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S E C U R I T I E SAND EXCHANGEBOARD OF INDIA

ANNUAL REPORT 2002 - 2003 11111

PART ONE: POLICIES AND PROGRAMMES

This Annual Report of the Securities and

Exchange Board of India (SEBI) presents a

review of its policies and programmes, its

working and operations in the financial year,

2002-03. The Report also describes the

manner in which the SEBI has been

discharging its functions and exercising

powers in terms of the Securities and

Exchange Board of India Act, 1992; the

Securities Contracts (Regulation) Act, 1956;

the Depositories Act, 1996; as well as in

terms of the delegated powers under the

Companies Act, 1956. The Report also

provides details of the developments in Indian

securities market during 2002-03 and their

bearing on and relation with the work of the

SEBI. The Report has been prepared in

accordance with the format prescribed in the

Securities and Exchange Board of India

(Annual Report) Rules, 1994, notified in the

Official Gazette on April 7, 1994.

The SEBI operates within the legal framework

of the SEBI Act, 1992. The statutory

objectives of the SEBI as enshrined in the

SEBI Act, 1992 are fourfold:

� Protection of the interests of investors in

securities

� Development of the securities market

� Regulation of the securities market, and

� Matters connected therewith and

incidental thereto.

In keeping with these statutory objectives, the

SEBI has set for itself strategic aims in the

four key spheres which encompass SEBI’s

activities, viz, the investors, issuers,

intermediaries and the regulatory regime. To

the investors, the SEBI strives to assure that

their rights are protected, they are able to

make informed choices and decisions and the

market is fair in the financial dealings.

To the issuers, the SEBI strives to provide a

transparent, efficient market where they are

able to raise resources at reasonable cost,

and conduct themselves in accordance with

the highest standards of corporate

governance and that they are conscious of

and meet their regulatory obligations.

To the intermediaries, the SEBI strives to

provide a market in which they can compete

freely and operate in a manner which gives

the investors and market participants

confidence that the market is efficient, orderly

and fair. In the regulatory regime, the SEBI

seeks to ensure that it always remains

appropriate, proportionate and effective in

which all “stakeholders” have the confidence.

With these strategic aims in view, the SEBI

has been constantly reviewing and reapprising

its policies and programmes, formulating new

policies and regulations to cover areas

hitherto unregulated or inadequately regulated

and to implement them in a manner to

promote the growth of the market with

transparency, fairness, efficiency and integrity.

The major policy reforms and developments

in the Indian securities market during 2002-

03 are presented in Box 1.1.

Part-I Policies and Programmes

22222 ANNUAL REPORT 2002 - 2003

Box 1.1: Major Policy Reforms and Developments in the Securities Marketsduring 2002-03:

During 2002-03, SEBI initiated several structural changes in the securities market and worked assiduously toachieve them. Some of the major accomplishments of SEBI during the last financial year are as follows :

� Implementation of T+3 rolling settlement for all listed securities across the exchanges from April 2, 2002 tomove T+2 on April 1, 2003.

� Introduction of scientific model for risk management, based on VaR.

� Introduction of Electronic Data Information Filing And Retrieval (EDIFAR) System to facilitate electronic filingof certain documents/statements by the listed companies and their immediate disclosure to the marketparticipants.

� Launch of Securities Market Awareness Campaign.

� Introduction of rating corporate governance on the principles of wealth creation, wealth management andwealth sharing.

� Introduction of Straight Through Processing (STP) for the securities transaction.

� Implementation of a comprehensive risk management system for Mutual Funds.

� Introduction of the Dual fungibility of ADRs and GDRs.

� Establishment of the Central Listing Authority (CLA).

� Issuance of necessary guidelines/circulars for Corporatization and Demutualization of stock exchanges.

� Introduction of the trading of Government Securities on the Stock Exchanges.

� Posting all the orders passed by the Securities Appellate Tribunal (SAT) and the Board on the SEBI website,to bring in regulatory transparency.

� Introducing the consultative process on policy formulation by putting all reports of committees and draftregulations on the SEBI website for seeking comments, suggestions and opinions from public.

� Issuance of guidelines on Delisting of Securities from the Stock Exchanges.

� Establishment of inter-depository transfer through on-line connectivity between CDSL and NSDL.

� Review and amendment of the following regulations and guidelines – a measure of regulatory proactiveness

� SEBI (Insider Trading) Regulations, 1992

� SEBI (Underwriters) Regulations 1993

� SEBI (Debenture Trustees) Regulations, 1993

� SEBI (Portfolio Managers) Regulations, 1993

� SEBI (Foreign Institutional Investors) Regulations 1995

� SEBI (Mutual Fund) Regulations, 1996

� SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997

� SEBI (Employee Stock Option Scheme & Employee Stock Purchase Scheme) Guidelines, 1999.

� SEBI (Credit Rating Agencies) Regulations, 1999

� SEBI (Issue of Sweat Equity) Regulations, 2002

� SEBI(Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002.

� Announcement of Accounting Standards and disclosure practices of the Indian companies by ICAI inconsultation with SEBI in accordance with International Accounting Standards.

� Expansion of the derivatives products basket.

� Introduction of benchmarking of all the Mutual Funds Schemes to facilitate the understanding of the investorsabout the performance of the funds.

� Introduction of nomination facility for the unit holders of mutual funds.

� Simplification of documentation procedure for FII registration and reduction of registration fee for FIIs.

� Memoranda of Understanding (MoUs) for co-operation and information sharing were signed with internationalregulators like Securities and Finance Commission of Mauritius and Securities and Exchange Commissionof Sri Lanka.


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1. REVIEW OF THE GENERALECONOMIC ENVIRONMENT ANDTHE INVESTMENT CLIMATE

I. General Economic EnvironmentThe growth rate in Gross Domestic Product(GDP) of India has been experiencing acheckered history in the recent past.Provisional estimates of Central StatisticalOrganization for the year 2002-03 show anexpected GDP growth rate of 4.4 per cent.Compared to the immediate previous year itis lower by 1.6 percentage points. A fall of27 per cent. The agriculture sector – pulleddeceleration in growth, in 2002-03 cloudingacross-the-board improvement in the growthperformance of industry and services.Actually, industry and services sectorsrecorded growth from 3.3 percent to 6.1percent and 6.8 percent to 7.1 percentrespectively, between 2001-02 and 2002-03.

Gross Domestic Savings

Gross Domestic Savings (GDS) have beenhovering around an average 23 percent for thepast 4 years. The details of GDS and its

components are presented in Table 1.1 andChart 1.1. A noteable feature of savings is thathousehold savings have been increasing for thepast 5 years starting from 1997 -98 till 2001-02;it grew from 17.6 percent to 22.5 percent ofGDP. Public sector savings have been comingdown gradually from 1995-96 till 2001-02 andthe pace of decline accelerated in 2000-01.Public sector savings showed negative savingsfor the past four years. The ratio of financialassets to physical assets has been increasing.Savings in financial assets have been rising forthe past four years albeit slowly. More than 50percent of the household savings have been infinancial assets. The portion of shares anddebentures have come down drastically, it was0.9 percent of GDP in 1999-00 and fell to 0.3percent of GDP in 2001-02 recording a two-thirds decline. Investments in contractualsavings is more or less stable over the past fouryears. Details of savings and investments,household savings in financial assets and othermacro economic indicators are presented inTables 1.1 to 1.3 and Charts 1.1 to 1.3

Table 1.1: Savings and Investment Trends in Indian Economy1998-99 1999-2000 2000-01 (P) 2001-02 #

As percent of GDP at Current Market Prices

Gross Domestic Savings 21.5 24.1 23.4 24.0

Public -1.0 -1.0 - 2.3 - 2.5

Private 3.7 4.4 4.1 4.0

Households Savings 18.8 20.8 21.6 22.5

Financial Assets 10.5 10.8 11.0 NA

Physical Assets 8.4 9.6 9.9 NA

Private Corporate Saving 3.7 3.7 4.2 NA

Gross Domestic Investment 22.6 25.2 24.0 23.7

Public 6.5 6.2 6.1 5.9

Private 15.1 15.6 15.8 15.7

GFCF 21.5 21.8 21.8 21.7

GFCF: Gross Fixed Capital FormationP: Provisional estimates. NA: Not Available # PreliminarySource: Economic Survey, Government of India 2002-03, RBI Annual Report 2001-02.


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Table 1.2: Savings of the Household Sector in Financial Assets

(Rs crore)

Item 1998-99 1999-00 2000-01 2001-02 #

Financial Assets 2,07,390 2,39,058 2,56,734 2,91,405(11.9) (12.4) (12.3) (12.7)

Currency 21,822 20,845 17,686 28,192(1.3) (1.1) (0.8) (1.2)

Deposits 80,250 89,598 1,05,078 1,12,517(4.6) (4.6) (5.0) (4.9)

Claims on Government 28,220 28,985 39,008 49,923(1.6) (1.5) (1.9) (2 B.2)

Shares and Debentures + 6,992 17,045 6,135 6,946(0.4) (0.9) (0.3) (0.3)

Contractual savings * 69,836 82,585 88,828 93,827(4.0) (4.3) (4.3) (4.1)

Financial Liabilities 26,773 35,275 32,229 40,451(1.5) (1.8) (1.5) (1.8)

Savings in financial Assets 1,80,617 2,03,783 2,24,505 2,50,954(10.4) (10.6) (10.8) (10.9)

# Preliminary

+ Includes Units of UTI and other Mutual Funds

* Comprise Life Insurance, Provident and Pension Funds.

Figures in parentheses are percent of GDP at current market prices.

Source: RBI Annual Report 2001-02.


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66666 ANNUAL REPORT 2002 - 2003

Foreign exchange reserves of India havebeen growing at a faster rate over the pastfew years. With growth rates of 11.1 percent,28.2 percent and 38.1 percent during 2000-01, 2001-02 and 2002-03 respectively, thetotal reserves at the end of 2002-03 stood atUS$ 74.805 billion. This is a recordachievement. Average inflation (provisional)for the year 2002-03 is 3.0 percent, higherthan what it was in 2001-02. The growth rateof money supply (M3) has been more or lessconstant providing further strength to stableprice levels and interest rates. A close lookat these macro economic indicators revealsstable and positive developments. Thus theeconomy of the country looks strong and ismarching ahead. This should auger well forthe capital market also.

Facilitated by relatively lower inflation, interestrates continued to soften during the year. TheRBI reduced the bank rate by 25 basis pointto 6.25 percent in October 2002. At thepresent level, the bank rate is the lowestsince 1973. The yield on 7.4 percent 12 yeargovernment paper reached a low of 6.13percent on December 31, 2002.

In 2002-03 fewer number of issuers accessedcapital market through the primary marketroute to mobilise resources compared to2001-02. In 2002-03, a total of Rs. 4070 crore

was mobilized as against Rs. 7543 crore in2001-02. Both public and rights issue marketexhibited subdued trend in 2002-03. Banksand financial institutions were the main fundmobilisers during the year.

Performance of secondary market also did notshow any encouraging trend. In fact popularindices such as S&P CNX Nifty and Sensexand other broad indices such as BSE NationalIndex and S&P CNX 500 also recordedlosses ranging from 8 percent to 13.4 percent.Nifty lost the maximum while BSE 500 lostthe least at 13.4 percent and 8 percent,respectively. But considering the P/E andprice to book ratio, Indian market continuedto be more attractive (cheaper). The totalturnover of all the exchanges in2002-03 grew up by 8 percent at Rs. 9,69,164crore compared to Rs. 8,95,817 crore in2001-02. Turnover at NSE was the largest(20 percent growth) while BSE recorded anincrease of 2.2 percent.

Mutual funds mobilized, on gross basis, arecord Rs. 3,14,706 crore in 2002-03 butrepurchases also rose substantially to Rs.3,10,509 crore recording a net inflow of onlyRs.4196 crore.

The year 2002-03, thus, witnessed a mixedrecord of performance. Some sectors, like the

Table 1.3: Macro Economic IndicatorsParameters

2000-01 2001-02 2002-03

Money Stock (M3) * 1311583 1500003 1727877(Rs. Crore) (16.4) (14.1) (15.3)Foreign Exchange Reserves * 42.256 54.154 74.805(US $ Bn.) (11.1) (28.2) (38.1)

11.9 20.7Wholesale Price Index * 160.7 164.7 171.6(Base Year 1993-94 = 100) (5.2) (2.5) (4.2)Gross Domestic Product 1917724 2094013 2217800(Rs. Crore) (current prices) (8.8) (9.2) (6.6)Gross Domestic Product (1993-94 prices ) 1186300 1257000 1309900(Rs. Crore) (4.3) (6.0) (4.4)

Figures in the parentheses indicate percentage change over the previous year.* Last day of the respective year.Source: Reserve Bank of India and Central Statistical Organisation


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mutual funds, performed better than theprevious year while others including resourcesmobilised in primary issues and performanceof secondary market continued to besubdued.

2. REVIEW OF POLICIES ANDPROGRAMMES

During 2002-03, SEBI took several newinitiatives and revised some of its existingpolicies and programmes. These measureshave been listed at the beginning of theannual report. In the following sections theseare discussed in greater detail.

I. Primary Securities Market

The objectives of reviewing the existingpolicies and for initiating new policies inPrimary Market Department, are as follows :

A. To help the investors make moreinformed investment decision.

B. To make regulations more transparent,effective and understandable to theregulated entities.

C. To give confidence to the investors andother participants that the markets areefficient, orderly and clean.

D. To increase the transparency, efficiencyof the primary market so as to sustainthe confidence of investors and marketparticipants.

To achieve the above objectives, the followingsteps were taken:

A. The disclosure requirements in offerdocuments for Public Issue/Rights Issue/Offer for Sale, were streamlined andstrengthened.

B. The existing procedure and process ofregistration and renewal of registrationwere reviewed and streamlined.

C. The existing regulations pertaining tointermediaries / other existing guidelines/regulations, were reviewed and amendedwhere necessary.

Accordingly following regulations wereamended /reviewed:

a. SEBI (Merchant Bankers) Rules andRegulations, 1992

b. SEBI (Debenture Trustees) Rules andRegulations, 1993

c. SEBI (Portfolio Managers) Rules andRegulations, 1993

d. SEBI (Registrars to an Issue and ShareTransfer Agents) Rules and Regulations,1993

e. SEBI (Underwriters) Rules andRegulations, 1993

f. SEBI (Employee Stock Option Schemeand Employee Stock Purchase Scheme)Guidelines, 1999

g. SEBI (Issue of Sweat Equity)Regulations, 2002

II. Secondary Securities Market

A. Shortening of settlement cycle fromT+5 to T+3 to T+2

Rolling settlement on T+5 basis, which wasmade compulsory in all stock exchanges for200 actively traded scrips in BSE and NSE,was extended to cover all scrips fromDecember 31,2001. The settlement cycle wasthen shortened to T+3 from April 01, 2002.The transition from T+5 to T+3 took placesmoothly without any glitches. In order toderive greater benefits of increased efficiencyof the rolling settlement and ensure speediersettlement, the need for contracting the rollingsettlement cycle from existing T+3 to T+2 wasfelt. Market participants were intimated about


88888 ANNUAL REPORT 2002 - 2003

further shortening of the settlement cycle toT+2 from April 1, 2003.

B. Demutualisation and Corporatisationof the Stock Exchanges

Following the announcement by the Hon’bleFinance Minister in the Parliament on March 13,2001 that “corporatisation of stock exchangesby which ownership, management and tradingmembership would be segregated from eachother, SEBI constituted a ‘Committee onCorporatisation and Demutualisation of StockExchanges’ under the Chairmanship of JusticeM H Kania, former Chief Justice of India, foradvising SEBI on corporatisation anddemutualisation of exchanges and torecommend the steps that need to be taken toimplement the same. Recommendations of thecommittee were accepted with the exceptionthat in the case of NSE, the present structureof its board would be maintained and the votingrights of the shares held by the broker memberswould be determined by SEBI in consultationwith the Government of India.

SEBI issued circulars to all stock exchangesadvising them the scheme for uniform modelof corporatisation and demutulisation. Thestock exchanges are required to submit theirproposals to SEBI in accordance with thescheme, within 6 months from January 30,2003, the date of the SEBI Circular.

C. Guidelines for Delisting of Securitieson Stock Exchanges

A committee was constituted on delisting ofsecurities to –

a. examine and review the presentconditions for delisting of securities ofcompanies listed on recognized stockexchanges and suggest changes innorms and procedures in this regard.

b. examine the concept of listing at regionalstock exchange and the establishment ofa listing authority across the stockexchanges.

c. suggest ways for effective implementationof listing conditions and penal provisionsfor non-compliance

Following the acceptance of therecommendations of the Committee by theSEBI Board, SEBI (Delisting of Securities)Guidelines 2003, were issued on February 17,2003.

Some of the salient features of the guidelinesare –

a. Applicability to any acquisition of sharesof the company (either by a promoter orby any other person) or scheme orarrangement, by whatever name referredto, consequent to which the publicshareholding falls below the minimumlimit specified in the listing conditions orlisting agreement that may result indelisting of securities.

b. Companies are not permitted to use thebuy-back provision to delist its securities.

c. No longer would there be any stockexchange designated as regional stockexchange.

d. A company can delist the securities fromall the stock exchanges including theregional stock exchange provided that thesecurities of the company have been listedfor a minimum period of 3 years on anystock exchange.

e. An exit price for delisting of securitieswould be determined through bookbuilding process, which will be madeavailable through the stock exchangeterminals.

f. Such opportunity need not be given incases where securities continue to belisted in a stock exchange which hasnation wide trading terminals viz. BSE,NSE or any other stock exchangespecified by SEBI.


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D. Unique Client ID

The brokers were required to use uniqueclient codes for all clients for order valuesover Rs. 1 lakh. The stock exchanges wererequired to deactivate the trading terminalsof the brokers, who do not comply with thenorms of unique client code from January 01,2003. As there is no single identity code forinvestors in India, such as the social securitynumber available in many countries, the codecould be passport number, ration card, drivinglicense or PAN Card, with a provisionavailable on stock exchanges for mapping toestablish one to one correspondence. SEBIis in discussion with NSDL to work out asystem of providing unique number to allinvestors. NSDL has been entrusted by theGovernment to set up the registry of the TaxPayer Information Network.

E. Risk Containment Measures

a) Withdrawal of margins

In response to the volatility witnessed in themarkets in March 2001, margins were leviedon the institutional trades and volatilitymargins were made applicable to thepositions of financial institutions, foreigninstitutional investors, banks and mutualfunds. With the implementation of the VaRbased margins, the institutional businesscontinued to be margined on their netoutstanding sale position which wasequivalent to the positive differential betweenthe minimum VaR (1.75 times index VaR) andthe actual margin percentage calculated.

Considering that the market structure and theoverall margin system witnessed a majorstructural change with the implementation ofrolling settlement on T+5 basis and furtherreduction to T+3, the margins applicable onthe financial institutions, FIIs, banks andmutual funds were withdrawn.

b) Removal of price bands

As a temporary measure, a price band of 10per cent was imposed on 53 scrips on whichthe derivatives products were available toaddress excess market volatility pursuant tothe events of September 11, 2001 in the US.The price band on the stocks on whichderivatives products were available wassubsequently withdrawn.

c) Threshold for maintenance of minimummargin deposit

The clients have to maintain a margin depositwith the broker which is atleast 10 per centof his net outstanding positions at any pointof time. The deposit was to be maintained inthe form of cash, bank guarantees, fixeddeposit receipts or approved securities. It wasrepresented that this called for continuousmonitoring and caused considerableinconvenience to the clients. In view of therepresentation, an exemption was granted forclients for collection of 10 per cent upfrontmargin to the extent of Rs 50, 000, i.e., onlyif a client’s position exceeds Rs 5lakhs, thebroker would necessarily collect the 10 percent upfront margin.

The compliance officer appointed by thebroker in terms of regulation 18A of theSecurities and Exchange Board of India,(Stock Brokers and Sub-Brokers) Regulations,1992 shall certify the compliance of the brokerwith this requirement.

d) Risk Management for T+2 rollingsettlement

The risk containment measures were revisedand rationalized for the reduced T+2 rollingsettlement. Pursuant to the deliberations ofthe Advisory Committee on Derivatives andMarket Risk Management the revised riskcontainment measures were implementedwith effect from April 01, 2003. The scripswere classified into three categories based


1010101010 ANNUAL REPORT 2002 - 2003

on their liquidity and volatility. Based on theclassification of the scrips, the VaR basedmargins were applicable for these scrips.

F. Model Rules Prescribed For StockExchanges

The committee set up by SEBI to examinethe existing Articles and Memorandum ofAssociation, Rules, Bye-laws and Regulationsof Stock Exchanges and to frame a uniformset of Rules and Bye-laws to be followed byall the stock exchanges, has submitted itsreport. The report alongwith therecommendations has been put up on SEBIwebsite for public comments. After examiningthese comments, SEBI issued a circular tothe stock exchanges, to amend their rules inline with the recommendations.

G. Trading of Government Securities onthe Stock Exchanges

Trading in government securities on nationwide anonymous, order driven, and screenbased trading system of the stock exchanges,was launched by Hon’ble Minister of Financeand Company Affairs. India is the firstjurisdiction, which allows governmentsecurities to trade through screen based,automated, anonymous, price time prioritysystem on the stock exchanges. World overthe market is limited to select players and issolely a negotiated/ telephone market. Allgovernment securities, as notified by RBI fromtime to time, would be traded along with theequity segment of the eligible exchangeswhere the minimum order size of 10 units ofRupees One hundred each and multiplesthere of and the traded price would beinclusive of interest.

H. Amendments to Listing Agreement

To compensate the aggrieved party foropportunity losses due to delay in transfer,the clause 12A has been amended to providefor the compensation to the investors in case

of delay in transfer of securities and furnishingof objection memo beyond the specified time.

I. Continuous disclosures for ListedCompanies

Accounting Standards Committee of SEBIrecommended the following disclosures tofurther enhance the quality of disclosures andtimely availability of information for theinvestors :

a. Amendment to Clause 41 of theListing Agreement

Clause 41 that provides for continuousdisclosures and financial disclosures wasamended as follows :

i Publication of audited results: Thecompanies which opt to publish auditedresults for the entire year within 3months instead of publishing un-auditedresults for the last quarter within 30 daysare required to publish annual auditedresults in the prescribed format.

ii Audit Qualification: The companies wouldhave to make disclosures regarding auditqualification in the audited/unauditedfinancial results published by thecompanies along with the impact of auditqualification on their profit & loss.

iii Limited Review for un-audited quarterlyresults: The unaudited quarterly resultswould also be subjected to limited reviewfrom the quarters ending on or after June30, 2003. In this regard, all otherprovisions relevant to half yearly limitedreview became applicable to limitedreview of unaudited quarterly results.

iv Publication of consolidated financialresults: All listed companies would have topublish consolidated financial results alongwith standalone annual financial results.

b. Clause 32 of the Listing Agreement

The clause 32 of listing agreement whichprovides for continuous disclosures was


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amended to incorporate certain disclosuresrelated to loans/advances and investment inits own share by listed companies, theirsubsidiaries, associates, etc. This is expectedto bring in a greater degree of transparencyin the investments made by companies inshares and debentures :

a) Disclosure will have to made in theannual accounts of the parent companyabout the loans and advances in thenature of loans to subsidiaries andassociates by name and amount. Theparent company would also have todisclose loans and advances in thenature of loans by name and accountwhere there is no repayment schedule/repayment beyond 7 years or wherethere is no interest/interest less thanSection 372A of Companies Act.Disclosures will also have to be madeon loans and advances in the nature ofloans by name and account given tofirms and companies where directors ofthe parent company are interested. Thesame set of disclosures as applicable toparent company shall also be applicableto subsidiary companies.

b) The investments by the loanee in theshares of parent company and subsidiarycompany, when the company has madea loan or advance in the nature of loanhas to be disclosed in the accounts ofparent company. These disclosures haveto be made with respect to the amountsat the year end and maximum amountof loan/advances/investmentsoutstanding during the year.

The above set of disclosures becamenecessary as SEBI investigations haverevealed that a large number of shellinvestment companies are floated bycorporate houses wherein, directors areemployees of these corporates or are thenominees of the Chartered Accountants/

Financial Consultants. These investmentcompanies act as fronts for the corporate andlarge industrialist house and are used forrouting of funds into the stock market intovarious layers. These investment companiesthus provide a façade for the promoters ofthe industrial house who carry outtransactions which are not allowed or are incontravention of various rules and regulationsunder SEBI Act,1992, SC(R) Act, 1956, IndianCompanies Act, 1956 etc.

J. Electronic Data Information Filingand Retrieval (EDIFAR):

The Electronic Data Information Filing andRetrieval (EDIFAR) System was launched inJuly 2002. EDIFAR was set up as a websiteby SEBI in association with NationalInformatics Center (NIC) to facilitate filing ofcertain documents/statements by the listedcompanies on line in the EDIFAR web-site-www.sebiedifar.nic.in. This would enableelectronic filing of information in a standardformat by the companies and would benefitvarious classes of market participants likeinvestors, regulatory organization, researchinstitutions, etc.

Initially the company would be allowed to filethe documents both physically with the stockexchanges and electronically on the web site.Till March 31, 2003, 1750 companies werebrought within the scope of EDIFAR. It isintended that after gaining experience andfurther refining the website and fil ingprocedure as well as the security aspect, thephysical filing will be discontinued.

K. Review of Corporate Governance

SEBI constituted a new committee oncorporate governance under the chairmanshipShri N.R.Narayana Murthy to have a freshlook on the corporate governance with a viewto further improving the corporate governancestandards, to review the adequacy of theexisting requirements of the corporate


1212121212 ANNUAL REPORT 2002 - 2003

governance and suggest revisions /improvements, wherever necessary. TheCommittee has submitted its report to SEBIwhich is under consideration .

Meanwhile, SEBI has worked with the creditrating agencies to prepare “CorporateGovernance Index” as a measure of wealthcreation, management and its distribution bythe corporates. Some companies havealready been rated on this index. At presentthe index is voluntary. It is expected that overtime, as more and more companies will getthemselves rated voluntarily and the ratingmethodology is refined. This index would beregarded as a valuable indicator of corporategovernance of companies and will be widelyused by the market.

L. Restructuring of SubsidiaryManagement

SEBI, has allowed the stock exchanges to floatsubsidiaries to obtain the membership of BSEand NSE. Through this measure, the brokersin the same stock exchange which had virtuallyno trading could trade through NSE and BSE.To ensure that subsidiaries effectivelydischarge their responsibilities towardsinvestors protection, SEBI mandated certainchanges in management structure of thesubsidiaries. The subsidiary companies wouldbe required to comply with the minimumstipulated requirements in order to ensure thatthe transactions in subsidiaries are conductedin a manner which is not detrimental to theinterest of the investors and to enablesubsidiaries to provide a safe and transparentmechanism for transaction in securities.

M. Arbitration Proceedings

It has been noted that arbitration proceedingtake unduly long time to reach the stage ofarbitration awards. The procedure providedunder the Bye Laws of the stock exchangesfor distributing the assets after the award hasbeen granted, are too cumbersome and

further delay the completion of theproceedings. There has been somerefinement in the arbitration proceedings.

Arbitration Tribunal to make arbitral awardwithin three months from the date of thereference and the time taken to make theaward not to extend more than three timesand even if three extensions are sought in aparticular case, the arbitration award shouldbe passed within a period of six months fromthe date of entering into a reference. In otherwords, extension of time of award can be fora maximum period of three months.

N. Monitoring Compliance of SEBIInspection Report

To simplify the procedures and to ensure thatthe arbitration proceedings are completedspeedily, SEBI issued a directive to the stockexchanges requiring the stock exchanges toform a sub-committee of Governing Board ofStock Exchanges shall comprising ofExecutive Director/Managing Director, twopublic representatives, one SEBI nominee andone broker representative to review theactions taken by the stock exchange toimplement the suggestions of SEBI ’sInspection Report.

This Committee should meet at least twiceeach quarter to review the actions taken toimplement the suggestions of SEBI ’sinspection report and put up same to theBoard of the Exchange. The Sub-Committeeis required to approve all the compliancereports sent by the Stock Exchange to SEBIrelated to inspection. To strenghten SEBI’sinternal systems of inspection and follow-up,SEBI set up a separate division for inspectionand monitoring.

O. Private Placements

SEBI Secondary Market Advisory Committeerecommended a regulatory framework forissuance and trading of all corporate debt


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securities, including those issued through theprivate placement route. These have beenplaced on the website of SEBI for publiccomments.

P. Derivatives

The SEBI Advisory Committee on Derivativesreviewed the report of the Dr. L.C.Guptacommittee on derivatives in the context of thepresent market structure which is vastlydifferent from the time the recommendationswere made by Dr. L.C.Gupta Committee. Theadvisory committee reviewed the eligibilitycriteria for stocks on which derivatives aretraded. The recommendation of the adivosrycommittee were placed on the SEBI websitefor pubic comments. SEBI, after examiningthe public comments accepted therecommendations. Accordingly, the previouseligibility criteria was based on the turnover,market capitalisation, minimum non-promoterholding and volatility of the stock vis-à-vis theindex. These were replaced by liquidity,market capitalization, average daily tradedvolume and quarter sigma order size.

Simultaneously, the risk containmentmeasures were also modified with the changein the eligibility criteria. It has now been linkedto the impact cost of the underlying scrip. TheDerivatives Exchange/ Segment can also nowdetermine the manner of adjustment inderivative contracts at the time of corporateactions.

The Advisory Committee on Derivatives hadrecommended that SEBI and RBI shouldconsider utilising the exchange platform tointroduce Interest Rate and CurrencyDerivatives. RBI had constituted a committeeon OTC Rupee Derivative where SEBI wasalso a member. The committeerecommended introduction of exchangetraded Interest Rate derivative contracts.Steps are underway to introduce suchderivatives shortly.

The Derivative Exchange Segments are nowrequired to work out an appropriate policy forinspecting its members and the stipulation of100 percent inspection has been removed.

Mutual Funds have been allowed toparticipate in Derivatives trading for thepurpose of hedging and portfolio balancing.Committee on Derivatives has clarified thetypes of transactions which may beconsidered as hedging and portfoliobalancing. These have been clarified basedon the recommendations of the committee.

III. Mutual Funds

SEBI initiated a number of policy measuresin the year 2002-03 to safeguard the interestsof investors in mutual funds and to developand regulate the mutual fund industry and thusachieving the objectives as specified in theSEBI Act, 1992.

A. Corporate Governance/Professionalism in Operations ofMutual Funds

SEBI introduced a number of measures toimprove corporate governance standards andprofessionalism in the mutual funds industry.

a. Benchmarks for Mutual Funds Schemes

In order to provide the investors objectiveanalysis of the performance of the mutualfund schemes in comparison with the rise andfall in the markets, the mutual funds wereadvised to disclose the performance ofbenchmark indices also while publishing half-yearly results. These benchmark indices canbe decided by the AMCs and trustees andany change at a later date is required to berecorded and reasonably justified.

The boards of AMCs and trustees were alsoadvised to review the performance of theirschemes on periodical basis and compare theperformance of their schemes withbenchmarks in all of their meetings. They


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should also review the performance of theirschemes in the light of performance of themutual funds industry as published from timeto time by independent research agencies andfinancial newspapers and journals and to takecorrective action in case of unsatisfactoryperformance. While guidelines for benchmarksfor equity oriented schemes were issued inMarch 2002, guidelines for benchmarks fordebt-oriented schemes and balanced fundschemes were issued in April 2002.

b. Introducing Best Practices Standards -Certification and Code of Conduct forMutual Funds Intermediaries

Intermediaries play a very important role indistribution of mutual funds units. They interactwith investors and advise them for makinginvestment in various mutual funds schemes.SEBI took a number of measures to improvethe quality of intermediaries and also that theydo not indulge in unethical practices.

SEBI (Mutual Funds) Regulations, 1996specify that mutual funds should not use anyunethical means to sell, market or induce anyinvestor to buy their scheme. Further theRegulations also require that mutual fundsshould maintain high standards of integrityand fairness in all their dealings, render atall times high standards of service andexercise due diligence. In furtherance of theseobjectives, SEBI has made it mandatory forall distributors and agents to pass certificationexamination and to follow SEBI (MutualFunds) Regulations with specific focus onregulations/ guidelines on advertisements/sales literature and code of conduct. SEBIhas also advised the mutual funds to monitorthe activities of their agents/distributors toensure that they do not indulge in any kindof malpractice or unethical practice whileselling / marketing mutual fund units.

The distributors and agents must follow thedetailed code of conduct as recommendedby AMFI. If any intermediary does not comply

with the code of conduct, the mutual fundsare required to report it to AMFI and SEBI.No mutual fund allowed to deal with thoseintermediaries who do not follow the code ofconduct. The intermediaries have beenadvised not to share commission withinvestors. Investors should subscribe to unitsof a mutual fund on the basis of merits andperformance and not on the basis of quantumof commissions.

All intermediaries engaged in selling andmarketing of mutual fund units were requiredto be registered with AMFI. Such registrationwill be subject to passing of certificationexamination and adherence to guidelines asspecified by SEBI and AMFI from time totime. However, senior citizens with experiencein distributing mutual funds units have beenallowed exemption from certificationexamination. They should have completed 60years of age as on March 31, 2003 andshould have two years of experience. Theyshould follow SEBI and AMFI guidelines andshould be registered with AMFI. They shouldalso attend a mutual fund training programmewithin one year from March 31, 2003 and acertificate to that effect endorsed by a mutualfund should be submitted to AMFI.

The mutual funds are required to monitor thecompliance of these guidelines and code ofconduct by their intermediaries in terms ofbusiness done across all mutual funds. Incase of non-compliance, the empanellingmutual funds may suspend further businessand pay out of commissions, etc. until fullcompliance by them.

c. Applicability of Insider TradingRegulations (2002)

The trustee companies, asset managementcompanies and their employees and directorshave been advised to strictly follow theSecurities and Exchange Board of India(Insider Trading) (Amendment) Regulations,2002.


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d. Bi-monthly Trustee Meetings

A number of responsibilities have beenassigned to trustees of mutual funds underSEBI (Mutual Funds) Regulations. Therefore,it has been decided that the trustees shouldmeet on bi-monthly basis to review theperformance and compliance related issuesof their mutual funds, instead of the earlierrequirement of meeting on a quarterly basis.

e. Independent Directors on the Board ofAMCs and Trustee Companies

According to SEBI(Mutual Funds)Regulations, 1996, 50 percent of directors ofAMC and two-third of the trustees arerequired to be independent i.e. who are notassociates of the sponsors. With an objectiveto improve corporate governance and to bringabout transparency in the operations of themutual funds, the definition of IndependentDirectors was revised so that certaincategories of persons could not be consideredas ‘associates’ and not as independentdirectors.

With a view to implementing the regulationin letter and spirit and improving corporategovernance standards in mutual funds, it hasbeen clarified to mutual funds that personsproviding any type of professional service tothe mutual fund, asset management company,trustee company and sponsors shall beconsidered as associate directors of AMCsor trustee companies, as the case may be.Also, persons having any material pecuniaryrelationship with these entities, which in thejudgement of the trustees may affectindependence of directors, shall be treatedas associate directors.

At times, an unduly long period of time elapsesbefore an outgoing independent director isreplaced on the board of AMC. Afterdiscussions in SEBI Advisory Committee, themutual funds were advised to appointindependent director(s) in place of the

outgoing director(s) within a period of 3 monthsfrom the date of resignation. The Mutual fundswere also advised to maintain a panel ofeligible persons who could be appointed asindependent directors as and when required.Also that they may consider appointing morethan the required minimum number ofindependent directors in order to enhance thestandards of corporate governance.

f. Risk Management System

Guidelines were issued to all mutual funds toensure a minimum standard of due diligenceor risk management system while undertakingvarious activities by the mutual funds like fundmanagement, operations, customer service,marketing and distribution, disaster recoveryand business contingency, etc. The purpose isto eliminate/ minimise the risks in operationsof mutual funds. A comprehensive riskmanagement manual was issued to all mutualfunds.

g. Strengthening Roles of ChiefExecutives and Fund Managers ofMutual Funds

Chief executives and fund managers ofmutual funds play very important role in thefunctioning of mutual funds. After takingfeedback from chief executives and fundmanagers from all mutual funds, the SEBIdefined their roles in SEBI (Mutual Funds)Regulations, 1996.

Accordingly the Chief Executive Officer(whatever the designation may be) of the assetmanagement company is required to ensurethat the mutual fund complies with all theprovisions of SEBI (Mutual Fund) Regulations,1996 and the guidelines issued thereunder andthat the investments made by the fundmanagers are in the interests of theunitholders. He/ She shall also be responsiblefor the overall risk management function of themutual fund. The fund manager (whatever thedesignation may be) is also required to ensure


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that the funds of the mutual fund schemes areinvested to achieve the objective of the schemeand in the interests of the unitholders.

The objective of these measures is to enablethe chief executives and fund managers ofmutual funds to play their roles in the interestof investors without any influence andpressures.

h. Transactions of Mutual Funds in theGovernment Securities inDematerialised Form and theirReconciliation

All mutual funds have been advised to enterinto transactions relating to governmentsecurities only in dematerialised form. Theyhave also been advised to reconcile theiraccounts with the RBI periodically.

In order to make the transactions in governmentsecurities transparent without any scope ofmisuse, it has been decided in consultation withRBI to introduce a system of monthlyreconciliation between RBI and mutual fundsmaintaining SGL/CSGL Accounts in respect ofgovernment securities on an ongoing basis.The Public Debt Offices of RBI will issuemonthly statement of balances to the mutualfunds, which are to be reconciled by the mutualfunds for the transactions undertaken by them.The reconciliation procedure shall be made apart of internal audit and the auditors shallcheck, on a continuous basis, about the statusof reconciliation and submit a report to the AuditCommittees. These reports are also to beplaced in the meetings of boards of AMCs andtrustees. These measures would prevent anymajor loss arising out of non-reconciliation ofgovernment securities.

B. Prudential Investment and ValuationNorms

a. Guidelines for Valuation of UnlistedEquity Shares

SEBI issued guidelines for the valuation ofunlisted equity shares with a view to bringing

about uniformity in the calculation of NAVs ofthe schemes by all mutual funds. Theguidelines prescribe detailed methodology forvaluation of unlisted equity shares based onstringent pricing formula. The mutual fundshave been prohibited from buying unlistedequity shares at a price higher than thatworked out in accordance with themethodology. Guidelines also prescribeexercise of due diligence while making suchinvestments.

b. Treatment and Disposal of IlliquidSecurities/ NPAs at the Time ofMaturity/ Closure of the Scheme

Some of the investments made by mutual fundsmay become non-performing assets (NPAs) orilliquid at the time of maturity / closure of theschemes, which may be realised by the mutualfunds in due course i.e. after winding up of thescheme.

SEBI issued guidelines during the year andthe mutual funds were advised to distributesuch amount, if it is substantial and is realisedwithin two years, to the old investors. In casethe amount is not substantial or it is realisedafter two years, it may be transferred to theInvestor Education Fund maintained by eachmutual fund. The decision as to determinationof substantial amount is to be taken by thetrustees of the mutual funds after consideringrelevant factors.

c. Investment Valuation Norms

According to the investment valuation normsspecified in the SEBI (Mutual Funds)Regulations, any change in securities andin the number of units is to be recorded inthe books not later than the first valuationdate following the date of transaction. If thisis not possible given the frequency of thenet asset value disclosure, the recording maybe delayed upto a period of seven daysfollowing the date of the transaction, provided


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that as a result of non-recording, the NAVcalculation shall not be affected by more thantwo percent. As a result, the investors of ascheme may be affected by variation of twopercent in the NAV. This variation of twopercent was now felt to be on the higherside. As improvement in systems andtechnology over the years, should make itpossible for the mutual funds to calculatethe NAV accurately than what was when therate was formulated so as that the investorsmay enter or exit at sale and repurchaseprices based on NAV which is very near tothe actual NAV.

SEBI Regulations have been amended toreduce the allowable variation in NAV fromthe present ‘2 percent’ to ‘1 percent’. TheRegulations also now require that in case theNAV of a scheme differs due to non-recordingof transactions by more than one per cent,the investors or schemes shall becompensated. If investors are allotted unitsat higher NAV or they are given lower NAVat the time of their sale of units, they shouldbe compensated by the schemes. However,if investors are charged lower NAV at the timeof their purchase of units or they are givenhigher NAV at the time of their sale of units,asset management company shallcompensate the schemes.

d. Accuracy and Uniformity in Valuation

Uniformity and accuracy in valuation by themutual funds is necessary. If each mutualfund has its own valuation methods, it is verymuch likely that two mutual funds in spite ofhaving same portfolios would have differentNAVs. Therefore, SEBI has been issuingvaluation guidelines from time to time.

During the year 2002-03, SEBI issued furtherguidelines that all mutual funds shall providetransaction details of various types of debtsecurities like NCDs, Mibor Linked floatersand CPs on a daily basis in the prescribedformat to the agency recommended by AMFI.

Submission of data would help in daily matrixgeneration, improve uniformity and accuracyof valuation in the mutual funds industry.

C. New Products/ Activities

a. Investment in Foreign Securities

The investments limit on foreign securities hasbeen raised from the earlier limit of fourpercent of net assets (as on February 28,2002) to 10 percent of net assets of eachmutual fund as on January 31, 2003.However a minimum of US$ 5 million andmaximum of US$ 50 million is permissible toeach mutual fund irrespective of size ofassets. It was also clarified to the mutualfunds that the regulations which restrictinvestments in mutual fund units upto fivepercent of net assets and prohibits chargingof fees is not applicable to investments inmutual funds in foreign countries. Themanagement fees and other expensescharged by mutual fund(s) in foreign countriesalong with the management fee and recurringexpenses charged to the domestic mutualfund scheme should not exceed the totallimits on expenses prescribed under theRegulations. Where the mutual fund isinvesting only a part of the net assets in theforeign mutual fund(s), the same principle isapplicable for that part of the investment. Thedetails of the calculation for charging suchexpenses is to be reported to the Boards ofAMC and trustees and is to be disclosed inthe annual report of the scheme.

Mutual funds have also been permitted toinvest in the equity of listed overseascompanies subject to certain restrictions.Necessary guidelines have been issued tomutual funds.

b. Clarifications for Participation by MutualFunds in Trading in Derivatives

Guidelines for participation by mutual fundsin trading in derivatives were issued on


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February 9, 2002. The SEBI AdvisoryCommittee on Derivatives clarified certaintypes of transactions with illustrative exampleswhich could be considered by mutual fundsas hedging and portfolio balancing. Necessaryclarifications were issued to mutual funds.

c. Fund of Funds

A fund of funds (FoFs) is a mutual fundscheme that invests in schemes of othermutual funds instead of investing insecurities. They may invest in equity-oriented, debt-oriented and liquid schemes orsector specific schemes. They may also exitfrom a particular scheme depending on theirperception of market conditions which maynot be possible for an investor to decide.

Investors may invest in a particular FoFscheme depending on their investmentobjectives instead of investing in a numberof schemes. Such schemes would be subjectto (i) maximum limit on expenses to the extentof 0.75 per cent of net assets and (ii) certainrestrictions and disclosures in SEBI (MutualFund) Regulations, 1996 which are in theprocess of being notified.

D. Improvement in DisclosureStandards

SEBI has taken a number of steps over theyears in the area of disclosures so that theinvestors may take well informed investmentdecisions. During the year 2002-03, SEBIinitiated the following measures:

a. Portfolio Disclosure

While making half-yearly portfolio disclosures,mutual funds have been advised to makecertain disclosures in the equity and debtoriented schemes. In case of equity-orientedschemes, the mutual funds are required todisclose the portfolio turnover ratio as afootnote and the name of the industry against

the name of each security in accordance withindustry classification as recommended byAMFI. The same industry classification canalso be followed by the mutual funds whilemaking disclosure of portfolios to investors,distributors and others, which are non-statutoryin nature. Further, in case of debt-orientedschemes, the average maturity period isrequired to be disclosed as a footnote.

b. Simplification of Disclosure in OfferDocuments

The standard offer document for mutual fundsprescribed in April 1998 inter-alia requiresdisclosure of all penalties imposed on thesponsor/AMC or their associates. Manymutual funds who have a very long historyor a large number of associate entities withmany of them based in various countries hadexpressed their difficulty in collating therequired information and updating the sameon a continuous basis. In view of this genuineconcern, SEBI reviewed the requirement ofdisclosure on penalties in consultation withmutual funds industry. The modified disclosurecriteria was finalised and communicated toall the mutual funds. SEBI made sure thatthe difficulty in collecting information wouldbe minimized without sacrificing therequirement of disclosing the regulatoryconduct of the group.

c. Other Disclosure Requirements

SEBI also prescribed disclosure requirementsfor conversion of close ended schemes intoopen ended schemes and in case of changein controlling interest of mutual funds.

E. Investor Servicing

a. Nomination Facility for Unitholders ofMutual Funds.

SEBI (Mutual Funds) Regulations, 1996 wereamended by including a provision for theAMCs to provide an option to the unitholder(s)


ANNUAL REPORT 2002 - 2003 1919191919

to nominate a person in whom the units heldby the unitholder(s) can be vested in theevent of the death of the unitholder(s). Theformat for nomination has also beenprescribed.

b. Uniformity in Calculation of Sale andRepurchase Price and Rounding off ofNAVs

All the mutual funds have been advised tofollow a uniform method to calculate the saleand repurchase price. The mutual funds mustclarify in the offer documents that the loadsshall be charged as a percentage of NAV i.e.applicable load as a percentage of NAV willbe added to NAV to calculate sale price andwill be subtracted from NAV to calculaterepurchase price. They are also required toexplain the calculation by means of anexample.

Apart from bringing about uniformity in themutual funds industry, it would now be veryeasy for the investors to calculate their sale /repurchase price.

The mutual funds have also been advisedto round off NAV upto four decimal placesin respect of index funds and all types ofdebt-oriented schemes like liquid/moneymarket mutual fund schemes i.e in case ofschemes which invest predominantly inmoney market instruments, gilt, income shortterm plans, fixed maturity plans, monthlyincome plans etc. and upto two decimalplaces in case of equity-oriented andbalanced fund schemes. However, the mutualfunds can round off NAVs upto more thantwo decimal places in case of equity-orientedand balanced fund schemes also, if they sodesire. This has been introduced so thatthere is uniformity in the mutual fundsindustry. The mutual funds are also requiredto make necessary disclosures in the offerdocuments.

c. Effective Investor Grievances RedressalMechanism

Investor grievances against mutual funds arehandled on priority basis by SEBI. Due toregular monitoring and follow-up, the rate ofredressal has always been about 99.5 percent. The difference of 0.5 per cent isbecause some of the complaints are underprocessing i.e. being forwarded to mutualfunds, reporting by mutual funds andincorporation in our data base. It may be saidthat all complaints received from investorsagainst mutual funds are redressed promptly.

F. Re-Engineering of Systems andProcesses

Several initiatives were taken by SEBItowards re-engineering of systems andprocesses in the case of mutual funds.

a. Revised format for Annual StatisticalReport (ASR)

The format of Annual Statistical Report earlierrunning into several pages was revised andsimplified to a one page report, so that wemay compile and analyse the data receivedfrom mutual funds. The analysis of the datain the ASRs gave industry the opportunity tostudy distribution of holdings of the mutualfund units by individual investor, corporates,NRI /OCBs, FIIs trusts., etc. The ASR isavailable on the SEBI’s web site.

b. New Scheme Reports simplified

The format for new scheme reports requiredto be filed by the mutual funds have beensimplified and revised. While earlier they wererequired to file two separate reports, one afterclosure of scheme and another afterallotment, now they are required to file onlyone report after allotment. While earlierreports were for the purpose of datacollection, new format of the report alsocovers regulatory compliances by the mutualfunds.


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c. Quarterly reports on movement in netassets discontinued

The statement of movement in net assets/portfolios, in prescribed formats on quarterlybasis was discontinued as the purpose wasadequately served by other reports submittedby the mutual funds.

d. Transparency in registration of mutualfunds and VCFs/FVCIs

In order to further streamline the process andshorten the time taken for registration as amutual fund, we have taken the initiative topost the entire step by step procedure ofgranting registration on SEBI website under‘Mutual Funds Section” - ‘How to getregistered as a Mutual Fund’. All informationrequired in addition to that in the applicationform has been included. SEBI has alsomentioned the benchmark time period withinwhich our observation/replies will becommunicated to them.

This exercise will greatly help the applicantsto understand the procedural formalities ingetting registered with SEBI. This will alsomake registration procedure completelytransparent. This will also help the foreignsponsors in various countries.

e. Cross-reference between Regulationsand circulars/guidelines

SEBI (Mutual Fund) Regulations, 1996 havebeen modified/ amended and guidelines andclarifications, which have the sanctity ofRegulation, have been issued from time to time.To avoid the risk of inadvertent non-complianceand to help the funds to have an integrated viewof the updated Regulations and inter-relatedcirculars and guidelines, we have indicatedsuitable linkages and cross-references to therelevant circulars, schedules and guidelinesissued till September 30, 2002. The same hasbeen circulated among the mutual funds andhas also been posted in our website under“Mutual Funds Section”.

f. Clarifications on SEBI Regulations andGuidelines

SEBI issued certain clarifications/interpretations of regulations to AMFI forcirculation among the mutual funds. This willhelp the existing as well as new mutual fundsto understand and interpret the Regulations andguidelines in their true spirit. This initiative is justthe beginning. In future also, such clarificationswould be issued from time to time.

g. Conversion of Close ended schemes intoopen ended schemes

Guidelines/instructions were issued to themutual funds to be followed for conversionof close ended schemes into open endedones. Certain information like pastperformance of the scheme, comparison withbenchmarks, etc must be disclosed in theletter to the unitholders so that they maytake well informed investment decisions. Also,the unitholders must be given a period of atleast 30 days for the purpose of exercisingthe exit option.

h. Procedure for Change in ControllingInterest of Mutual Funds

After handling such cases, we have evolvedcertain procedure in this regard. The entireprocedure to be followed for obtaining SEBI’sapproval was put on SEBI website. In caseswhere there has been change in controllinginterest of mutual funds has been placed withSEBI’s website.

IV. Venture Capital : Development andPolicy Initiatives

SEBI (Venture Capital Funds) Regulationswere notified in 1996. Subsequently, on thebasis of recommendations made by thecommittee set up by SEBI under thechairmanship of Shri K.B. Chandrashekhar,regulations were amended in September2000. Also, for the first time, regulations forforeign venture capital investors were notified.


ANNUAL REPORT 2002 - 2003 2121212121

Thereafter, SEBI has received somerepresentations/suggestions from the venturecapital industry. To deliberate upon theseissues, SEBI has set up an AdvisoryCommittee on Venture Capital under thechairmanship of Dr. Ashok Lahiri, ChiefEconomic Advisor, Minsitry of Finance,Government of India.

V. Foreign Institutional Investors (FIIs)

A. Simplification of documentationrequired for registration as an FII

SEBI(FII) Regulations, 1995 was amended toreduce the requirement for documentation andfollowing list specifies documents required.The registration fee was also reduced to US$5,000 from US$ 10,000.

B. Adoption of Straight ThroughProcessing

Straight Through Processing (“STP”) involvescapturing and processing transactions in onepass, from the point of first deal to finalsettlement. This will obviate the need formanual entry and re-entry of data of tradeparticulars which is time consuming and proneto errors.

In order to examine the feasibility of STP inthe Indian markets, SEBI constituted acommittee of representatives from variousmarket intermediaries and the Reserve Bankof India.

The Committee in its report recommended thefollowing:

a. Adoption of ISO 15022 messagingstandards by the market participants

b. Electronisation of contract notes

c. Connectivity among the marketparticipants and implementation of STP.

SEBI accepted the Committee ’srecommendations and introduced STP for

electronic trade processing with a commonmessaging standard i.e. ISO15022 with effectfrom December 02, 2002 on a voluntarybasis. After gaining some experience it isintended to make STP mandatory across allsegments of market.

VI. Substantial Acquisition of Sharesand Takeovers

A. Amendment to the SEBI (SubstantialAcquisition of Shares andTakeovers), Regulations, 1997

Based on the recommendations made by theBhagwati Committee, SEBI made certainamendments to the Takeover Regulations onSeptember 9, 2002. Major amendmentsinclude -

a) Removal of automatic exemption foracquisition through preferential allotment.

b) Additional condition in case of inter setransfer amongst different promoters orgroups of promoters added i.e. intersetransfers at a price not exceeding 25 percent price as determined in terms of theprovisions of the Regulations alonewould merit automatic exemption.

c) Increased frequency in disclosure ofshareholding when it crosses 5 percent,10 percent and 14 percent.

d) Disclosure of purchases or sales atevery 2 percent level, in respect personsholding between 15 percent and 75percent.

e) Change of control through specialresolution including giving the facility ofvoting through postal ballot instead ofordinary resolution.

f) Dispensation with the requirement ofadvance submission of copy of draftpublic announcement to SEBI, stockexchanges and target company.


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g) Additional parameter of two weeks dailyaverage of the high and low of the pricespreceding the date of the publicannouncement for determination of offerprice.

h) Factoring of payment made towards non-compete agreement in excess of 25percent of the offer price arrived in termsof the Regulations while calculating theopen offer price.

i) Minimum offer size of 20 percent in allcases.

j) Reduction in creeping acquisition limitfrom 10 percent to 5 percent with effectfrom October 01, 2002.

k) In case of indirect acquisition or changein control, the open offer may be madewithin 3 months of consummation ofsuch acquisition or change in control orrestructuring of the parent or thecompany holding shares of or controlover the Indian target company.However, the offer price has to bedetermined with reference to the date ofpublic announcement for parentcompany and date of publicannouncement for Indian target companyand whichever is higher would apply.

l) Facility of withdrawal of acceptances byshareholders upto three working daysbefore the closure of the offer.

m) Removal of the facility of withdrawal bythe first acquirer in case of a competitivebid.

n) The shares of the target company wouldbe deemed to be infrequently traded ifthe trading turnover is less than 5percent (instead of 2per cent earlier) of theshares listed on the stock exchange.

o) The relaxations extended fordisinvestment of central PSUs have beenmade applicable for state PSUs as well.

p) The directions that could be given bySEBI for the various violations havebeen increased to include :

i. Appointment of a merchant bankerfor the purpose of causingdisinvestment of shares acquired inbreach of regulations 10, 11 or 12;

ii. Transfer of any proceeds orsecurities to the Investors ’Protection Fund of a recognisedstock exchange;

iii. The target company or depositoryto cancel the shares where anacquisition of shares pursuant to anallotment is in breach of regulations10,11 or 12;

iv. The target company or thedepository not to give effect totransfer or further freeze the transferof any such shares and not topermit the acquirer or any nomineeor any proxy of the acquirer toexercise any voting or other rightsattached to such shares acquired inviolation of regulations 10, 11 or 12;

q) Additional parameter of two weeks dailyaverage of the high and low of the pricespreceding the date of the publicannouncement for determination of offerprice would not be applicable in the caseof disinvestment of a Public SectorUndertaking.

B. SEBI Regularisation Scheme, 2002

In terms of Chapter II of the SEBI (SubstantialAcquisition of Shares and Takeovers)Regulations, 1997 (hereinafter referred to as‘the Takeover Regulations, 1997’) certaincategories of persons are required to disclosetheir shareholding and/or control in a listedcompany to that company. Such companies,in turn, are required to disclose such details


ANNUAL REPORT 2002 - 2003 2323232323

to the stock exchanges where shares of thecompany are listed. It has been observed thatmany listed companies and/or their promoters/shareholders have either not complied at all orhave complied with the said requirements afterthe expiry of the time specified in the saidregulations.

In order to enable such persons andcompanies to comply with theserequirements, SEBI introduced a scheme,namely, “SEBI Regularization Scheme, 2002”(hereinafter referred to as `the Scheme’).Under the Scheme, the persons andcompanies who have not made disclosuresor who have made disclosures after the expiryof the period as specified in the TakeoverRegulations, 1997 are permitted to makedisclosures to the company and the stockexchange as the case may be, and pay thelump-sum amount specified herein.

The scheme was in force for –

a) A period of 3 months, i.e. from October1, 2002 to December 31, 2002 {later onextended to February 28, 2003} , for theshareholders/ promoters of the listedtarget companies.

b) A period of 4 months, i.e. from October1, 2002 to January 31, 2003 {later onextended to March 31, 2003} , for thelisted target companies. As of February28, 2003, 131 companies haveparticipated.

VII. Other Policies and ProgrammesHaving a Bearing on the Working ofthe Securities Market

A. Amendment to the Companies Act,1956

a. Companies (Amendment) Act, 2002

i Notified with effect from 6.2.2003.

ii It makes provision for registration ofcertain entities operating on the

basis of mutual assistance asproducer companies under the newpart IXA of the Companies Act.They will be akin to private limitedcompanies.

B. Companies Act – Schedules

a. Schedule II of the Companies Act

i. The Schedule amended by theCentral Government with effect from17.9.2002, requiring the declarationfrom the directors of the companyinviting subscription from the publicthat all relevant provisions of theCompanies Act and the SEBIGuidelines and GovernmentGuidelines have been complied withand that no statement made in theprospectus is contrary to theCompanies Act, the SEBI Act andthe rules made or guidelines issuedthereunder and the guidelinesissued by the Central Government.

b. Schedule V of the Companies Act

i. The Schedule dealing with formatof annual return has been alteredwith effect from 2.11.2002 and nowcontains a revised certificate statingthat all amounts mentioned insection 205C remaining unpaid /unclaimed for a period of 7 yearsas specified have been transferredto the Investors Education andProtection Fund.

c. Schedule VI of the Companies Act

i The Schedule dealing with theformat of balance sheet has beenaltered with effect from 13.11.2002to contain details of the amountscredited to the Investors Educationand Protection Fund under the head‘Current Liabilities and Provisions’.


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ii Permissible rounding off of theamounts mentioned in the balancesheets have been revised witheffect from 1.8.2002.

iii The limit of paid-up capital forcompulsory appointment ofCompany Secretaries under section383 A has been raised from Rs.50lakh to Rs.2 crore. Companieshaving lesser paid-up capital willhave to file the prescribedsecretarial compliance certificate.

C. Companies Act – Rules /Amendments Rules / Circulars

a. Companies (Issue of Indian DepositoryReceipts) Rules, 2002.

i SEBI has given its detailedcomments on the Draft Companies(Issue of Indian DepositoryReceipts) Rules drafted by the DCAunder section 605A of theCompanies Act.

b. The Directors’ Relatives (Office orPlace of Profit) Rules, 2003

i It applies to all offices and places ofprofits in a company carrying amonthly remuneration of more thanRs. 50,000/- per month. Theobtaining of approval of the CentralGovernment for appointment to suchoffices is mandatory. The factorswhich the Central Government wouldtake into consideration while grantingor refusing approval have beenindicated in the Rules.

ii By General Circular No. 2 of 2003,the DCA has clarified that the CostAuditor of a company can take partin the meeting of its AuditCommittee in his capacity as aninternal auditor, but cannot become

a member thereof and cannotexercise voting rights therein.

D. Amendment to the Securities andExchange Board of India Act, 1992

The Securities and Exchange Board of IndiaAct, 1992 has been amended by Securitiesand Exchange Board of India (Amendment)Act, 2002 with effect from 29.10.2002 :

a. Management of the Board

i The Board shall consist of aChairman, two members fromamongst Officials of the Ministry ofthe Central Government dealingwith Finance and Administration ofthe Companies Act, one memberfrom the Reserve Bank and fiveother members of whom atleastthree shall be whole-time members,to be appointed by the CentralGovernment.

ii The composition of the Board hasbeen increased to nine memberswith further provision that out of fivemembers other than those from theCentral Government and theReserve Bank, atleast three shall bewhole-time members.

iii After the amendment therepresentative of the CentralGovernment on the Board shall notbe from the Ministry of Law.

b. Functions of the Board

i The Board has been conferredpowers to call for information andrecord from any Bank or otherAuthority or Board or Corporationconstituted under any Central orState Act in respect of anytransaction in securities which isunder investigation or enquiry bythe Board.


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ii Section 11 (2A) empowers theBoard for taking measures toundertake inspection of any book orregister or document or record ofany listed company or a publiccompany which intends to get itssecurities listed on a recognisedstock exchange, if the Board hasreasonable grounds to believe thatsuch company has been indulgingin insider trading or fraudulent andunfair trade practices relating tosecurities market.

iii Section 11(3) further extends thepower of a Civil Court to the Boardin respect of inspecting any bookor register or document or recordof a listed company or a publiccompany which intends to get itssecurities listed on a recognisedstock exchange and in respect ofissuing commissions for theexamination of witnesses.

iv The Board has been conferredpowers for passing an order forreasons to be recorded in writing, inthe interest of investors or securitiesmarket, either pending investigationor enquiry or on completion of suchinvestigation or enquiry for takingany of the following :

� Suspend the trading of anysecurity in any recognised stockexchange.

� Restrain persons fromaccessing the securities marketand prohibit any personassociated with the securitiesmarket to buy, sell or deal insecurities.

� Suspend any office bearer ofany stock exchange or selfregulatory organization fromholding such position.

� Impound and retain theproceeds or securities in respectof any transaction which isunder investigation.

� Attach one or more bankaccount of any intermediary orperson associated with thesecurities market in any mannerinvolved in violation of any ofthe provisions of the Act, Rulesor Regulations. However, suchorder of attachment can bemade by the Board only afterpassing of an order by a JudicialMagistrate of the First Class onan application made for theapproval. Further, such order ofattachment can be made onlyfor a period not exceeding onemonth and that only the bankaccount so far as it relates tothe proceeds actually involvedin violation of the provisions ofthe Act, Rules, or Regulationsshall be allowed to be attached.

� Direct any intermediary or anyperson associated with thesecurities market in any mannernot to dispose off or alienate anasset forming part of thetransaction which is underinvestigation.

v The Board may, for the protectionof investors, by general or specialorders -

� Prohibit any company fromissuing prospectus, any offerdocument, or advertisementsoliciting money from the publicby the issue of securities;

� Specify the conditions subject to


2626262626 ANNUAL REPORT 2002 - 2003

which the prospectus, such offerdocument or advertisement, ifnot prohibited, may be issued.

vi The Board may specify therequirements for listing and transferof securities and other mattersincidental thereto.

c. Investigation

i The Board may, by an order inwriting, direct any person toinvestigate the affairs of suchintermediary or persons associatedwith the securities market and toreport thereon to the Board.

ii It shall be the duty of everymanager, managing director, officerand other employee of the companyand every intermediary to preserveand to produce to the InvestigatingAuthority all the books, registers,other documents and record of, orrelating to, the company or, as thecase may be, of or relating to, theintermediary or such person, whichare in their custody or power.

iii The Investigating Authority mayrequire the concerned persons tofurnish such information to, orproduce such books, or registers,or other documents, or recordbefore him.

iv The Investigating Authority maykeep in its custody any books,registers, other documents andrecord for six months and thereaftershall return the same to theconcerned persons by whom or onwhose behalf the books, registers,other documents and record areproduced. The InvestigatingAuthority may call for any book,

register, other document and recordif they are needed again.

v The Investigating Authority mayexamine on oath, any manager,managing director, officer and otheremployee of any intermediary orany person associated withsecurities market in any manner, inrelation to the affairs of his businessand may administer an oathaccordingly and for that purpose,may require any of those personsto appear before him personally.

vi If any person fails withoutreasonable cause or refuses toproduce to an InvestigatingAuthority any book, register, otherdocument and record or to furnishany information which it is his dutyor to appear before the InvestigatingAuthority personally when requiredto do so or to answer any questionwhich is put to him by theInvestigating Authority or to sign thenotes of any examination he shallbe punishable with imprisonment fora term which may extend to oneyear, or with fine, which may extendto one crore rupees, or with both,and also with a further fine whichmay extend to five lakh rupees forevery day after the first duringwhich the failure or refusalcontinues.

vii The Investigating Authority may,pursuant to an order made on anapplication by the JudicialMagistrate of the first class havingjurisdiction-

� enter the place or places wheresuch books, registers, otherdocuments and record are kept;


ANNUAL REPORT 2002 - 2003 2727272727

� search that place or thoseplaces in the manner specifiedin the order ; and

� seize books, registers, otherdocuments and record itconsiders necessary for thepurposes of the investigation.

viii Seizure of books, registers, otherdocuments and record, of listedpublic company or a public company(which is not an intermediary whichintends to get its securities listed onany recognized stock exchange) isnot permitted unless such companyindulges in insider trading or marketmanipulation.

d. Cease and Desist proceedings

i If the Board finds, after causing aninquiry to be made that any personhas violated, or is likely to violate,any provisions of this Act, or anyrules or regulations madethereunder, the Board may pass anorder requiring such person tocease and desist from committingor causing such violation.

ii Board shall pass such order inrespect of listed public company or apublic company which intends to getits securities listed on any recognizedstock exchange only if such companyhas indulged in insider trading ormarket manipulation.

e. Prohibition of Manipulative andDeceptive Devices, Insider Trading andSubstantial Acquisition of Securities orControl

The following activities have been prohibited -

i use or employment of anymanipulative or deceptive device orcontrivance in contravention of the

provisions of this Act or the rules orthe regulations made there under;

ii employment of any device, schemeor artifice to defraud in connectionwith issue or dealing in securities ;

iii engaging in any act, practice,course of business which operatesor would operate as fraud or deceiptupon any person, in connection withthe issue, dealing in securities incontravention of the provisions ofthis Act or the rules and theregulations made there under;

iv engaging in insider trading;

v dealing in securities while inpossession of material or non-publicinformation or communicating suchmaterial or non-public information toany other person, in a manner whichis in contravention of the provisionsof this Act or the rules and theregulations made there under;

vi acquiring control of any company orsecurities more than the percentageof equity share capital of a listedcompany in contravention of theprovisions of this Act or the rules andthe regulations made there under.

f. Penalties and Adjudication

i The penalties to be imposed byAdjudicating Officer have beenenhanced so as to serve aseffective deterrents.

ii The sum realized by way ofpenalties shall be credited to theConsolidated Fund of India.

g. Establishment of Securities AppellateTribunal (SAT)

i The Securities Appellate Tribunalshall consist of a Presiding Officerand two other members.


2828282828 ANNUAL REPORT 2002 - 2003

ii A person, who is a sitting or retiredJudge of the Supreme Court or asitting or retired Chief Justice of aHigh Court, may be appointed asPresiding Officer in consultation withthe Chief Justice of India or hisnominee.

iii A person who is a person of ability,integrity and standing who hasshown capacity in dealing withproblems relating to securitiesmarket and has qualification andexperience of corporate law,securities laws, finance, economicsor accountancy shall be qualified forappointment as Member

iv A member of the Board or anyperson holding a post at levelequivalent to Executive Director inthe Board shall not be appointed asPresiding Officer or Member of aSecurities Appellate Tribunal duringhis service or tenure as such withthe Board or within two years fromthe date on which he ceases to holdoffice as such in the Board.

v The Presiding Officer, Members andother officers and employees of theSecurities Appellate Tribunal shallbe deemed to be public servants.

vi Appeal to Supreme Court- Againstany decision or order of theSecurities Appellate Tribunal anappeal shall to the Supreme Court.

vii Such appeal may be filed by theaggrieved party within sixty days fromthe date of communication of thedecision or order on any question oflaw arising out of such order.

h. Offences

i The penalties for offences under theAct enhanced to ten years, or with

fine, which may extend to twenty-five crores rupees or with both.

i. Compounding of Offences

i Any offence punishable under theAct, not being an offencepunishable with imprisonment onlyor with imprisonment and also withfine may either before or after theinstitution of any proceeding, becompounded by a SecuritiesAppellate Tribunal or a court beforewhich such proceedings arepending.

j. Power to Grant Immunity

i If on recommendation by the Board,the Central Government is satisfiedthat any person, who is alleged tohave violated any of the provisionsof this Act or the rules or theregulations made thereunder, hasmade a full and true disclosure inrespect of the alleged violation, itmay grant to such person, subjectto such conditions as it may thinkfit to impose, immunity fromprosecution for any offence underthis Act, or the rules or theregulations made thereunder or alsofrom the imposition of any penaltyunder this Act with respect to thealleged violation.

ii No such immunity can be grantedin cases where the proceedings forthe prosecution for any suchoffence have been instituted beforethe date of receipt of application forgrant of such immunity.

iii An immunity granted to a personmay, at any time, be withdrawn bythe Central Government, if it issatisfied that such person had, inthe course of the proceedings, not


ANNUAL REPORT 2002 - 2003 2929292929

complied with the condition onwhich the immunity was granted orhad given false evidence.

k. Cognizance of Offences by Courts

i A court of the rank of a Court ofSession shall try an offencepunishable under the Act.

E. SEBI Regulations and Amendment toSEBI Regulations

Some of the amendments have been listedin the chapter. This section describes theamendments in greater details.

a. SEBI (Procedure for Holding Enquiryby Enquiry Officer and ImposingPenalty) Regulations, 2002 werenotified on 27.9.2002 vide S.O.No.1045 (E).

i The provisions regarding enquiryproceedings provided under thevarious regulations deleted.

ii A common and comprehensiveprocedure of enquiry and impositionof penalty provided.

iii The Enquiry Officer may beappointed by the Chairman or amember designated in this behalf inthe matter involving technical orcomplicated questions of fact or law.The Chairman or the member mayappoint more than one EnquiryOfficer to function as a benchpresided over by the Senioramongst them.

iv The notice may be served byRegistered Post by A.D. or by thecourier service approved by theboard. If the notice cannot beserved by these modes the samemay be served by affixing the sameon the door or some otherconspicuous part of the premises of

the registered office or the principaloffice of the intermediary. In caseof a stock broker the notice shallbe served through the concernedstock exchange.

v The intermediary may appearbefore the Enquiry Officer throughan authorized representative who isnot a legal practitioner unless theChairman or the member hasappointed a legal practitioner aspresenting officer.

vi The Enquiry Officer mayrecommend minor penalties ormajor penalties by givingjustification therefor.

vii The minor penalties and majorpenalties have been defined. Minorpenalties include warning,prohibiting the intermediary to takeup any new assignment upto sixmonths, suspension of certificate fora period upto three months etc. Themajor penalties include cancellationof certificate, suspension for aperiod exceeding three months,prohibiting or debarring theintermediary for a period exceedingsix months.

viii The grounds for imposing of majorpenalties prescribed.

ix The Chairman or the Member maypass the appropriate order afterconsidering the reply to the showcause notice issued to theintermediary after the report of theenquiry officer.

x If the Enquiry Officer recommendsminor penalty and the Chairman orthe member proposes to imposemajor penalty, a notice to makewritten submissions within 15 daysand after considering the writtensubmissions if any, the Chairman orthe Member may pass suitable order.


3030303030 ANNUAL REPORT 2002 - 2003

xi A summary procedure has beenprovided in case of certaincircumstances involving establishedfacts as provided in the regulations.

xii For the summary procedure, theChairman or the Member mayappoint an officer of the Board notbelow the rank of Division Chief topass appropriate orders under thecircumstances specified in theregulations in this behalf. The officerso appointed shall give a notice tothe concerned intermediary formaking written submissions. Afterconsidering the written submissionsthe officer shall pass appropriateorders.

xiii The orders passed under theregulations are to be published byissue of press release in respect ofthe order in two newspapers ofwhich atleast one shall havenationwide circulation. The ordershall also be put on the website ofthe Board.

b. SEBI (Central Listing Authority)Regulations, 2003

These regulations were notified on 13thFebruary, 2003 vide S.O. No. 171 (E).

i A Central Listing Authority (CLA)shall be constituted by the SEBI.

ii The CLA shall have the functionsof issuing or rejecting theapplication made by any bodycorporate, mutual fund or collectiveinvestment scheme for letter ofrecommendation for listing, ofmaking recommendations as tolisting conditions and of dischargingsuch other functions as may bespecified by SEBI from time to time.

iii Before making an application forlisting to any stock exchange, a

body corporate, mutual fund orcollective investment scheme shallobtain a letter of recommendationfor listing from the CLA on anapplication made in that behalf.

iv An exchange shall not consider anylisting application made by any bodycorporate, mutual fund or collectiveinvestment scheme, unless it isaccompanied by a letter ofrecommendation issued by theCLA.

v Where the CLA refuses to issue aletter of recommendation inaccordance with the procedure laiddown in the Regulations, theaggrieved party may approachSEBI, which may, if satisfied, directthe CLA to issue a letter ofrecommendation.

vi If the exchange refuses listing to thebody corporate, mutual fund orcollective investment scheme, itmay prefer an appeal to theSecurities Appellate Tribunal asprovided in the Securities Contracts(Regulation) Act, 1956.

c. SEBI (Portfolio Managers)(Amendment) Regulations, 2002

SEBI (Portfolio Managers) AmendmentRegulations 2002 were notified on 11.10.2002to amend SEBI (Portfolio Managers)Regulations, 1993 to provide inter-alia thefollowing:

i The Portfolio Manager to be a BodyCorporate.

ii Multiple registration i.e. registrationto associates/group companies/companies under samemanagement of the PortfolioManager may be considered. Theapplication may be rejected if anyapplication of a person directly or


ANNUAL REPORT 2002 - 2003 3131313131

indirectly connected with applicanthas been rejected or anydisciplinary action has been takenby the Board against such person.

iii Requirement of minimum two keypersonnel.

iv Before taking up an assignment ofmanagement of funds and portfolioof securities, the portfolio managershall enter into an agreement inwriting with the client clearlydefining the inter se relationship andsetting out their mutual rights,liabilities and obligations relating tothe management of funds orportfolio of securities.

v The details to be contained in theagreement are specified inSchedule IV. Such agreementbetween the portfolio manager andthe client shall, inter alia, contain:

� the investment objectives andthe services to be provided;

� areas of investment andrestrictions, if any, imposed bythe client; type of instrumentsand proportion of exposure;

� tenure of portfolio investments;terms for early withdrawal offunds or securities by theclients; period of the contractand provision of earlytermination, if any

� attendant risks involved in themanagement of the portfolio;

� amount to be invested subjectto the restrictions providedunder the regulations;

� fees payable to the portfoliomanager; the quantum andmanner of fees payable by theclient for each activity for whichservice is rendered by the

portfolio manager directly orindirectly (where such service isout sourced) ;

� in case of a discretionaryportfolio manager a conditionthat the liability of a client shallnot exceed his investment withthe portfolio manager;

vi The portfolio manager shall provideto the client, the DisclosureDocument alongwith a certificateregarding the correctness of thecontents, atleast two days prior toentering into an agreement with theclient. The contents of theDisclosure Document have beenspecified in Schedule.

vii The Disclosure Document, shallinter alia contain the completedisclosures in respect oftransactions with related parties asper the accounting standardsspecified by the Institute ofChartered Accountants of India inthis regard; the performance of theportfolio manager; the auditedfinancial statements of the portfoliomanager for the immediatelypreceding three years.

viii The contents of the DisclosureDocument shall be certified by anindependent chartered accountant.

ix Disclosure Document to filed withSEBI before its issue and thereafterevery six months or effecting materialchange in Document whichever isearlier.

x The portfolio manager shall chargean agreed fee from the clients forrendering portfolio managementservices without guaranteeing orassuring, any return and the fee socharged may be a fixed fee or a


3232323232 ANNUAL REPORT 2002 - 2003

return based fee or a combinationof both.

xi The portfolio manager shall notaccept from the client, funds orsecurities worth less than five lacsrupees.

xii The portfolio manager shall notborrow funds or securities on behalfof the client. The portfolio managershall not lend securities held onbehalf of clients to a third personexcept as provided under theseregulations.

xiii The money or securities acceptedby the portfolio manager shall notbe invested or managed by theportfolio manager except in termsof the agreement between theportfolio manager and the client.

xiv The funds or securities can bewithdrawn or taken back by theclient before the maturity of thecontract under the circumstancesspecified in the regulations.

xv Permit Portfolio Managers to investin Derivatives. However, leveragingof portfolio shall not be permittedin respect of investment inderivatives.

xvi The portfolio manager may, subjectto authorisation by the client inwriting, participate in securitieslending.

xvii The portfolio accounts of theportfolio manager shall be auditedannually by an independentchartered accountant and a copy ofthe certificate issued by thechartered accountant shall be givento the client.

xviii The client may appoint a charteredaccountant to audit the books and

accounts of the portfolio managerrelating to his transactions.

d. SEBI (Underwriters) (Amendment)Regulations, 2002 were notified onDecember 10, 2002 vide S.O. No.1291(E). The amendment provides thatan applicant being a merchant bankerand seeking registration as underwriterwould not be entitled to exemption frompayment of the registration fees.

e. SEBI (Prohibition of Insider Trading)(Second Amendment) Regulations,2002 were notified on 29th November,2002 vide S.O. No. 1245(E).

i The definition of ‘person deemed tobe a connected person’ includesconcerns, firms, companies etc. inwhich other specified insiders havemore than 10per cent of the holdingor interest. The reference toholdings of relatives of suchpersons has been removed.

ii Any communication made in theordinary course of profession oremployment shall also be exemptfrom the prohibition of regulation3(ii) in addition to those made in theordinary course of business orunder any law.

iii A new regulation 3B has beenintroduced to lay down certaindefences in proceedings forviolation of regulation 3A inspecified circumstances. Sub-regulation (1) says that a companywould not be liable under regulation3A for entering into a transaction insecurities while its officer oremployee was in possession ofunpublished price sensitiveinformation relating to the securities,if the decision to deal was taken bya person other than that officer or


ANNUAL REPORT 2002 - 2003 3333333333

employee, and there are systemsand procedures in the companywhich ensure that such personcannot have access to suchinformation or to advice regardingthe transaction from that officer oremployee and if the information oradvice was in fact notcommunicated to such person. Sub-regulation (2) of regulation 3B givesexemption in case of an acquisitionmade in accordance with the SEBI(Substantial Acquisition of Sharesand Takeovers) Regulations, 1997.

iv The continuous disclosurerequirements in regulation 13(4)have now been made applicableonly in a case where the change inholdings exceeds the lower of Rs.5 lacs in value, or 25000 shares or1per cent of the total shareholdingor voting rights.

v The definition of ‘designatedemployee’ for the purpose of theModel Code of Conduct for ListedCompanies does not now extend toall the employees of the financedepartment. Only employees whoare in the top three tiers ofmanagement and those specificallydesignated by the company wouldbe covered.

vi It has been clarified that the timeof commencement of closure of thetrading window in connection withcertain specified events shall bedecided by the company.

f. SEBI (Foreign Institutional Investors)(Amendment) Regulations, 2002 werenotified in the Official Gazette onDecember 10, 2002 vide S.O. No.1292(E). The amendment proposes tofurther rationalize the registration processof Foreign Institutional Investors.

i It is required that a certified copy ofthe relevant clauses or articles ofthe Memorandum and Articles ofAssociation of the applicant or theagreement authorizing the applicantto invest on behalf of its clients isenclosed alongwith the applicationform.

ii The requirement of filing the auditedfinancial statement and annualreport pertaining to the last fiveyears is dispensed with. The copiesof these documents for the last oneyear, not being less than 12 monthsare required to be filed with theapplication.

iii The requirement of fil ing thedocuments evidencing theregistration of the applicant with aSecurities Commission or selfregulatory organization or any otherregulatory authority removed. Itwould be now sufficient if adeclaration is made by the applicantwith the requisite particulars.

iv Instead of filing a copy of theagreement with the domesticcustodian, it would suffice, if adeclaration is made by the applicantthat it has entered into a custodianagreement together with details ofthe domestic custodian.

v The registration fee has beenreduced from US $ 10,000/- to US$ 5,000/-.

g. SEBI (Mutual Funds) (SecondAmendment) Regulations, 2002 Theasset management company shallprovide an option to the unitholder(s) tonominate a person in whom the units heldby the unitholder(s) can be vested in theevent of the death of the unitholder(s).The format for nomination has also beenspecified in the Regulations.


3434343434 ANNUAL REPORT 2002 - 2003

h. SEBI (Mutual Funds) (ThirdAmendment) Regulations, 2002notified in July, 2002 vide S.O.No.809(E)

i The variation in NAV has beenreduced from ‘2 percent ’ to‘1percent’.

ii The Regulations also require that incase the NAV of a scheme differsdue to non-recording of transactionsby more than 1per cent, theinvestors or schemes shall becompensated.

iii If investors are allotted units at higherNAV or they are given lower NAV atthe time of their sale of units, theyshould be compensated by theschemes. However, if investors arecharged lower NAV at the time of theirpurchase of units or they are givenhigher NAV at the time of their sale ofunits, asset management companyshall compensate the schemes.

iv It has been provided that themeeting of the Trustees shall beheld atleast once in every twocalendar months and at least sixsuch meetings to be held in everycalendar year.

i. SEBI (Mutual Funds) (FourthAmendment) Regulations, 2002 werenotified in September, 2002 Vide S.O.No.956(E) to provide for:

i Service fees linked to the assetsunder management as on 31stMarch of the previous year.

ii The service fees of Rupees twolakhs fifty thousand payable by allmutual fund to the service feespayable based on the net assets ofthe fund as on 31st March of theprevious year has been modified.

The Regulations provide for scaleof service fees payable fromRs.2.50 Lacs to Rs.7.50 Lacsbased on the NAV as on 31stMarch of the previous year.

j. SEBI (Credit Rating Agencies)(Amendment) Regulations, 2003 werenotified on 19.02.03 Vide S.O.No.203(E). The following amendmentswere made:

i The proviso to Regulation 27provides that Credit Rating Agencymay rate a security issued by itsassociate having a commonindependent director with it or itsrating committee.

ii The above relaxation is providedsubject to condition that theindependent director does notparticipate in the discussions onrating decisions and that the CreditRating Agency makes a disclosurein the rating announcement of theassociate about the existence of theindependent director and about hisnon participation in the ratingdecisions.

iii The expression “ independentdirector” has been explained to be asa director who, apart from receivingdirector ’s remuneration does nothave any material pecuniaryrelationship or transaction with acompany, its promoters, itsmanagement or its subsidiaries,which in the judgement of the Boardof the company may affect theindependence of the judgement ofsuch director.

VIII. Retrospect and Prospects

a) Retrospect : The year that went by hadnow posed several challenges to SEBI.


ANNUAL REPORT 2002 - 2003 3535353535

On one hand there was the challenge ofrestoring investor confidence which wasbattered by the market turbulence, whileon the other hand the challenge ofcontinuously reviewing, improving anddeveloping the regulatory framework toprovide for a market which is fair andtransparent as functions with a highdegree of efficiency and integrity. In themidst of these challenges, SEBI for thefirst time forged for itself a vision –“themost dynamic and respected regulator -globally”, and carefully crafted out astrategic action plan, in consonance withSEBI’s objective and its mission to helpthe securities market retain thecompetitive edge and to address thestructural, systemic and operational risksof the markets. It goes to the credit of theteam of SEBI that it was able tosuccessfully complete a large number ofthe activities. The remaining activities areof continuing nature and SEBI would haveto work at these continuously. The majormilestones covered by SEBI during theyear have already been delineated earlierin this chapter.

b) Prospects : In furtherance of its visionand mission, the team of SEBI laid outits Second Strategic Action Plan for theyear ahead. If the current year’s (2002-03) plan aimed at building thecompetitive edge for the Indian SecuritiesMarket, the aim of the next year’s planis to make Indian Securities Market, aglobal benchmark. SEBI would workassiduously in conjunction with thegovernment , other regulatory agenciesand market participants to reach the goaland to make Indian Securities Market ,a vibrant and a destination for globalcapital. Some of the salient features ofthe Strategic Action Plan for 2003-04 aregiven below :-

� Development of SROs in varioussegments of the Market.

� Greater co-ordination with the otherregulators with global view of the issueand deliver the better values to themarket.

� Enhanced cooperation with overseasregulators for superior regulation andto improve the visibility of the IndianSecurities Market at the global level.

� Disclosures for private placements ofdebt(listed).

� Disclosure norms for debt issues byInternational Multilateral Agencies.

� Comprehensive Review of Marketintelligence and SurveillanceSystems

� Concrete measures to enhanceliquidity in market

� Disclosures by Market Participants.

� Certification for various intermediariesin the Securities Market to bring inthe higher level of professionalism.

� Enhance speed of enforcementactions.

� Physical settlement of the derivativeproducts.

� Cross margining between the cashand derivatives markets to economizethe use of capital of the participants inthe market.

� Introduction of new financialinstruments like fund of funds andreal estate funds.

� Policy formulation for the IndianDepository Receipts (IDRs)

� Expansion of STP across the marketparticipants to enhance theprocessing speed through theseamless flow of information.

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