. Transactions with Stock-Brokers:

A stock-broker shall carry out his transactions with other stock-brokers and shall

comply with his obligations in completing the settlement of transactions with

them.


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4. Advertisement and Publicity:

A stock-broker shall not advertise his business publicly unless permitted by the

stock exchange.

5. Inducement of Clients:

A stock-broker shall not resort to unfair means of inducing clients from other

stock- brokers.

6. False or Misleading Returns:

A stock-broker shall not neglect or fail or refuse to submit the required returns

and not make any false or misleading statement on any returns required to be

submitted to the Board and the stock exchange.

Registration of Sub-Broker

An application by a sub-broker for the grant of a certificate is made in the

prescribed format accompanied by a recommendation letter from a stock-broker

of a recognized stock exchange with who he is to be affiliated along with two

references including one from his banker (Regulation 11). The application form is

submitted to the stock exchange of which the stock- broker with whom he is to be

affiliated is a member. The eligibility criteria for registration as a sub-broker are

as follows:

(i) In the case of an individual:

(a) The applicant is not less than 21 years of age,

(b) The applicant has not been convicted of any offence involving fraud or

dishonesty,

(c)The applicant has at least passed 12th standard equivalent examination from an

institution recognized by the Government, and

(d) The applicant is a fit and proper person. Provided that SEBI may relax the

educational qualifications on merits having regard to the applicant's

experience.


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(ii) In the case of partnership firm or a body corporate the partners or directors, as the

case may be, shall comply with the following requirements:

(a) The applicant is not less than 21 years of age,

(b)The applicant has not been convicted of any offence involving fraud or

dishonesty, and

(c)The applicant has at least passed 12th standard equivalent examination from an

institution recognized by the Government.

The stock exchange on receipt of an application, verifies the information contained

therein and certifies that the applicant is eligible for registration. The stock exchange

forwards the application form of such applicants who comply with all the requirements

specified in the Regulations to SEBI as early as possible, but not later than thirty days

from the date of its receipt. SEBI on being satisfied that the sub-broker is eligible, grants

a certificate to the sub-broker and sends intimation to that effect to the stock exchange or

stock exchanges as the case may be. SEBI grants a certificate of registration to the

appellant subject to the terms and conditions as stated in rule 5. Where an application

does not fulfill the requirements, SEBI may reject the application after giving a

reasonable opportunity of being heard. The sub-broker shall –

(a) Pay the fees as specified in Schedule III,

(b) Abide by the Code of Conduct specified in Schedule II, and

(c) Enter into an agreement with the stock-broker for specifying the scope of his authority

and responsibilities.

3.9 SEBI (INSIDER TRADING) REGULATIONS, 1992

Insider trading is the trading of a corporation's stock or ther securities (e.g. bonds or stock

options) by individuals with potential access to non-public information about the

company. In most countries, trading by corporate insiders such as officers, key

employees, directors, and large shareholders may be legal, if this trading is done in a way

that does not take advantage of non-public information. However, the term is frequently

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used to refer to a practice in which an insider or a related party trades based

on material non-public information obtained during the performance of the insider's

duties at the corporation, or otherwise in breach of a fiduciary or other relationship of

trust and confidence or where the non-public information was misappropriated from the

company.

Illegal insider trading is believed to raise the cost of capital for securities issuers, thus

decreasing overall economic growth.[2]

However, it is relatively easy for insiders to capture insider-trading like gains through the

use of transactions known as "open market repurchases." Such transactions are legal and

generally encouraged by regulators through safe harbors against insider trading liability.

Legal insider trading

Legal trades by insiders are common, as employees of publicly traded corporations often

have stock or stock options. These trades are made public in the United States

through Securities and Exchange Commission filings, mainly Form 4. Prior to 2001, U.S.

law restricted trading such that insiders mainly traded during windows when their inside

information was public, such as soon after earnings releases. SEC Rule 10b5-1 clarified

that the prohibition against insider trading does not require proof that an insider actually

used material nonpublic information when conducting a trade; possession of such

information alone is sufficient to violate the provision, and the SEC would infer that an

insider in possession of material nonpublic information used this information when

conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative

defense if the insider can demonstrate that the trades conducted on behalf of the insider

were conducted as part of a pre-existing contract or written binding plan for trading in the

future.[5]

For example, if an insider expects to retire after a specific period of time and, as

part of his or her retirement planning, the insider has adopted a written binding plan to

sell a specific amount of the company's stock every month for two years and later comes

into possession of material nonpublic information about the company, trades based on the

original plan might not constitute prohibited insider trading.

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Illegal insider trading

Rules against insider trading on material non-public information exist in most

jurisdictions around the world, though the details and the efforts to enforce them vary

considerably. Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly

and indirectly address insider trading. Congress enacted this act after the stock market

crash of 1929. [6]

The United States is generally viewed as having the strictest laws

against illegal insider trading, and makes the most serious efforts to enforce them.[7]

Definition of "insider"

In the United States and Germany, for mandatory reporting purposes, corporate insiders

are defined as a company's officers, directors and any beneficial owners of more than ten

percent of a class of the company's equity securities. Trades made by these types of

insiders in the company's own stock, based on material non-public information, are

considered to be fraudulent since the insiders are violating the fiduciary duty that they

owe to the shareholders. The corporate insider, simply by accepting employment, has

undertaken a legal obligation to the shareholders to put the shareholders' interests before

their own, in matters related to the corporation. When the insider buys or sells based upon

company owned information, he is violating his obligation to the shareholders.

Liability for insider trading

Liability for inside trading violations cannot be avoided by passing on the information in

an "I scratch your back, you scratch mine" or quid pro quo arrangement, as long as the

person receiving the information knew or should have known that the information was

company property. It should be noted that when allegations of a potential inside deal

occur, all parties that may have been involved are at risk of being found guilty.

Misappropriation theory

A newer view of insider trading, the "misappropriation theory," is now part of US law. It

states that anyone who misappropriates (steals) information from their employer and



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trades on that information in any stock (not just the employer's stock) is guilty of insider

trading.

Proof of responsibility

Proving that someone has been responsible for a trade can be difficult, because traders

may try to hide behind nominees, offshore companies, and other proxies. Nevertheless,

the U.S. Securities and Exchange Commission prosecutes over 50 cases each year, with

many being settled administratively out of court. In order for a case against insider

trading to stand up in court, it must not only infer the trading of information but also have

the plus factor. The plus factor is one approach to prove responsibility and is the

additional facts implying guilt or deception and to detect this, the government put into

consideration six key pieces of evidence: parties access to the information, their

relationship to one another, the timing of the contract involved, the timing of their trades,

trade patterns, and any attempt to hide their relationship. The SEC and several stock

exchanges actively monitor trading, looking for suspicious activity.

Trading on information in general

Not all trading on information is illegal insider trading, however. For example: if, while

dining at a restaurant, you hear the CEO of Company A at the next table telling the CFO

that the company's profits will be higher than expected, and then you buy the stock, you

are not guilty of insider trading unless there was some closer connection between you, the

company, or the company officers. However, information about a tender offer (usually

regarding a merger or acquisition) is held to a higher standard. If this type of information

is obtained (directly or indirectly) and there is reason to believe it is non-public, there is a

duty to disclose it or abstain from trading.

Tracking insider trades

Since insiders are required to report their trades, others often track these traders, and there

is a school of investing which follows the lead of insiders. This is of course subject to the

risk that an insider is making a buy specifically to increase investor confidence, or

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making a sell for reasons unrelated to the health of the company (e.g. a desire to diversify

or pay a personal expense).

Generally, insider traders act upon information that they believe to be true that is not

available to the public giving them the upper hand in making profits. Insider informants

pass along information in the form of gossip and do not personally buy or sell stock based

on projections. Whether or not either party is acting illegally is solely in the hands of the

SEC.

3.10 SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR

TRADE PRACTICES RELATING TO SECURITY MARKETS)

REGULATIONS, 1995

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices in relation to the

Securities Market) Regulations, 1995 enable SEBI to investigate into cases of market

manipulation and fraudulent and unfair trade practices. The regulations specifically

prohibit market manipulation, misleading statements to induce sale or purchase of

securities, unfair trade practices relating to securities. SEBI can conduct investigation,

suo moto or upon information received by it, by an investigating officer in respect of

conduct and affairs of any person dealing, buying/selling/dealing in securities. Based on

the report of the investigating officer, SEBI can initiate action for suspension or

cancellation of registration of an intermediary.

The term ―fraud‖ has been defined by Regulation 2(1)(c). Fraud includes any of the

following acts committed by a party to a contract, or with his connivance, or by his agent,

with intent to deceive another party thereto or his agent, or to induce him to enter into the

contract:

1. The suggestion, as to a fact which is not true, by one who does not believe it to be

true;

2. The active concealment of a fact by one having knowledge or belief of the fact;

3. A promise made without any intention of performing it;


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4. Any other act fitted to deceive; and

5. Any such act or omission as the law specially declares to be fraudulent; and

‗fraudulent‘ shall be construed accordingly.

The regulation prohibits:

(1) Dealings in securities in a fraudulent manner

(2) Market manipulation

(3) Misleading statements to induce sale or purchase of securities

(4) Unfair trade practice relating to securities

Prohibition of certain dealings in securities

A person shall not buy, sell or otherwise deal in securities in a fraudulent manner

(Regulation 3).

Prohibition against Market Manipulation

For prohibition against market manipulation, Regulation 4 specifies that no person shall-

(i) Effect, take part in, or enter into, either directly or indirectly, transactions

insecurities, with the intention of artificially raising or depressing the prices

of securities and thereby inducing the sale or purchase of securities by any person,

(ii) Indulge in any act, which is calculated to create a false or misleading appearance

of trading in the securities market,

(iii) Indulge in any act which results in reflection of prices of securities based on

transactions that are not genuine trade transactions,

(iv) Enter into a purchase or sale of any securities, not intended to effect transfer of

beneficial ownership but intended to operate only as a device to inflate, depress,

or cause fluctuations in the market price of securities, and


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(v) Pay, offer or agree to pay or offer, directly or indirectly, to any person any money

or money's worth for inducing another person to purchase or sell any security with

the sole object of inflating, depressing, or causing fluctuations in the market price

of securities.

Prohibition of misleading statements to induce sale or purchase of securities

According to Regulation 5(1), no person shall make any statement, or disseminate any

information which –

(a) Is misleading in a material particular; and

(b) Is likely to induce the sale or purchase of securities by any other person or is

likely to have the effect of increasing or depressing the market price of securities,

if when he makes the statement or disseminates the information-

(i) He does not care whether the statement or information is true or false; or

(ii) He knows, or ought reasonably to have known that the statement or information is

misleading in any material particular.

According to Regulation 5(2), nothing in this sub-regulation shall apply to any general

comments made in good faith in regard to –

a) The economic policy of the Government,

b) The economic situation in the country,

c) Trends in the securities markets, or

d) Any other matter of a similar nature. Whether such comments be made in public

or in private.

Prohibition on unfair trade practice relating to securities (Regulation 6)

No person shall:


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(a) In the course of his business, knowingly engage in any act, or practice

which would operate as a fraud upon any person in connection with the purchase

or sale of, or any other dealing in, any securities;

(b) On his own behalf or on behalf of any person, knowingly buy, sell or otherwise

deal in securities, pending the execution of any order of his client relating to the

same security for purchase, sale or other dealings in respect of securities; Nothing

contained in this clause shall apply where according to the clients instructions, the

transaction for the client is to be effected only under specified conditions or in

specified circumstances;

(c) Intentionally and in contravention of any law for the time being in force delays

the transfer of securities in the name of the transferee or the dispatch of securities

or connected documents to any transferee;

(d) Indulge in falsification of the books, accounts and records; (whether maintained

manually or in computer or in any other form);

(e) When acting as an agent, execute a transaction with a client at a price other than

the price at which the transaction was executed by him, whether on a

stock exchange or otherwise, or at a price other than the price at which it was

offset against the transaction of another client.

3.11. THE DEPOSITORIES ACT, 1996

The Depositories Act, 1996 was enacted to provide for regulation of depositories in

securities and for matters connected therewith or incidental thereto. It came into force

from 20th

September, 1995. The terms used in the Act are defined as under:

(1) "Beneficial owner" means a person whose name is recorded as such with

depository.


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(2) "Depository" means a company, formed and registered under the Companies Act,

1956 and which has been granted a certificate of registration under sub-section

(1A) of section 12 SEBI Act, 1992.

(3) "Issuer" means any person making an issue of securities.

(4) "Participant" means a person registered as such under sub-section (1A) of section

12 of SEBI Act, 1992.

(5) "Registered owner" means a depository whose name is entered as such in the

register of the issuer.

Agreement between depository and participant

A depository shall enter into an agreement in the specified format with one or more

participants as its agent.

Services of depository

Any person, through a participant, may enter into an agreement, in such form as may be

specified by the bye-laws, with any depository for availing its services.

Surrender of certificate of security

Any person who has entered into an agreement with a depository shall surrender the

certificate of security, for which he seeks to avail the services of a depository, to the

issuer in such manner as may be specified by the regulations. The issuer, on receipt of

certificate of security, shall cancel the certificate of security and substitute in its records

the name of the depository as a registered owner in respect of that security and inform the

depository accordingly. A depository shall, on receipt of information enter the name of

the person in its records, as the beneficial owner.


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Registration of transfer of securities with depository

Every depository shall, on receipt of intimation from a participant, register the transfer of

security in the name of the transferee. If a beneficial owner or transferee of any security

seeks to have custody of such security, the depository shall inform the issuer accordingly.

Options to receive security certificate or hold securities with depository

Every person subscribing to securities offered by an issuer shall have the option either to

receive the security certificates or hold securities with a depository. Where a person opts

to hold a security with a depository, the issuer shall intimate such depository the details

of allotment of the security, and on receipt of such information the depository shall enter

in its records the name of the allotter as the beneficial owner of that security.

Securities in depositories to be in fungible form

All securities held by a depository shall be dematerialized and shall be in a fungible form

Rights of depositories and beneficial owner

A depository shall be deemed to be the registered owner for the purposes of effecting

transfer of ownership of security on behalf of a beneficial owner. The depository as a

registered owner shall not have any voting rights or any other rights in respect of

securities held by it. The beneficial owner shall be entitled to all the rights and benefits

and be subjected to all the liabilities in respect of his securities held by a depository.

Pledge or hypothecation of securities held in a depository

A beneficial owner may with the previous approval of the depository create a pledge or

hypothecation in respect of a security owned by him through a depository. Every

beneficial owner shall give intimation of such pledge or hypothecation to the depository

and such depository shall thereupon make entries in its records accordingly. Any entry in

the records of a depository under Section12 (2) shall be evidence of a pledge or

hypothecation.


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Furnishing of information and records by depository and issuer

Every depository shall furnish to the issuer information about the transfer of securities in

the name of beneficial owners at such intervals and in such manner as may be specified

by the bye-laws. Every issuer shall make available to the depository copies of the

relevant records in respect of securities held by such depository.

Option to opt out in respect of any security

If a beneficial owner seeks to opt out of a depository in respect of any security he shall

inform the depository accordingly. The depository shall on receipt of intimation make

appropriate entries in its records and shall inform the issuer. Every issuer shall, within

thirty days of the receipt of intimation from the depository and on fulfillment of such

conditions and on payment of such fees as may be specified by the regulations, issue the

certificate of securities to the beneficial owner or the transferee, as the case may be.

Depository to indemnify loss in certain cases

Any loss caused to the beneficial owner due to the negligence of the depository or the

participant, the depository shall indemnify such beneficial owner. Where the loss due to

the negligence of the participant is indemnified by the depository, the depository shall

have the right to recover the same from such participant.

Securities not liable to stamp duty

As per Section 8-A of Indian Stamp Act, 1899; an issuer, by the issue of securities to one

or more depositories shall, in respect of such issue, be chargeable with duty on the total

amount of security issued by it and such securities need not be stamped;

1) Where an issuer issues certificate of security under sub-section (3) of Section

14of the Depositories Act, 1996, on such certificate duty shall be payable as is

payable on the issue of duplicate certificate under the Indian Stamp Act, 1899;

2) Transfer of registered ownership of shares from a person to a depository or from a

depository to a beneficial owner shall not be liable to any stamp duty;


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3) Transfer of beneficial ownership of shares, such shares being shares of a company

formed and registered under the Companies Act, 1956 or a body corporate

established by a Central Act dealt with by a depository, shall not be liable to duty

under Article 62 of Schedule I of the Indian Stamp Act, 1899;

4) Transfer of beneficial ownership of units, such units being units of mutual fund

including units of the Unit Trust of India, dealt with by a depository shall not be

liable to duty under Article 62 of Schedule I of the Indian Stamp Act, 1899;

5) Transfer of beneficial ownership of debentures, such debentures being debentures

of a company formed and registered under the Companies Act,1956 or a body

corporate established by a Central Act, dealt with a depository, shall not be liable

to duty under Article 27 of Schedule I of the Indian Stamp Act, 1899;

3.12 ONLINE SHARE TRADING FRAUD

With the advent of dematerialization of shares in India, it has become mandatory for

investors to have demat accounts. In most cases an online banking account is linked with

the share trading account. This has led to a high number of online share trading frauds.

The scenario

Scenario 1: The victim‘s account passwords are stolen and his accounts are misused for

making fraudulent bank transfers.

Scenario 2: The victim‘s account passwords are stolen and his share trading accounts are

misused for making unauthorized transactions that result in the victim making losses.

The law

Scenario 1: Sections 43 and 66 of Information Technology Act and section 420 of Indian

Penal Code.

Scenario 2: Sections 43 and 66 of Information Technology Act and section 426 of Indian

Penal Code.


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Who is liable?

Scenario 1: All persons who have stolen the account information as well as those who

have misused it.

Scenario 2: All persons who have stolen the account information as well as those who

have misused it.

The motive

Scenario 1: Illegal financial gain

Scenario 2: Revenge, jealousy, hatred

Modus Operandi

Scenario 1: The suspect would install key loggers in public computers (such as cyber

cafes, airport lounges etc) or the computers of the victim. Unsuspecting

victims would use these infected computers to login to their online banking

and share trading accounts. The passwords and other information of the

victim would be emailed to the suspect.

Scenario 2: Same as scenario 1

3.13 THE LEGAL ISSUES OF ONLINE TRADING

There are a number of legal issues that an online trader need to consider and it is your

responsibility to ensure that all legal requirements are met. Here are just some of the

general guidelines to follow:

Non e-commerce websites

1. Include copyright information: "© Copyright Company name 2008. All rights

reserved"


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2. Watch out for internet libel – don't allow defamatory statements against customers

/ competitors and make sure that you police messages and topics posted to

bulletin boards

3. Conform to data protection – include a privacy statement on the web site, or

something like 'your continued use of our web site constitutes your consent to our

processing of your personal data'. Tell customers what information will be

collected, to whom the data will be disclose, what purpose is the data to be

process for. Position this information just before the 'submit' button on a contact

form.

4. If the company is a limited company, include the registered address, company

number and VAT number if relevant. The best place for this is on the contact page

and make sure that you include the information on all emails sent by the

company.

Transactional sites

1. You will need SSL & encryption software

2. Make sure that you include all the components of a binding contract – Offer

(made by the customer, e.g. adding to their basket), Acceptance (accepted by the

web site), Consideration (monies paid, and clear statement of intention to create

legal relations.

3. You will need: terms of access / copyright, data protection statement (privacy

policy), terms and conditions of sale and any regulatory information.

4. Inclusion of a defined purchase procedure is advisable – e.g. "how to place an

order"

5. Information you must display include: trading status, address, returns address,

email & telephone, professional affiliations, registration for VAT.


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Distance selling:

When distance selling you need to provide the same rights as selling in a shop:

1. Your name & address, description of goods, price, arrangements for payment,

delivery costs, delivery arrangements, right to cancel the order, minimum duration

of contract, how long the offer is valid.

2. After purchase, send the following information via email:

3. Written confirmation of order

4. Details of how to cancel

5. Address for complaint

6. Details of after sales service

7. Contract cancellation – cooling off period of 7 days after goods being received or

services starting

8. Refund rights – business can charge for returning the goods, but you shouldn't

charge if goods are faulty

The following are some of the case studies related to the fraud in the field of online

trading.

CASE: 1

Both Jerome Kerviel (Société Générale) and Kweku Adoboli (UBS), two rogue traders,

worked on the same type of position, the Delta One desk - a table where one does not

exchange single stocks or bonds but derivatives. Those operations are relatively simple

and often reserved for novice traders, who also specialize in ETFs (exchange traded

funds), financial products that mimic the performance of an index, upward or downward.

Easy to use, they can diversify their portfolio by buying such contracts backed by a stock

index or industry (e.g., commodities). Those two traders were very familiar to control

http://en.wikipedia.org/wiki/Jerome_Kerviel

http://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale

http://en.wikipedia.org/wiki/Kweku_Adoboli

http://en.wikipedia.org/wiki/UBS

http://en.wikipedia.org/wiki/Rogue_trader

http://en.wikipedia.org/wiki/Delta_One

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Exchange_traded_funds

http://en.wikipedia.org/wiki/Exchange_traded_funds


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procedures. They made a passage through the back office, the administrative body of the

bank that controls the regularity of operations, before moving to trading. In 2005 and

2006, Kerviel had "led" by taking 100 to 150 million euros in positions on the shares

of Solar world AG listed in Germany, according to the report of the Inspector General of

Society General. Moreover – as Kerviel – the "unauthorized trading" of Kweku Adoboli

did not date back a long way. Adoboli would have made some operations since October

2008 - his failure and subsequent arrest was in 2011.

CASE: 2

Adolf Merckle, a German heir of a large business, stock investor and stock trader, a large

stockholder of Phoenix Pharmahandel, generic drug manufacturer Ratiopharm, and large

parts of cement companyHeidelbergCement as well as vehicle manufacturer Kässbohrer,

spent most of his time investing. In December 2008, believing that Porsche could not

complete its takeover of Volkswagen and would have to sell its shares, Merckle and

others bet against Volkswagen stock. But Porsche had quietly and effectively cornered

Volkswagen stock, so short-sellers such as Merckle could not buy enough Volkswagen

stock to cover their short positions. Volkswagen stock therefore quintupled in value in a

single day, causing billions in losses for those who had bet against Volkswagen's share

price. Faced with such losses, Merckle's cement company was unable to make payments

on a huge loan taken out to purchase an English competitor, Hanson.[3]

In 2006, he was

the world's 44th richest man, dropping to 96th place by December 2008, but still one of

Germany's five richest men. He committed suicide on 5 January 2009.

CASE: 3

Alcolm spent 6 weeks trying to get an investment scammer to stop calling him. It all

started when he received a call from a guy claiming he was a broker from the Kensington

Group. He offered Malcolm a great investment opportunity for a stock called Interglobal

Waste Management, which was soon to be listed on NASDAQ. The broker spent an hour

establishing his credentials and the stock's expected rise in value. Malcolm was emailed

information on the company and directed to some websites. A day later he got another

call from the broker asking what he thought of the information he had sent. Malcolm said

http://en.wikipedia.org/wiki/Solarworld_AG

http://en.wikipedia.org/wiki/Adolf_Merckle

http://en.wikipedia.org/wiki/Phoenix_Pharmahandel

http://en.wikipedia.org/wiki/Generic_drug

http://en.wikipedia.org/wiki/Ratiopharm

http://en.wikipedia.org/wiki/HeidelbergCement

http://en.wikipedia.org/wiki/K%C3%A4ssbohrer

http://en.wikipedia.org/wiki/Porsche

http://en.wikipedia.org/wiki/Volkswagen

http://en.wikipedia.org/wiki/Hanson_plc

http://en.wikipedia.org/wiki/Stock_trader#cite_note-2


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he did not want the stock as it was not the right investment for him. The caller then spent

the next 45 minutes 'hard selling' the stock to Malcolm. To get the caller off the phone,

Malcolm finally agreed to buy $10,000 worth of stock. The caller promised the

paperwork would be sent to Malcolm and said the deal had to be settled within 48 hours

to meet the deadline. After a sleepless night worrying about what he had agreed to,

Malcolm emailed the company to tell them he did not want the stock and he was not

going to transfer the money. Later that day the broker called to tell Malcolm he was

missing a great opportunity and to ask Malcolm to 'do him the courtesy' of explaining

why he had pulled out of the deal. The broker said he wanted to develop a long-term

relationship with Malcolm. He said once Malcolm had reaped the investment rewards, he

would want to give the broker more money to invest and friends' names as referrals. The

broker even told Malcolm that he was doing the wrong thing by his kids by not taking up

the investment. Malcolm finally got the broker off the phone but a day later he was called

by a more senior broker who also wanted to know why he had pulled out of the deal. The

more senior broker claimed there was an outstanding settlement for the stock. When

Malcolm told him he had already explained his reasons to the previous broker, the more

senior broker claimed the other broker was on leave. Malcolm finally got rid of the caller

but was called again by various people in the Kensington Group over the next 6 weeks

asking him why he had not invested. He knew after this amount of harassment that they

were definitely scammers.

Malcolm was very glad he had not signed up to a deal with the Kensington Group as he

found their name on ASIC's list of companies you should not deal with. The company

was an overseas business not licensed by ASIC and was operating illegally in Australia.

Malcolm reported the company to ASIC.

https://www.moneysmart.gov.au/scams/companies-you-should-not-deal-with


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REFERENCES:

1. http://www.sebi.gov.in/acts/contractact.pdf

2. http://www.sebi.gov.in/acts/SecuritiesContractAct.html

3. http://220.227.161.86/19400sm_cal_finalnew_cp17.pdf

4. http://en.wikipedia.org/wiki/Indian_Contract_Act_1872

5. http://en.wikipedia.org/wiki/The_Companies_Act,_1956

6. http://business.gov.in/starting_business/companies_act.php

7. http://www.sudhirlaw.com/Securities3.html

8. http://www.sebi.gov.in/acts/act02c.pdf

9. http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India_Act,1992

10. http://en.wikipedia.org/wiki/Stock_trader

11. http://en.wikipedia.org/wiki/Securities_fraud

12. https://www.moneysmart.gov.au/

13. http://www.traderji.com/investors-grieviences/14593-problem-sharekhan-fraud-

case.html

14. http://www.kipnotes.com/scandal.htm

15. http://www.pjweb.co.uk/resources/articles/the-legal-issues-of-trading-online.htm

http://www.sebi.gov.in/acts/contractact.pdf

http://www.sebi.gov.in/acts/SecuritiesContractAct.html

http://220.227.161.86/19400sm_cal_finalnew_cp17.pdf

http://en.wikipedia.org/wiki/Indian_Contract_Act_1872

http://en.wikipedia.org/wiki/The_Companies_Act,_1956

http://business.gov.in/starting_business/companies_act.php

http://www.sudhirlaw.com/Securities3.html

http://www.sebi.gov.in/acts/act02c.pdf

http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India_Act,1992

http://en.wikipedia.org/wiki/Stock_trader

http://en.wikipedia.org/wiki/Securities_fraud

https://www.moneysmart.gov.au/

http://www.traderji.com/investors-grieviences/14593-problem-sharekhan-fraud-case.html

http://www.traderji.com/investors-grieviences/14593-problem-sharekhan-fraud-case.html

http://www.kipnotes.com/scandal.htm

http://www.pjweb.co.uk/resources/articles/the-legal-issues-of-trading-online.htm