Unit-1 Investment and Competition Law E-Notes.pdf

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E-Notes

Class
Paper Code : LLB 308
Subject : Investment and Competition law

Unit-1
Investment and Securities Law
 Evolution of Securities and Investment Laws in
India
 Concept of Securities and kinds of Securities
 Regulatory Framework to govern Securities in India: The Securities
Contracts (Regulation) Act, 1956-Delisting of Securities; Role of Stock
Exchange under It- Powers and Functions under SEBI Act,1992; The
Depositories Act,1996-Dematerialisation of Shares



: BBA LL.B VI Semester A+B+C

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Evolution of Securities and Investment Laws

In the recent years, Securities market in India has grown exponentially as measured in
terms of:
 Amount raised from the market
 Number of Stock exchanges and other intermediaries
 Number of Listed Stocks
 Market Capitalization
 Trading Volumes and Turnover on Stock Exchanges
 Investor population and price indices

Today, India has two (2) national exchanges namely Bombay Stock Exchange (BSE)
and the National Stock Exchange (NSE). Each has fully electronic trading platforms
with around 10,000 participating broking outfits. These are companies listed on the
respective exchanges with a combined market capitalization of more than Rs.24.7 Lakh
Crore.
Therefore, it is necessary to ensure that our securities market is efficient, transparent,
and safe. The historical records relating to securities in India is meagre and obscure, but
there is evidence to indicate that the issue of securities by corporate units in India dates

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back to the 18
th
Century when the securities of the East India Company were traded in
Mumbai and Kolkata. However, the real beginning came in the 1850 when the
provision of Joint-Stock Companies with Limited Liability was introduced under the
British Companies Act.
The American Civil War broke out in 1861which cut off supply of cotton from the
USA to Europe. This heightened the demand for cotton from India. Cotton prices
increased. Exports of cotton grew payments were received in bullion.
On 3
rd
December,1887, they established a stock exchange called “Native Share and
Stock Brokers”. This laid the foundation of the oldest stock exchange in India. The
word ‘native’ indicated that only natives of India could be brokers of the Exchange. In
1880s a number of textile mills came up in Ahmedabad. This created a need for trading
of shares of these mills. In 1894, the brokers of Ahmedabad formed “The Ahmedabad
Share and Stock Brokers Association”. The 1870s saw a boom in jute prices, 1880s
and 1890s saw boom in tea prices, then followed coal boom. When the booms ended,
there were endless differences and disputes among brokers in eastern India which was
home to production of jute, tea, and coal. This provoked the establishment of “The
Calcutta Stock Exchange Association” on June 15,1908. Though the stock exchange
were in operation, there was no legislation for their regulation till the Bombay
Securities Contracts Control Act was enacted in 1925. The Bombay Stock Exchange
was recognized in May 1927 under the Bombay Securities Contracts Control Act,1925.

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However, the securities market/capital market was not well organized and developed
during the British rule because the British government was not interested in economic
growth of the country.
After Independence, when the constitution, came into force stock exchange and
forward markets came under the exclusive authority of the Central Government.
Further, Government appointed the A.D. Gorwala Committee in 1951 to formulate a
legislation for the regulation of the stock exchanges and of contracts in securities.
Following the recommendations of the A.D. Gorwala Committee in 1951, the Securities
Contracts (Regulation) Act,1956 was enacted to provide for direct and indirect control
of virtually all aspects of securities trading and the running of stock exchanges and to
prevent undesirable transactions in securities. Thus, Securities Contracts (Regulation)
Act,1956 became the parent regulation after the Indian Contract Act,1872, basic law to
be followed by security markets in India.
To regulate the issue of share prices, The Controller of Capital Issues Act (CCI) was
passed in 1947. The CCI Act had its origin during the war in 1943 when the objective
was to channel resources to support the war effort. Control of capital issues was
introduced through the Defence of India Rules in May 1943 under the Defence of India
Act,1939. The control was retained after the war with some modifications as a means of
controlling the raising of capital by companies and to ensure that natural resources were
channeled into proper lines, i.e., for desirable purposes to serve goals and priorities of

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the government, and to protect the interest of investors. The relevant provisions in the
Defence of India Rules were replaced by the Capital Issues (Continuance of Control)
Act in April1947. This Act was made permanent in 1956 and enacted as the Capital
Issues (Control) Act, 1947. Under the Act, the Controller of Capital Issues was set up
which granted approval for issue of securities and also determined the amount, type,
and price of the issue. This Act was, however, repealed in 1992 as a part of
liberalization process to allow the companies to approach the market directly provided,
they issue securities in compliance with prescribed guidelines relating to disclosure and
investor protection.
The authorities have been quite sensitive to requirements of the development of
securities market, so much so that the last decade (1992-2003) witnessed nine special
legislative interventions, including two new enactments, namely the Securities and
Exchange Board of India (SEBI) Act, 1992 and the Depositories Act, 1996. The
SCRA, the SEBI Act and the Depositories Act were amended six, five and three times
respectively during the same period. The developmental need was so urgent at times,
that the last decade witnessed five ordinances relating to securities laws. Besides, a
number of other legislations (the Income Tax Act, the Companies Act, the Indian
Stamps Act, the Bankers’ Book Evidence Act, the Benami Transactions (Prohibition)
Act etc.) having bearing on securities markets have been amended in the recent past to
complement amendments in securities laws.
The legal reforms began with the enactment of the SEBI Act, 1992, which

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established SEBI with statutory responsibilities to:
(i) protect the interest of investors in securities,
(ii) promote the development of the securities market, and
(iii) regulate the securities market.
This was followed by repeal of the Capital Issues (Control) Act, 1947 in 1992 which
paved way for market determined allocation of resources. Then followed the
Securities Laws (Amendment) Act in 1995, which extended SEBI’s jurisdiction over
corporate in the issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with securities market. It empowered SEBI to
appoint adjudicating officers to adjudicate wide range of violations and impose
monetary penalties and provide for establishment of Securities Appellate Tribunals
(SATs) to hear appeals against the orders of the adjudicating officers. Then followed
the Depositories Act in 1996 to provide for the establishment of depositories in
securities with the objective of ensuring free transferability of securities with speed,
accuracy, and security. It made securities of public limited companies freely
transferable subject to certain exceptions; dematerialised the securities in the
depository mode; and provided for maintenance of ownership records in a book entry
form. The Depositories Related Laws (Amendment) Act, 1997 amended various
legislations to facilitate dematerialization of securities. The Securities Laws
(Amendment) Act, 1999 was enacted to provide a legal framework for trading of

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derivatives of securities and units of CIS. The Securities Laws (Second Amendment)
Act, 1999 was enacted to empower SAT to deal with appeals against orders of SEBI
under the Depositories Act and the SEBI Act, and against refusal of stock exchanges
to list securities under the SCRA. The next intervention is the SEBI (Amendment)
Act, 2002 which enhanced powers of SEBI substantially in respect of inspection,
investigation, and enforcement. The latest and the ninth legislative intervention
namely the Securities Laws (Amendment) Bill, 2003 introduced in the monsoon
session of the Parliament to amend the SCRA to provide for demutualization of stock
exchanges is awaiting approval. The approval to this bill is a matter of time as it is a
money bill. This paper explains the provisions in these nine legislative interventions in
a historical perspective.
Concept of Securities and Kinds of Securities
Any financial instruments which are tradable or that can be brought and sold are
generally referred to as securities. More elaborately a security is a certificate
representing a contract between two or more people which promises to pay
cashflows under certain defined circumstances. Securities can represent either
an ownership or debt or both, or it can mean right and entitlements. The key
aspects are that it should be transferable.
For instance, Fixed Deposit with banks is not considered as a security since it
cannot be transferred to another person.

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Meaning of Securities under the Constitution of India and other Statutory
Acts
The meaning given to Securities under the Constitution of India and other
Statutory Acts are as follows: -
Under the Constitution of India
According to Article 366(26) of the Constitution of India “securities” include
stock.
Under the Companies Act,2013
According to Section:2(81) of the Companies Act,2013, “securities” means the
securities as defined in clause (h) of Section:2 of the Securities Contracts
(Regulation) Act,1956.
Under the Securities Contract (Regulation) Act,1956
Securities are defined under the Securities Contracts (Regulation) Act,1956 in
Section:2 (h) as follows:
(h) "securities" include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or other
body corporate:
(ia) derivative.

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(ib) units or any other instrument issued by any collective investment
scheme to the investors in such schemes.
(ic) security receipt as defined in clause (zg) of section 2 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
(id) units or any other such instrument issued to the investors under any
mutual fund scheme.
(ie) any certificate or instrument (by whatever name called), issued to an
investor by any issuer being a special purpose distinct entity which possesses
any debt or receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be.
(ii) Government securities.
(iia) Such other instruments as may be declared by the Central
Government to be securities; and
(iv) rights or interests in securities.

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Under the Forward Contract (Regulation) Act,1952
As per Section:2(1), “securities” includes shares, scrips, stocks, bonds,
debentures, debenture stock or other marketable securities of a like nature in or of
any incorporated company or other body corporate and also Government securities.
Types of Securities
 Debts
 Equities
 Derivates
 Stock
 Shares
 Bonds
 Mutual Funds
 Warrants
 Debt Security: Debt Security represents money that is borrowed and must be
repaid with terms that define the amount borrowed, interest rate and
maturity/renewal date.
Debt Security includes Debentures, Deposits, Commercial Paper and

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Bonds. It usually fixed term securities. It will be redeemable at the end of the
term. It may be Secured, unsecured or protected by collateral.
Debt Security may offer some control to investors if the company is a start-up
or an established business undergoing restructuring if the interest payments are
missed. The creditors may take control of the company liquidate it to recover
some of their investment.
People favour buying debt securities because of the usually higher rate of
return than bank deposits.
Debt Securities are issued by the government usually have a lower interest rate
than the securities issued by the commercial companies.
 Equity Securities: The popular type of equity securities is common stock. The
investor of equity securities is called shareholders, who own a share of the
equity interest of capital, stock of a company, trust, or partnership. Equity
Securities represents ownership interest held by shareholders in a corporation.
The holders of equity securities can get profit from capital gain. Who invests in
the equity securities usually buying a tiny part of a company. Investing in equity
securities give a shareholder access to profits and capital gains.
Equity investment offers control of the business of the issuer.
 Derivative Contract: It is a security with a price that is, dependent upon or

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derived from one or more underlying assets. It is a contract between two or
more parties based upon the asset or assets. Derivative value is determined by
fluctuations in the underlying assets. Derivatives are traded Over the Counter
“OTC” and on an exchange.
Over the Counter Derivatives constitute greater proportion of derivatives
in existence and are unregulated. It carries greater risk for the counter party.
Derivatives are traded on exchange are standardized.
For example, Future Contract is an agreement to exchange the underlying asset
at a future date.
 Stock: It is best known as equity security. In stock, the price can fluctuate
greatly.
You are purchasing an ownership interest in a company when you buy the
stock. You are entitled to a portion of company profits and sometimes
shareholder voting rights.
Investors try to buy the stock when the price is low and sell it when the price is
high. Higher investment risk than most other securities.
No guarantee that you won’t lose money. Stock has potential for the greatest
return.
It is also considered as common stock. Preferred Stock offers dividends but not

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voting rights.
 Shares: It is a part of equity security. The owner of the shares owns one part of
the capital of the company which has issued the shares in question. Shares
enables the shareholder right to take part in the decision making of the
company.
If the latter operates with profits, owners of the share may receive
dividends. Amount of dividend will be decided upon by the shareholders at the
General Meeting of the shareholders.
 Bonds: It will be classified into three (3) categories:
(i) Corporate Bonds
(ii) Municipal Bonds
(iii) Government Bonds
(i) Corporate Bonds: It is a kind of debt instrument issued by a company. These
kinds of bonds are safer and more stable than the stocks.
It is a kind of loan to the company when you invest in these kinds of bond.
You are entitled to receive interest each year on the loan until it is paid off.
Through these bonds, we are guaranteed a steady income.
Bondholders are not entitled to dividends or voting rights.

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Stockholders have potential for greater returns in the long run.
(ii) Government Bonds: It is issued by the US Federal Government. This kind of
bond issued to help finance the national debt.
Most common form of government bonds are US Treasury Bonds. It has very low
investment risk. Government bonds are risk free since they are guaranteed by the
US Government.
The potential return is lower as compared to stock and corporate bonds.
(iii) Municipal Bonds: It is a kind of debt securities. It is issued from the State
and local entities includes cities, towns, districts.
Municipal bonds may also exempt from State and local income taxes
if you are living at that place where the bonds are issued.
The interest rate on municipal bonds is lower than the corporate bonds

 Mutual Funds: Mutual Funds are made up of a variety of security. It may focus
on Stocks and Bonds or it can be collection of both.
Under Mutual Funds, the money can be pooled with the other investors.
Investment Company chooses the securities and manages the mutual funds. This
diversity helps in decreasing the investment risk.

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 Warrants: Under this kind of securities, after a certain period the right to
purchase the share will be terminated. It will give options issued by a Joint
Stock Company and it gives the holders the right to purchase a certain quantity
of the respective company’s shares at a pre-determined price.

Regulatory Framework to Govern Securities in India

The Securities Contracts (Regulation) Act, 1956 Act was enacted in order to
prevent undesirable transactions in securities and to regulate the working of stock
exchanges in the country. The provision of the Act came into force with effect
from 20th February 1957.

Definitions: Stock exchange [Section 2(j)]
a. anybody of individuals, whether incorporated or not, constituted before
corporatization and demutualization under sections 4A and 4B, or
b. a body corporate incorporated under the Companies Act, 1956 whether
under a scheme of corporatization and demutualization or otherwise for the
purpose of assisting, regulating, or controlling the business of buying,
selling, or dealing in securities.

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Recognized Stock Exchange [Section 2(f)] means a stock exchange which is for
the time being recognized by the Central Government under Section 4 of the Act.
Corporatization [Section 2(aa)] means the succession of a recognized stock
exchange, being a body of individuals or a society registered under the Societies
Registration Act, 1860 (21 of 1860), by another stock exchange, being a company
incorporated for the purpose of assisting, regulating, or controlling the business of
buying, selling, or dealing in securities carried on by such individuals or society.
Demutualisation [Section 2(ab)] means the segregation of ownership and
management from the trading rights of the members of a recognised stock
exchange in accordance with a scheme approved by the Securities and Exchange
Board of India (SEBI).
The main parts of the Act are as follows and the powers of Central
Government with regard to this Act are exercisable by SEBI:
(A) Recognised Stock Exchanges (B) Penalties Brief description of important
sections of the Act: (A) Recognised Stock Exchanges
i. Application for recognition of stock exchanges (Section 3)

3(1): Every stock exchange which desirous of being recognized for the purposes of
this Act, may make an application in the prescribed manner to the Central
Government (the powers of Central Government with regard to this Act are
exercisable by SEBI)

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3(2): Every such application shall contain required particulars and be accompanied
by a copy of the byelaws of the stock exchange for the regulation and control of
contracts and also a copy of the rules relating in general to the constitution of the
stock exchange
ii. Grant of recognition to stock exchanges (Section 4)
4(1): If the Central Government is satisfied, after making such inquiry as may be
necessary may grant recognition to the stock exchange subject to some conditions.
(B) Corporatisation and demutualisation of stock exchanges (Section 4A)
On and from the appointed date, all recognised stock exchanges (if not
corporatised and demutualised before the appointed date) shall be corporatised and
demutualised in accordance with the provisions contained in section 4B.
(C) Procedure for corporatisation and demutualisation (Section 4B)

4B (1): All recognised stock exchanges referred to in section 4A shall, within such
time as may be specified by the SEBI, submit a scheme for corporatisation and
demutualisation for its approval

4B (2): On receipt of the scheme, the SEBI after making such enquiry as may be
necessary and if it is satisfied that it may approve the scheme with or without
modification.

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“Appointed date” means the date which the SEBI may, by notification in the
Official Gazette, appoint and different appointed dates may be appointed for
different recognised stock exchanges.
(D) Power of Central Government to call for periodical returns or direct
inquiries to be made (Section 6)

Every recognised stock exchange shall furnish to SEBI periodical returns relating
to its affairs as may be prescribed. Every recognised stock exchange and every
member thereof shall preserve such books of accounts and other documents for
period of not exceeding five years.

(E) Annual reports to be furnished to Central Government by stock exchanges
(Section 7)
Every recognised stock exchange shall furnish the Central Government a copy of
the annual report.
(F) Power of recognised stock exchanges to make byelaws (Section 9)

9(1) Any recognised stock exchange may, subject to the previous approval of the
SEBI, make byelaws for the regulation and control of contracts.

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(G) Power of SEBI to make or amend byelaws of recognised stock exchanges
(Section 10)
10(1) The SEBI may either on a request from the governing body of a recognised
stock exchange or on its own motion make byelaws for all or any of the matters
specified in section 9 or amend any byelaws made by such stock exchange under
that section.
(H) Power to suspend business of recognised stock exchanges (Section 12)
The Central Government is empowered to suspend the business of recognised
stock exchange on an emergency situation by giving notification in the Official
Gazette stating the reasons therein, for a period of not exceeding seven days and
subject to such conditions as may be specified in the notification. However, in the
interest of the trade or the public the said period can be extended from time to time,
provided that no such period of suspension can be extended, unless the governing
body of the recognised stock exchange has been given an opportunity of being
heard in the matter.
(I) Conditions for listing (Section 21)
Where securities are listed on the application of any person in any recognised stock
exchange, such person shall comply with the conditions of the listing agreement
with that stock exchange.

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(J) Delisting of securities (Section 21A)
21A (1): A recognised stock exchange may delist the securities, after recording the
reasons therefor, on any of the ground or grounds as may be prescribed under this
Act, provided that the securities of a company shall not be delisted unless the
company concerned has been given a reasonable opportunity of being heard.
21A (2): A listed company or an aggrieved investor may file an appeal before the
Securities Appellate Tribunal (SAT) against the decision of the recognised stock
exchange within fifteen days from the date of the decision of the recognised stock
exchange, provided that SAT may, if it is satisfied that the company was
prevented by sufficient cause from filing the appeal within the said period, allow it
to be filed within a further period not exceeding one month.
 The Securities and Exchange Board (SEBI)
The Securities and Exchange Board of India is the regulatory body for dealing with
all matters related to the development and regulation of securities market in India.
It was established on 12th of April in 1988. It is headquartered in Mumbai. SEBI
was declared a constitutional body in 1992. At present, Ajay Tyagi is the
Chairperson of SEBI.
Organizational Structure of SEBI
SEBI is managed by the six members-one chairman (nominated by the chairman),
two members from office of central ministries, one from RBI, and remaining to
members are nominated by the central government.

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Powers of SEBI: -
For the discharge of its functions efficiently, SEBI has been vested with the
following powers:
1. to approve by−laws of Securities exchanges.
2. to require the Securities exchange to amend their by−laws.
3. inspect the books of accounts and call for periodical returns from recognized
Securities exchanges.
4. inspect the books of accounts of financial intermediaries.
5. compel certain companies to list their shares in one or more Securities
exchanges.
6. registration broke
Functions of SEBI: -
We can classify the functions of SEBI into three categories: -
1. Protective functions
2. Developmental functions
3. Regulatory functions
1.Protective Functions:
As the name suggests, the main focus of this function of SEBI is to protect the
interest of investor and security of their investment as protective

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functions SEBI performs following functions:
(i) SEBI checks Price Rigging:
Price Rigging means some people manipulate the prices of securities for
inflation or depressing the market price of securities. SEBI prohibits such practice to
avoid fraud and cheating which can happen to any investor.

(ii) SEBI prohibits Insider trading:
Any person which is connected with a company such as directors,
promoters, workers etc. is called Insiders. Due to working in the company they have
sensitive information which affects the prices of the securities. Such information is not
available to people at large but Insider gets this key full knowledge by working in
such company. Insider can use this information for their personal benefits or make a
profit from it, such process is known as Insider Trading.
For Example - Managers or Directors of a company may know that company will
issue Bonus shares to its shareholders at a particular time and they purchase shares
from market to make a profit with bonus issue prices. SEBI always restricts these
types of practices when Insiders are buying securities of the company and take
strict action to avoid this in future.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI always restricts the companies which make misleading statements

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which are likely to induce the sale or purchase of securities by any other person.
(iv)SEBI sometimes educate the investors so that become able to evaluate the
securities and always invest in profitable securities
(v)SEBI issues guidelines to protect the interest of debenture holders.
(vi)SEBI is empowered to investigate cases of insider trading and has provision for
stiff fine and imprisonment.
(vii) SEBI has stopped the practice of allotment of preferential shares unrelated to
market.
(viii)SEBI has stopped the practice of making a preferential allotment of shares
unrelated to market prices.
2. Developmental Functions:
Under developmental categories following functions are performed by
SEBI:
i. SEBI promotes training of intermediaries of the securities market.
ii. SEBI tries to promote activities of stock exchange by adopting a flexible and
adaptable approach in following way:
a) SEBI has permitted internet trading through
registered stockbrokers.
b) SEBI has made underwriting optional to reduce the
cost of issue.

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c) An Even initial public offer of primary market is permitted through the stock
exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange.
To regulate the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and
private placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stockbrokers, sub-brokers, share
transfer agents, trustees, merchant bankers and all those who are associated with
stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies
(vi) SEBI conducts inquiries and audit of stock exchanges.

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Other Functions
1. Registering and regulating the working of stockbrokers, sub-brokers,
share transfer agents, bankers to issue, trustees of the trust deed,
registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment adviser and such other intermediaries who may be
associated with securities markets in any manner.

2. SEBI also perform the function of registering and regulating the
working of depositories, custodians of securities. Foreign Institutional
Investors, credit rating agencies etc.

3. Registering and regulating the working of Venture Capital Funds and
collective investments schemes including mutual funds.

4. Promoting and regulating self-regulatory organizations.

5. Calling for information form, undertaking inspection, conducting
inquiries and audits of the stock exchange, mutual funds and
intermediaries and self - regulatory organizations in the securities
market.

6. Calling for information and record from any bank or any other

26. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



authority or boars or corporation established or constituted by or under
any Central, State or Provincial Act in respect of any transaction in
securities which are under investigation or inquiry by the Board.

7. Conduct research on any matter described if any.
8. Calling information from any agency, institution, banks etc.
9. Delisting of Securities
As stated above delisting of securities means removal of the securities of a
listed company from the stock exchange. It may happen either when the
company does not comply with the guidelines of the stock exchange, or that the
company has not witnessed trading for years, or that it voluntary wants to get
delisted or in case of merger or acquisition of a company with/by some other
company.
So, broadly it can be classified under two head
1. Compulsory Delisting.
2. Voluntary Delisting.
Compulsory delisting refers to permanent removal of securities of a listed
company from a stock exchange as a penalizing measure at the behest of the
stock exchange for not making submissions/comply with various requirements
set out in the Listing agreement within the time frames prescribed. In voluntary
delisting, a listed company decides on its own to permanently remove its

27. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



securities from a stock exchange. This happens mainly due to merger or
amalgamation of one company with the other or due to the non-performance of
the shares on the particular exchange in the market. A stock exchange may
compulsorily delist the shares of a listed company under certain circumstances
like:
• non-compliance with the Listing Agreement. for a minimum period of six
months.
• failure to maintain the minimum trading level of shares on the exchange.
• promoters' Directors' track record especially with regard to insider trading,
manipulation of share prices, unfair market practices (e.g., returning of share
transfer documents under objection on frivolous grounds with a view to creating
scarcity of floating stock, in the market causing unjust aberrations in the share
prices, auctions, close-out, etc. (Depending upon the trading position of directors
or the firms).
The company has become sick and unable to meet current debt obligations or to
adequately finance operations, or has not paid interest on debentures for the last
2-3 years, or has become defunct, or there are no employees, or liquidator
appointed, etc. Where the securities of the company are delisted by an exchange
under this method, the promoter of the company shall be liable to compensate
the security-holders of the company by paying them the fair value of the

28. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



securities held by them and acquiring their securities, subject to their option to
remain security-holders with the company. In such a case there is no provision
for an exit route for the shareholders except that the stock exchanges would
allow trading in the securities under the permitted category for a period of one
year after delisting.
Companies may upon request get voluntarily delisted from any stock exchange
other than the regional stock exchange, following the delisting guidelines. In
such cases, the companies are required to obtain prior approval of the holders of
the securities sought to be delisted, by a special resolution at a General
Meeting of the company.
The shareholders will be provided with an exit opportunity by the promoters or
those who are in the control of the management. Companies can
get delisted from all stock exchanges following the substantial acquisition of
shares. The regulation state that if the public shareholding slides to 10 per cent or
less of the voting capital of the company, the acquirer making the offer, has the
option to buy the outstanding shares from the remaining shareholders at the same
offer price. An exit price mechanism called the book-building method is used by
the delisted companies to derive to the price at which the share will be brought
into and that which will be paid to the shareholders. However, an exit
opportunity need not be given in cases where securities continue to be listed in a
stock exchange having nationwide trading terminals.

29. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



Under the existing SEBI takeover code, an acquirer is required to make an offer
to buy securities at the same offer price. However, here the exit price is based on
the average of the preceding 26-week high and low prices. The acquirer is
required to allow a further period of 6 months for any of the remaining
shareholders to tender securities at the same price. The stock exchange monitors
the possibility of any price manipulation and keeps under special watch
securities for which announcement for delisting has been made. This
mechanism however is not seen as beneficial in depressed Indian market
conditions as the price arrived through this principle may not adequately
compensate the shareholder for the permanent loss of investment opportunity,
especially in a company whose shares are regarded as value investment.
The SEBI (Delisting of Securities) Guidelines- 2003 is the regulating Act
framing the guidelines and the procedure for delisting of securities. Under
this the prescribed procedure is:
1. The decision on delisting should be taken by shareholders though a special
resolution in case of voluntary delisting & though a panel to be constituted by
the exchange comprising the following in case of compulsory delisting:
• Two directors/ officers of the exchange (one director to be a public
representative).

• One representative of the investors.

• One representative from the Central government (Department of Company
Affairs) / regional director/ Registrar of Companies.

30. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



• Executive Director/ Secretary of the Exchange.
2. Due notice of delisting and intimation to the company as well as other Stock.
Exchanges where the company’s securities are listed to be given.
3. Notice of termination of the Listing Agreement to be given.
4. Making an application to the exchange in the form specified, annexing a copy
of the special resolution passed by the shareholders in case of voluntary
delisting.
5. Public announcement to be made in this regard with all due information.
Dematerialisation of Shares
In order to mitigate the risks associated with share trading in paper
format, dematerialisation concept was introduced in Indian Financial
Market. Dematerialisation or Demat in short is the process through investor’s
physical share certificate gets converted to electronic format which is maintained
in an account with the Depository Participant.
India adopted the Demat System successfully and there are plans to
facilitate trading of almost all financial assets in demat format in future. Through
this article, we will try to understand the demat process and its benefits from
common investor’s perspective.
Dematerialisation is the process of converting physical shares into electronic
format. An investor who wants to dematerialise his shares need to open a demat
account with Depository Participant. Investor surrenders his physical shares and

31. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



in turn gets electronic shares in his demat account.
Storage of Dematerialised Shares Depository: Depository is the body which is
responsible for storing and maintaining investor's securities in demat or
electronic format. In India there are two depositories i.e., NSDL and CDSL.
Who a Depository Participant? Depository Participant (DP) is the market
intermediary through which investors can avail the depository services.
Depository Participant provides financial services and includes organizations
like banks, brokers, custodians, and financial institutions.
Advantages of Demat: Dealing in demat format is beneficial for investors,
brokers, and companies alike. It reduces the risk of holding shares in physical
format from investor’s perspective. It is beneficial for brokers as it reduces the
risk of delayed settlement and enhances profit because of increased participation.
From share issuing company’s perspective, issuance in demat format reduces the
cost of new issue as papers are not involved. Efficiency and timeliness of the
issue is also maintained while companies deal in demat format. There are a lot of
other benefits, but let us focus on benefits with respect to common investor and
the same are listed below.
Demat format reduces the risk of bad deliveries Time and money
is saved as you are not dealing in paper now. You need not go to
the notary, broker for taking delivery or submitting the share

32. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



certificate Liquidity is very high in case of demat format as whole
process in automated.
All the benefits of corporate action like bonus, stock split, rights
etc. are managed through the depository leading to elimination of
transit losses Interest on loan against demat shares are less as
compared to physical shares Investors save stamp duty while
transferring shares in demat format.
One needs to pay less brokerage in case of demat shares.

Demat Conversion

Most of the trading in shares are done in demat format now a day, but there
are few investors who still hold shares in paper format. You cannot deal in
paper shares now, so you need to dematerialise them first. In order to
dematerialise physical/paper shares, investors need to fill Demat Request
Form (DRF) and submit the same along with physical shares. DRF is available
with the DP and you simply need to raise a request for demat conversion with
the DP. Their representative will come and get the DRF form signed. So, the
complete process of dematerialisation involves: Investor surrenders the
physical certificates for dematerialisation to the DP along with DRF.DP
updates the account of the investor and shares are allocated in investor demat
holding.

33. Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)



 The Depositories Act – 1996

The Depositories Act, 1996 provides for regulation of
depositories in securities and for matters connected thereto. The Act which
initially came into force as an ordinance viz. The Depositories Ordinance, 1995,
was designed to provide a legal framework for establishment of depositories to
record ownership details in book entry form.
The Act also made consequential amendments in the Companies Act, 1956; the
Securities and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899;
the Income tax Act, 1961; and the Benami Transactions (Prohibition) Act, 1988.

The Depositories Act, 1996 provides a legal framework for establishment of
depositories to facilitate holding of securities including shares in the demat form
(electronic form) and to effect transfer of securities through book entry.

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