3

Stock Market Regulation

Regulations protect the integrity of the marketplace, member firms, and most importantly, the investor/customer. The concept of self-regulation is more pertinent than authority-enforced regulation in any capital market. Given the strength and nature of market participants, it is imperative that the stock exchanges adhere strictly to the regulations to ensure that these transactions are executed properly and fairly.

Every transaction made at the stock exchange has to be under continuous surveillance during the trading day. Many stock exchanges have computer-based systems that search for unusual trading patterns and alert regulatory personnel to possible insider trading abuses or other prohibited trading practices.

Besides curbing insider trading, regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on broker’s sales practices, and continuous monitoring of specialist operations.

In short, the intentions of regulations can be listed as:

• promote market transparency
• maintain a level playing field for all investors
• protect the integrity of the marketplace
• monitor and enforce member and issuer compliance with the regulatory framework

The reliability of market information and assurance that the market is being monitored closely means that all constituents can participate in the market with confidence. Regulation establishes and maintains standards for fair, orderly, and efficient markets. Regulation is essential to monitor and assess the market participants including broker-dealers, self-regulatory organisations (such as the clearing agencies), and transfer agents.

SECURITIES EXCHANGE BOARD OF INDIA

Transactions worth millions of rupees are circulated through the stock exchanges each day in the Indian capital market. The Securities and Exchange Board of India was established in 1988 to regulate and develop the growth of the Indian capital market. SEBI regulates the working of the stock exchanges and intermediaries such as stock brokers and merchant bankers, accords approval for mutual funds, and registers foreign institutional investors who wish to trade in Indian scrips. The SEBI Act, 1992 states that the duty of the board is to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

SEBI also promotes the investor’s education and training of intermediaries of securities markets. It prohibits fraudulent and unfair trade practices relating to the securities markets and insider trading in securities, with the imposition of monetary penalties on erring market intermediaries. It regulates substantial acquisition of shares and takeover of companies and conducts inquiries and audits of the stock exchanges and intermediaries and self-regulatory organisations in the securities market.

The organisational structure of SEBI is given in Figure 3.1. The Board of Members constitutes the top structure of governance. The board is headed by a chairman and has five members representing the Central Government and Reserve Bank of India.

The Central Government, under Section 17 of SEBI Act, 1992, can supersede SEBI in certain instances such as under a grave emergency, if SEBI is unable to discharge its functions and duties, or if SEBI persistently defaults leading to a deterioration in the financial/administrative position of SEBI, or in public interest.

 

POWERS AND FUNCTIONS OF SEBI

SEBI, being the surveillance authority of the capital markets in India, is vested with requisite powers. SEBI’s activities, to a great extent, centre on ensuring a good governance mechanism of the several players in the market. Specifically, SEBI’s powers and functions are for:

1. Regulating the business in stock exchanges and any other securities market;
2. Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with the securities market in any manner;
3. Regulating substantial acquisition of shares and takeover of companies;
4. Registering and regulating the working of collective investment schemes, including mutual funds;
5. Promoting and regulating self-regulatory organisations;
6. Prohibiting fraudulent and unfair trade practices in the securities market;
7. Prohibiting insider trading in securities;
8. Protecting investors and promoting investor education and training of intermediaries in the securities market;
9. Calling for information from, undertaking inspection, conducting enquiry and audits of the stock exchanges, intermediaries, and self-regulatory organisations in the securities market;

SEBI has a Primary Market Department, Secondary Market Department, Mutual Funds Department, and a Derivative Cell, to carry out regulatory services.

LEGISLATION GOVERNING SEBI FUNCTIONS

The legislations governing the Primary Market operations are Merchant Banker, 1992; Debenture Trustee, 1993; Portfolio Managers, 1993; Registrars to Issue, 1993; Underwriters Regulations, 1993, Bankers to an Issue, 1994; and Buy-back of Securities Regulations, 1998. The guidelines for capital issues are contained in SEBI (Disclosure and Investor Protection) Guidelines, 2000, Guidelines for Offering securities in public issues through the Stock Exchange mechanism.

The Secondary Market Department is guided by the Stock and Sub-Brokers Regulations, 1992; Insider Trading, 1992; Unfair Trade Practices, 1995; Depositories Act, 1996; Depositories and Participants Regulations 1996; and Credit Rating Agencies Regulations, 1999.

Mutual Funds Department is governed by the Mutual Funds Regulations, 1996. The venture capital funds come under the legislation of the Venture Capital Regulations 1996 and SEBI (Foreign Venture Capital Investor) Regulations, 2000.

The Derivatives Cell has the L C Gupta Committee Report 1998 and Verma Committee Report constituted in 1998 for regulating the market activities.

PRIMARY MARKET REGULATION

Issue of Shares

Companies issuing securities to the public through an offer document are expected to file the offer document and make out an application for the listing of those securities. The draft prospectus has to be filed with SEBI through a merchant banker at least 21 days prior to the filing of the prospectus with the Registrar of Companies. This time period ensures that the company, through its merchant banker, can change the contents of the document as per the modifications suggested by SEBI. If SEBI prohibits a company from entering the capital market the company cannot make a public issue of its securities.

Equity shares and convertible securities offer for sale can be issued by a company if it has a track record of distributable profits and a pre-issue net worth of not less than Rs 1 crore in three of the immediately preceding five years. The company must have the minimum net worth requirement met with during the immediately preceeding two years.

An unlisted company which does not have a track record or the requisite net worth, can still make a public issue of shares or convertible securities provided a public financial institution or a scheduled commercial bank:

1. Has appraised the project to be financed through the proposed offer to the public;
2. Not less than 10 per cent of the project cost is financed by the said appraising bank or institution by way of loan/equity participation in the issue of security in the proposed issue or a combination of any of them; and
3. The appraising bank or institution brings in the minimum specified contribution at least one day before the opening of the public issue.

A listed company in a stock exchange can make a public issue of convertible securities if as a result of the proposed issue, the net worth of the company becomes more than five times the net worth prior to the issue.

The above requisites of track record and net worth requirement need not be adhered to by a banking company, an infrastructure company, and in case of a rights issue by a listed company when they make public issue of equity shares or convertible securities, subject to certain conditions.

When there are financial instruments that are outstanding such as warrants or any other right that would entitle the existing promoters or shareholders, an option to receive equity share capital after the initial public offering, the company cannot make a public issue.

The company offering shares or rights issue or making an offer for the sale of securities has to enter into an agreement with a depository for the dematerialisation of securities already issued or for those that are proposed to be issued. However, the company has to give an option to subscribers/shareholders/investors to receive the security certificates or hold securities in dematerialised form with a depository.

When there are partly paid-up shares, the company cannot make a public or rights issue of equity share or any convertible security. These companies can make a public issue only after all the shares are fully paid or forfeited.

In the case of issue of a debt instrument (including convertible instruments), irrespective of their maturity or conversion period, the company has to obtain its instrument credit rated from at least one credit rating agency and disclose this information in the offer document. For a public and rights issue of debt-securities of issue size greater than or equal to Rs100 crores, two ratings from two different credit rating agencies have to be obtained.

Pricing by Companies Issuing Securities

The public or rights issue by listed companies and public issue by unlisted companies, infrastructure companies, and initial public issue by banks are eligible to freely price their equity shares or any convertible security.

An eligible company can make a public or rights issue of equity shares in any denomination. The company that has already issued shares in the denomination of Rs 10 or Rs 100 may change the standard denomination of the shares by splitting or consolidating the existing shares. While changing the denomination, the company cannot issue in a denomination of a decimal of a rupee and, at any time, there can be only one denomination for the shares of the company.

The issuer company can mention a price band of 20 per cent (cap in the price band should not be more than 20 per cent of the floor price) in the offer documents filed with the board. The actual price can be determined at a later date, before filing of the offer document with the Registrar of companies. The final offer document has to contain only one price and one set of financial projections.

A company can opt for the firm allotment procedure while issuing shares. Firm allotment implies that the company can specifically reserve shares for a certain category of investors subject to conditions laid down by SEBI. Reservation means reservation on a competitive basis where the allotment of shares is made in proportion to the shares applied for by the reserved categories.

A company is free to make reservations and/or firm allotments to various categories of investors such as Indian mutual funds, foreign institutional investors, banks, permanent employees of the company, and shareholders of the promoting or group company.

In case of a firm allotment, any unlisted or listed company may issue shares to the firm allotment category at a price different from the price at which the net offer to the public is made. In such instances, the price in the firm allotment category should be higher than the price at which securities are offered to the public. The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations, or promoters’ contributions. However, a justification for the price difference has to be given in the offer document. In addition, the company should not have made any payment, direct or indirect, in the nature of a discount, commission, allowance, or in any other form to the investors who have received firm allotment in such a public issue.

The lead merchant banker(s) can be included in the category of investors entitled to firm allotments subject to an aggregate maximum ceiling of 5 per cent of the proposed issue of securities. The aggregate of reservations and firm allotments for employees in an issue cannot exceed 10 per cent of the total proposed issue amount. For shareholders, the reservation cannot exceed 10 per cent of the total proposed issue amount. While presenting the capital structure, the lead merchant banker states the proposed issue amount as (promoters’ contribution in the proposed issue)+ (firm allotment)+ (offer through the offer document).

Successful applicants receive share certificates/instruments for the eligible number of shares in trad-able lots. The minimum tradable lot can be fixed on the basis of the offer price as given in the following table.

Offer Price Per Share	Minimum Tradable Lot
Upto Rs 100	100 shares
Rs101-Rs400	50 shares
More than Rs 400	10 shares

 

If the subscription money is proposed to be received in calls, the calls have to be structured in such a manner that the entire subscription money is called within 12 months from the date of allotment. If the investor fails to pay the call money within 12 months, the subscription money already paid may be forfeited. The subscription list for public issues has to be kept open for at least three working days and not more than ten working days. A public issue made by an infrastructure company may be kept open for a maximum period of 21 working days. A rights issue may be kept open for at least 30 days and not more than 60 days. The period of operation of the subscription list of public issue has to be disclosed in the prospectus.

The quantum of issue, whether through rights or a public issue, cannot exceed the amount specified in the prospectus/letter of offer. An oversubscription to the extent of 10 per cent of the net offer to the public is permissible for the purpose of rounding off to the nearest multiple of 100 while finalising the allotment.

The issuers have the option to have the public issue underwritten by an underwriter. Underwriters are market intermediaries who agree to take up securities that are not fully subscribed. Underwriters make a commitment to get the issue subscribed. Companies pay an underwriting commission for this service rendered by the intermediaries. In respect of every underwritten issue, the lead merchant banker(s) accepts a minimum underwriting obligation of 5 per cent of the total underwriting commitment or Rs 25 lakhs whichever is less. The outstanding underwriting commitments of a merchant banker cannot exceed 20 times its net worth at any point of time. In respect of an underwritten issue, the lead merchant banker has to ensure that the relevant details of the underwriters are included in the offer document.

Preferential allotment or private placement is the issue of shares to a select group of persons such as promoters or financial institutions or people in charge of company management. The issue can be made on a preferential basis at an average of the weekly high and low of the closing prices of the related shares. Preferential allotment usually has a lock-in period of five years.

Another procedure adopted by companies in the issue of shares is the book building process. Book building is the selling of shares to the public at an acceptable price through merchant bankers. A book building process may mention the floor price of the offer. The merchant banker then records the number of offers that have been received and the offer prices along with the name of the investor who is making the offer. The allotment is made on the basis of the best bids received up to the requisite number of shares.

For example, if in the book building process, the following share volume and price quotes have been received, and the offer in terms of the book building process is for 8,000,000 shares, then the cut-off price in terms of the book building offer will be Rs 710 per share.

Shares	Price Quote	Acceptance
500,000	790	Yes
1,200,000	750	Yes
2,800,000	720	Yes
4,800,000	710	Yes
2,00,000	700	No

Promoters’ Contribution

The extent of the promoters’ contribution for the different classes of public offer is as follows:

Nature of offer	Promoters’ Contribution
Public issue of unlisted companies	> = 20 per cent of post issue capital
Public issue of listed companies	20 per cent of the proposed issue or post issue capital (rights issue component will not be considered)
Offers for sale	> = 20 per cent of post issue capital

 

The exemptions to the minimum requirement of promoters’ contribution are:

• Public issue of securities by a company that has been listed on a stock exchange for at least three years (paid dividend for at least three years);
• Companies where no identifiable promoter/group exists.

For computing the percentage of shares held by the promoters, shares that have been acquired by them earlier for consideration other than cash, revaluation of assets/reserves or capitalisation of intangible assets, and resulting from a bonus issue will not be considered. Private placements also do not constitute promoters’ contribution.

In case of a public issue by an unlisted company, securities which have been issued to the promoters during the preceding year, at a price lower than the price at which equity is being offered to the public cannot be included for the computation of the promoter’s contribution.

Companies can be formed by conversion of partnership firms, where the partners become promoters of the company. Here the shares allotted to the promoters during the preceding year out of the funds brought in during that period will be considered only when such shares have been issued at the same price at which the public offer is made. If the partners’ capital existed in the firm for a period of more than one year on a continuous basis, the shares allotted to the promoters against such capital cannot be included for computing the promoters’ contribution.

In case of any issue of convertible security by a company, the promoters can have an option to bring in their subscription by way of equity or by way of subscription to the convertible security. In these cases, the conversion price should not be predetermined and the promoters should contribute by subscribing to the instrument. In case of any issue of convertible security in stages either at par or premium (conversion price being predetermined), the promoters’ contribution in terms of capital cannot be at a price lower than the weighted average price (at various stages) of the share capital arising out of the conversion.

In case of a listed company, participation by promoters in the proposed public issue in excess of the required minimum percentage will attract pricing provisions, if the issue price is lower than the price as determined on the basis of preferential allotment guidelines.

The promoters have to bring in the full amount of the promoters’ contribution including the premium at least one day prior to the opening date of the issue. Where the minimum contribution of the promoters exceeds Rs 100 crores, the promoters can bring in Rs 100 crores before the opening of the issue and the remaining contribution can be brought in by the promoters in advance on a pro-rata basis before calls are made on the public. Against the receipt of money, the company’s board has to pass a resolution allotting the shares or convertible instruments to the promoters. SEBI also has to receive a list of names and addresses of friends, relatives, and associates who have contributed to the promoters’ quota along with the amount of subscription made by each of them.

The promoters’ contribution is subject to a lock-in period of three years. The lock-in will start from the date of allotment in the proposed public issue and the last date of the lock-in will be three years from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later.

A lock-in period of six months from the date of the listing of shares is applicable to the shares of an unlisted company that have been issued to promoters (six months prior to the public issue) at a price lower than the price at which equity is being offered/issued to the public.

Locked-in securities held by promoters can be pledged only with banks or financial institutions as a collateral for loans. Locked-in securities can be transferred amongst promoters as named in the offer document, subject to the lock-in being applicable to the transferees for the remaining period of the lock-in. The securities that are subject to the lock-in will have an inscription “non-transferable” along with the duration of the non-transferable period mentioned on the face of the security certificate.

Other Issue Requirements

An unlisted company (with a commercial operation of less than two years) proposing to issue securities to the public, resulting in a post-issue capital of Rs 3 crores and not exceeding Rs 5 crores, can apply for listing of its securities only on those stock exchange(s) where the trading of securities is screen-based. The company has to appoint market maker(s) in all these stock exchanges. The appointment of market makers will be subject to the following:

• At least one market maker undertakes to make market for a minimum period of 18 months and at least one additional market maker undertakes to make market for a minimum period of 12 months from the date on which the securities are admitted for dealing;
• Market makers undertake to offer buy and sell quotes for a minimum depth of three marketable lots;
• Market makers undertake to ensure that the bid-ask spread (difference between quotations for sale and purchase) for their quotes does not exceed 10 per cent at any time; and
• The inventory of market makers on each of such stock exchanges, as on the date of allotment of securities, has to be at least 5 per cent of the proposed issue of the company.

Unlisted companies whose capital after the proposed issue of securities is less than Rs 3 crores, are eligible to be listed only on the Over the Counter Exchange of India (OTCEI).

An unlisted infrastructure company making a public issue of pure debt instruments/convertible debt instruments and a municipal corporation making a public issue of pure debt instruments are eligible to apply for the listing of these instruments on the stock exchanges subject to credit rating and have to be fully secured by creating security in favour of the debenture trustees.

A company cannot make any further issue of capital by way of issue of bonus shares, preferential allotment, rights issue, or public issue, till the securities in the offer document have been listed or application moneys refunded on account of non-listing or undersubscription.

When a company has in its books fully convertible debentures (FCDs) or partly convertible debentures (PCDs) that are not yet converted, it cannot issue any shares by way of bonus or rights. If such other issues are made, similar benefit must be extended to the holders of the FCDs or PCDs through reservation of shares in proportion to their holding. The share so reserved may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus or rights issue was made.

An issuer company cannot withdraw a rights issue after the announcement of a record date in relation to such an issue. In cases where the issuer has withdrawn the rights issue after announcing the record date, the company cannot make an application for a listing of any securities for a minimum period of 12 months from the record date.

Pre-issue Obligations

The merchant banker concerned with the public issue of shares has to fulfil certain pre-issue obligations. The lead merchant banker has to pay the requisite fee in accordance with SEBI regulations along with the draft offer document filed with the Board. Along with the offer documents the Memorandum of Understanding (MOU), the allocation of rights, obligations, and responsibilities (in case of more than one merchant banker), and Due Diligence Certificate have to be submitted as well. Additional certificates that need to be submitted in case of listed companies making further issues of capital relate to refund orders, dispatch of certificates, and list of previous issues with a stock exchange.

A merchant banker who is associated with the company as a promoter or a director, cannot be a lead manager to the issue of the company. Such a merchant banker can be a lead manager if the issuer company has been listed or is proposed to be listed on the Over the Counter Exchange of India and the market makers have either been appointed or are proposed to be appointed as per the offer document. The number of co-managers to an issue cannot exceed the number of lead merchant bankers to the issue and there can be only one advisor to the issue. The lead merchant banker cannot act as a registrar to an issue of which it is also handling the post-issue responsibilities.

The registrars to issue have to be registered with SEBI. The lead merchant banker has to ensure that the registrar to an issue is not acting as the company’s promoter or director. Where the number of applications in a public issue is expected to be large, registrars registered with SEBI can be appointed for the limited purpose of collecting the application forms at different centres. These registrars have to forward the applications to the designated registrar to the issue as mentioned in the offer document. The designated registrar to the issue will be primarily and solely responsible for all the activities of issue management.

The draft offer document filed with SEBI has to be made public for a period of 21 days from the date of filing. Simultaneously, copies of the draft offer document have to be filed with the stock exchanges where the securities are offered.

After a period of 21 days from the date the draft offer document was made public, the lead merchant banker has to file with SEBI the list of complaints received and the proposed amendments to the draft offer document.

The company may appoint any number of collection centres, as it may deem fit. The minimum number of collection centres for an issue of capital will be the four metropolitan centres of Mumbai, Delhi, Kolkata, and Chennai, and the stock exchanges located in the region of the company’s registered office.

The company can also appoint authorised collection agents in consultation with the lead merchant banker. The names and addresses of such agents have to be disclosed in the offer document. The collection agents so selected have to be equipped for the purpose in terms of infrastructure and manpower requirements. The collection agents may collect such applications as are accompanied by payment through cheques, drafts, and stockinvest schemes, but not in cash. The application money has to be deposited in the special share application account with a designated scheduled bank either on the same date or latest by the next working day. The collection agent has to forward the application forms along with duly reconciled schedules to the registrar to the issue after the realisation of cheques. This has to be done within two weeks from the date of closure of the public issue.

Many banks offer stockinvest schemes to investors to enable the smooth transition of money. Cheques issued through stockinvest schemes enable investors to earn interest money till the allotment of shares takes place. Investors from places other than where the mandatory collection centres and authorised collection agents are located, can forward their applications along with stockinvests to the registrar to the issue directly by registered post with acknowledgement due.

In case of a rights issue, an advertisement concerning the offer has to be released in daily newspapers at least seven days before the date of opening of the issue. The advertisement indicates centres other than the registered office of the company, where the shareholders or the investors entitled to rights may obtain duplicate copies of application forms in case they do not receive the original application form within a reasonable time even after the opening of the rights issue. The advertisement itself has to contain a format to enable shareholders to make the application on plain paper. The details sought are name, address, ratio of rights issue, issue price, number of shares held, ledger folio numbers, number of shares entitled and applied for, additional shares if any, amount to be paid along with application, particulars of cheque, and so on.

An issuer company has to appoint a compliance officer who directly interacts with SEBI regarding compliance of laws, rules, regulations, and other directives. The lead merchant banker ensures that a copy of the abridged prospectus accompanies every application form distributed by the company. The abridged prospectus has to be printed at least in 7 point font size with proper spacing.

The abridged prospectus contains general information about the company and the issue, risk factors and issue highlights, capital structure of the company, terms of the present issue, authority for the issue, terms of payment and procedure, and time schedule for the allotment and issue of certificates. It also contains information on the availability of forms, prospectus, and mode of payment. Application requirements by NRIs; particulars of the issue; information on the company, its management and projects, products, and future prospects; stock market data; particulars of listed companies under the same management; basis for issue price; and financial performance of the company for the last five years have to be given as well. The issuer cannot offer any incentives to prospective investors by way of medical insurance scheme, lucky draw, prizes, and so on.

Contents of the Prospectus

The offer document (prospectus) contains all material information that are true and adequate so as to enable investors to make an informed decision on investment in the issue. The prospectus has information on the following:

• Availability of application forms, prospectus, and mode of payment.
• Undertaking by the issuer company to fulfill issue obligations.
• Issue details such as issue period, issue size, issue type, face value, tick size, minimum order quantity, IPO market timings, lead managers, and members of issue.
• Particulars of issue such as objects of the issue, project cost, means of financing.
• Project appraisal document.
• Company management stating the personnel and their qualification.
• Location of the project.
• Infrastructure facilities.
• Schedule of project implementation.
• Product details.
• Future prospects in terms of capacity and capacity utilization.
• Stock market data.
• Project Financials.
• Financial data (Income Statement and balance sheet) of the company and group companies.
• Basis for issue price such as pre-issue earnings per share, pre-issue P/E and comparison with industry P/E, and average return on net worth.
• Outstanding litigation or defaults.
• Risk factors and management perception of the same.
• Method of arrangements made for disclosure on investor grievances.
• Minimum subscription.
• Expenses of issue for issue advisors, registrar to issue, issue manager and trustee for the issue.
• Particulars of underwriting commission and brokerage.
• Details of previous issue.
• Information on directors of the issue company.
• Rights of members in respect of restriction or transfer of shares.
• Material contracts and place of inspection of documents.

Post-issue Obligations

Post-issue monitoring reports have to be submitted within three working days from the due date irrespective of the level of subscription. In case of public issues, the following reports are to be submitted: (a) a three-day post-issue monitoring report and (b) a 78-day post-issue monitoring report. In case of a rights issue (a) a 3-day post-issue monitoring report and (b) a 50-day post-issue monitoring report are to be submitted.

The post-issue lead merchant banker actively associates with post-issue activities namely, allotments, refunds, and dispatch, and regularly monitors the redressal of investor grievances arising therefrom.

If the issue is proposed to be closed at the earliest closing date, the lead merchant banker ensures that the issue is fully subscribed before announcing the closure of the issue. In case, there is no definite information about subscription figures, the issue will be kept open for the required number of days to take care of the underwriters’ interests and to avoid any dispute, at a later date, by the underwriters in respect of their liability. In case there is an involvement on underwriters, the lead merchant banker ensures that the underwriters honour their commitments within 60 days from the date of the closure of the issue. In case of undersubscribed issues, the lead merchant banker furnishes information in respect of underwriters who have failed to meet their underwriting obligations to SEBI.

The post-issue lead merchant banker ensures that in all issues, an advertisement giving details relating to over-subscription; basis of allotment; number, value, and percentage of applications received along with stockinvest; successful allottees, date of completion of dispatch of refund orders; and the date of dispatch of certificates is released in a daily newspaper within 10 days of the date of completion of the various activities.

The basis of allotment is finalised in a fair and proper manner in accordance with the SEBI guidelines. The allotment is in marketable lots, on a proportionate basis. Applicants are categorised according to the number of shares applied for and the total number of shares to be allotted to each category as a whole is arrived at on a proportionate basis.

The computation to determine proportionate allotment involves finding the total number of shares applied for in a specific category (number of applicants in the category x number of shares applied for) and multiplying it by the inverse of the over-subscription ratio. This pro-rata allotment method is illustrated using the following example:

        Total number of applicants in category of 1,000 = 5,000

        Total number of shares applied for in this category (1,000 × 5,000) = 50,00,000

        Number of times oversubscribed = 2

        Proportionate allotment to category = 50,00,000 × (1/2) = 25,00,000

Since each applicant has applied for 1,000 shares, the proportionate allotment to each successful applicant is [1000 × (1/2)] = 500.

In case of applications where the proportionate allotment works out to less than 100 shares per applicant, the successful applicants will be determined by a draw of lots and each successful applicant will be allotted a minimum of 100 securities.

If the proportionate allotment to an applicant works out to a number that is more than 100 but is not a multiple of 100, the number in excess of the multiple of 100 will be rounded off to the higher multiple of 100 if that number is 50 or higher. For example, if the proportionate allotment works out to 380, the applicant would be allotted 400 shares. If that number is lower than 50, it will be rounded off to the lower multiple of 100. As an illustration, if the proportionate allotment works out to 240, the applicant would be allotted 200 shares.

If the shares allocated on a proportionate basis to any category is more than the shares allotted to the applicants in that category, the balance available shares for allotment will be first adjusted against any other category, where the allocated shares are not sufficient for proportionate allotment. The balance shares if any, after such an adjustment will be added to the category comprising applicants applying for the minimum number of shares. As the process of rounding off to the nearest multiple of 100 may result in the actual allocation being higher than the shares offered, it may be necessary to allow a 10 per cent margin, that is, the final allotment may be higher by 10 per cent of the net offer to public.

The above proportionate allotments of securities in an issue that is oversubscribed will be subject to reservation for small, individual applicants. A minimum 50 per cent of the net offer of securities to the public will initially be made available for allotment to individual applicants who have applied for allotment equal to or less than 10 marketable lots. The balance net offer of securities to the public will be made available for allotment to:

1. individual applicants who have applied for allotment of more than 10 marketable lots of shares and;
2. other investors including corporate bodies/institutions irrespective of the number of shares, applied for.

The unsubscribed portion of the net offer to any one of the categories may be made available for allotment to applicants in other categories.

Regulation on Employee Stock Option Scheme (ESOS)/Employee Stock Purchase Scheme (ESPS)

Only an employee of a company is eligible for participation in ESOS/ESPS. Specifically, an employee who is a promoter and a director who directly or indirectly holds more than 10 per cent of the outstanding equity shares cannot participate in the ESOS. For administration and superintendence of ESOS, a compensation committee has to be constituted by the company. This committee formulates the detailed terms and conditions of ESOS including the quantum of option to be granted per employee and in aggregate, and the conditions under which the option vested in the employees may lapse in case of termination of employment for misconduct. The right of an employee to exercise all the options at one time or at various points of time and the exercise period within which the employee should exercise the option are to be formulated clearly.

ESOS to be offered to employees has to be approved by passing a special resolution in the general body meeting. Approval of shareholders by way of a separate resolution has to be obtained by the company in case of grant of option to employees of a subsidiary or holding company and to identified employees equal to or exceeding 1 per cent of the issued capital of the company.

Companies granting option to its employees pursuant to ESOS will have the freedom to determine the exercise price subject to conforming to the accounting policies. There will be a minimum period of one year between the grant of options and the vesting of option. The company will also have the freedom to specify the lock-in period for the shares issued pursuant to the exercise of option. The employee will not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted till shares are issued on the exercise of option.

The company may forfeit the amount payable by the employee at the time of grant of option if the option is not exercised or the amount may be refunded due to non-fulfilment of condition relating to vesting of option as per ESOS. The option granted to an employee cannot be transfered to any other person. It cannot be pledged, hypothecated, mortgaged, or otherwise alienated in any other manner. In the event of the death of an employee while in employment, all the options granted till such date will vest in the legal heirs or nominees of the deceased employee. In case the employee suffers a permanent incapacity while in employment, all the options granted as on the date of permanent incapacitation, will vest in that person as on that day. In the event of resignation or termination of employment, all options not vested as on that day would expire. However, the employee will be entitled to retain all the vested options.

In case of listed companies, shares arising pursuant to an ESOS and shares issued under an ESPS, will be eligible for listing on any recognised stock exchange only if such schemes (ESOS or ESPS) are in accordance with SEBI guidelines.

Issue of Sweat Equity by a Listed Company

A company whose equity shares are listed on a recognised stock exchange may issue sweat promoter equity shares, to its employees and directors in accordance with the Companies Act, 1956 and SEBI Regulations. In case of issue of sweat equity shares to promoters, approval by a simple majority of the shareholders in a general meeting is required. The promoters to whom such sweat equity shares are to be issued cannot participate in such a meeting.

The price of sweat equity shares cannot be less than the maximum value of the average of the weekly high and low of the closing prices of the related equity shares during the six months preceding the relevant date; or during the two weeks preceeding the relevant date.

The amount of sweat equity shares issued will be treated as part of managerial remuneration if the shares are issued to any director or manager for non-cash consideration, which does not take the form of an asset that can be shown in the balance sheet of the company.

Sweat equity shares have a lock-in period of three years from the date of allotment. The sweat equity issued by a listed company will be eligible for listing only if such issues are in accordance with SEBI regulations.

The explanatory statement to the notice and the resolution to be passed in the general body meeting for approving the issuance of sweat equity will contain the following information:

1. The total number of shares to be issued as sweat equity.
2. The current market prices of the shares of the company.
3. The value of the intellectual property rights or technical know-how or other value addition to be received from the employee or director along with the valuation report/basis of valuation.
4. The names of the employees or directors or promoters to whom the sweat equity shares are to be issued, specifying their relationship with the company.
5. The consideration to be paid for the sweat equity.
6. The price at which the sweat equity shares is to be issued.
7. Ceiling on managerial remuneration, if any, which will be affected by the issuance of such sweat equity.
8. Diluted earning per share pursuant to the issue of securities to be calculated. (The EPS if all convertible/issuable securities are considered.)
9. A statement to the effect that the company will conform to the accounting policies as specified by SEBI.

SECONDARY MARKET REGULATIONS

Secondary market regulations protect investors by curbing insider trading and through regulations governing the buyback of shares by the company.

Insider Trading

An insider is any person, who is or deemed to be or was connected with the company and who is reasonably expected to have access, by virtue of such a connection, to unpublished, price-sensitive information about the securities of the company. Unpublished, price-sensitive information pertains to any information which is of direct or indirect concern to the company and is not generally known or published, but which, if published or known, might materially affect the price of the securities of that company in the market. The following information is deemed to be price sensitive:

1. periodical financial results;
2. intended declaration of interim/final dividends;
3. issue of securities/buyback;
4. major expansion/new projects;
5. amalgamation/takeovers;
6. disposal of whole/substantial part of the undertaking; and
7. any significant change in policies, plans, or operations of the company.

The insiders of a company (directors/promoters/officers/designated employees, and others) are prohibited from trading in shares/securities of the company based on unpublished, price-sensitive information.

SEBI has given a model code of internal procedure and conduct for implementation and compliance by companies and others associated with the securities market. As per the code:

• The compliance officer of the company (a senior level employee) is made responsible for the preservation of price-sensitive information and pre-clearing of trading in securities of designated employees and their dependents. The compliance officer maintains a record of designated employees who will include officers of the top three tiers of the management and all employees of the finance department. Specific employees may also be designated by the company for this purpose.
• The unpublished, price-sensitive information should be disclosed by the company only to those within the company who need the information for the discharge of their duties and in whose possession the information will not give rise to a conflict of interest or misuse.
• The company has to specify a trading period (trading window) during which trading of securities can be done by the directors/officers/designated employees. They cannot trade in the company’s securities during the period when the trading window is closed.
• The trading window will be closed, among others, at the time of declaration of financial results/ dividends (interim/final), decisions are taken using price sensitive information. The trading window for the insiders will be opened 24 hours after the above information is made public. The trading window can be closed during other period/s also, at the discretion of the company.
• All directors/officers/designated employees should get a pre-clearance of the transactions in securities that they intend to deal. The company is permitted to fix a minimum threshold limit above which such pre-clearance would be required. An application has to be made by such a person, giving prescribed particulars to the compliance officer. Once the compliance officer gives his approval, the person concerned has to execute the order within a week. Moreover, if securities are acquired, the same has to be held for a minimum period of 30 days.
• The compliance officer has to place before MD/CEO/a committee all the details of the dealings in securities by employees/directors/officers. This is to be done on a monthly basis.

The company has to ensure that adequate and timely disclosure of price-sensitive information is given on continuous and immediate basis to the stock exchanges. The compliance officer has to approve and oversee the disclosures. The company has to lay down the procedure for responding to any queries/ requests for verification of market rumors by stock exchanges. The compliance officer is also responsible for deciding whether a public announcement is necessary for verifying/denying rumors and then make the disclosure. The disclosure has to be done through various media/company web site. Information sent to stock exchanges may be put on the website. While dealing with institutions, only public information has to be provided. At least two company representatives should be present at meetings with institutions and discussions should preferably be recorded.

Buyback of Shares

A company may buyback its specified securities by any one of the following methods:

1. From the existing securities holders on a proportionate basis through a tender offer;
2. From the open market through (i) book-building process and (ii) stock exchange; and
3. From odd-lot holders.

A company cannot buyback its specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.

A company, authorised by a resolution passed by the Board of Directors at its meeting to buyback its securities, may buyback its securities subject to the following conditions:

1. Before making a public announcement, a public notice has to be given in at least one English national daily, one Hindi national daily, and a regional language daily, all with a wide circulation at the location of the company’s registered office;
2. The public notice has to be given within two days of the passing of the resolution by the Board of Directors; and
3. The public notice has to contain all the requisite disclosures.

The company should disclose the maximum price at which the buyback of specified securities is to be made. It should also state whether the Board of Directors of the company is being authorised at the general body meeting to determine subsequently the specific price at which the buyback may be made at the appropriate time. If the promoter intends to offer the specified securities, the quantum of specified securities proposed to be tendered, and the details of transactions and holdings for the preceding six-months including information on the number of specified securities acquired, and the price and date of acquisition are to be given.

On payment of consideration to all the securities holders, the balance amount, in the escrow account (account usually formed to hold funds while a negotiation is in process), can be released to the company. The board, in the interest of the securities holders, may in case of non-fulfilment of obligations under the regulations of the company, forfeit the escrow account either in full or in part. The amount forfeited may be distributed pro rata amongst the securities holders who accepted the offer and the balance can be utilised for investor protection. Immediately after the date of closure of the offer, the company has to open a special account with a banker to an issue registered with SEBI and deposit therein the entire sum due and payable as consideration for buyback. Within seven days the company has to make payment of consideration in cash to those securities holders whose offers have been accepted or return the securities certificates to the security holders if the offer is not accepted.

The company has to extinguish and physically destroy the securities certificates so bought back, in the presence of a registrar or the merchant banker, and the statutory auditor within seven days of the date of acceptance of the specified securities. The specified securities offered for buyback, if already dematerialised, also have to be destroyed. The company then has to furnish a certificate to the Board and to the stock exchange, duly verified by the registrar/merchant banker, two wholetime directors including the managing director and the statutory auditor of the company within seven days of the extinguishing and destruction of the certificates. The company has to maintain a record of the securities certificates/which have been cancelled and destroyed.

The company cannot issue any specified securities including by way of bonus till the date of closure of the offer. The company cannot withdraw the offer to buyback after the draft letter of the offer is filed with SEBI or a public announcement of the offer to buyback is made. No public announcement of a buyback can be made when any scheme of amalgamation or compromise or any other arrangement is pending. The company nominates a compliance officer and investor service centre for compliance with the buyback regulations and to redress the grievances of the investors. The company cannot buyback locked-in specified securities and non-transferable specified securities till the lock-in period is over or till the specified securities become transferable. The company can pay the consideration only by way of cash.

Buyback through Tender Offer/Buyback of Odd Lot Specified Securities

A company may buyback its specified securities from its existing securities holders on a proportionate basis. The offer for buyback remains open to the members for a period not less than 15 days and not exceeding 30 days. The date of the opening of the offer cannot be earlier than seven days or later than thirty days after the specified date. The letter of offer has to be sent to the securities holders so as to reach them before the opening of the offer. In case the number of specified securities offered by the securities holders is more than the total number of specified securities to be bought back by the company, the acceptances per securities holder will be on a proportionate basis.

The company has to open an escrow account on or before the opening of the buyback offer. The escrow account consists of cash deposited with a scheduled commercial bank, bank guarantee in favour of the merchant banker, or deposit of acceptable securities with the merchant banker, or a combination of above. The escrow account balance will be at the rate of 25 per cent of the consideration payable if the total consideration payable does not exceed Rs 100 crores. If the consideration payable exceeds Rs 100 crores, then beyond the base level of 25 per cent, for every additional Rs 100 crores a 10 per cent additional balance is required.

Buyback from Open Market

In a buyback from the open market, if there is any safety net scheme or buyback arrangements of the shares proposed in any public issue that has been finalised by the company with the lead merchant banker in advance, this has to be disclosed in the prospectus. Such buyback or safety net arrangements can be made available only to all original resident individual allottees. Such buyback or safety net facility, however, will be limited up to a maximum of 1,000 shares per allottee and the offer will be valid at least for a period of six months from the last date of dispatch of securities. The financial capacity of the person making available the buyback or safety net facility has to be disclosed in the draft prospectus.

The buyback of specified securities from the open market may be by any one of the following methods: (a) stock exchange or (b) book building process.

Buyback through Stock Exchange

A company can buyback its specified securities through the stock exchange by passing a special resolution and specifying the maximum price at which the buyback is to be made. The buyback cannot be made from the promoters or persons in control of the company. The company has to appoint a merchant banker and make a public announcement of the offer at least seven days prior to the commencement of the buyback. A copy of the public announcement has to be filed with SEBI within two days of such an announcement along with the fees.

The public announcement discloses details of the brokers and stock exchanges through which the buyback of the specified securities would be made. The buyback can be made only on stock exchanges with an electronic trading facility. The buyback of specified securities has to be made only through the order matching mechanism except the “all or none” order matching system. The identity of the company as a purchaser appears on the electronic screen when the order is placed. Both the company and the merchant banker inform the stock exchange on a daily basis about the specified securities purchased for buyback and the same information is also to be published in a national daily.

The company then should extinguish the certificates as in the buyback through tender/odd-lot methods.

Buyback through Book Building

A company may buyback its specified securities through the book-building process by passing a special resolution. The public announcement of buyback contains detailed methodology of the book-building process, manner of acceptance, format of acceptance to be sent by the securities holders pursuant to the public announcement, and details of bidding centres. The book building process has to be made through an electronically linked transparent facility. The number of bidding centres cannot be less than 30 and there has to be at least one electronically linked computer terminal at all the bidding centres.

The merchant banker and the company determine the buyback price based on the acceptances received. The final buyback price, which is the highest accepted price, would be paid to all holders whose specified securities have been accepted for buyback. After buyback, the certificates have to be extinguished at the earliest date.

Within two days of the completion of buyback issue the company has to give a public advertisement in a national daily. This discloses the number of specified securities bought, price at which they are bought, and total amount invested in buyback. The details of the securities holders who have bought securities exceeding 1 per cent of the total specified securities bought back and the consequent changes in the capital structure and the shareholding pattern after and before the buyback also needs to be advertised.

Any acquirer, who acquires more than five, or ten, or fourteen per cent shares or voting rights in a company, has to disclose at every stage the aggregate shareholding or voting rights to the company and to the stock exchanges where the shares of the company are listed.

All the above disclosures have to be made within two days of the receipt of the intimation of allotment of shares or the acquisition of shares or voting rights. The stock exchange has to immediately display the information received from the acquirer on the trading screen, notice board, and also on its website.

Every person, including a person who holds more than 15 per cent shares or voting rights in any company, within 21 days from the financial year ending March 31, has to make yearly disclosures to the company, in respect of holdings as on March 31.

Substantial Acquisition of Shares or Voting Rights or Control in a Listed Company

When an acquirer buys shares or voting rights which entitle him to exercise 15 per cent or more of the voting rights in a company, he has to make a public announcement to acquire shares of such company in accordance with the SEBI regulations. An acquirer can have control over the company only when such person makes a public announcement to acquire shares through the merchant banker not later than four working days of entering into an agreement.

The offer to acquire shares has to be made at a price not lower than the price determined. The offer price is payable (a) in cash, or (b) by issue, exchange, and/or transfer of shares (other than preference shares) of an acquirer-listed company, or (c) by issue, exchange and, or transfer of secured instruments of acquirer company with a minimum ‘A’ grade rating from a credit rating agency, or (d) a combination of the above.

The public offer made by the acquirer to the shareholders of the company has to be for a minimum 20 per cent of the voting capital of the company. If the public offer results in the public shareholding being reduced to 10 per cent or less, the acquirer has to make an offer to buy the outstanding shares remaining with the shareholders or undertake to disinvest through an offer for sale or by a fresh issue of capital to the public. The fresh public offer has to be made within a period of six months from the date of closure of the public share acquisition.

The board of directors of the company cannot, during the offer period, sell, transfer, encumber, or otherwise dispose of or enter into an agreement for sale, transfer, encumbrance, or disposal of assets of the company or its subsidiaries. There cannot be an issue allotting any authorised but unissued securities carrying voting rights during the offer period. The company also cannot enter into any material contracts.

Any other person desirous of making a competitive offer within 21 days of the public announcement of the first offer, has to make a public announcement of a competitive offer for the acquisition of the shares of the same company. Upon the public announcement of a competitive bid(s), the acquirer(s) who had made the public announcement(s) of the earlier offer(s) may have the option to make an announcement revising the offer. Where there is a competitive bid, the date of closure of the original bid and of all the subsequent competitive bids will be the date of closure of the public offer under the last competitive bid.

No public offer, once made, can be withdrawn except when the statutory approval(s) required have been refused, the sole acquirer, being a natural person, has died and other circumstances as SEBI may pronounce. In such a withdrawal of the offer, the merchant banker has to make a public announcement in the same newspapers in which the public announcement of offer was published, indicating reasons for the withdrawal of the offer and simultaneously inform SEBI, all the listed stock exchanges, and the company.

The acquirer has to open an escrow account by way of security for the acquisition. The escrow amount will be calculated as 25 per cent for a public offer up to and including Rs 100 crores and 10 per cent thereafter. For offers which are subject to a minimum level of acceptance, and the acquirer does not want to acquire a minimum of 20 per cent, then 50 per cent of the consideration payable under the public offer in cash has to be deposited in the escrow amount. The escrow account is in the form of cash deposited with a bank, or a bank guarantee in favour of the merchant banker, or a deposit of acceptable securities with appropriate margin, with the merchant banker. In respect of consideration payable by way of exchange of securities, the acquirer has to ensure that the securities are actually issued and dispatched to the shareholders.

Bail out Takeovers

A bail out takeover applies to a substantial acquisition of shares in a financially weak company not being a sick industrial company. A financially weak company is one, which has, at the end of the previous financial year, accumulated losses, that have resulted in the erosion of more than 50 per cent but less than 100 per cent of its net worth as at the beginning of the previous financial year. The scheme may provide for the acquisition of shares in the financially weak company in terms of outright purchase of shares, or exchange of shares, or a combination of both.

Before giving effect to any scheme of rehabilitation, the lead institution invites offers for acquisition of shares from at least three parties. The lead institution evaluates the bids received with respect to the purchase price or exchange of shares, track record, financial resources, reputation of the management of the person acquiring shares, and ensures fairness and transparency in the process. After evaluation, the lead institution selects one of the parties to rehabilitate the financially weak company.

The person acquiring shares can make a formal offer to acquire the shares from the promoters or persons in charge of the affairs of the management of the financially weak company, at a price determined by mutual negotiation between the person acquiring the shares and the lead institution. The person acquiring the shares then has to make a public announcement of the intention for acquisition of shares from the other shareholders of the company. Such a public announcement will contain relevant details about the offer such as identity and background of the person acquiring shares, number and percentage of shares proposed to be acquired, offer price, specified date, date of opening of the offer, and the period for which the offer will be kept open. This letter of offer will be forwarded to each of the shareholders other than the promoters or the persons in charge of the management of the financially weak company and the financial institutions. Once the lead institution has evaluated the bid and accepted the bid of the acquirer who has made the public announcement of offer for acquisition of shares, no other competitive bid can be made.

REGULATION FOR MUTUAL FUNDS

A mutual fund is a mechanism for pooling resources by issuing units to investors and investing funds in securities in accordance with the objectives as disclosed in the offer document. Investment in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to investors according to the quantum of money invested by them. Investors of mutual funds are known as unit holders.

The investors share the profits or losses in proportion to their investments. Mutual funds normally launch a number of schemes with different investment objectives from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India before it can collect funds from the public.

A mutual fund is set up in the form of a trust, with sponsor, trustees, asset management company (AMC), and custodian. The trust is established by a sponsor, or sponsors, who is like the promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. An asset management company approved by SEBI manages the funds by making investments in various types of securities. The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over the AMC. They monitor the performance and compliance of SEBI regulations by the mutual fund.

SEBI regulations require that at least two-thirds of the directors of the trustee company or board of trustees must be independent, that is, they should not be associated with the sponsors. Also, 50 per cent of the directors of the AMC must be independent. SEBI also regulates the investments made by the mutual funds.

REGULATIONS ON DERIVATIVES TRADING

The Dr L C Gupta Committee constituted by SEBI in 1998 laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bylaws for derivative exchanges/segments and their clearing corporation/house, which lay down the provisions for trading and settlement of derivative contracts. The eligibility conditions have been framed to ensure that the derivative exchange/segment and clearing corporation/house provide a transparent trading environment, safety, and integrity, and provide facilities for the redressal of investor grievances.

Some of the important eligibility conditions are that derivative trading has to take place through an online screen-based trading system. It has to have online surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation. It has to have arrangements for the dissemination of information about trades, quantities, and quotes on a real time basis through at least two information vending networks, which are easily accessible to investors across the country. It should have an arbitration and investor grievances redressal mechanism operative from all the four regions of the country. It should have a satisfactory system of monitoring investor complaints and preventing irregularities in trading.

SEBI has specified that the value of a derivative contract should not be less than Rs 2 lakhs at the time of introducing the contract in the market. Lot size refers to the number of underlying securities in one contract. Additionally, for stock-specific derivative contracts, SEBI has specified that the lot size of the underlying individual security should be in multiples of 100 and fractions, if any, should be rounded of to the next higher multiple of 100. This requirement of SEBI, coupled with the requirement of a minimum contract size, forms the basis of arriving at the lot size of a contract.

For example, if the shares of XYZ Ltd are quoted at Rs 2,000 each and the minimum contract size is Rs 2 lakhs, then the lot size for that particular scrips stands to be 200000/2000 =100 shares, that is, one contract in XYZ Ltd. covers 100 shares.

The measures specified by SEBI to protect the rights of the investor in the derivative market include the following:

1. The investor’s money has to be kept separate at all levels and is permitted to be used only against the liability of the investor and is not available to the trading member or clearing member or any other investor.
2. The trading member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives.
3. An investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client. The investor could also demand the trade confirmation slip. This will protect the investor from the risk of price favour extended by the member.

In the event of a default of a member, losses suffered by the investor, if any, on settled/closed out position are compensated from the investor protection fund.

SUMMARY

Authority enforced regulations are needed in a market to the extent that the concept of “self-regulation” fails. The Indian stock markets are regulated by the Securities and Exchange Board of India. SEBI regulations cover the primary market, secondary market, mutual fund administration, and derivatives market.

SEBI’s guidelines bring an orderly trading practice among the players in the market and are oriented towards investor protection in the stock market.

CONCEPTS

• Offer document	• Due diligence
• Firm allotment	• Promoter’s quota
• Preferential allotment	• Insider trading
• ESOS/ESOP	• Sweat equity
• Buy-back of shares	• Lock-in-period
• Lead manager	• Book building
• Underwriting	• Unlisted company
• Market lot	• Odd lots
• Takeovers	• Escrow account

SHORT QUESTIONS

1. Who can make premium issues?
2. What are reservations in issues?
3. What is due diligence? Who issues the due diligence certificate?
4. What is insider trading?
5. What is sweat equity?

ESSAY QUESTIONS

1. Discuss SEBI regulations regarding primary market operations.
2. Discuss how secondary markets are regulated by SEBI.
3. What are the regulations relating to pricing of public issue of shares?
4. What are the regulations regarding insider trading?
5. Explain the procedure for the buy back of shares.
6. Explain ESOS/ESOP.

APPENDIX

INDIAN STOCK MARKET EVALUATION—AN INTERNATIONAL COMPARISON