PROJECT REPORT

ON
Corporate Law Including,

CAPITAL MARKET

IN

INDIA

Presented By:

JYOTI
KUKREJA
CS Registration No. 221183850/08/2011

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 INDEX
Sl. No. Subject Page No.

Chapter 1 Introduction 1 to 8

Chapter 2 Recent Developments in Capital 9 to 15

Market

Chapter 3 Recent Amendments in Capital 16 to 25

Market

Chapter 4 Corporate Governance & Capital 26 to 27

Market

Chapter 5 A brief Study on Sanjay Dangi 28 to 29

Case

Chapter 6 Future Growth & Conclusion 30 to 33

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 CHAPTER 1

INTRODUCTION

The capital market has witnessed major reforms in the decade of 1990s and
thereafter. It is on the verge of the growth. Thus the Government of India and SEBI
has taken a number of measures in order to improve the working of the Indian
Stock Exchanges and to make it more progressive and vibrant.

The Indian capital market is more than a century old. Its history
goes back to 1875, when 22 brokers formed the Bombay Stock
Exchange (BSE). Over the period, the Indian securities market
has evolved continuously to become one of the most dynamic,
modern, and efficient securities markets in Asia. Today, Indian
market confirms to best international practices and standards
both in terms of structure and in terms of operating efficiency.
Indian securities markets are mainly governed by a) The
Company’s Act1956, b) the Securities Contracts (Regulation) Act 1956 (SCRA Act),
and c) the Securities and Exchange Board of India (SEBI) Act, 1992.

A brief background of these above regulations is given below:

a) The Companies Act 1956 deals with issue, allotment and transfer of
securities and various aspects relating to company management. It provides norms
for disclosures in the public issues, regulations for underwriting, and the issues
pertaining to use of premium and discount on various issues.

b) Securities Contracts (Regulation) Act, 1956 provides regulations for direct

and indirect control of stock exchanges with an aim to prevent undesirable
transactions in securities. It provides regulatory jurisdiction to Central Government
over stock exchanges, contracts in securities and listing of securities on stock
exchanges. As amended by the securities contracts (regulation) amendment act,
2007.

c) The SEBI Act empowers SEBI to protect the interest of investors in the
securities market, to promote the development of securities market and to regulate
the security market.

The Capital Market is a market for financial investments that are direct or indirect
claims to capital. It is wider than the Securities Market and embraces all forms of
lending and borrowing, whether or not evidenced by the creation of a negotiable
financial instrument.

ROLE OF CAPITAL MARKET IN INDIA

India’s growth story has important implications for the capital market, which has
grown sharply with respect to several parameters — amounts raised number of

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stock exchanges and other intermediaries, listed stocks, market capitalization,
trading volumes and turnover, market instruments, investor population, issuer and
intermediary profiles. Capital Market contributed significantly to mobilizing funds to
meet public and private companies’ financing requirements. The introduction of
exchange-traded derivative instruments such as options and futures has enabled
investors to better hedge their positions and reduce risks. Capital markets provide a
mechanism for intermediation over the long term between financial surplus units
and financial deficit units. As such they form the artery for the flow of resources
among the various economic sectors.

Healthy capital markets grow from the real needs of the economy, specially the
need for long-term financing, and they develop through serving resident and non-
resident sectors. These markets thrive within an appropriate legal and regulatory
environment and a stable economy.

TYPE OF CAPITAL MARKET IN INDIA

The Securities Market refers to that Capital Market segment in which financial
instruments, claims, obligations are commonly and readily transferrable by sale.
The Securities Market has two inter-independent and inseparable segments which
are commonly known as Primary (New Issue) Market and Secondary (Stock)
Market.

» Primary Market

In this segment of Securities Market, the issuer of securities sells the securities to
raise funds. In other words, the market wherein resources are mobilized by
companies through issue of new securities to direct investors is termed as Primary
Market. These resources are required for new projects as well as for existing
projects with a view of expansion, diversification, modernization and up gradation
etc. The Primary Market is of great significance for the economy as thorough it
funds flow for productive purposes from investors to entrepreneurs. The latter uses
the funds for creating new products and rendering services to customer within and
outside the country.

Mode of raising of funds through Primary Market

1. Initial public offer;

2. Further issue of capital;
3. Rights issue to the existing shareholders;
4. Offer of securities under reservation or firm allotment basis to:
 Foreign partners and collaborators
 Mutual Funds
 Merchant Bankers
 Banks and Institutions
 Non-resident Indians and Overseas Corporate Bodies’
 Employees

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 » Secondary Market

Secondary Market is that segment of Securities Market in which the securities

already issued to the investors are bought and sold. Secondary market enables
those who hold securities to adjust their holdings in response to changes in their
assessment of risk and return. They also sell securities for cash to meet their
liquidity needs. The price signals, which subsume all information about the issuer
and his business including, associates risks, generated in the secondary market,
help the primary market in allocation of funds.

Secondary market essentially comprises of stock exchange which provide platform

for purchase and sale of securities by investors. The trading platform of stock
exchange is accessible only through brokers and trading of securities is confined
only to stock exchanges.

Capital Market Instruments

Capital Market Instruments can be divided under following classes

a) Pure Instruments
Instruments which are issued are issued with their basic characteristics in tact
without mixing features of other classes of instruments are called Pure
Investments. e.g equity shares, preference shares and debentures etc.

b) Hybrid Instruments
Hybrid Instruments are those which are created by combining the features of equity
with bond and preference with equity etc. e.g. convertible preference shares,
cumulative convertible preference shares, convertible debentures etc.

c) Derivatives Instruments
Derivatives are contracts which derive their values from the value of one or more of
other assets (known as underlying assets). Some of the most commonly traded
derivatives are futures, forwards, options and swaps

Equity Shares

Equity shares are those shares which represents the fractional ownership in this the
business of the company. Equity shareholders undertake the maximum risk
associated with a business venture. Equity shares, other than non-voting shares,
have voting rights at all general meetings of the company. Those votes have the
affect of the controlling management of the company. Equity shares have the rights
to share the profits of the company in the form of dividend (cash) bonus shares.
However even equity shareholders cannot demand declaration of dividend by the
company which is left to the discretion of the Board of Directors and When the
company is wound up, payment towards the equity share capital will be made to
the respective shareholders only after payment of the claims of all the creditors and
preference share capital.

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 Preference Shares

Preference Shares are that share which carries first right on the dividend of the
company and in case winding up of company they receive their claim before equity
shares. Equity shares carries a fixed dividend rate which must be paid in full before
paying a single rupee dividend to equity shareholders of the company. Generally
preference shares does not possess voting rights, but a company can issue
preference shares with voting rights, there are many types of preference shares
some of them are explained as follows:

1. Cumulative Preference Shares : In the case of this type of shares the dividend
payable every year becomes first claims while declaring dividend. In case the
company does not have adequate profit or for some reason the company does not
want to pay preference dividend, it gets accumulated for being paid subsequently.

2. Non-Cumulative Preference Shares : In the case of this type of shares no

dividend is accumulated. If there are no profits or inadequate profits in any year,
then company can opt not to pay any preference dividend and same shall not be
carried forward in the next year. The preference shareholders have no right to
participate in the surplus profits or surplus assets in the winding up, unless
provided by the articles of association of the company.

3. Convertible Preference : In the case of these type of shares, the terms of issue
provides for the conversion into equity shares of the company after expiry of
certain period. These shares are sometimes referred as quasi equity shares in
common parlance.

4. Redeemable Preference Shares : In the case of this type of shares, the

shareholders claim are settled in full and shares are redeemed i.e. ceased to be
exist after specified time duration.

5. Irredeemable Preference Shares : In this type of shares, the terms of issue

provides that these shares shall not be redeemed until happening of certain
specified events which may not happen for indefinite period such as winding up of
the company.

6. Participating Preference Shares : Preference shareholders are not eligible for

higher rate of dividend then what is stated in terms of issue, even in the year when
company has made huge profits. If the terms of issue provide for higher dividend in
case of huge surpluses these shares are called participating preference shares.

7. Non-participating preference shares : All preference shares other than

participating preference share are non-participating preference shares.

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 DEBENTURES

Section 2(12) of the Companies Act, 1956 debentures as follows:

Debentures include debenture stock, bonds and any other securities of a company,
whether constituting a charge on the assets of the company or not. Debenture is a
document evidencing a debt or acknowledging it and any document which fulfills
either of these conditions is a debenture. The important features of debentures are:

1. It is issues by a company as a certificate of indebtedness.

2. It usually indicates the date of redemption and also provides for the repayment
of principal and payment of interest at specified date.
3. It usually creates a charge on the undertaking or the assets of the company. In
such a case the lenders of money to the company enjoy better protection as
secured creditors, i.e. if the company does not pay interest or repay principal
amount, the lenders may directly or through the debenture trustees bring action
against the company to realize their dues by sale of the assets/undertaking
earmarked as security for the debt.

Following are the types of debentures:

a) Naked or unsecured debentures

b) Secured Debentures
c) Redeemable Debentures
d) Perpetual Debentures
e) Bearer Debentures
f) Registered Debentures
g) Convertible Debentures :
 Fully Convertible Debentures
 Non Convertible Debentures
 Partly Convertible Debentures

Secured Premium Notes : These instruments are issued with detachable warrants
and are redeemable after a notified period say 4 to 7 years. The warrants enable
the holder to get equity shares allotted provided the secured premium notes are
fully paid. During the lock in period no interest is paid. The holder has an option to
sell back the SPN to the company at par value after the lock in period. if the holder
exercises this option, no interest/premium is paid on redemption.

Equity Shares with Detachable Warrants : The holder of the warrant is eligible
to apply for the specified number of shares on the appointed date at the pre-
determined price. These warrants are separately traded on stock exchanges. Essar
Gujarat, Ranbaxy and Reliance has issued these warrants.

Deep Discount Bond : Deep Discount bond are issued at a discounted value but
are redeemable at par, no interest or dividend is payable to the holders of this

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instrument, the discount allowed at the time of issue of this instrument is the
remuneration of the investor.

Sweet Equity Shares : Sweet equity shares are issued other than by way of cash,
i.e. the investor need not pay cash to the issuing company, the consideration may
flow in the form of intellectual property right, technical know how etc.

Security Receipts: Security receipt means a receipt or other security, issued by a

securitisation company or reconstruction company to any qualified institutional
buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder
thereof, of an undivided right, title or interest in the financial asset involved in
securitisation.

Government securities (G-Secs): These are sovereign (credit risk-free) coupon

bearing instruments which are issued by the Reserve Bank of India on behalf of
Government of India, in lieu of the Central Government's market borrowing
programme. These securities have a fixed coupon that is paid on specific dates on
half-yearly basis. These securities are available in wide range of maturity dates,
from short dated (less than one year) to long dated (up to twenty years).

Commercial Papers: A short term promise to repay a fixed amount that is placed
on the market either directly or through a specialized intermediary. It is usually
issued by companies with a high credit standing in the form of a promissory note
redeemable at par to the holder on maturity and therefore, doesn’t require any
guarantee. Commercial paper is a money market instrument issued normally for
tenure of 90 days.
Treasury Bills: Short-term (up to 91 days) bearer discount security issued by the
Government as a means of financing its cash requirements.

Futures : Futures is a contract to buy or sell an underlying financial instrument at a

specified future date at a price when the contract is entered. Underlying assets for
the purpose include equities, foreign exchange, interest bearing securities and
commodities. The idea behind financial future contract is to transfer future changes
in security procces from one party in the contract to another.

Options : An option contract conveys the right to buy or sell a specific security or
commodity at specified price within a specified period of time. The right to buy is
referred to as a call option whereas the right to sell is known as put.

Other Instruments : Some other noted Capital Market instruments are Disaster
Bonds, Option Bonds, Easy Exit Bonds, Pay in Kind Bonds, Split Coupon
Debentures,Floating Rate Bonds and Notes, Clip and Strip Bonds, Dual Convertible
Bonds, Debt Instruments with Debt Warrants, Indexed Rate Notes, Stepped Coupon
Bonds, Dual Option Warrants, Extendable Notes, Level Pay Floating Rate Notes,
Industrial Revenue Bonds, Commodity Bonds, Participating Debentures, Mortgage
Back Securities, Carrot and Stick Bond, Capital Indexed Bonds, Debt for Equity
Swap, Zero Coupon Convertible Notes, Global Depository Receipts, Foreign
Currency Convertible Bonds

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 CHAPTER 2

RECENT DEVELOPMENTS IN CAPITAL MARKET

ESTABLISHMENTS OF SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) was established in 1988. It got
a legal status in 1992. SEBI was primarily set up to regulate the activities of the
merchant banks, to control the operations of mutual funds, to work as a promoter
of the stock exchange activities and to act as a regulatory authority of new issue
activities of companies. The SEBI was set up with the fundamental objective, "to
protect the interest of investors in securities market and for matters connected
therewith or incidental thereto."

ROLE OF SEBI IN CAPITAL MARKET

The role of security exchange board of India (SEBI) in regulating Indian capital
market is very important because government of India can only open or take
decision to open new stock exchange in India after getting advice from SEBI.If SEBI
thinks that it will be against its rules and regulations, SEBI can ban on any stock
exchange to trade in shares and stocks.

Now, we explain role of SEBI in regulating Indian Capital Market more deeply with
following points:

1. Power to make rules for controlling stock exchange: SEBI has power to
make new rules for controlling stock exchange in India.

2. To provide license to dealers and brokers: SEBI has power to provide

license to dealers and brokers of capital market. If SEBI sees that any financial
product is of capital nature, then SEBI can also control to that product and its
dealers. One of main example is ULIPs case. SEBI said, "It is just like mutual
fundsand all banks and financial and insurance companies who want to issue it,
must take permission from SEBI."

3. To Stop fraud in Capital Market: SEBI has many powers for stopping fraud in
capital market.It can ban on the trading of those brokers who are involved in
fraudulent and unfair trade practices relating to stock market. It can impose the
penalties on capital market intermediaries if they involve in insider trading.

4. To Control the Merger, Acquisition and Takeover the companies: Many big
companies in India want to create monopoly in capital market. So, these companies
buy all other companies or deal of merging. SEBI sees whether this merger or
acquisition is for development of business or to harm capital market.

5. To audit the performance of stock market: SEBI uses his powers to audit the

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performance of different Indian stock exchange for bringing transparency in the
working of stock exchanges.

6. To make new rules on carry - forward transactions: Share trading

transactions carry forward cannot exceed 25% of broker's total transactions.90 day
limit for carry forward.

7. To require report of Portfolio Management Activities: SEBI has also power

to require report of portfolio management to check the capital market performance.
Recently, SEBI sent the letter to all Registered Portfolio Managers of India for
demanding report.

8. To educate the investors: Time to time, SEBI arranges scheduled workshops

to educate the investors. On 22 may 2010 SEBI imposed workshop. If you are
investor, you can get education through SEBI leaders by getting update information
on this page.

GROWING STOCK EXCHANGES:

The numbers of Stock Exchanges in India are increasing. Initially the BSE was the
main exchange, but now after the setting up of the NSE and the OTCEI, stock
exchanges have spread across the country. Recently a new Inter-connected Stock
Exchange of India has joined the existing stock exchanges.
Capital markets in India have considerable depth. There are 22 stock exchanges in
India. In terms of legal structure, the stock exchanges in India could be segregated
into two broad groups – 16 stock exchanges which were set up as companies,
either limited by guarantees or by shares, and 3 stock exchanges which were set up
as association of persons and later converted into companies, viz. BSE, ASE and
Madhya Pradesh Stock Exchange.

National Stock Exchange (NSE)

To inject an international standard to the Indian Stock Market the National Stock
Exchange was started in 1992 by the Industrial Development Bank of India,
Industrial Credit and Investment Corporation of India, Industrial Finance
Corporation in India, all Insurance Corporations and the selected commercial banks.
The National Stock Exchange (NSE), located in Bombay, is India's first debt market.
It was set up to encourage stock exchange reform through system modernization
and competition. It opened for trading in mid-1994. It was recently accorded
recognition as a stock exchange by the Department of Company Affairs. The
instruments traded are, treasury bills, government security and bonds issued by
public sector companies. There are two kinds of players in NSE:
 Trading members
 Participants
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large
players like banks who take direct settlement responsibility

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Bombay Stock Exchange (BSE)

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,
now spanning three centuries in its 133 years of existence. What is now popularly
known as BSE was established as "The Native Share & Stock Brokers' Association"
in 1875.

BSE is the first stock exchange in the country which obtained permanent
recognition (in 1956) from the Government of India under the Securities Contracts
(Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of
the Indian capital market is widely recognized.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major
sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive
to market sentiments and market realities. Apart from the SENSEX, BSE offers 21
indices, including 12 sectoral indices. BSE has entered into an index cooperation
agreement with Deutsche Börse. This agreement has made SENSEX and other BSE
indices available to investors in Europe and America. Moreover, Barclays Global
Investors (BGI), the global leader in ETFs through its iShares® brand, has created
the 'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF
enables investors in Hong Kong to take an exposure to the Indian equity market.

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate
Electronic Reporting System) to facilitate information flow and increase
transparency in the Indian capital market. While the Directors Database provides a
single-point access to information on the boards of directors of listed companies,
the ICERS facilitates the corporates in sharing with BSE their corporate
announcements.

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way
to many functional inefficiencies, such as, absence of liquidity, lack of transparency,
unduly long settlement periods and benami transactions, which affected the
small investors to a great extent. To provide improved services to investors, the
country's first ringless, scripless, electronic stock exchange - OTCEI - was created
in 1992 by country's premier financial institutions - Unit Trust of India, Industrial
Credit and Investment Corporation of India, Industrial Development Bank of India,
SBI Capital Markets, Industrial Finance Corporation of India, General Insurance
Corporation and its subsidiaries and CanBank Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities
traded on the OTCEI are classified into:

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 Listed Securities - The shares and debentures of the companies listed on the OTC
can be bought or sold at any OTC counter all over the country and they should not
be listed anywhere else.

Permitted Securities - Certain shares and debentures listed on other exchanges

and units of mutual funds are allowed to be traded.

Initiated debentures - Any equity holding atleast one lakh debentures of

particular scrip can offer them for trading on the OTC.

In the case of permitted securities, the system is similar to a traditional stock

exchange. The difference is that the delivery and payment procedure will be
completed within 14 days.

GROWTH IN COMMODITY TRADING

A commodity trading is a sophisticated form of investing. It is similar to stock

trading but instead of buying and selling shares of companies, an investor buys and
sells commodities. Like stocks, commodities are traded on exchanges where buyers
and sellers can work together to either get the products they need or to make a
profit from the fluctuating prices. Along with the trading of ordinary securities, the
trading in commodities is also recently encouraged. The Multi Commodity Exchange
(MCX) is set up. The volume of such transactions is growing at a splendid rate.

 Commodities Defined : Commodities are products that are found naturally or are
grown. Gold, lumber, cattle, platinum, wheat, cotton, orange juice, oil, sugar and
pork bellies are all commodities.
 The Marketplace : Commodities are part of the national and international
marketplace. The products are traded on exchanges, and the prices are based on
supply and demand.
 The Players : Many industries need commodities to run their business and buy and
sell commodities in the marketplace. For example, clothing manufacturers need
cotton, builders need lumber, and restaurants and supermarkets need beef.
 The Investors : Investors (individuals or companies like mutual funds) can profit
from the changing prices of commodities if they predict the direction of the prices,
either up or down.
 Trading Commodities : There are a few ways to trade commodities. Futures (for
future delivery) are contracts to buy or sell commodities at a specific price. Options
are buying the right to buy or sell a commodity at a specific price and date.

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 DEPOSITORY ACT, 1996

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

depositories in securities and for matters connected therewith or incidental
thereto. It came into force from 20th September, 1995.The terms used in The
Depositories Act,1996 are defined as under:

(1) “Beneficial owner” means a person whose name is recorded as such with a
depository.

(2) “Depository” means a company, formed and registered under the

Companies Act, 1956 and which has been granted a certificate of registration
under sub-section (1A) of section 12 of the SEBI Act, 1992.

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

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

section 12 of the SEBI Act, 1992.

(5) “Registered owner” means a depository whose name is entered as such in

the register of the issuer.

Surrender of certificate of security

Any person who has entered into an agreement with a depository shall surrender
the certificate of security, for which he seeks to avail the services of a depository,
to the issuer in such manner as may be specified by the regulations. The issuer,
on receipt of certificate of security, shall cancel the certificate of security and
substitute in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly. A depository shall,
on receipt of information enter the name of the person in its records, as the
beneficial owner.

Registration of transfer of securities with depository

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

transfer of security in the name of the transferee. If a beneficial owner or a
transferee of any security seeks to have custody of such security, the depository
shall inform the issuer accordingly.

Options to receive security certificate or hold securities with depository

Every person subscribing to securities offered by an issuer shall have the option
either to receive the security certificates or hold securities with a depository.
Where a person opts to hold a security with a depository, the issuer shall intimate
such depository the details of allotment of the security, and on receipt of such
information the depository shall enter in its records the name of the allottee as
the beneficial owner of that security.

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Rights of depositories and beneficial owner

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

effecting transfer of ownership of security on behalf of a beneficial owner. The
depository as a registered owner shall not have any voting rights or any other
rights in respect of securities held by it. The beneficial owner shall be entitled to
all the rights and benefits and be subjected to all the liabilities in respect of his
securities held by a depository.

Pledge or hypothecation of securities held in a depository

A beneficial owner may with the previous approval of the depository create a
pledge or hypothecation in respect of a security owned by him through a
depository. Every beneficial owner shall give intimation of such pledge or
hypothecation to the depository and such depository shall thereupon make
entries in its records accordingly. Any entry in the records of a depository under
Section 12 (2) shall be evidence of a pledge or hypothecation.

Securities not liable to stamp duty : As per Section 8-A of Indian Stamp Act,
1899:

a) an issuer, by the issue of securities to one or more depositories shall, in

respect of such issue, be chargeable with duty on the total amount of security
issued by it and such securities need not be stamped;

b) where an issuer issues certificate of security under sub-section (3) of Section

14 of the Depositories Act, 1996, on such certificate duty shall be payable as is
payable on the issue of duplicate certificate under the Indian Stamp Act, 1899;

c) transfer of registered ownership of securities from a person to a depository or

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

d) transfer of beneficial ownership of shares, such securities dealt with by a

depository shall not be liable to duty under Article 62 of Schedule I of the Indian
Stamp Act, 1899;

e) transfer of beneficial ownership of units, such units being units of mutual fund
including units of the Unit Trust of India, dealt with by a depository shall not be
liable to duty under Article 62 of Schedule I of the Indian Stamp Act, 1899;

CAPITAL MARKET REFORMS

Capital market reform enables the capital markets to embrace new ideas and
techniques affecting the capital market. Capital market liberalization is one such
capital market reform that is adopted by various countries to strengthen their
economy.

It has been always a big question to the economists whether to allow or not to

14
allow the foreign investments in the country. Packaged with both advantages and
disadvantages, the liberalization of the capital markets has always been
controversial. In the 1980s and 1990s when the US Treasury and International
Monetary Fund (IMF) tried to push world-wide capital-market liberalization, there
had been enormous opposition. Economists were not in the support of free and
unfettered markets.

Now the economic or financial change in one country can affect the capital
market of other country in real time. Almost all the countries are now exposed to
the inter-country trades and inter-country investments. The use of internet and
electronic media has added some more feasibility to the practice. Exchange of
information is fast and accurate with internet. Another advantage of this system
is that it brings the entire world in a single place. The capital market is one of the
industries that enjoy the maximum facility of the internet service.

Over the last few years, SEBI has announced several far-reaching reforms to
promote the capital market and protect investor interests. Reforms in the
secondary market have focused on three main areas: structure and functioning of
stock exchanges, automation of trading and post trade systems, and the
introduction of surveillance and monitoring systems. Computerized online trading
of securities, and setting up of clearing houses or settlement guarantee funds
were made compulsory for stock exchanges.

Online trading systems have been introduced in almost all stock exchanges.
Trading is much more transparent and quicker than in the past. Until the early
1990s, the trading and settlement infrastructure of the Indian capital market was
poor. Trading on all stock exchanges was through open outcry, settlement
systems were paper-based, and market intermediaries were largely unregulated.

Since 1992, there has been intensified market reform, resulting in a big
improvement in securities trading, especially in the secondary market for equity.
Most stock exchanges have introduced online trading and set up clearing
houses/corporations.It was opened up for investment by foreign institutional
investors (FIIs) in 1992 and Indian companies were allowed to raise resources
abroad through Global Depository Receipts (GDRs) and Foreign Currency
Convertible Bonds (FCCBs). The primary and secondary segments of the capital
market expanded rapidly, with greater institutionalization and wider participation
of individual investors accompanying this growth. However, many problems,
including lack of confidence in stock investments, institutional overlaps, and other
governance issues, remain as obstacles to the improvement of Indian capital
market efficiency.

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 CHAPTER 3

RECENT AMENDMENTS

 ISSUE OF CAPITAL AND DISCLOSURE REGULATIONS, 2009 (ICDR)

The ICDR Regulations was introduced by SEBI vide its notification No. LAD-
NRO/GN/2009-10/15/174471 dated 26th August, 2009, wherby the SEBI
(Disclosure and Investor Protection) Guidelines, 2000 were repealed.

SEBI (Disclosure and Investor Protection or DIP Guidelines, 2000) were to regulate
the issue of securities of a company to public, shareholders and institutional
investors through the primary market. Over the years, subsequent amendments to
DIP Guidelines coupled with several SEBI notifications and issue-specific SEBI
observations made it a confusing and disorganized piece of legislation.

1. Eligibility to Access Public Money- Uniform Applicability

The exemptions available under the DIP Guidelines to certain banking and
infrastructure companies from eligibility norms for making initial public offers (IPOs)
have been done away with under ICDR Regulations, and thus eligibility norms have
now been made applicable uniformly to all types of issuers. This qualification was
needed as ICDR no longer governs the issue of debt securities.

2. Offer for Sale by Listed Companies Allowed

Under the DIP Guidelines, an “offer for sale” was permitted only for unlisted
companies proposing IPOs. The ICDR Regulations now permits an “offer for sale”
even by listed companies (subject to certain eligibility criteria) through a new
definition of “follow on offer”. ICDR Regulations provides that such offer for sale can
be made if the shares are held by the seller for a period of at least one year prior to
the filing of draft offer document with the SEBI. The holding period now includes
the period when a convertible instrument was held, which has subsequently been
converted to an equity share. These changes are desirable since there appeared no
rationale for barring shareholders of listed companies from accessing the market
through an offer for sale and convertible instruments are essentially equity and
should be treated as such from the date the convertible instrument is issued.

3. Minimum Promoters Contribution

Under the erstwhile DIP Guidelines, minimum promoter’s contribution in a public

issue could be brought in by promoters/ persons belonging to promoter group/
friend/ friends, relatives and the associates of the promoters. Under the ICDR
Regulations, only promoters are permitted to contribute the minimum promoters’

16
contribution. While this may compromise the ability of promoters to make this
contribution, this provision is more meaningful.

4. Underwriting

The ICDR Regulations explicitly provide that the underwriting obligations would not
be restricted to the minimum subscriptttion level but to the whole issue, where
applicable. The rationale to such change appears to be that while minimum
subscriptttion clause is valid for determining the success of any issue from legal
point of view, an issuer may agree to have the issue underwritten with an
understanding to get the full amount of funds. Thus, where 100% of the offer
through offer document is underwritten, the underwriting obligations shall be for
the entire amount underwritten, except cases where compulsory allotment to QIBs
is prescribed. This provision gives a public issue greater reliability.

5. Preferential Allotment

Though the ICDR Regulations have introduced a new exception for preferential
issue of equity shares pursuant to convertible debt instruments under sub sections
(3) and (4) of section 81 of the Companies Act, 1956. This exemption recognises
the need to do away with dual regulation since such conversion is subject to Central
Government approval and specific rules.

6. Efficient Procedure and Adequate Disclosures

Book Building Process: Under the DIP Guidelines, two type of book building was
allowed, being 100% book building and 75% book building. The ICDR Regulations
does away with the 75% book built route which was hardly used.

Issue, allotment and Refund Period: Under the DIP Guidelines, in case there is a
revision in the price band in a book building issue, issue period was not clear but
the ICDR Regulations clarifying this lacuna has specifically provided the total issue
period not to exceed 10 days, including any revision in the price band. Further, 30
days period for allotment/ refund in case of fixed price issue as provided under DIP
Guidelines have been replaced with 15 days, as there was no valid reason to give
an extra 15 days to complete the process in case of a fixed price issue, making the
public issue process speedier and accountable to investors’ interest.

7. Difference between DIP Guidelines and ICDR regulation

As per the annexure attached to the Circular No. CFD0/DIL/ICDR/1/2009/03/09

dated 3rd September, 2009, followings are the significant changes between Dip
Guidleines and ICDR regulations:

S. Subject Provision under the Provision under the

No. Matter rescinded guidelines ICDR Regulations
1 Exemption Exemption available to Exemption removed.
from eligibility banking Company, Eligibility norms made

17
 norms for corresponding new bank and applicable uniformly to all
making an IPO infrastructure company type of issuers.
2 Debarment Company prohibited from Issuer not to make pubic
making an issue of securities issue or rights issue of
if it had been prohibited specified securities if ;
from accessing the capital a. The issuer, any of its
market under any order or promoter, promoter group
directions passed by the or directors or person in
board. control of the issuer are
debarred from accessing
the capital market by the
board
3 Book Building Book builing process through 75% book building route
Process 75% or 100 % of issue size omitted
4 Allotment/ 30 days for fixed price issue 15 days for both fixed price
refund period and 15 days for book built and book built issue
in public issue issue
5 Issue period 21 days, as against 10 days Uniform period of 10 days
for for other issues for all type of issuers
infrastructure
companies in
public issues
6 Financial The term “financial The term “financial
institution as a institution” opened to institution” replaced by
monitoring interpretation “public financial institution
agencies or a scheduled commercial
bank.”
7 Restriction on If issue opening and closing If advertisement contain
advertisement advertisement contain information other than the
highlights then the details specified in the
advertisement require to format for issue
contain risk factor. advertisement, the
advertisement shall contain
risk factor
8 Minimum Could be brought in by Shall be brought in only by
promoters promoters/ person belonging promoter whose identity,
contribution to promoter group/ friends, photograph, etc are
relatives and associates of disclosed in the offer
promoters document.
9 Issue period in Issue period not clear in Total issue period not to
case of public case of revision in price exceed 10 days including
issue band in book build public any revision in price band.
issues.
10 Document to Document such as Only check list to be
be attached Memorandum of association attached.
with due and Artice of association of
diligence the company, audited
certificate balancesheet, che3cklist for

18
 compliance with the
rescinded guidelines etc.
11 Group The term group companies The term group companies
companies not explained is explained

 SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations,

2011

The Securities and Exchange Board of India (“SEBI”) had been mulling over
reviewing and amending the existing SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 (“Takeover Code of 1997”) for quite some time now.
A Takeover Regulations Advisory Committee was constituted under the
chairmanship of Mr. C. Achuthan (“Achuthan Committee”) in September 2009 to
review the Takeover Code of 1997 and give its suggestions. The Achuthan
Committee provided its suggestions in its report which was submitted to SEBI in
July 2010. After taking into account the suggestions of the Achuthan Committee
and feedback from the interest groups and general public on such suggestions, the
SEBI finally notified the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (“Takeover Code of 2011”) on 23 September 2011. The
Takeover Code of 2011 will be effective from 22 October 2011.

The Takeover Code of 2011 adheres to the framework and principles of the
Takeover Code of 1997 but the changes it brings about are significant. Some of the
most important amendments are discussed below:

1. Initial threshold limit for triggering of an open offer

Under the Takeover Code of 1997, an acquirer was mandated to make an open
offer if he, alone or through persons acting in concert, were acquiring 15% or more
of voting right in the target company. This threshold of 15% has been increased to
25% under the Takeover Code of 2011.

Therefore, now the strategic investors, including private equity funds and minority
foreign investors, will be able to increase their shareholding in listed companies up
to 24.99% and will have greater say in the management of the company. An
acquirer holding 24.99% shares will have a better chance to block any decision of
the company which requires a special resolution to be passed. The promoters of
listed companies with low shareholding will undoubtedly be concerned about any
acquirer misutilising it.

However, at the same time, this will help the listed companies to get more
investments without triggering the open offer requirement as early as 15%,
therefore making the process more attractive and cost effective.

2. Creeping acquisition

19
The Takeover Code of 1997 recognised creeping acquisition at two levels – from
15% to 55% and from 55% to the maximum permissible limit of 75%. Acquirers
holding from 15% to 55% shares were allowed to purchase additional shares or
voting rights of up to 5% per financial year without making a public announcement
of an open offer. Acquirers holding from 55% to 75% shares were required to make
such public announcement for any additional purchase of shares. However, in the
latter case, up to 5% additional shares could be purchased without making a public
announcement if the acquisition was made through open market purchase on stock
exchanges or due to buyback of shares by the listed company.

The Takeover Code of 2011 makes the position simpler. Now, any acquirer, holding
more 25% or more but less than the maximum permissible limit, can purchase
additional shares or voting rights of up to 5% every financial year, without requiring
to make a public announcement for open offer. The Takeover Code of 2011 also
lays down the manner of determination of the quantum of acquisition of such
additional voting rights.

This would be beneficial for the investors as well as the promoters, and more so for
the latter, who can increase their shareholding in the company without necessarily
purchasing shares from the stock market.

3. Indirect acquisition

The Takeover Code of 2011 clearly lays down a structure to deal with indirect
acquisition, an issue which was not adequately dealt with in the earlier version of
the Takeover Code. Simplistically put, it states that any acquisition of share or
control over a company that would enable a person and persons acting in concert
with him to exercise such percentage of voting rights or control over the company
which would have otherwise necessitated a public announcement for open offer,
shall be considered an indirect acquisition of voting rights or control of the
company. It also states that wherever,

a) the proportionate net asset value of the target company as a percentage of

the consolidated net asset value of the entity or business being acquired;

b) the proportionate sales turnover of the target company as a percentage of the

consolidated sales turnover of the entity or business being acquired; or

c) the proportionate market capitalisation of the target company as a percentage

of the enterprise value for the entity or business being acquired;
is more than 80% on the basis of the latest audited annual financial statements,
such indirect acquisition shall be regarded as a direct acquisition of the target
company and all the obligations relating to timing, pricing and other compliance
requirements for the open offer would be same as that of a direct acquisition.

4. Voluntary offer

20
A concept of voluntary offer has been introduced in the Takeover Code of 2011, by
which an acquirer who holds more than 25% but less than the maximum
permissible limit, shall be entitled to voluntarily make a public announcement of an
open offer for acquiring additional shares subject to their aggregate shareholding
after completion of the open offer not exceeding the maximum permissible non-
public shareholding. Such voluntary offer would be for acquisition of at least such
number of shares as would entitle the acquirer to exercise an additional 10% of the
total shares of the target company.

This would facilitate the substantial shareholders and promoters to consolidate their
shareholding in a company.

5. Size of the open offer

The Takeover Code of 1997 required an acquirer, obligated to make an open offer,
to offer for a minimum of 20% of the ‘voting capital of the target company’ as on
‘expiration of 15 days after the closure of the public offer’. The Takeover Code of
2011 now mandates an acquirer to place an offer for at least 26% of the ‘total
shares of the target company’, as on the ‘10th working day from the closure of the
tendering period’.

The increase in the size of the open offer from 20% to 26%, along with increase in
the initial threshold from 15% to 25%, creates a unique situation under the
Takeover Code of 2011. An acquirer with 15% shareholding and increasing it by
another 20% through an open offer would have only got a 35% shareholding in the
target company under the Takeover Code of 1997. However, now an acquirer with
a 25% shareholding and increasing it by another 26% through the open offer under
the Takeover Code of 2011, can accrue 51% shareholding and thereby attain
simple majority in the target company.

These well thought out figures clearly shows the intention of the regulator to
incentivize investors acquiring stakes in a company by giving them an opportunity
of attaining simple majority in a company.

6. Important exemptions from the requirement of open offer

Inter-se transfer – The Takeover Code of 1997 used to recognize inter-se

transfer of shares amongst the following groups –

a) group coming within the definition of group as defined in the Monopolies and
Restrictive Trade Practices Act, 1969

b) relatives within the meaning of section 6 of the Companies Act, 1956

c) Qualifying Indian promoters and foreign collaborators who are shareholders,

etc.

21
The catagorisation of such groups have been amended in the Takeover Code of
2011 and transfer between the following qualifying persons has been termed as
inter-se transfer:

a) Immediate relatives
b) Promoters, as evidenced by the shareholding pattern filed by the target
company not less than 3 years prior to the proposed acquisition;

c) a company, its subsidiaries, its holding company, other subsidiaries of such

holding company, persons holding not less than 50% of the equity shares of such
company, etc.

d) persons acting in concert for not less than 3 years prior to the proposed
acquisition, and disclosed as such pursuant to filings under the listing agreement.
To avail exemption from the requirements of open offer under the Takeover Code of
2011, the following conditions will have to be fulfilled with respect to an inter-se
transfer:

- If the shares of the target company are frequently traded – the acquisition
price per share shall not be higher by more than 25% of the volume-weighted
average market price for a period of 60 trading days preceding the date of issuance
of notice for such inter-se transfer

- If the shares of the target company are infrequently traded, the acquisition
price shall not be higher by more than 25% of the price determined by taking into
account valuation parameters including, book value, comparable trading multiples,
etc.

Rights issue – The Takeover Code of 2011 continues to provide exemption from
the requirement of open offer to increase in shareholding due to rights issue, but
subject to fulfillment of two conditions:

(a) The acquirer cannot renounce its entitlements under such rights issue; and

(b) The price at which rights issue is made cannot be higher than the price of the
target company prior to such rights issue.

Scheme of arrangement – The Takeover Code of 1997 had a blanket exemption

on the requirement of making an open offer during acquisition of shares or control
through a scheme of arrangement or reconstruction. However, the Takeover Code
of 2011 makes a distinction between where the target company itself is a transferor
or a transferee company in such a scheme and where the target company itself is
not a party to the scheme but is getting affected nevertheless due to involvement
of the parent shareholders of the target company. In the latter case, exemption
from the requirement of making an open offer would only be provided if

(a) the cash component is 25% or less of the total consideration paid under the
scheme, and

22
(b) post restructuring, the persons holding the entire voting rights before the
scheme will have to continue to hold 33% or more voting rights of the combined
entity.
Buyback of shares – The Takeover Code of 1997 did not provide for any
exemption for increase in voting rights of a shareholder due to buybacks. The
Takeover Code of 2011 however provides for exemption for such increase.

In a situation where the acquirer’s initial shareholding was less than 25% and
exceeded the 25% threshold, thereby necessitating an open offer, as a
consequence of the buyback, The Takeover Code of 2011 provides a period of 90
days during which the acquirer may dilute his stake below 25% without requiring
an open offer.

Whereas, an acquirer’s initial shareholding was more than 25% and the increase in
shareholding due to buyback is beyond the permissible creeping acquisition limit of
5% per financial year, the acquirer can still get an exemption from making an open
offer, subject to the following:

(a) such acquirer had not voted in favour of the resolution authorising the buy-
back of securities under section 77A of the Companies Act, 1956;

(b) in the case of a shareholder resolution, voting was by way of postal ballot;

(c) the increase in voting rights did not result in an acquisition of control by such
acquirer over the target company

In case the above conditions are not fulfilled, the acquirer may, within 90 days from
the date of increase, dilute his stake so that his voting rights fall below the
threshold which would require an open offer.

7. Other important changes

Following are few other important amendments that have been brought about in
the Takeover Code of 2011:

Definition of ‘share’ – The Takeover Code of 1997 excluded ‘preference shares’

from the definition of ‘shares’ vide an amendment of 2002. However, this exclusion
has been removed in the Takeover Code of 2011 and therefore now ‘shares’ would
include, without any restriction, any security which entitles the holder to voting
rights.

Non-compete fees – As per the Takeover Code of 1997, any payment made to
the promoters of a target company up to a maximum limit of 25% of the offer price
was exempted from being taken into account while calculating the offer price.

However, as per the Takeover Code of 2011, price paid for shares of a company
shall include any price for the shares / voting rights / control over the company,

23
whether stated in the agreement or any incidental agreement, and includes ‘control
premium’, ‘non-compete fees’, etc.

Responsibility of the board of directors and independent directors – The

general obligations of the board of directors of a target company under the
Takeover Code of 1997 had given a discretionary option to the board to send their
recommendations on the open offer to the shareholders and for the purpose the
board could seek the opinion of an independent merchant banker or a committee of
independent directors.

The Takeover Code of 2011, however, makes it mandatory for the board of
directors of the target company to constitute a committee of independent directors
(who are entitled to seek external professional advice on the same) to provide
written reasoned recommendations on such open offer, which the target company
is required to publish.

Conclusion

The Takeover Code of 2011 is a timely and progressive regulation that would
facilitate investments and attract investors. Even though SEBI has not implemented
all the suggestions of the Achuthan Committee, it has still taken into consideration
some of the major issues that had been plaguing the industry till now. It has tried
to maintain a balance between the concerns of the investors as well as that of the
promoters.

 CHANGES IN LISTING AGREEMENT

It has been decided to amend certain clauses in the Equity Listing Agreement to
enhance disclosures regarding shareholding of promoters and promoter group.
Accordingly, this circular is issued in exercise of powers conferred by subsection (1)
of Section 11 of the Securities and Exchange Board of India Act, 1992, to protect
the interest of investors in securities and to promote the development of, and to
regulate the securities market. The details of amendment are as under:

1. Amendment to Clause 35

The format for reporting the shareholding pattern contains six parts. The first two
parts viz. Part I(a) and I(b) contains disclosures of shareholding of promoter and
promoters group. Part I(a) and I(b) of the format are required to be amended to
include details of shares pledged by promoters and promoter group entities, as
specified in the annexure. Part I(c) has been divided into two new parts i.e. Part
I(c)(i) disclosing the shareholding of the public holding more than 1% shares and
Part I(c)(ii) disclosing the shareholding of the public holding more than 5% shares
in the company.

2. Amendments to Clause 41

24
 The format for submitting the quarterly financial result of the company, is required
to be modified to include details of promoters and promoter group shareholding
including the details of pledged shares, as specified in the annexure.

Applicability

 The revision in the formats under clause 35 and 41 of Equity Listing Agreement as
specified in the annexure shall come into force with immediate effect.
 The reporting as per the revised formats under clause 35 and 41 shall start from
the quarter ending March 31, 2009.
 The report for quarter ending March 2009, June 2009, September 2009 and
December 2009 under Clause 41, may not contain details of pledged shares for the
corresponding quarter of the previous year.
 This circular is available on SEBI website at www.sebi.gov.in under the categories
“Legal Framework” and “Issues and Listing”.

As per the circular no. CIR/CFD/DIL/1/2010 dated April 05, 2010 following
amendments has been made to the listing agreement:

Timelines for submission and publication of financial results by listed

entities-Amendment to clause 41(I)(c),(d)(e) and 41(VI)(b)

(i) With a view to streamline the submission of financial results by listed entities by
making it uniform and to reduce the timeline for submission of the same to
the stock exchanges, it has been decided that listed entities shall disclose, on
standalone or consolidated basis, their quarterly (audited or un-audited with
limited review), financial results within 45 days of the end of every quarter.

(ii) Also, audited annual results on stand-alone as well as consolidated basis, shall
be disclosed within 60 days from the end of the financial year for those entities
which opt to submit their annual audited results in lieu of the last quarter
unaudited financial results with limited review.

(iii) With regard to publication of consolidated financial results alone, the following,
viz.,(a) Turnover (b) Profit before tax and (c) Profit after tax on a stand-alone
basis shall also be published.

25
 CHAPTER 4

CORPORATE GOVERNANCE AND CAPITAL MARKET

Good corporate governance by the company gives a belief to their investor that
their Investment will be executed in bonafide intention. However, on the other
hand, poor governance has the following bad effect:

 It undermines integrity of corporations and discourages the use of public

markets as a means to intermediate savings,
 Particularly the areas of transparency and disclosure have been a major
factor behind instability in the financial markets across the globe.
 Good corporate governance prevailing in the company essentially pre-
requisite for the integrity and credibility of capital market players and
Contributes to the development of a vibrant economy and robust capital
markets in the country.

Role of Company Secretary in Capital market

 Advisor / Consultant in issue of Shares and other securities in India and Abroad.
 Advising companies on compliance of legal and procedural aspects.
 Drafting of prospectus/offer for sale/ letter of offer/other documents related to
issue of securities and obtaining various approvals in association with lead
managers.
 Listing / delisting of securities
 Private placement of securities
 Advisor/consultant in Buy-back of shares
 Raising of funds from international markets through ADR/GDR/ECB/FCCB
 Acting as compliance officer for companies.
 Compliance officer for various capital market intermediaries

Corporate Governance and Transparency

At this point, the relationship between good corporate governance and

transparency should be apparent. Corporate governance at its core involves the
monitoring of the corporation’s performance and the monitor’s capacity to respond
to poor performance – the ability to observe and the ability to act. Transparency
goes directly to the equity market’s ability to observe a corporation’s performance.
Most information concerning a corporation’s performance is uniquely available from
the corporation.

Without effective disclosure of financial performance, existing equity investors

cannot evaluate management’s past performance, and prospective investors cannot
forecast the corporation’s future cash flow. One might well respond that
corporations have an incentive to voluntarily provide financial information in order
to lower its cost of capital. But as my colleague Bernard Black has pointed out,
“delivering information to investors is easy; but delivering credible information is

26
hard.”5 Suppose honest and effective managers report good earnings. What keeps
dishonest and ineffective managers from also reporting good, although false,
earnings? To take a less extreme but nonetheless illustrative example, imagine two
companies that find themselves in very different circumstances. The first accurately
reports a substantial profit from its activities that year. The second also reports a
substantial profit from its activities, but in this case the profit really results from
reversing reserves created in better times that hide an actual loss from
operations.6 In the extreme, if investors cannot distinguish between accurate and
inaccurate financial reporting, then the market cannot distinguish between them.

If the market therefore discounts the value of both companies, a good company
looks for a form of financing that allows it the ability to demonstrate, at greater
cost, its actual quality. Higher cost bank financing thus may have an advantage
based on the barriers that accurately reporting companies confront in distinguishing
themselves from companies with less transparent accounting practices.

Thus, we have established a straightforward relationship: Equity investment

requires good corporate governance, and good corporate governance requires the
capacity to make credible disclosure of financial results. In the absence of effective
financial disclosure, a country’s capacity to support equity markets and, in turn,
important kinds of industry, is compromised,
Effective corporate governance also requires a second form of transparency –
ownership transparency.

27
 CHAPTER 5
STUDY ON SANJAY DANGI CASE

Sanjay Dangi, Another barred market manipulator

The market regulator SEBI recently banned Sanjay Dangi for colluding with
promoters of four companies to influence share prices; however, Intelligence
Bureau reports suggest that his involvement stretches way beyond these four firms

he market watchdog, Securities and Exchange Board of India (SEBI) had issued an
order against Sanjay Dangi, a Mumbai-based high net-worth individual, barring him
from dealing in the equity markets. Initial investigations by the Income Tax
Department and further findings of SEBI confirmed that Mr Dangi had colluded with
promoters of four companies, namely, Murli Industries, Ackruti City, Welspun
Corp and Brushman India, to artificially jack up these scripts through dummy
companies connected to the promoters or Mr Dangi himself.

What Is the Case all about????

According to regular reports by the Intelligence Bureau (IB), which has been
keeping tabs of Mr Dangi's market activity, he has been active in several other
companies as well. Reports suggest that Mr Dangi, together with Viren Ahuja, a
Mumbai-based business man "was planning to take the share price of Core
Projects to around Rs350". After securing F&O trading rights from 25 June 2010,
Mr Dangi, with a view to hiking up the share price had suggested that the
promoters convert their holdings in cash into the F&O. The IB found that the share
price of Core Projects had increased steadily from around Rs195 in the beginning of
June 2010 to close to Rs250 by the end of the month. This raises questions about
how stock exchanges select stocks for inclusion in the derivatives segment.

At the same time, the IB also found that "Dangi in conjunction with Anand Rathi,
were working to hike up the share price of Ackruti City to Rs 700. In this
connection,Dangi was willing to buy shares worth Rs 25 crore. Dangi and Rathi
were also planning to operate the Gokul Refoils & Solvent counter by cornering
around 40 lakh shares in the open market and hike the share price to around
Rs120-125 and eventually into the F&O segment." It further revealed that Mr
Dangi, along with one Akash Bhansali of Enam Securities and the promoter of
Welspun Gujarat Stahl Rohren was proposing to purchase 5-10 million shares, so as
to push up the share price.

During August, it was found that Mr Dangi continued to collude with BK Goenka,
promoter of Welspun Corporation, with the objective of manipulating the share
price towards Rs400 by November 2010. Mr Bhansali and the Janus Capital group
were also roped in to buy in a sustained manner. Janus was to buy 2.5 million
shares at around Rs260. The cartel expected that a sustained rise in prices would
attract buying from LIC which would then take the scrip to much higher levels.

28
But this was merely the tip of the iceberg. Mr Dangi was also active in the Prakash
Steelage stock, selling 1.3 million shares at Rs225 through Edelweiss Capital. Of
the total sale, the report says, 0.8 million shares were from the account of one
Pawan Bansal. Earlier, Mr Dangi and his associates had accumulated large
quantities of the scrip through various entities, including Pacific Corporate Services.
After booking profits, Mr Dangi was involved in heavy selling of this counter.

Further, Mr Dangi, in collusion with the promoters, was also involved in the counter
of Amar Remedies and was responsible for raising the price of the share to Rs102
as on 23 August 2010. Subsequently, Mr Dangi was scheduled to go to the UK to
organise an FCCB issue at a stock price of Rs150. In another counter, Sahyadri
Industries, Mr Dangi had bought a 20% stake out of which 14% was in his own
company's name (Pacific Corporate Service), while 6% was in the name of his
associates. In consultation with the promoters, Dangi directed his associates to buy
the scrip taking the price up to Rs195 and beyond. Meanwhile, Mr Dangi continued
to be active on the stocks of Core Projects and Technologies, Orchid Chemicals and
Pharmaceuticals and Panasonic Home Appliances India Company.

It was also found that Mr Dangi, along with Anand Rathi and Pradeep Rathod, in
conjunction with the promoters, proposed to operate the Ackruti City scrip. The
game-plan included raising the price of the scrip to around Rs700 for placement
with fund managers.

While the IB reports blandly reproduce such explosive and eye-popping information,
complete with the names of top institutions, it is not clear if any of these details are
being investigated by SEBI.

29
 CHAPTER 6

FUTURE GROWTH PATH FOR CAPITAL MARKET

Markets end on a high note

The markets have ended on a good note following the stable Asian and European
markets. The Sensex shut shop at 19,594, up 177 points and the Nifty added 56
points at 5,884.Earlier in the day, the markets opened higher on back of positive
cues from Asia, Sensex opened higher by 150 points at 19,573 and the Nifty surged
50 points to 5877 in opening trades.

On the international front, the world indices clocked weekly gains for the third
consecutive week. Following positive cues from the US, Asian indices mostly traded
in the the green and ended on a high note. Nikkei and Hang Seng ended higher, by
over 1% each, and Shanghai Compisite ended flat, up 0.3%. Banking stocks in
Hong Kong and Shaghai were under pressure on concerns of possible interest rate
hike from People's Bank of China to curb rising inflation.

In the broader markets, the midcap index closed at 1.4%, outperforming the
benchmark index and the smallcap index at 0.9%. The movers in the midcaps were
Ispat Industries up 17%, Bhushan Steel, Texmaco and Indusind Bank gaining 6%
each. In the smallcap space,Delta Corporation gained 19% followed by Hinduja
Foundaries at 16% and Astral Polysters adding 13%.

Among the sectoral indices on the BSE, Consumer Durables topped the charts at
2% closely followed by Health Care, Oil & Gas and Metal. Earlier,at the start of the
trade Consumer Durables opened at the bottom of the chart. Auto and Realty which
opened at the top saw some profit booking to slip as the day progressed.

With regards to banking, one of the stellar performers in the past few days, the
index was up 94 points at 13,744. Macquarie in a reserach note said, "Hike in
rverse repo rate will keep the shorter end of the yield curve high, thereby keep in
liquidity deficit mode - negative for Non-Banking Finance Companies." Deposite
rates are likely to rise faster than lending rates as credit growth is yet to take off,
hence expect more pressure on Net Interest Margin of PSU banks verses private
sector banks, Macquarie added in a research note.

The gainers in the Sensex-30 stocks were Reliance Communications (Rs 166) up
5%, ACC (Rs 997),Bharti Airtel (Rs 357) gaining 3%, index heavyweight RIL (Rs
1026) adding 2.5%.Sterlite, TCS up 2%,Tata Steel, Hindustan Unilever, Hindalco
gaining 1.5% are the other siognificant gainers.

On the losers list on the Sensex were HDFC,Wipro,BHEL down nearly 1% followed
by SBI,NTPC and ONGC shedding 0.1% - 0.2% round off the list.

30
The market breadth was positive. Of the total 3103 stocks traded on the BSE, 1802
stocks have advanced while 1169 have declined.

RECOMMENDATIONS

Over the last few years, there have been substantial reforms in the Indian capital
market. But there are still many issues to be addressed to make it more efficient in
mobilizing and allocating capital. Investor confidence in stock investment is low.
This must be regained in order to encourage capital mobilization through primary
market issues. Further strengthening of investor protection, and improvements in
transparency, corporate governance, and monitoring will be necessary. The capital
market infrastructure, such as accounting standards and legal mechanisms, should
also be improved to this end.

On the supply side, to encourage corporate firms to rely more on stock markets for
their source of financing, the issuing costs in terms of length of time required and
administrative burden should be streamlined

Policy Recommendation

• Improve accounting principles, make them consistent with international practice.

• Strictly enforce punitive measures for inaccurate accounting practice.

• Establish prompt and effective settlement of disputes to protect small investors’

interests.

• Grant institutional investors voting power.

• Allow hostile takeovers.

• Require consolidated balance sheets for conglomerates-affiliated firms to better

monitor crosssubsidization

and internal transactions between affiliated firms.

• Streamline the procedure for public subscription of securities to reduce

transaction costs in

terms of time lag and uncertainty.

• Apply fully market-based interest rates for issuing Government securities.

• Further reduce statutory liquidity requirements.

• Further enhance the credibility of credit rating agencies.

• Amend stamp duty regime by the Government of Maharashtra, where Mumbai is

located, in the

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form of one time levy or consolidated fee payable by National Securities Depository,
Ltd (NSDL).

• Indicate the framework within which the private placement has to function to
protect investors

from risk associated with subscriptions in the private placement market.

• Provide favorable environment or some incentives for establishing central trading

system through

interconnectivity.

• Encourage the corporatization and merger of brokers and merchant bankers

through tax

incentives.

• Securities and Exchange Board of India to more closely monitor and inspect the
intermediaries

and stock exchanges and, if necessary, strengthen punitive measures.

• Banking system to establish a good electronic funds transfer (EFT) solution to

enable direct

payments of dividends to bank accounts, eliminate counterparty risk, and facilitate

FIIs.

• Encourage sound competition between the banking sector and the capital market
through more banking liberalization.

CONCLUSION

The Indian financial system has undergone structural transformation over the past
decade. The financial sector has acquired strength, efficiency and stability by the
combined effect of competition, regulatory measures, and policy environment.
While competition, consolidation and convergence have been recognized as the key
drivers of the banking sector in the coming years, consolidation of the domestic
banking system in both public and private sectors is being combined with gradual
enhancement of the presence of foreign banks in a calibrated manner. There has
been improvement in banks’ capital position and asset quality as reflected in the
overall increase in their capital adequacy ratio and declining NPLs, respectively.
Significant improvement in various parameters of efficiency, especially
intermediation costs, suggests that competition in the banking industry has
intensified. The efficiency of various segments of the financial system also
increased. The major challenges facing the banking sector are the judicious
deployment of funds and the management of revenues and costs. Concurrently, the
issues of corporate governance and appropriate disclosures for enhancing market
discipline have received increased attention for ensuring transparency and greater

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accountability. Financial sector supervision is increasingly becoming risk based with
the emphasis on quality of risk management and adequacy of risk containment.
Consolidation, competition and risk management are no doubt critical to the future
of Indian banking, but governance and financial inclusion have also emerged as the
key issues for the Indian financial system. The capital market in India has become
efficient and modern over the years. It has also become much safer. However,
some of the issues would need to be addressed. Corporate governance needs to be
strengthened. Retail investors continue to remain away from the market. The
private corporate debt market continues to lag behind the equity segment.

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