Sebi Report

This Report is in conformity with the format as per the Securitiesand Exchange Board of India (Annual Report) Rules, 1994,

notifi ed in Offi cial Gaze� e on April 7, 1994.

MEMBERS OF THE BOARD(As on March 31, 2012)

Appointed under Section 4(1) (a) of the SEBI Act, 1992 (15 of 1992)

U. K. SINHACHAIRMAN

Appointed under Section 4(1) (d) of the SEBI Act, 1992 (15 of 1992) PRASHANT SARANWHOLE TIME MEMBER

RAJEEV K AGARWALWHOLE TIME MEMBER

V. K. JAIRATHVoluntarily retired Principal Secretary (Industry)Government of Maharashtra

Nominated under Section 4(1) (b) of the SEBI Act, 1992 (15 of 1992)

NAVED MASOODSecretaryMinistry of Corporate Aff airsGovernment of India

Dr. THOMAS MATHEWJoint SecretaryMinistry of FinanceDepartment of Economic Aff airsGovernment of India

Nominated under Section 4(1) (c) of the SEBI Act, 1992 (15 of 1992)

ANAND SINHADeputy GovernorReserve Bank of India

MEMBERS OF THE SEBI BOARD(As on March 31, 2012)

U K SINHAChairman

PRASHANT SARANWhole Time Member

RAJEEV K AGARWALWhole Time Member

V K JAIRATHVoluntarily retired Principal

Secretary (Industry)Government of Maharashtra

NAVED MASOODSecretary

Ministry of Corporate Aff airs

Government of India

Dr. THOMAS MATHEWJoint Secretary

Ministry of FinanceDepartment of Economic

Aff airsGovernment of India

ANAND SINHADeputy Governor

Reserve Bank of India

CHAIRMAN, WHOLE TIME MEMBERS AND EXECUTIVE DIRECTORS

Le� to Right :

Si� ing : Shri Prashant Saran, Whole Time Member; Shri U K Sinha, Chairman; Shri Rajeev K Agarwal, Whole Time Member.

Standing : Shri S Ramann, Executive Director; Shri Ananta Barua, Executive Director; Smt. Usha Narayanan, Executive Director; Shri J Ranganayakulu, Executive Director; Shri P K Nagpal, Executive Director; Shri R K Padmanabhan, Executive Director; Shri S. Ravindran, Executive Director.

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CONTENTS

List of Boxes ..............................................................................................................................................vi

List of Tables ........................................................................................................................................... vii

List of Charts .............................................................................................................................................xi

List of Abbreviations ..............................................................................................................................xii

PART ONE: POLICIES AND PROGRAMMES

1. GENERAL MACRO-ECONOMIC ENVIRONMENT .............................................................. 1

2. REVIEW OF POLICIES AND PROGRAMMES ....................................................................... 8

I. Primary Market ...................................................................................................................... 8

II. Secondary Market ................................................................................................................ 13

III. Corporate Debt Market ........................................................................................................ 26

IV. Mutual Funds ....................................................................................................................... 27

V. Portfolio Managers ............................................................................................................... 32

VI. Foreign Institutional Investors .......................................................................................... 33

VII. Takeovers .............................................................................................................................. 35

VIII. Surveillance ........................................................................................................................... 35

IX. Investor Assistance and Education ................................................................................... 36

X. Retrospect and Prospects ................................................................................................... 37

PART TWO: REVIEW OF TRENDS AND OPERATIONS

1. PRIMARY MARKET .................................................................................................................... 40

I. Resource Mobilisation ......................................................................................................... 41

II. Sector-wise Resource Mobilisation ................................................................................... 44

III. Size-wise Resource Mobilisation ....................................................................................... 44

IV. Industry-wise Resource Mobilisation ............................................................................... 45

2. SECONDARY MARKET ............................................................................................................... 46

I. Equity Market in India ........................................................................................................ 46

II. Performance of Major Stock Indices and Sectoral Indices ............................................. 50

III. Turnover in the Indian Stock Markets .............................................................................. 52

IV. Market Capitalisation ......................................................................................................... 54

V. Stock Market Indicators ...................................................................................................... 56

VI. Volatility in Stock Markets ................................................................................................. 59

VII. Trading Frequency .............................................................................................................. 61

VIII. Activities of Stock Exchanges ........................................................................................... 62

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IX. Dematerialisation ................................................................................................................ 63

X. Derivatives Segment ........................................................................................................... 65

3. TRENDS IN THE BOND MARKET ........................................................................................... 72

I. Corporate Bond Market ...................................................................................................... 72

II. Wholesale Debt Market ...................................................................................................... 75

4. MUTUAL FUNDS ......................................................................................................................... 76

5. FOREIGN INSTITUTIONAL INVESTMENT ........................................................................ 83

6. CORPORATE RESTRUCTURING ............................................................................................ 88

7. VENTURE CAPITAL FUNDS AND FOREIGN VENTURE CAPITAL INVESTORS ................................................................................................................ 89

PART THREE: REGULATION OF SECURITIES MARKET

1. INTERMEDIARIES ...................................................................................................................... 90

I. Streamlining of Registration Process of Intermediaries ................................................ 90

II. Registered Intermediaries Other than Stock Brokers and Sub-brokers ....................... 90

III. Registration of Stock Brokers ............................................................................................. 92

IV. Registration of Sub-brokers ............................................................................................... 96

V. Recognition of Stock Exchanges ........................................................................................ 97

VI. Platform / Stock Exchanges for Small and Medium Enterprises .................................. 98

VII. Memorandum of Understanding (MoU) between Stock Exchanges ........................... 98

VIII. Registration of Foreign Institutional Investors and Custodians of Securities ............ 98

IX. Registration of Collective Investment Schemes .............................................................. 99

X. Registration of Mutual Funds ............................................................................................ 99

XI. Registration of Venture Capital Funds ............................................................................. 99

XII. Fees and Other Charges ...................................................................................................... 99

2. CORPORATE RESTRUCTURING .......................................................................................... 101

I. Substantial Acquisition of Shares and Takeovers ......................................................... 101

II. Buy-back ............................................................................................................................. 102

3. SUPERVISION ............................................................................................................................ 102

I. Inspection of Market Intermediaries .............................................................................. 102

II. Inspection of Stock Exchanges ......................................................................................... 104

III. Follow-up Inspection Reports ......................................................................................... 105

CONTENTS

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4. SURVEILLANCE ......................................................................................................................... 105

I. Mechanism of Market Surveillance ................................................................................ 105

II. Data Warehousing and Business Intelligence System .................................................. 106

III. Significant Market Movements during 2011-12 ............................................................ 106

IV. Surveillance Actions .......................................................................................................... 106

V. Surveillance Measures ...................................................................................................... 107

VI. Enforcement Actions ......................................................................................................... 107

5. INVESTIGATION ....................................................................................................................... 113

I. Initiation of Investigation ................................................................................................. 113

II. Process of Investigation .................................................................................................... 113

III. Trends in Investigation Cases .......................................................................................... 114

IV. Regulatory Action ............................................................................................................. 117

V. Follow-up of Investigations ............................................................................................. 117

6. ENFORCEMENT OF REGULATIONS ................................................................................... 118

I. Enforcement Mechanisms ................................................................................................ 118

II. Market Intermediaries ...................................................................................................... 121

III. Regulatory Actions against Mutual Funds .................................................................... 123

IV. Regulatory Actions against CISs ..................................................................................... 123

V. Regulatory Actions under SEBI (SAST) Regulations, 1997 ......................................... 123

VI. Regulatory Actions against FIIs ...................................................................................... 124

VII. Regulatory Actions against Market Intermediaries ..................................................... 124

7. PROSECUTION .......................................................................................................................... 125

I. Trends in Prosecution ....................................................................................................... 125

II. Nature of Prosecution ....................................................................................................... 129

III. Disposal of Prosecution Cases .........................................................................................130

8. LITIGATIONS, APPEALS AND COURT PRONOUNCEMENTS ................................... 130

9. CONSENT AND COMPOUNDING……………………………………………… ................ 131

10. INVESTOR EDUCATION, ASSISTANCE AND TRAINING ………………. .................. 133

11. RESEARCH ACTIVITIES ……………………………………………………….... .................. 139

PART FOUR: REGULATORY CHANGES

1. REGULATORY DEVELOPMENTS ......................................................................................... 143

CONTENTS

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I. New Regulations .............................................................................................................. 143

II. Amendments to Existing Rules/ Regulations ............................................................... 145

2. SIGNIFICANT COURT PRONOUNCEMENTS ................................................................... 152

I. Supreme Court .................................................................................................................. 152

II. High Court ......................................................................................................................... 154

III. Securities Appellate Tribunal .......................................................................................... 157

IV. Other Courts ...................................................................................................................... 158

PART FIVE: ORGANISATIONAL MATTERS

1. SEBI BOARD ................................................................................................................................ 159

2. AUDIT COMMITTEE ................................................................................................................ 159

3. ORGANISATION RESTRUCTURING .................................................................................. 160

4. HUMAN RESOURCES .............................................................................................................. 160

I. Staff Strength, Recruitment and Deputation ................................................................ 160

II. Training and Development .............................................................................................. 161

III. Strengthening of Regional Offices .................................................................................. 161

IV. Promotions ........................................................................................................................ 161

V. Enhancement of Staff Pay, Allowance, and Benefits .................................................... 162

VI. Scheme for Recognizing and Rewarding Academic Excellence of Children of Employees ..................................................................................................... 162

VII. Disciplinary Matters .......................................................................................................... 162

5. NATIONAL INSTITUTE OF SECURITIES MARKETS ..................................................... 162

I. Certification of Associated Persons in the Securities Market ...................................... 162

II. Development and Administration of Continuing Professional Education (CPE) ... 163

III. Financial Literacy and Investor Education .................................................................... 163

IV. Securities Markets Education .......................................................................................... 164

V. Executive Education Program ......................................................................................... 164

VI. Project with World Bank Technical Assistance ............................................................. 165

VII. Initiatives on Information and Communication Technology Matters ....................... 165

6. VIGILANCE CELL ...................................................................................................................... 166

7. PROMOTION OF OFFICIAL LANGUAGE .......................................................................... 166

I. Bilingualisation ................................................................................................................. 166

CONTENTS

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II. Correspondence in Hindi ................................................................................................ 166

III. Training .............................................................................................................................. 166

IV. Rajbhasha Competitions and Functions ........................................................................ 166

V. Aaj Ka Shabd ..................................................................................................................... 167

VI. Hindi Noting and Hindi Quotes .................................................................................... 167

VII. Rajbhasha Meetings and Seminars ................................................................................ 167

VIII. Information Technology and Hindi ............................................................................... 167

IX. Investor Website and SCORES (SEBI Complaints Redress System) ......................... 167

X. Investor Awareness .......................................................................................................... 167

XI. Regional offices ................................................................................................................. 167

8. INFORMATION TECHNOLOGY ........................................................................................... 167

I. Strengthening IT Security ................................................................................................ 168

II. New Web-Mail .................................................................................................................. 168

III. Implementation of secured system to access SEBI applications ................................ 168

IV. Implementation of Information Rights Management (IRM) and Data Leakage Protection(DLP) systems ......................................................................... 168

9. INTERNATIONAL CO-OPERATION .................................................................................... 168

I. Association with IOSCO .................................................................................................. 169

II. Chair of the Asia Pacific Regional Committee ............................................................. 170

III. Association with G20/FSB ............................................................................................... 170

IV. Joint Forum ........................................................................................................................ 170

V. Hosting of International Seminar ................................................................................... 171

VI. MMoU and MoU Requests ............................................................................................. 171

VII. Contribution to Various International Treaties ............................................................ 172

VIII. Participation in the International Programs ................................................................. 172

IX. Visits by Foreign Delegates/Dignitaries ........................................................................ 172

X. Study Tours for Overseas Regulators ............................................................................ 172

10. PARLIAMENT QUESTIONS ……………………………………………………… ................ 172

11. RIGHT TO INFORMATION ACT ……………………………………………….. ................. 174

CHRONOLOGY OF MAJOR POLICY INITIATIVES BY SEBI ………………………. ............ 176

CONTENTS

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LIST OF BOXES

Box No. Name Page No.

1.1 Disclosure of track record of the public issues managed by merchant bankers/investment bankers ..........................................................................................................9

1.2 Review of Bid-cum-Application Form and Abridged Prospectus .........................................11

1.3 Institutional Placement Programme ...........................................................................................12

1.4 Offer for sale of shares by promoters through Stock Exchanges ...........................................15

1.5 Policy on review of Ownership and Governance of Market Infrastructure Institutions and Exit of non-operational stock exchanges ......................................................17

1.6 Alternative Investment Funds .....................................................................................................33

3.1 Investment Advisors .....................................................................................................................92

3.2 SEBI Investigations in recent Initial Public Offers..................................................................116

4.1 Salient features of SEBI (Substantial Acquisitions of shares and Takeovers)Regulations, 2011 .........................................................................................................................143

5.1 Implementing Global Standards ...............................................................................................171

vii

LIST OF TABLES

Table No. Name Page No.

1.1 National Income (at 2004-05 prices) ...................................................................................2

1.2 GDP (at Factor Cost) by Economic Activity (at 2004-05 prices) .....................................2

1.3 Gross Domestic Savings and Investment ..........................................................................5

1.4a Demat Statistics .....................................................................................................................7

1.4b No. of Listed Companies .....................................................................................................7

1.5 Growth of Turnover in various Segments in Indian Stock Markets ..............................8

1.6 Assets under the Custody of Custodians ..........................................................................8

2.1 Resource Mobilisation through Public and Rights Issues .............................................41

2.2 Resource Mobilisation through Qualifi ed Institutions’ Placement ..............................42

2.3 Sector-wise Resource Mobilisation ...................................................................................43

2.4 Size-wise Resource Mobilisation ......................................................................................44

2.5 Mega Issues in 2011-12 .......................................................................................................45

2.6 Industry-wise Resource Mobilisation ..............................................................................46

2.7 Major Indicators of Indian Stock Markets .......................................................................48

2.8 Major Stock Indices and their Percentage Variation ......................................................50

2.9 Sectoral Stock Indices and their Percentage Variation ...................................................51

2.10 Exchange-wise Cash Segment Turnover ........................................................................53

2.11 Turnover at BSE and NSE: Cash Segment .......................................................................53

2.12 City-wise Turnover of Top 10 Cities in Cash Segment during 2011-12 .......................54

2.13 Market Capitalisation at BSE .............................................................................................55

2.14 Market Capitalisation at NSE ............................................................................................56

2.15 Select Ratios Relating to Stock Market .............................................................................56

2.16 Price to Earnings Ratio .......................................................................................................57

2.17 Price to Book-Value Ratio ...................................................................................................58

2.18 Daily Volatility of Benchmark Indices .............................................................................60

2.19 Trends in Daily Volatility of International Stock Market Indices during 2011-12 .....................................................................................................................60

2.20 Trading Frequency of Listed Stocks .................................................................................61

2.21 Share of Brokers, Securities and Participants in Cash Market Turnover ....................62

2.22 Trading Statistics of Stock Exchanges ..............................................................................62

2.23 Turnover of Subsidiaries of Stock Exchanges .................................................................63

2.24 Depository Statistics: Equity Shares .................................................................................64

2.25 Depository Statistics: Debenture/Bonds and Commercial Paper ..................................64

2.26 Cities According to Number of DP Locations: Geographical Spread ..........................65

2.27 Trends in Turnover and Open Interest in Equity Derivatives Segment .......................66

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2.28 Product-wise Derivatives Turnover at NSE and BSE .....................................................67

2.29 Trends in Index Futures at NSE and BSE ........................................................................68

2.30 Trends in Single Stock Futures at NSE and BSE .............................................................69

2.31 Trends in Index Options at NSE and BSE ........................................................................69

2.32 Trends in Stock Options at NSE and BSE .........................................................................70

2.33 Shares of Various Classes of Members in Equity Derivatives Turnover at NSE and BSE .........................................................................................................................70

2.34 Trends in Currency Derivatives Segment ........................................................................71

2.35 Product-wise Market Share in Currency Derivatives Volume .....................................72

2.36 Trends in Interest Rate Derivatives at NSE .....................................................................72

2.37 Secondary Market: Corporate Bond Trades ....................................................................73

2.38 Se� lement of Corporate Bonds .........................................................................................74

2.39 Private Placement of Corporate Bonds Reported to BSE and NSE ..............................74

2.40 Business Growth on the Wholesale Debt Market Segment of NSE .............................75

2.41 Instrument-wise Share of Securities Traded in Wholesale Debt Market Segment of NSE ...................................................................................................................76

2.42 Share of Participants in Turnover of Wholesale Debt Market Segment of NSE ........77

2.43 Mobilisation of Resources by Mutual Funds ...................................................................77

2.44 Sector-wise Resource Mobilisation by Mutual Funds during 2011-12 .........................78

2.45 Scheme-wise Resource Mobilisation and Assets under Management by Mutual Funds as on March 30, 2012 .................................................................................79

2.46 Number of Schemes by Investment Objectives as on March 30, 2012 ..........................80

2.47 Trends in Transactions on Stock Exchanges by Mutual Funds ....................................81

2.48 Unit Holding Pa� ern of All Mutual Funds as on March 30, 2012 ................................82

2.49 Unit Holding Pa� ern of Private and Public Sector Mutual Funds ..............................82

2.50 Assets managed by Portfolio Managers ..........................................................................83

2.51 Investment by Foreign Institutional lnvestors ................................................................84

2.52 Investments by Mutual Funds and Foreign Institutional lnvestors ............................85

2.53 Notional Value of Open Interest of Foreign Institutional lnvestors in Derivatives during 2011-12 ................................................................................................86

2.54 Allocation of Debt Investment limits to FIIs and Sub-accounts during 2011-12 .......87

2.55 Category-wise Utilization of Debt limit by FIIs/sub-accounts as on March 30, 2012 ......................................................................................................................87

2.56 Quarterly Reporting of external debt under FII Investment in Govt. Securities & other instruments (As on March 30, 2012) .................................................................. 88

2.57 Trends in Corporate Restructuring .................................................................................. 88

LIST OF TABLES


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2.58 Investments of VCFs and FVCIs ........................................................................................89

3.1 Registered Intermediaries other than Stock Brokers and Sub Brokers ...................... 91

3.1a Initial registration, Permanent registration and Renewal of Registration of Intermediaries ......................................................................................... 92

3.2 Registered Stock Brokers .................................................................................................. 93

3.2a Stock Broker and Sub-Broker Applications under the Process of Registration as on March 31, 2012 ................................................................................... 93

3.3 Classifi cation of Stock Brokers in Cash Segment on the Basis of Ownership ........... 93

3.4 Number of Registered Members in Equity Derivatives Segment ............................... 95

3.5 Number of Registered of Members in Currency Derivatives Segment ..................... 96

3.6 Registered Sub-Brokers ......................................................................................................96

3.7 Stock Exchanges with Permanent Recognition .............................................................. 97

3.8 Renewal of Recognition Granted to Stock Exchanges ...................................................97

3.9 Number of Registered FIIs, Sub-accounts and Custodians ..........................................98

3.9a Status of Registration of FII, Sub-accounts and Custodians .........................................99

3.10 Mutual Funds Registered with SEBI ................................................................................99

3.11 Registered Venture Capital Funds ....................................................................................99

3.12 Fees and Other Charges .................................................................................................. 100

3.13 Status of Dra� Le� er of Off ers for Open Off ers fi led ..................................................101

3.14 Open off ers and Exemption from Open Off ers ............................................................101

3.15 Buyback cases during 2011-12 .........................................................................................102

3.16 Inspection of Stock Brokers/Sub-brokers/Clearing Members .....................................103

3.16a Inspection of Stock Brokers by Stock Exchange ...........................................................103

3.17 Inspection of other Market Intermediaries ....................................................................104

3.18 Number of Surveillance Actions during 2011-12 .........................................................105

3.19 Actions against AML/CFT Violations/Discrepancies ...................................................112

3.20 Investigations by SEBI ......................................................................................................114

3.21 Nature of Investigations Taken up and Completed .....................................................115

3.22 Type of Regulatory Actions Taken ..................................................................................117

3.23a Age-wise Analysis of Enforcement Actions - U/S 11, 11B and 11D of SEBI Act ..... 119

3.23b Age-wise Analysis of Enforcement Actions - Enquiry Proceedings ......................... 120

3.23c Age-wise Analysis of Enforcement Actions - Adjudication Proceedings ................ 120

3.23d Age-wise Analysis of Enforcement Actions - Prosecution Proceedings ...................121

3.23e Age-wise Analysis of Enforcement Actions – Summary Proceedings ......................122

3.24a Enquiry and Adjudication Proceedings Initiated during 2011-12 ............................ 122

LIST OF TABLES


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3.24b Enquiry and Adjudication during 2011-12 ....................................................................122

3.24c Pending Enforcement Actions as on March 31, 2012 ...................................................122

3.25 Enquiry and Adjudication Proceedings Initiated against other Intermediaries ......123

3.26 Prosecutions Launched ....................................................................................................125

3.27 Region-wise Data on Prosecution Cases ........................................................................125

3.28 Nature of Prosecutions Launched ..................................................................................130

3.29 Number of Prosecution Cases decided by the Courts .................................................130

3.30 Court Cases where SEBI was a Party .............................................................................130

3.31 Appeals before the Securities Appellate Tribunal .......................................................131

3.32 Appeals under Section 15Z of the SEBI Act against the Orders of SAT ....................131

3.32a Disposals of Appeals by Securities Appellate Tribunal ...............................................131

3.33 Receipt and Disposal of applications under Consent and Compounding ...............132

3.34 Consent Applications fi led with SEBI during 2011-12 .................................................132

3.35 Compounding Applications fi led by the accused in criminal courts during 2011-12 ....................................................................................................................133

3.36 Status of Investor Grievances Received and Redressed ..............................................134

3.37 Companies Restrained From Accessing the Securities Market ..................................134

3.38 Companies Penalised For Their Failure to Redress Investor Grievances .................135

3.39 Trends in Awareness Programs/ Workshops Conducted by SEBI .............................136

3.40 Regional Seminars Conducted by SEBI during 2011-12 ..............................................136

3.41 School Programs Conducted by SEBI during 2011-12 .................................................138

3.42 Trends in Financial Education Programs through Resource Persons .......................139

3.43 Financial Education Programs through RPs - Target Group Wise ............................139

3.44 Trends in Visit to SEBI ......................................................................................................139

5.1 Board Meetings during 2011-12 ......................................................................................159

5.2 Promotion of SEBI Offi cials .............................................................................................162

5.3 Parliament Queries received/ raised ..............................................................................173

5.4 Session-wise Parliament Queries received and replied by SEBI ................................173

5.5 Details on appearance of SEBI representatives before various Commi� ees ............173

5.6 Queries/ points raised by various Commi� ees and replied by SEBI ........................173

5.7 RTI applications and First Appeal to SEBI Appellate Authority ...............................175

5.8 Appeal before Central Information Commission .........................................................175

LIST OF TABLES


xi

LIST OF CHARTS


1.1 Share of Components of GDP (at Factor Cost) ................................................................. 4

2.1 Share of Broad Categories of Issues in Resource Mobilisation .................................... 42

2.2 Sector-wise Resource Mobilisation .................................................................................... 43

2.3 Movement of Benchmark Stock Market Indices ............................................................ 47

2.4 Year-on-Year Returns of International Indices ................................................................ 49

2.5 Movement of Sectoral Indices of BSE ............................................................................... 51

2.6 Movement of Sectoral Indices of NSE .............................................................................. 52

2.7 P/E Ratio of International Indices ..................................................................................... 58

2.8 Annualised Volatility of International Indices ................................................................ 59

2.9 Cash Segment (Turnover) vis-a-vis Derivatives Segment (Notional Turnover) during 2011-12 ...................................................................................................................... 66

2.10 Product-wise Share in Equity Derivatives Turnover at NSE and BSE ........................ 67

2.11 Trends in Foreign Institutional Investment ..................................................................... 85

2.12 Net Institutional Investment and Monthly Average Ni� y ……………….................... 86

3.1 Ownership Pa� ern of Stock Brokers (As on March 31, 2012)……………. ................... 94

3.2 Percentage Share of Stock Brokers (By Ownership) (As on March 31, 2012) ............. 95

3.3 Investigation Cases ........................................................................................................... 114

3.4 Nature of Investigation Cases Taken Up ....................................................................... 115

3.5 Nature of Investigation Cases Completed .................................................................... 116

3.6 Type of Regulatory Actions Taken .................................................................................. 118

This Report can also be accessed on internet – http://www.sebi.gov.in

Conventions used in this Report` : RupeesLakh : Hundred thousandCrore : Ten millionMillion : Ten lakhBillion : Thousand million/hundred croreNA : Not AvailableNa : Not Applicable p.a. : Per annum

Differences in total are due to rounding off and sometimes they may not exactly add up to hun-dred per cent.

Source of Charts and Boxes where not mentioned, is SEBI.

xii

AA Appellate AuthorityAC Assessment Commi� eeADB Asian Development BankADR American Depositary ReceiptAGM Assistant General ManagerAIs Anchor InvestorsAIF Alternative Investment FundAMC Asset Management CompanyAMFI Association of Mutual Funds in IndiaAML Anti-Money LaunderingAPG Asia/Pacifi c GroupAPs Authorised PersonsAPEC Asia Pacifi c Economic Co-operationAPRC Asia Pacifi c Regional Commi� eeASBA Application Supported by Blocked AmountATRs Action Taken ReportsAUM Assets Under ManagementBCBS Basel Commi� ee on Banking SupervisionBSE Bombay Stock ExchangeCAGR Compounded Annual Growth RateCAPIO Central Assistant Public Information Offi cerCBI Central Bureau of InvestigationCC Clearing CorporationCBSE Central Board of Secondary EducationCCI Competition Commission of IndiaCDs Certifi cate of DepositsCDSL Central Depository Services (India) LimitedCETTM Centre for Excellence in Telecom Technology and ManagementCFERM Certifi cate in Financial Engineering and Risk Management CFFEX China Financial Futures ExchangeCFIM Coordination Framework for Implementation MonitoringCFT Combating Financing of TerrorismCIC Central Information CommissionCIS Collective Investment SchemesCM Clearing MemberCPE Continuous Professional Education/Continuing Professional Education CPF Customer Protection FundCPIO Central Public Information Offi cerCPs Commercial PapersCRA Credit Rating AgencyCRC Confl ict Resolution Commi� eeCSL Certifi cate in Securities LawCSO Central Statistical OrganisationCSX Coimbatore Stock ExchangeDC Division Chief

ABBREVIATIONS

xiii

DFIs Development Finance InstitutionsDJIA Dow Jones Industrial AverageDLP Data Leakage ProtectionDMS Document Management SystemDPs Depository ParticipantsDSE Designated Stock ExchangeDWBIS Data Warehousing and Business Intelligence SystemEC Executive Commi� eeEMCAB Emerging Markets Advisory BoardED Executive DirectorEFD Enforcement DepartmentELSS Equity Linked Saving SchemeEMC Emerging Markets Commi� eeEPFO Employee Provident Fund OrganisationERO Eastern Regional Offi ceETF Exchange Traded FundF & O Futures and OptionsFAQs Frequently Asked QuestionsFATF Financial Action Task ForceFCCBs Foreign Currency Convertible Bonds FIIs Foreign Institutional InvestorsFIMMDA Fixed Income Money Market and Derivatives Association of IndiaFINRA Financial Industry Regulatory AuthorityFPOs Follow-on Public Off eringsFRTI Financial Regulators Training InitiativeFSAP Financial Sector Assessment ProgrammeFSB Financial Stability Board FSDC Financial Stability and Development CouncilFSLRC Financial Sector Legislative Reforms CommissionFSR Financial Stability ReportFSRB FATF-Style Regional BodyFSS Financial Supervisory Service, South KoreaFVCI Foreign Venture Capital InvestorHFT High Frequency TradingHNIs High Net Worth IndividualsHUFs Hindu Undivided FamiliesGAAPs Generally Accepted Accounting PrinciplesG20 Group of Twenty GDCF Gross Domestic Capital FormationGDP Gross Domestic ProductGDRs Global Depository ReceiptsGDS Gross Domestic SavingsGETFs Gold Exchange Traded FundsGNI Gross National IncomeGoI Government of India

ABBREVIATIONS

xiv

IA Investors’ AssociationsIAD Investor Awareness DivisionIAIS International Association of Insurance SupervisorsIBT Internet Based TradingICCL Indian Clearing Corporation LimitedICDR Issue of Capital and Disclosure RequirementsIDF Infrastructure Debt FundIDRs Indian Depository ReceiptsIFCF India Focus Cardinal FundIGRC Investor Grievance Redressal Commi� eeIIP Index of Industrial ProductionIMF International Monetary FundIMSS Integrated Market Surveillance SystemIMD Investment Management DepartmentIMN Implementation Monitoring NetworkIPF Investor Protection FundIPP Institutional Placement ProgrammeINR Indian RupeeIOSCO International Organisation of Securities CommissionsIPEF Investor Protection and Education FundIPF Investor Protection FundIPO Initial Public Off erIPS Intrusion Detection and Prevention SystemIPV In-Person Verifi cationIRDA Insurance Regulatory and Development AuthorityIRM Information Rights ManagementISB Indian School of BusinessISD Integrated Surveillance DepartmentISE Inter-Connected Stock Exchange of India LimitedIT Information TechnologyITF Implementation Task ForceJF Joint ForumKRA KYC Registration AgencyKYC Know Your ClientLAF Liquidity Adjustment FacilityLESs Liquidity Enhancement SchemesMAS Monetary Authority of SingaporeMBs Merchant BankersMCA Ministry of Corporate Aff airsMCR Monthly Cumulative ReportMCX-SX MCX Stock ExchangeMFs Mutual FundsMIIs Market Infrastructure InstitutionsMIMPS Manner of Increasing and Maintaining Public Shareholding in Stock

Exchanges

ABBREVIATIONS

xv

MMoU Multilateral Memorandum of UnderstandingMoF Ministry of FinanceMoU Memorandum of UnderstandingMPSE Madhya Pradesh Stock Exchange LimitedMSE Madras Stock ExchangeNASDAQ National Association of Securities Dealers Automated QuotationsNAV Net Asset ValueNCAER National Council of Applied Economic ResearchNCD Non Convertible DebentureNDP Net Domestic ProductNGO Non-Government OrganisationsNIIs Non-Institutional InvestorsNISM National Institute of Securities MarketsNNI Net National IncomeNoC No Objection Certifi cateNRIs Non-Resident IndiansNRO Northern Regional Offi ceNSCCL National Securities Clearing Corporation LimitedNSDL National Securities Depository LimitedNSE National Stock Exchange of India LimitedNSMD Network for Securities Markets DataODI Off shore Derivatives InstrumentOECD Organisation for Economic Co-operation and DevelopmentOFS Off er for Sale of SharesOIAE Offi ce of Investor Assistance and EducationOMO Open Market OperationsOSD Offi cer on Special DutyOTC Over the CounterOTCEI Over the Counter Exchange of IndiaP.A. Per AnnumP/B ratio Price to Book-Value RatioP/E ratio Price-Earnings RatioPCD Partly Convertible DebenturePCI Press Council of India PF Provident FundPFI Public Financial InstitutionPFUTP Prevention of Fraudulent and Unfair Trade PracticesPID Public Interest DirectorsPMAC Primary Market Advisory Commi� eePFRDA Pension Fund Regulatory and Development AuthorityPMLA Prevention of Money Laundering ActPoS Points of ServicePGCSM Post Gradute Program in Securities MarketsQFIs Qualifi ed Foreign InvestorsQIBs Qualifi ed Institutional Buyers

ABBREVIATIONS

xvi

QIP Qualifi ed Institutions’ PlacementRBI Reserve Bank of IndiaRCG Regional Commi� ee GroupREER Real Eff ective Exchange RateRHPs Red Herring ProspectusRoCs Registrar of CompaniesRRD Regulatory Research DivisionRSEs Regional Stock ExchangesRTA Registrar to an Issue and Share Transfer AgentRTI Right to InformationSAARC South Asian Association for Regional Co-operationSAS Statistical Analysis SystemSAST Substantial Acquisition of Shares and TakeoversSAT Securities Appellate TribunalSC(R)A Securities Contracts (Regulation) ActSCORES SEBI Complaints Redress SystemSEBI Securities and Exchange Board of IndiaSEBON Securities Board of NepalSEC Securities and Exchange CommissionSIEFL School for Investor Education and Financial LiteracySMAC Secondary Market Advisory Commi� eeSMDA Securities Market Data AccessSME Small and Medium EnterpriseSOP Statement of Purpose SPV Special Purpose VehicleSRO Southern Regional Offi ceSSE School for Securities EducationSTT Securities Transaction TaxSTWT Securities Trading using Wireless Technology TAC Technical Advisory Commi� eeTC Technical Commi� eeTRAC Takeover Regulations Advisory Commi� eeT to T Trade-to-TradeUAT User Acceptance TestUCR Uniform Confi rmation ReceiptUPSE U� ar Pradesh Stock Exchange LimitedUSD United States DollarUSE United Stock ExchangeUSIBC US-India Business CouncilUTI Unit Trust of IndiaUTI MF UTI Mutual FundVCF Venture Capital FundWDM Wholesale Debt MarketWPI Wholesale Price IndexWRO Western Regional Offi ceWTM Whole Time Member

ABBREVIATIONS

PART ONE: POLICIES AND PROGRAMMES

The Annual Report of the Securities and Exchange Board of India (SEBI) for 2011-12 is written against the backdrop of turbulent global economy. Post the recession of 2008, the financial regulatory reforms have been the priority of every major economy and more so with the slowdown witnessed in the current year. The securities market regulation, in particular, is being revamped globally, relooked and revised. SEBI Annual Report for 2011-12 elaborates on the policies and programmes undertaken during the year, in view of these developments in the domestic and world economy, while aligning them with the stated objectives to strengthen the Indian regulatory framework of capital markets. The report has been prepared as per the format prescribed by the Securities and Exchange Board of India (Annual Report) Rules, 1994. SEBI continued to ensure that it fulfills its commitment to the three statutory objectives, namely: (a) protection of the interests of investors in securities, (b) promotion of the development of the securities market and (c) regulation of the securities market.

The current year has witnessed SEBI attaining these objectives through a series of reforms in the existing policies and introduction of new initiatives as necessitated. The major policy issues are discussed in public domain through discussion papers. The decisions and quasi-judicial orders pursuant to a thorough examination are placed on the website along with the agenda papers of the Board.

In line with the stated objectives, this Report provides the manner in which SEBI discharged its responsibilities and exercised its powers during the year in furtherance of the objectives enshrined in (a) the Securities and Exchange Board of India Act, 1992, (b) the Securities Contracts (Regulation) Act, 1956 (c) the Depositories Act, 1996 and (d) the relevant provisions of the Companies Act, 1956. It also

broadly encompasses the global background to these developments.

1. GENERAL MACRO-ECONOMIC ENVIRONMENT

Against the revival in the preceding two years, the current year saw the global economy entering a turbulent phase once again. While US experienced a sluggish growth, the sovereign debt crisis in Europe underpinned the shaky investor confidence across the world. Increasing oil prices and a resultant slower world trade growth has earmarked modest growth in emerging and developing countries as well.

The growth-price stability equilibrium further deteriorated in 2011-12. The situation has been compounded with exchange rate fluctuations triggered by downgrading of US and the monetary tightening measures to curb inflation at home. Concomitant effect of these has been a slowdown in capital flows and a rising cost of funds which in turn have dampened the domestic activity. Despite the given scenario, it is heartening to note that by any peer comparison the growth rate in India remains ahead of most other countries.

After a robust growth of over 8 percent in the last two years, the Indian economy has slowed down in the year 2011-12 to a modest 6.5 percent. Revised estimates of Central Statistical Organisation (CSO) estimate Gross Domestic Product (GDP) at factor cost at constant (2004-05) prices for FY12 is likely to be ` 52,22,515 crore as against ` 48,85,954 crore for FY11 of and the growth is expected to be 6.5 percent as compared to 8.4 percent in FY11(Table1.1).

Services sector continued to maintain its momentum with only a minor decrease in growth from 9.2 percent to 8.5 percent, and is expected to boost the overall growth in the

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Annual Report 2011-12

economy. Industry and agriculture sectors, on the other hand, have dampened in the current fiscal attributed to both the domestic and global factors. The growth rate for agriculture sector may, however, be treated in synchronous with the trend as it comes to 2.8

percent on a high base of 2010-11(exhibiting 7 percent growth). Industry sector, meanwhile has displayed a dip in its growth with a more than halving of the growth rate to 2.6 percent from an earlier 6.8 percent primarily due to demand and inflationary factors.

Table 1.1: National Income (at 2004-05 prices)(` Crore)

Item 2009-10 2010-11(Quick

Estimate)

2011-12(Revised

Estimate)1 2 3 4

A. Estimates at Aggregate Level 1. National Product

1.1 Gross National Income (GNI) at factor cost 44,79,973 48,33,178(7.9)

51,50,686(6.6)

1.2 Net National Income (NNI) at factor cost 39,59,653 42,68,715(7.8)

45,49,652(6.6)

2. Domestic Product 2.1 Gross Domestic Product (GDP) at factor cost

45,07,637 48,85,954(8.4)

52,02,514(6.5)

2.2 Net Domestic Product (NDP) at factor cost

39,87,317 43,21,491(8.4)

46,01,480(6.5)

B. Estimates at Per Capita Level 1. Population (million) 1,170 1,186

(1.4)1,202(1.4)

2. Per Capita NNI at factor cost (`) 33,843 35,993(6.4)

37,851(5.2)

3. Per Capita GDP at factor cost (`) 38,527 41,197(6.9)

43,282(5.1)

Note: Figures in the parentheses are percentage change over the previous year.Source: Central Statistical Organisation

Table 1.2: GDP (at Factor Cost) by Economic Activity (at 2004-05 prices) (` Crore)

Industry 2009-10 2010-11(Quick

Estimate)

2011-12(Revised Estimate)

Percentage Change over Previous Year

2010-11 2011-121 2 3 4 5 6

1. Agriculture, Forestry & Fishing 6,62,509 7,09,103 7,28,667 7.0 2.82. Mining and Quarrying 1,04,225 1,09,421 1,08,469 5 -0.93. Manufacturing 7,19,728 7,74,162 7,93,468 7.6 2.54. Electricity, Gas and Water Supply 88,266 90,944 98,105 3 7.9 Industry (2+3+4) 9,12,219 9,74,527 10,00,042 6.8 2.65. Construction 3,55,717 3,84,199 4,04,617 8 5.36. Trade, Hotels, Transport and Communication

11,97,213 13,30,455 14,62,772 11.1 9.9

7. Financing, Insurance, Real Estate and Business Services

7,69,883 8,49,995 9,31,714 10.4 9.6

8. Community, Social and Personal Services

6,10,096 6,37,675 6,74,703 4.5 5.8

Services (5+6+7+8) 29,32,909 32,02,324 34,73,806 9.2 8.5GDP at Factor Cost 45,07,637 48,85,954 52,02,515 8.4 6.5

Note: Construction as per RBI classification comes under services sector.Source: Central Statistical Organisation

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Part One: Policies and Programmes

Agriculture:

A propitious monsoon in the current fiscal year has augmented well for the growth in agricultural output, significantly contributed by an increase in rice production. Hence the decreased growth has to be seen in the light of a higher base of 7 percent, which in turn was the highest in the six preceding years. Though the sector is still prone to the uncertain and uncontainable fluctuations, assuming a normal monsoon augurs well for the trend line to continue in next year as well.

From an average share of 19.4 percent in the GDP for 2001-10, Agriculture has moved to an approximate 14 percent share since the previous three years. But given the enormous size of population the sector employs as well as the increasing demand post 2000, the sector has a prime importance in the economy of India.

Industry:

Industry has seen a major setback in growth with Mining and Quarrying moving into the de-growth area. The sector went on from a 5 percent growth in 2010-11 to a deceleration in growth at 0.9 percent in 2011-12. Heavy monsoon rainfall along with environmental and regulatory concerns has been the major reasons behind the downfall.

The Index of Industrial Production (IIP), a parameter to gauge the industrial growth, has been showing fluctuating trends in the past year. While the initial slowdown was a result of global rub off, the resultant domestic weakening of demand hampered the prospects further. Overall growth during 2011-12 stands at 2.8 percent as compared to the 8.2 percent growth over the corresponding period of previous year.

Manufacturing has witnessed a growth of 2.9 percent in IIP in 2011-12 compared to

8.9 percent in 2010-11. With manufacturing contributing 75 percent weightage in the IIP, the Industry as a whole treaded on a path to shrinkage. In terms of use based classification, only the consumer non durables have shown a growth when compared with the previous fiscal, while the capital and intermediate goods have showed a negative growth. With the index showing improvement in the past few months, the sector is expected to pose a higher growth in the next fiscal.

Electricity has been the only sub-sector in the IIP, with its weight of 14 percent, the only one to record a higher growth of 8.2 percent in 2011-12 as compared with the last fiscal where it was only 5.5 percent.

Services:

Services sector recorded a growth of 8.5 percent in 2011-12 as compared to 9.2 percent in the corresponding period of previous year, as per the figures provided by the Advance Estimates of the CSO.

The Community, Social and Personal Services sub sector is expected to grow at 5.8 percent in the current year compared to 4.5 percent of the last year, on account of incremental government spending. The Financing, Insurance, Real Estate and Business Services, meanwhile, is anticipated to show a 9.6 percent growth than 10.4 percent exhibited last year, mostly on account of monetary tightening and exchange rate fluctuations.

Trade, Hotels, Transport and Communication sub-sector is to increase its share further in the GDP from 26.6 percent two years ago to 28.1 percent in the current year. The sector is estimated to show a growth of 9.9 percent as against 11.1 percent last year. The growth is attributed to a significant growth in passengers handled in civil aviation, stock of telephone connections and

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commercial vehicles. The Construction sub sector is to experience a contraction in growth on account of the higher interest rates coupled

with higher debt levels of the sector and rising input costs.

Chart 1.1: Share of Components of GDP (at Factor Cost)

Savings and Investments:

The latest data of CSO points to a decrease in India’s Gross Domestic Savings as a percentage of GDP at market prices from 33.8 percent in 2009-10 to 32.3 percent in 2010-11 (Table 1.3). The decrease came primarily on the back of reduced Private corporate savings from 8.2 percent in 2009-10 to 7.9 percent in 2010-11 as also the Household savings in financial assets moving from 12.9 percent in 2009-10 to 10 percent in 2010-11, which may be attributed to the inflationary pressures that loomed over the economy for most of the year. The household savings in physical assets though increased marginally from 12.4 percent in 2009-10 to 12.8 percent in 2010-11, along with a substantial increase in the Public sector

savings from 0.18 percent in 2009-10 to 1.7 percent in 2010-11 due to fiscal consolidation. The investment too has seen a dwindling trend in both the private and public sector.

It may be noted here that Indian households have the highest savings rates in the world with the annual household saving nearly quadrupling in the last decade. While the share of physical assets has outweighed financial assets in most of the years, it is to be noted that the fall in 2010-11 household savings (as a percent of GDP at market prices) to 22.8 percent from 25.4 percent in 2009-10 is primarily reflected in the reduction in share of financial assets with the share of physical assets being nearly constant.

In other words, when the global

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environment is turbulent, as also witnessed during the slowdown of 2008, investments in physical assets like gold and real estate remain stable or incremental while that in the financial assets record a slump. We may hence deduce that for financial savings to increase the macro-economic scenarios needs to be favourable.

The savings-investment gap in terms of percent of GDP has nearly been the same at 2.7 percent in 2010-11 as that of 2.8 percent

in 2009-10. The gap as a percent of GDP has though increased in recent years (1.3 percent in 2007-08) on account of the increased reliance on the foreign inflows (savings) to finance our investment requirements. The trend as in 2010-11 though exhibits a slight narrowing of this trend. The savings- investment gap in public sector has moved from 9 percent in 2009-10 to 7.1 percent in 2010-11 while in private sector it stands at 5.8 percent in 2010-11 as compared to 8.5 percent in 2009-10.

Credit Growth

The bank credit recorded a year on year increase of 17.8 percent in 2011-12 as against 20.8 percent in 2010-11. Higher government

borrowing resulted in a shortfall in liquidity which together with monetary tightening measures led to a slowdown in investment and hence a slowdown in growth rate of bank credit compared to last year.

Table 1.3: Gross Domestic Savings and InvestmentS.

No.Item Amount in ` crore (Per cent of GDP at current market

prices)2007-08 2008-09 2009-10

(PE)2010-11

(QE)2007-08 2008-09

(PE) 2009-10

(PE)2010-11

(QE)1 2 3 4 5 6 7 8 9

1 Household Saving 1,118,347 1,330,873 1,639,038 1,749,311 22.4 23.6 25.4 22.8of which :a) Financial Assets 580,210 571,026 835,558 767,691 11.6 10.1 12.9 10.0b) Physical Assets 538,137 759,846 803,481 981,620 10.8 13.5 12.4 12.8

2 Private Corporate Saving 469,023 417,467 532,136 602,464 9.4 7.4 8.2 7.93 Public Sector Saving 248,962 54,280 11,796 130,155 5.0 1.0 0.2 1.74 Gross Domestic Saving 1,836,332 1,802,620 2,182,970 2,481,930 36.8 32.0 33.8 32.35 Net Capital Inflow 64,430 128,760 180,700 210,100 1.3 2.3 2.8 2.76 Gross Domestic Capital Formation 1,900,762 1,931,380 2,363,670 2,692,030 38.1 34.3 36.6 35.18 Total Consumption

Expenditure (a+b)3,363,415 3,873,278 4496308 5270511 67.4 68.8 69.6 68.7

a) Private Final Consumption Expenditure

2,850,394 3,257,945 3722036 4,359,792 57.2 57.9 57.6 56.8

b) Government Final Consumption Expenditure

513,021 615,333 774272 910,719 10.3 10.9 12.0 11.9

Memo ItemsSaving-Investment Balance (4-6) -64,430 -128,760 -180,700 -210,100 (1.3) (2.3) (2.8) (2.7)Public Sector Balance# -192,961 -477,450 -579,826 -546,065 (3.9) (8.5) (9.0) (7.1)Private Sector Balance# 186,086 352,180 546,727 441,643 3.7 6.3 8.5 5.8a) Private Corporate Sector -394,124 -218,847 -288,830 -326,048 (7.9) (3.9) (4.5) (4.2)b) Household Sector 580,210 571,027 835,557 767,691 11.6 10.1 12.9 10.0

PE : Provisional Estimates. QE : Quick Estimates. #: Investment figures are not adjusted for errors and omissions.Source : Central Statistical Organisation.

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Non-food credit growth at end of March 2012 stood at 17 percent, showing a considerable decline from the 20.6 percent recorded at the end of March 2011. The later part of the year saw some improvements resulting from a pickup in credit flow to agriculture and industry as a result of easing in policy stance.

Liquidity

High inflation and inflationary expectations led to monetary tightening during the course of 2011-12 which caused shrinkage in liquidity in the economic system. The resultant higher cost of borrowing from banks arising out of a rate hike of 13 times between March 2010 and January 2012 has led the corporate to meet their requirements through external commercial borrowings. Consequently the FDI flows have witnessed a surge as compared to previous fiscal while the portfolio flows have been nearly stagnant on the back of European crisis and moderation in growth rate.

Liquidity injection through the Liquidity Adjustment Facility (LAF) has been to the tune of around ̀ 0.5 lakh crore in April – September 2011, ` 1.4 lakh crore in February 2012 and further to ` 1.6 lakh crore in March 2012. Further to this, the Open Market Operations (OMO) have inducted a liquidity of around ` 1.3 lakh crore during November 2011 and March 2012. In addition to this, there has been a reduction in the Cash Reserve Ratio of the banks by 125 basis points (50 basis points effective January 28, 2012 and 75 basis points effective March 10, 2012), from 6 percent to 4.75 percent, that in turn provided a further ` 80,000 crore worth liquidity.

Government Securities

Government security yield that had remained nearly stable during the earlier

part of 2011-12, hardened up later on account of high government borrowing and higher interest rates. A primary reason to the effect may be an expectation of increased government borrowing in the next fiscal to fund the various programmes.

Inflation

Wholesale Price Index (WPI), the central measure of inflation in India, showed signs of moderation as the year ended. The average inflation for 2011-12 was at 9 percent as compared to 9.6 percent during 2010-11. Inflation stood at 6.9 percent in March 2012 compared to 9 percent in March 2011.

Inflation in primary articles declined from 17.8 percent in FY11 to 9.7 percent in FY12 while that in manufactured goods rose from 5.7 percent in FY11 to 7.2 percent in FY12. The fuel group on the other hand has shown a marginal increase in inflation from 12.3 percent in the last fiscal in comparison to 13.4 percent in the current fiscal, primarily on the account of high international crude prices.

The overall increase in the index has been contributed by higher primary articles inflation which in turn is driven by the changing dietary pattern of the consumers towards protein based items, as also the high commodity prices leading to a higher raw material cost of manufactured goods.

Trade Balance and Balance of Payments

Cumulative exports in India, which stood at US$ 303, 718 million have registered a growth of 20.9 percent in 2011-12 while the growth in imports for the same period registered a 32.2 percent growth with a cumulative value of US$ 488, 640 million. While the moderation in exports may be seen in the light of a slow global recovery, the import bill is rising on account of higher crude prices accompanied with a fall

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in rupee. The trade deficit consequentially stands at being 56 percent higher than the corresponding period of 2010-11.

The current account deficit is estimated to be at 4 percent of GDP during April- December 2011, mainly on the heels of a higher trade deficit. Under net capital flows, the foreign direct investment, though demonstrated a considerable increase from the corresponding period in the previous year, it was a decrease in inflows of portfolio investments that led to a moderation in net capital inflows.

The foreign exchange reserves declined to US$ 293 billion in end March from US$ 304.8 billion in the corresponding period of the previous fiscal. The Rupee has seen depreciation in the current fiscal coming as a result of high current account deficit and a weak global macro-economic environment.

Exchange Rate

The exchange rate stood at ` 51.16 per USD as on March 30, 2012, depreciating 14.6 percent over March 31, 2011 when the rate stood at ` 44.65 per USD. The depreciating rupee has been a potential risk to the softening inflation. The global economic climate has further contributed to exchange rate fluctuations with the capital inflows to India

slowing down along with rising gold imports. During 2011-12, the 6, 30 and 36- currency trade weighted real effective exchange rates (REER) depreciated by 8 to 9 percent.

Capital Markets

Indian stock markets mirrored the global sentiments with the indices sliding during 2011-12. The BSE Sensex closed at 17,404 on March 30, 2012 compared to the close of 19,445 on March 31, 2011. S&P CNX Nifty, closed at 5,296 on March 30, 2012 compared to close of 5,834 on March 31, 2011. The percent decrease in BSE Sensex recorded as on end- March 2012 over end-March 2011 was at 10.5 percent while that for the S&P CNX Nifty during the same period stood at 9.2 percent.

The market capitalisation of BSE stands at ` 62, 14,941 crore as of end-March 2012 compared to ` 68, 39, 084 in end-March 2011, while its ratio to GDP stood at 70 percent for 2011-12. The number of demat accounts at the two depositories has risen up sharply and the process of dematerialisation is still in progress. Simultaneously the number of listed companies at both NSE and BSE have risen steadily acting as a strong indicator of favourable market sentiments. (Table 1.4(a) & 1.4 (b))

The turnover in the equity derivative segment has risen from ` 2,92,48,375 crore in 2010-11 to ` 3, 21, 58,208 crore in 2011-12. The currency derivative segment too

has seen a rise in its turnover from being ` 76,43,805 crore in 2010-11 to ̀ 98,96,413 crore in 2011-12 (Table 1.5).

Table 1.4(a): Demat Statistics Table 1.4(b): No. of Listed Companies

Year Demat Quantity (Millions of Shares) Year No. of companies listed

NSDL CDSL NSE BSE

2008-09 2,82,870 70,820 2008-09 1,432 49292009-10 3,51,138 77,950 2009-10 1,470 49752010-11 4,71,304 1,05,310 2010-11 1,574 50672011-12 5,79,801 1,33,570 2011-12$ 1,646 5133

Note : Indicates as on last day of March 12 Source: NSE and BSESource: NSDL and CSDL

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National Stock Exchange, MCX-SX and United Stock Exchange of India feature in the top-30 derivatives exchanges, ranked by the number of contracts traded and/or cleared, at positions 5, 9, 13 respectively. Nifty index options have been ranked the world’s second most traded option in calendar year 2011 as per Futures Industry Association while Nifty index futures rank at number 12. As per the 2011, Annual Volume Statistics published by

the Futures Industry Association, National Stock Exchange (NSE) has seen an increase of 36 percent in the number of contracts traded in the equity derivatives segment and is ranked fifth worldwide as compared 2010.

The foreign investments in India contributed by the FII and FDI at the end of March 2012 stood at ̀ 13, 39,240 crore up from ` 12,52,781 crore at the end of March 2011.(Table 1.6)

Table 1.6: Assets under the Custody of Custodians

Year FIIS/SAs Foreign Depositories FDI Investments Foreign Venture Capital Investments

2009-10 9,00,869 1,56,616 1,45,555 17,604

2010-11 11,06,550 1,85,931 1,46,231 24,002

2011-12 11,07,399 1,43,370 2,31,841 35,041Source : SEBINote : As on last trading day of respective financial year

With a view to increase the penetration of secondary markets, certain policy measures have also been announced in the current budget mainly towards the disinvestment policy and strengthening investment environment.

1. REVIEW OF POLICIES AND PROGRAMMES

Keeping pace with the evolution in global regulatory scenario as well as up keeping with its stated objectives, SEBI has initiated certain policies and programmes in FY12 which are presented in this Section.

The developments are categorised under ten major heads viz., primary market, secondary market, corporate debt market, mutual funds, portfolio managers, foreign institutional investors, takeovers, buyback, surveillance and investor assistance and education. The section concludes with ‘Retrospect and Prospects’.

I. Primary Market

Primary market is a major and prominent source of fund raising for corporates and governments. A healthy and efficient primary market is crucial to the capital markets and

Table 1.5: Growth of turnover in various segments of Indian stock market

Year Turnover (` crore)

Cash Segment(All India)

Equity Derivatives(NSE+BSE)

Currency Derivatives(NSE+MCX+USE)

Interest Rate Derivatives (NSE)

2009-10 55,16,833 1,76,63,899 37,27,262 2,975

2010-11 46,82,437 2,92,48,375 76,43,805 62

2011-12 34,78,391 3,21,58,208 98,96,413 3,959

Source: Exchanges

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mirrors the underlying strength of an economy that further provides a favourable investment opportunity to the investors. Indian primary market has seen a slackening of the activity in the current fiscal year partly reflected by the global sentiments and partly by domestic factors.

Fewer companies have raised capital backed by the fear of failure in turbulent markets. A total of ` 12, 857 crore of equity capital has been raised during 2011-12 through 51 issues, compared with ` 58, 157 crore raised through 81 issues in 2010-11. Certain

reforms in policies have been undertaken to build up the investor confidence further. The major policy initiatives related to the primary market during 2011-12 are as under:

i. Eligibility Criteria under the Profitability Track Record

The eligibility norms for issuers coming out with IPOs through the profitability track record criteria were amended to clarify that the track record of distributable profits for at least three out of the immediately preceding five years should be complied with, both on stand-alone as well as on consolidated basis.

Box 1.1: Disclosure of track record of the public issues managed by merchant bankers/investment bankers

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, require that the offer document shall contain adequate disclosures so as to enable investors to take well informed investment decisions. Further, a merchant banker is required to exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosures in the offer documents. Therefore, it is necessary for investors to evaluate the post-issue performance of the issuer in terms of disclosures made in the offer documents. This will also enable them to understand the level of due diligence exercised by the merchant bankers. According to SEBI (Merchant Bankers) Regulations, 1992, a merchant banker (i) shall make all efforts to protect the interests of investors, (ii) shall fulfil its obligations in an ethical and professional manner and (iii) shall at all time exercise due diligence and independent professional judgement.Therefore, it was felt that a merchant banker should consider the quality of an issue before accepting the mandate and must exercise due diligence in making disclosures in the offer document and also during post issue till the time of listing. Thus, assessing the performance of the merchant banker is important for an investor while deciding on making investment in the issue. Disclosure of track record would encourage appropriate disclosures by the issuer and adequate due diligence by the merchant banker, as the disclosures and transparency prevent any wrong doing. The disclosure of track record has been intended to indicate the quality of issue(s) managed by the merchant bankers, which includes the pricing as well as fundamentals of the issue. With the above in view, vide circular dated January 10, 2012, a format for disclosure of the track record of the public issues managed by merchant bankers was prescribed. The track record is required to be disclosed for a period of three financial years from the date of listing for each public issue managed by the merchant banker This will help the investors to gauge the performance of issues on short term, medium term and long term basis.Contents of Track Record Disclosurea. Comparison of issue price with market price- The price on the day of listing, price at the end of month, quarter

and end of year and high, low during the year for next 3 years shall be disclosed. Mere comparison of the market price with the issue price alone may not be the right indicator, as the market price is affected by macro economic factors, bull / bear conditions, etc. Therefore, comparison of the market price of the scrip against certain benchmark (say, the Sensex or the Nifty or the BSE 500 etc. and also the industry / sector index) serves a useful assessment of the performance.

b. Grade of the issue- Grading of an issue is done with certain rationale. It will provide information on the kinds of issues brought out by the merchant banker. In addition, it will help investors evaluate the performance of issues as a function of grading.

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c. Subscription level and if the issue was undersubscribed, how the funds were arranged- This information is sought to know the demand elicited by the issue from the investors. There might be cases where the scrip is presently trading below the issue price; however it has elicited good response from the investors at the time of its issue.

d. Comparison of the following accounting ratios with the industry average and the peer group i. Earnings per share ii. Price- earnings ratio iii. Average return on networth iv. Net Asset value per share after issue and comparison thereof with the issue price The above ratios are also required to be disclosed in the offer document by the issuer in support of issue price.

The disclosure of same ratios over a period of time will indicate the quality of disclosure on issue price.e. Financials of the issuer company- The financials of the issuer company like turnover, net profit may be

disclosed by merchant bankers over 3-year period after the public issue. This is to enable the investors to assess the performance of the company.

f. Status of the trading in the scrip of issuer company (i.e., whether active, infrequently traded, delisted, suspended etc.) This is required to track the status of the issuer company pursuant to issue.

g. QIB holdings- The interest of QIBs in a particular issue is an important factor for decision by other investors. This information will help to understand the trading pattern of the QIBs and when they exited from that scrip.

h. In case of debt issues: , whether interest paid on time along with the rating of debt instrumenti. Status of implementation of project- The issuer companies are required to disclose the schedule of

implementation of the project in the offer document. The information on status of project will help the investors evaluate the performance of the projects they have invested in and also of the due diligence exercised by the merchant banker.

j. Status of utilization of issue proceeds- This will enable investors to track the utilization of funds for the objects as mentioned in the offer document over a period of time.

k. Comments of monitoring agency, if applicable, on utilization of funds- In terms of ICDR regulations, in case the issue size exceeds `500 crore, the issuer is required to appoint a monitoring agency to monitor the use of proceeds of the issue. The investors will now know if such monitoring agency has pointed out any deviation in the use of the proceeds from the objects stated in the offer document or has given any other reservations regarding the end use of funds.

Merchant bankers have to disclose the above information on their websites and a reference to this effect shall be given in the offer documents of the issues managed by them in the future.

ii. Review of Policy on Allotment to Anchor Investors

The concept of Anchor Investors (AIs) was introduced by SEBI in June 2009 to evolve a class of committed investors who can be relied upon to anchor an issue of capital in all market conditions, adverse or otherwise. With a view to make the concept more effective, a minimum allotment of ` 5 crore per AI has

been prescribed along with a minimum and maximum number of AIs based on issue size.

iii. Review of Bid-cum-Application Form and Abridged Prospectus

The structure, design and contents of bid-cum-application form and abridged prospectus were revised so as to provide material information to investors in a user-friendly manner.

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iv. Disclosure of Price Information of Issues handled by Lead Managers

In order to apprise investors regarding the performance of issues brought in the past by Merchant Bankers (MBs), it was mandated that the price information of issues handled by MBs in the past be disclosed in the offer documents. The disclosures are to be given for issues during three financial years (current financial year and two financial years preceding the current financial year) subject to maximum 10 issues (IPOs) managed by merchant banker.

v. Disclosures in Offer Document when Funds are shown as Promoters of an Issuer Company

Considering the constraints in disclosure of details of investee companies of funds (such as venture capital funds, etc.) which are shown as one of the promoters of the issuer, a set of alternate disclosure requirements was specified in such cases in lieu of the existing disclosure requirements. Some of the alternate disclosure requirements include details of the fund manager, total number of investors in the fund, details of companies funded by the said funds, etc.

vi. Syndicate ASBA

With a view to enhance the role of ASBA in public issues and to have a wider reach of ASBA to investors, syndicate / sub-syndicate members were allowed to procure ASBA forms from the investors. For this purpose, syndicate / sub-syndicate members were mandated to commence this facility initially from 12 bidding centers which account for maximum number of applications in public issues.

vii. Mandatory Usage of ASBA facility by Non-retail Investors

In order to increase the spread and enhance the reach of ASBA, the non-retail investors i.e. Qualified Institutional Buyers (QIBs) and Non-Institutional Investors (NIIs), making application in public/ rights issue were mandated to make use of ASBA facility.

viii. Adjustment of Eligible Discount at the time of Application

Investors eligible for discount in public issues have been allowed to make payment at a price net of discount, if any, at the time of bidding. Hitherto, the effect of discount, if any, in public issues to eligible investors

Box 1.2: Review of Bid-cum-Application Form and Abridged ProspectusMarket feedback indicated that the information contained in the Abridged Prospectus had become voluminous and unstructured, with potentially material disclosures/risk factors not getting the required priority. The Application Form was also considered to be unwieldy and investor un-friendly. Therefore, SEBI set up a committee, comprising representatives of investor associations, legal fraternity, merchant banking/stock broking community, industry chambers and market professionals and SEBI to review the adequacy and quality of disclosures in the application form(including Abridged Prospectus) as well as the structure, design, format, contents and order of information. Pursuant to the recommendations of the Committee, the Application Form and Abridged Prospectus has been revised to ensure that materially important information is provided in a structured, logical and user-friendly manner. The revised Abridged Prospectus also contains company/ project specific information and highlights materially relevant disclosures such as peer comparison of important financial ratios, risk factors and price performance of past issues handled by merchant bankers. The revisions have also resulted in ease of handling the application/ abridged prospectus in a booklet form of A4 size, standardisation of form and single form for ASBA/ Non-ASBA, enabling download of the application form from the website of stock exchanges and approximately 50percent reduction in number of pages in the form/abridged prospectus.

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was given only at the time of allotment of shares and not at the time of application. The amendment confers certain benefits on the investors such as lower cash outflow at the time of application, the ability to apply for more shares with the same cash outlay etc.

ix. Reservation for Convertible Security Holders in Rights/Bonus Issuances

On the issue of reservation to convertible debt holders, it was clarified that reservation in rights/bonus issuances shall be made only to holders of compulsorily convertible debt securities. Earlier, the regulatory framework mandated a compulsory reservation in case of rights/bonus issue to the entire category of fully or partially convertible debentures. This was done with an objective to curtail the twin benefits arising out of price resetting as well as reservations to such holders.

x. Requirements in Respect of Minimum Public Shareholding

To comply with the amended rule 19(2) (b) of Securities Contracts (Regulation) Rules, 1957, which requires the listed companies to achieve and maintain minimum public shareholding at 25 percent (10 percent for public sector companies), 2 additional methods viz. Institutional Placement Programme (IPP) and Offer for Sale of Shares (OFS) through the stock exchange mechanism were introduced.

It was also decided to extend the OFS through the stock exchange mechanism to top 100 companies based on average market capitalisation for last completed quarter.

xi. Disclosure of Quarterly Financial Results

In order to give a better comparative picture of the quarterly financial results, which may aid investors while making investment decisions, it was mandated that companies disclose financial results in respect of immediately preceding quarter as well in addition to the disclosures of financial results pertaining to corresponding periods in the previous year.

xii. Mode of Supplying Annual Reports to Shareholders

As a green initiative to contain the environmental costs associated with printing and publishing Annual Reports, it has been decided that instead of supplying complete and full annual reports to all the shareholders, listed entities shall supply: soft copies of full annual reports to all those shareholders who have registered their email addresses for the purpose; hard copy of abridged annual reports to others and hard copies of full annual reports to those shareholders, who request for the same.

Box 1.3: Institutional Placement Programme (IPP)With a view to enable listed entities to meet the minimum public shareholding requirements (10percent for PSU and 25 percent for non-PSUs) under Securities Contracts (Regulation) Rules, 1957, the Institutional Placement Programme (IPP) has been introduced. IPP may be used for complying with minimum public shareholding either by way of fresh issue of capital or dilution by the promoters through an off er for sale. Using this method, public shareholding can be increased by upto 10 percent or such lesser percentage as is required to comply with the minimum public shareholding requirement. In IPP, the off er is made only to Qualifi ed Institutional Buyers (QIBs). Allotment to minimum 10 allo� ees is required with no single allo� ee to receive more than 25 percent of the issue size to ensure wider distribution of shares. Also, reservation of 25 percent of the issue size has been carved out for mutual funds and insurance companies. In IPP, issuer is required to announce a fl oor price or price band atleast one day prior to the opening of the off er. The allotment of shares may be made on price priority basis, proportionate basis or on pre-specifi ed criteria as disclosed in the off er document.

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xiii. Disclosure of Voting Results by Listed Entities

In order to ensure wider dissemination of information regarding voting results, which gives a better picture of how the meetings are conducted and how the different categories of investors have voted on a resolution, listed entities were mandated to disclose in a prescribed format, voting results/ patterns on their websites and to the exchanges within 48 hours from the conclusion of the concerned shareholders’ meeting. To begin with, this requirement has been made applicable to top 500 listed entities based on market capitalisation.

xiv. Exemption from Lock-in Requirements to Insurance Companies and Mutual Funds

Insurance companies and mutual funds are exempted from the provisions of SEBI (ICDR) Regulations relating to restriction on sale and lock-in of their pre-preferential shareholding in the issuer company, as the insurance companies and mutual funds are broad-based investment vehicles representing the interests of the public at large and are primarily engaged in trading (both buying and selling) of securities of numerous companies as part of their daily operations.

xv. Redemption of Indian Depository Receipts into Underlying Equity Shares

Considering the fact that the extant regulatory framework did not permit two way fungibility of Indian Depository Receipts (IDRs), but only partial one way redemption and also having regard to the fact that allowing redemption freely in the absence of two-way fungibility could result in reduction in the float and adversely impact the liquidity of IDRs traded in India, it was clarified vide circular

dated June 3, 2011 that after the completion of one year from the date of issuance of ID redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchanges in India.

xvi. Regulatory Framework for Rights Issues of Indian Depository Receipts

In order to facilitate simultaneous rights offering by the foreign issuers (who have listed their IDRs in Indian stock exchanges) in their home jurisdiction and in India, framework for rights issue of IDRs was notified. To simplify the requirements, it was mandated that for circulation in India, an additional wrap (disclosing information required in Indian jurisdiction and issue process relevant for the IDR holders) can be attached with the letter of offer circulated in their home jurisdiction by the overseas investor. Disclosure requirements for IDR rights issue were also made more or less in line with the reduced disclosure requirements applicable for domestic rights issues. Further, IDR issuers, who were in compliance with the continuous listing requirements, were provided with the facility of filing the offer document on fast track basis.

xvii. Forensic Accounting Cell at SEBI

A Forensic Accounting Cell has been set up to further enhance the monitoring of disclosure of financial information and to assist in detection of financial irregularities by companies.

II. Secondary Market

Secondary markets are often referred to as the barometer to a nation’s health. The stock prices in the current year have fluctuated owing to its integration with global financial markets which have been equally volatile. Some policy initiatives have though been taken to revive the confidence in the stock market and encourage small investors

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to invest as well. The policy initiatives taken in the secondary securities market for 2011-12 are as under:

i. Limitation Period for Filing an Arbitration Reference

In view of streamlining the provisions in the depositories with reference to limitation period for filing an arbitration reference, SEBI has specified that the limitation period for filing an arbitration reference shall be governed by the Law of Limitation i.e. The Limitation Act , 1963.

ii. Review of Annual Issuers’ Charges

SEBI has modified the methodology for calculating the annual issuers’ charges. The calculation for annual issuer charges shall be based on the average number of folios (ISIN positions) during the previous financial year instead of the total number of folios as on 31st March of the previous financial year.

iii. Modification to Investor Protection Fund (IPF) /Customer Protection Fund (CPF) Guidelines

Based on the representations received from stock exchanges, SEBI has modified partially the IPF/CPF guidelines, which ‘inter-alia’ states that stock exchanges shall ensure that the amount realised from the assets of the defaulter member is returned to the defaulter member after satisfying the claims of the stock exchange and SEBI in accordance with the bye-laws of the stock exchange.

iv. Change of Name by Listed Companies

In view of the representations received from companies and feedback received from the stock exchanges, it was notified that the listed companies seeking change of name shall ‘inter-alia’ comply with either of the following:

• At least 50 percent of its total revenue in the preceding one year period should have been accounted for by the new activity suggested by the new name (or)

• The amount invested in the new activity/project (fixed assets + advances + works in progress) is at least 50 percent of the assets of the company. The ‘advances’ shall include only those extended to contractors and suppliers towards execution of project, specific to new activity as reflected in the new name.

v. Call Auction in Pre-open Session for Initial Public Offering and Re-listed Scrips

Further to introducing call auction mechanism in pre-open session for the scrips forming part of Nifty and Sensex, SEBI has extended the call auction mechanism to IPOs on the first day of trading and to re-listed scrips on the day of recommencement of trading. Duration of the session is set for 60 minutes i.e. 9:00 a.m. to 10:00 a.m.

vi. Trade Controls in Normal Trading Session for Initial Public Offering (IPO) and Re-listed Scrips

In light of high volatility and price movement observed on first day of trading and recommencement of trading in case of IPOs and re-listed scrips, SEBI has put in place a framework of trade controls in normal trading session. The normal trading session shall commence only after the conclusion of call auction session for such scrips on BSE and NSE.

vii. Offer for Sale of Shares by Promoters through the Stock Exchange Mechanism

In order to facilitate promoters to dilute/offload their holding in listed companies in a

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transparent manner with wider participation, SEBI has permitted the offer for sale of shares by promoters of such companies through a separate window provided by the stock exchanges. To begin with, the facility of offer for sale of shares is made available on BSE and NSE. All promoter(s)/ promoter group entities that are eligible for trading and not met the requirements under clause 40A (ii) (c) of Listing Agreement, and all promoter(s)/ promoter group entities of top 100 companies based on average market capitalisation of the last completed quarter are permitted to participate as sellers. Further, all investors registered with the brokers of BSE and NSE other than promoter(s)/promoter group entities are allowed to participate as buyers under the scheme.

viii. Review of Internet Based Trading and Securities Trading using Wireless Technology

In a review to the extant guidelines on Internet Based Trading (IBT) and Securities Trading using Wireless Technology (STWT), SEBI has issued certain guidelines for broker’s compliance. Under this, broker shall ‘inter-alia’ capture the IP (Internet Protocol) address (from where the orders are originating) for all IBT/ STWT orders, implement secure end-to-end encryption for all data transmission between the client and the broker through a secure standardised protocol, and implement two-factor authentication for login session for all orders emanating using internet protocol.

Box 1.4: Offer for sale of shares by promoters through Stock Exchanges and Institutional Placement Programme

In order to facilitate promoters to dilute/offload their holding in listed companies in a transparent manner with wider participation, SEBI has allowed the offer for sale of shares by promoters of such companies through a separate window provided by the stock exchange(s). The salient features of the guidelines issued for the same are as follows:1. Eligibility (a) Exchanges To begin with, the facility of offer for sale of shares is made available on Bombay Stock Exchange (BSE) and

National Stock Exchange (NSE). (b) Sellers (i) All promoter(s)/promoter group entities of such companies that are eligible for trading and are

required to increase public shareholding to meet the minimum public shareholding requirements in terms Rule 19(2)(b) and 19A of Securities Contracts (Regulation) Rules, 1957 (SCRR), read with clause 40A(ii) (c) of Listing Agreement.

(ii) All promoter(s)/ promoter group entities of top 100 companies based on average market capitalisation of the last completed quarter.

For (i) and (ii) above, the promoter/promoter group entities should not have purchased and/or sold the shares of the company in the 12 weeks period prior to the offer and they should undertake not to purchase and/or sell shares of the company in the 12 weeks period after the offer.

(c) Buyers All investors registered with the brokers of the aforementioned stock exchanges other than the promoter(s)/

promoter group entities.2. Size of Offer for sale of shares The size of the offer shall be atleast 1percent of the paid-up capital of the company, subject to a minimum of

` 25 crores. However, in respect of companies, where 1percent of the paid-up capital at closing price on the specified date i.e. last trading day of the last completed quarter is less than ̀ 25 crores, dilution would be atleast

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10 percent of the paid-up capital or such lesser percentage so as to achieve minimum public shareholding in a single tranche.

3. Operational Requirements (a) Appointment of Broker The Seller(s) would have to appoint Seller’s broker(s) for this purpose. The Seller’s broker(s) may also

undertake transactions on behalf of eligible buyers. (b) Announcement/ Notice of the Offer for sale of shares Seller(s) shall announce the intention of sale of shares at least one clear trading day prior to the opening of

offer, along with the following information: (i) Name of the seller(s) (promoter/ promoter group) and the name of the company whose shares are

proposed to be sold. (ii) Name of the Exchange(s) where the orders shall be placed. In case orders are to be placed on both BSE

and NSE, one of them shall be declared as the Designated Stock Exchange (“DSE”). (iii) Date and time of the opening and closing of the offer. (iv) Allocation methodology i.e. either on a price priority (multiple clearing prices) basis or on a

proportionate basis at a single clearing price. (v) Number of shares being offered for sale. (vi) The name of the broker(s) on behalf of the seller(s). (vii) Floor price, if the seller(s) chooses to announce it to the market or a declaration to the effect that the

floor price will be submitted to the stock exchange(s) in a sealed envelope which shall be declared post closure of the offer.

(viii) Conditions, if any, for withdrawal or cancellation of the offer. (c) Floor price (i) Seller(s) may declare a floor price in the announcement/ notice (ii) In case the seller(s) chooses not to publicly disclose the floor price, the seller(s) shall give the floor price

in a sealed envelope to DSE before the opening of the offer. (iii) The floor price if not declared to the market, shall not be disclosed to anybody, including the selling

broker(s). (iv) Sealed envelope shall be opened by the DSE after the closure of the offer for sale and the floor price

suitably disseminated to the market. (d) Timelines (i) The duration of the offer for sale shall not exceed one trading day. (ii) The placing of orders by trading members shall take place during trading hours. (e) Order Placement (i) A separate window for the purpose of offer for sale of shares shall be created by stock exchanges.

Modification/ Cancellation of orders/ bids will be allowed during the period of the offer. However, modification/ cancellation of orders/ bids shall not be allowed during the last 30 minutes of the duration of the offer.

(ii) Cumulative orders/ bid quantity information shall be made available online by the exchanges at specific time intervals. The indicative price shall be disclosed by the exchanges only during the last half an hour of the duration of the offer for sale.

(iii) No price bands shall be applicable for the orders/ bids placed in the offer for sale. Stock specific tick size as per the extant practice in normal trading session shall be made applicable for this window.

(iv) In case of shares under offer for sale, the trading in the normal market shall also continue. However, in case of market closure due to the incidence of breach of “Market wide index based circuit filter”, the offer for sale shall be halted.

(v) Only limit orders/ bids shall be permitted. (vi) Multiple orders from a single buyer shall be permitted. (vii) In case floor price is disclosed, orders/ bids below floor price shall not be accepted.

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ix. Broad Guidelines on Algorithmic Trading

Based on the recommendations of Technical Advisory Committee (TAC) and Secondary Market Advisory Committee (SMAC), SEBI has put in place broad guidelines for Algorithmic Trading in the securities market. The guidelines define algorithmic trading as any order that is generated using automated execution logic. Further, the guidelines ‘inter-alia’ specify that stock exchanges shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders. Stock exchanges shall also have a system to identify dysfunctional algos and take suitable measures. In addition, stock brokers have been ‘inter-alia’ advised to submit an undertaking

to the respective stock exchange that, they have real-time monitoring systems to identify algorithms that may not behave as expected.

x. Reporting format under Regulation 11 of Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 (MIMPS Regulations)

Regulation 11 of MIMPS Regulations inter alia prescribes submission of shareholding report of recognized stock exchanges to SEBI on a quarterly basis. In order to bring uniformity in reporting, SEBI has standardised the format of reporting of shareholding pattern of the recognised stock exchanges under MIMPS Regulations.

Box 1.5 : Policy on review of Ownership and Governance of Market Infrastructure Institutions and Exit of non-operational stock exchanges

A. Policy on review of Ownership and Governance of Market Infrastructure Institutions A Committee was constituted to examine the issues arising from the ownership and governance of Market

Infrastructure Institutions (MIIs). The committee has submitted its report. The Board considered the Report of the committee and other related matter and took the following major decisions:

Networth and Ownership Norms for MIIs: 1. The Stock Exchanges will have minimum networth of `100 crore and the existing Stock Exchanges will be

given 3 years to achieve this networth of `100 crore. The minimum networth for the Clearing Corporation (CC) and the Depository will be ` 300 crore and `100 crore respectively. All existing clearing corporations shall be mandated to build up to the prescribed networth of `300 crore over a period of three years from the date of notification/ circular.

2. (i) The Stock Exchanges will have diversified ownership and no single investor will be allowed to hold more than 5percent except the Stock Exchange, Depository, Insurance Company, Banking Company or public financial institution which may hold upto 15percent.

(ii) At least 51percent of the holding of the Stock Exchanges shall be held by public. (iii) In case of CCs at least 51percent holding will be held by Stock Exchanges. No Stock Exchange can

hold more than 15 percent in more than one CC. To ensure diversified ownership for shareholders other than Stock Exchanges, the limit of 5percent and 15percent shall apply as in the case of Stock Exchanges.

(iv) In case of depositories minimum 51percent holding will be held by sponsors and the existing list of sponsors will continue. No other entity will be allowed to hold more than 5percent of equity share capital. Stock Exchange can hold upto 24percent.

(v) The shareholding limits prescribed for each category of investors shall be inclusive of all instruments that provide for equity or rights over equity at any future date. The voting rights of no shareholder shall, however, exceed the prescribed maximum shareholding limit at any point in time.

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Governance structure: 1. Autonomy of Regulatory Departments in MII will be maintained in order to avoid conflicts of interest

between regulatory and business functions of the MII - a. Member i) The heads of departments of Member Regulation will directly report to an independent committee

of the board of the Stock Exchange as well as to MD/CEO (dual reporting). ii) The long term goal would however be to set up an independent SRO at an appropriate time in

future and provide the seed fund for the same. b. Listing Regulation

i) In order to prevent a regulatory race to the bottom SEBI will prescribe the minimum listing standards to be followed by Exchanges.

ii) The head of departments of Listing Regulation will directly report to an independent committee of the board of the Stock Exchange as well as to MD/CEO (dual reporting).

c. Trading Regulation The surveillance function will report to an independent committee of the Board of the Exchange as

well as to the MD/CEO. All the independent committees will have a majority of Independent directors and will be headed by

one of them. d. Besides the above a Conflict Resolution Committee (CRC) will be formed by SEBI with majority

external and Independent members to deal with all issues concerning conflicts of interest. Issues of conflicts will be referred by Exchanges or may be taken up suo motu by CRC. The independent committee of Exchanges responsible for regulatory functions shall have regular interaction with CRC.

e. Separation of Risk Management to independent Clearing Corporation Among the functions of the Exchange it is the Clearing Corporation (CC) or Clearing House that fully

bears the risk of payment and delivery by providing a guaranteed settlement of all transactions on the Exchange. It has therefore been decided, inter alia, that the central role of the clearing function will be separated into an independent corporation with its own prescribed networth:

i) Clearing and settlement must compulsorily be carried out through a recognised clearing corporation under Regulation framed by SEBI.

ii) To ensure effective supervision of CCs through regulations of SEBI. iii) CC will constitute a risk committee comprising independent members which shall report to the

Board of the CC as well as directly to SEBI on issues and matters so identified and prescribed. iv) An expert committee will be set up by SEBI to examine the viability of introducing a single

clearing corporation or interoperability between different CCs. 2. The Board of Stock Exchanges/ C.C. will not have any Trading Member/Clearing Member representative.

However, an Advisory Committee shall be constituted by the Board of Stock Exchange/CC, comprising of Trading Members/ Clearing Members, to take benefit of experience of such Members. All recommendations of the Advisory Committee shall be placed in the ensuing Board meeting for consideration and appropriate decision. The Public Interest Directors representation on Board of Stock Exchange shall not be lesser than the number of shareholder directors and in case of recognised clearing corporation will be 2/3 of the Board strength.

3. Appointment of all Directors to the Board of Stock Exchanges/ CC will be subject to approval by SEBI. Appointment of MD/CEO of Depository will also be subject to approval by SEBI.

4. The compensation structure for key management personnel are to be based on the principles of sound compensation practices issued by international fora like Financial Stability Board. The decisions in this regard are directed towards curbing incentives that result in excessive risk taking in the short term:

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i) A compensation committee consisting of majority Public Interest Directors (PID) and chaired by a PID will determine the compensation of Key Management Personnel.

ii) The variable pay component will not exceed one-third of total pay. iii) Of the variable pay 50percent of it will be paid on a deferred basis after three years iv) ESOPs and other equity linked options in the MII will not form part of the compensation for the

identified key management personnel. v) The compensation policy to key management personnel will be approved by SEBI. Also, the terms and

conditions of the remuneration shall not be changed without the approval of SEBI. vi) The compensation policy may have ‘claw back’ arrangements. Profits of MIIs: 1. To bolster the risk management capacity of C.C. the stock exchange will be mandated to transfer 25percent

of their profits to the Settlement Guarantee Fund of the CCs where their trades are settled. 2. In case of depository 25percent of the profits will be transferred to Investor Protection Fund of the

depositories. 3. The non-core activities of MIIs will have to be segregated to a separate legal entity and when a related

business of an MII delivers a service to another MII it will provide equal and fair access to all. Listing: 1. The stock exchanges may be permitted to list when they put in place the appropriate mechanisms for

tackling conflicts of interest. 2. The stock exchanges will not be allowed to list on itself. 3. A recognised stock exchange shall be eligible for listing after three years of continuous trading operations

immediately preceding the date of application of listing. 4. Depository may also be allowed to list but not the clearing corporation considering its risk bearing role.B. Policy on Exit of non-operational stock exchanges The following was decided by the board with regard to exit of stock exchanges which are non-operational or

have been de-recognized: i. The Board decided the process of de-recognition and exit of stock exchanges. A stock exchange without

any trading at its own platform or where the annual trading is less than ` 1,000 crore may apply for voluntary de-recognition and exit. If the stock exchange eligible for voluntary de-recognition is not able to achieve a turnover of ` 1,000 crore on continuous basis or does not apply for voluntary de-recognition and exit within a period of two years from the date of notification, SEBI shall proceed with the compulsory de-recognition and exit of such stock exchange.

ii. With regard to exit option to shareholders of exclusively listed companies, a mechanism of dissemination board at stock exchange is decided on the lines of bulletin board.

iii. With regard to treatment of assets of the de-recognised stock exchanges, the Board decided that the stock exchanges may be permitted to exit subject to certain conditions such as payment of statutory dues to Government/SEBI contribution of certain percentage of assets of the exchange towards Investor Protection and Education Fund etc.

iv. The trading members of the de-recognised stock exchange will continue to avail trading opportunity through its existing subsidiary company, which will function as a normal broking entity, at the Exchanges having nationwide trading terminals.

xi. Composition of Arbitration Committee

SEBI has notified to do away with the representation of trading members on

arbitration committee/panel of all stock exchanges. Accordingly, the arbitration committee/panel of the stock exchange shall not comprise of any trading members.

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xii. Activities of Advisory Committees

i. Secondary Market Advisory Committee (SMAC): SMAC recommends measures, for changes and improvements in the market structure, for improving market safety, efficiency, transparency and integrity, and for reducing transaction costs. It has recommended review of risk management system. SMAC has been consulted on various matters such as refund of surplus fund to defaulting members, regulatory issues associated with technological advancements, expanding the scope of dematerialization, policy on recognized stock exchanges, etc.

ii. Technical Advisory Committee (TAC): Technological advancements have brought to the fore several challenges associated with the use and adoption of technology in the securities market. In order to keep pace with such advancements and market dynamics, and to, further, protect the interests of investors and to frame appropriate policies to that effect, TAC has been constituted, comprising of technological experts to advise SEBI. TAC has been consulted on various technological issues viz., Wireless trading, Co-location, Algorithmic trading, Smart Order Routing, etc. Also, TAC has been consulted in the matter of comprehensive review of the mandatory annual system audit by exchanges and depositories, and in the matter of Business Continuity Planning and Disaster Recovery policies and processes at stock exchanges and depositories.

iii. Risk Management Review Committee (RMRC): With the objective to review

the present risk management framework and align the same with the current market infrastructure, RMRC has been constituted to review the extant risk management guidelines of cash and derivatives market.

xiii. Investor Grievance Redressal Mechanism at Stock Exchanges

In order to facilitate early redressal of investor grievances, SEBI has mandated that stock exchanges having nationwide terminals (such as NSE, BSE, MCX-SX and USEIL), functional stock exchanges having trading volumes, stock exchanges entering into MoU with other exchanges and stock exchanges intending to recommence trading operations, shall constitute Investor Grievance Redressal Committees (IGRC) at every investor service centre. Such committee shall comprise of a single person for claims upto ` 25 lakh, whereas, for claims above ` 25 lakh, the IGRC shall comprise of three persons.

It was, further, advised that apart from the investor services centres that are currently operating in four metro cities (viz., New Delhi, Mumbai, Chennai and Kolkata), stock exchanges having nationwide terminals shall open investor service centres in other large cities.

xiv. Standardised lot size for SME Exchange / Platform

SEBI has notified the standardised lot sizes for SMEs in case of IPO and secondary market trading on SME exchange/platform.

xv. Annual System Audit

The existing frame work of system audit has been reviewed encompassing the system audit processes, auditor selection norms, terms of reference and auditor report guidelines.

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xvi. Guidelines for Intermediaries

a) Guidelines on Outsourcing of Activities by Intermediaries

Intermediaries regulated by SEBI outsource certain areas of their activities with a view to reduce costs and also for strategic reasons. In order to address the concerns arising from the outsourcing of activities, SEBI has framed principles for outsourcing to be implemented by the intermediaries which inter alia state as under:• Implementing comprehensive policy on

outsourcing of activities;• Establishing comprehensive outsourcing

risk management program to address outsourced activities and the relationship with the third party;

• Ensuring that the outsourcing arrangements neither diminish the ability to fulfill the obligation to customers and regulators nor impede effective supervision by the regulations;

• Conducting appropriate due diligence in selecting the third party and monitoring of its performance;

• Governing various aspects of outsourcing through written agreement / contracts containing all material aspects of the outsourcing arrangement;

• Establishing and maintaining contingency plans for disaster recovery and periodic testing of back up facilities;

• Taking appropriate steps to protect confidential information of intermediary and its customers from intentional or inadvertent disclosure to unauthorized persons;

• Putting safeguards to avoid/ prevent co-mingling of documents/ records/ assets by the outsourcing agency.

Intermediaries have also been advised not to outsource their core business activities and compliance functions. It has also been clarified that in spite of outsourcing, the primary responsibility of compliance with the regulations shall lie with the intermediary. The above guidelines are based on the principles advocated by IOSCO.

b) Review of Networth of Intermediaries

(i) Registrars to an issue and share transfer agents (RTAs): The regulations governing RTAs, framed in 1993, prescribed a networth of ` 6 lakh for Category I and ` 3 lakh for Category II RTAs respectively. Keeping in view the present day infrastructure needs for this business, vide notification dated August 16, 2011, the minimum networth requirement has been enhanced to ` 50 lakh for Category I and ` 25 lakh for Category II RTAs respectively. Further, a period of three years has been granted to the existing RTAs to comply with the above requirement.

(ii) Debenture Trustees: Minimum capital adequacy requirement of networth of ` 1 crore was specified by SEBI for debenture trustees in 2003. Considering the long period that had elapsed, the networth requirement for eligibility for registration as debenture trustees was revised upward to ` 2 crore. In consultation with the debenture trustees, it was decided to grant them a period of two years from the date of amendment to Regulations to increase their networth. This will help RTAs and debenture trustees to improve their infrastructure enabling them to discharge their functions in a professional manner.

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c) Enhanced Level of Compliance of the Intermediaries

In order to strengthen the monitoring mechanism through periodic reporting by intermediaries, a revised reporting format was prescribed by SEBI for debenture trustees (vide circular dated December 19, 2011) and bankers to an issue (vide circular dated March 29, 2012). The revised formats along with directives issued to these intermediaries envisage increasing the accountability of their boards in respect of review of regulatory compliance on half-yearly basis and corrective measures initiated to avoid deficiencies in future. This step taken by SEBI would improve the level of compliance of the intermediaries.

d) Enhancing the Competency Level of the Employees of the Market Intermediaries

Continuing its efforts to improve the competency levels of the employees of the market intermediaries and with a view to improve the quality of intermediation services in the securities market, SEBI on September 6, 2011 issued broad guidelines on Continuous Professional Education (CPE) for revalidation of various certifications issued by NISM. The guidelines required that certifications issued by NISM can be revalidated for a further period of three years by successfully completing relevant CPE program or by obtaining fresh certification in accordance with the provisions of the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007. These guidelines were finalised after receiving comments from public through a consultative process wherein the draft guidelines were placed on SEBI website for obtaining public comments.

xvii. Credit Rating Agencies

Some key developments that occurred

in the current year to further smoothen the functioning of the Credit Rating Agencies (CRAs) are as under mentioned:

a) Standardisation of Rating Symbols and Definitions

CRAs registered with SEBI were using different rating symbols and their definitions / descriptions. Multiple rating symbols in the same category of rating products used by different CRAs could confuse the investing community. This also had the possibility of unhealthy competition among the CRAs. For easy understanding of the rating symbols and their meanings by the investors and to achieve high standards of integrity and fairness in ratings, SEBI standardised the rating symbols and definitions in consultation with CRAs.

Standardised symbols and their definitions have been devised by SEBI for long-term debt instruments; short-term debt instruments; long-term structured finance instruments; short-term structured finance instruments; long-term mutual fund schemes; and short-term mutual fund schemes.

The CRAs were advised to take following steps for dissemination and implementation of the aforesaid guidelines: (i) disclose new rating symbols and definitions on their websites; (ii) update their rating lists on their websites; and (iii) inform their clients about the change in the rating symbols and definitions.

SEBI is probably one of the first regulators in the world to come up with this investor friendly regulation.

b) Guidelines for Uniform Compliance Standards for Ratings by Credit Rating Agencies

The CRAs play an important role in the securities markets as investors take their decisions for investing in debt instruments issued by the companies based on ratings.

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CRAs registered with SEBI also carry out rating of other securities/instruments and loans/facilities provided by banks which are not regulated by SEBI. Such ratings are being used by the other regulators or their regulated entities for the specified purposes. It was felt desirable that in addition to the review/accreditation process put in place by the other regulators; such ratings should also be governed by the same stringent norms as applicable for rating of securities issued by way of public/rights issue.

In consultation with CRAs as well as other regulators, it has been mandated that CRAs shall follow the applicable requirements pertaining to rating process and methodology and its records/transparency and disclosures, avoidance of conflict of interest, code of conduct, as specified in the SEBI Regulations and circulars issued by SEBI from time to time. These guidelines will bring about better governance and transparency in the operations of the CRAs.

xviii. Policy Initiatives for Derivatives

The key policy developments initiated for the derivatives segment during 2011-12 are as under:

a) Self-Clearing Member in the Currency Derivatives Segment

In consultation with RBI, vide circular dated May 13, 2011, SEBI permitted a new category of trading member, namely, self-clearing member in the currency derivatives segment having minimum networth of ` 5 crore.

b) Liquidity Enhancement Schemes for Illiquid Securities in Equity Derivatives Segment

SEBI, vide circular dated June 2, 2011 permitted stock exchanges to introduce one or more liquidity enhancement schemes (LESs)

to enhance liquidity of illiquid securities in their equity derivatives segments.

NSE, with effect from September 15, 2011 started LESs in futures and options contracts on S&P 500 and futures contracts in Dow Jones Industrial Average (DJIA). The S&P 500 Index has been represented as best single gauge of the large cap U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75 percent coverage of U.S. equities. The DJIA Index is one of the oldest indices in US which includes 30 significant and highly liquid stocks traded on the New York Stock Exchange and the Nasdaq.

BSE, with effect from September 28, 2011 started LESs in the illiquid equity derivatives segment. Subsequently, BSE, in order to generate further liquidity, has introduced modified LESs in a phased manner on October 26, 2011, February 1, 2012 and February 27, 2012.

c) Modification of Client Codes of Non-Institutional Trades executed on Stock Exchanges (all segments)

With a view to protect investors’ rights and interests and to further safeguard integrity of the market, SEBI in consultation with stock exchanges, vide circular dated July 5, 2011, permitted modifications of client code of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing/modifying the related order. In addition, SEBI laid down stringent penalty structure for client code modification. The circular came into force from August 1, 2011.

d) Short-Collection/Non-Collection of Client Margin (Derivative Segment)

SEBI, in consultation with stock exchanges, vide circular dated August 10, 2011 prescribed stringent penalty structure

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for short-collection/non-collection of margins from clients in the derivatives segment. In addition, it has been mandated that for wrong/false reporting of client margin, the member shall be penalised 100 percent of the falsely reported amount along with suspension of trading for one day in that segment. The circular came into force from September 1, 2011.

e) Exchange Traded Interest Rate Futures on 2-year and 5-year Notional Coupon Bearing Government of India Security

SEBI, vide circular dated December 30, 2011, permitted stock exchanges to introduce cash settled futures on 2-year and 5-year notional coupon bearing Government of India (GoI) security on currency derivatives segment of stock exchanges. Exchanges are yet to introduce interest rate futures contracts on 2-year and 5-year notional coupon bearing GoI security.

f) Market Integrity Related Disclosures

In order to increase transparency and to provide greater disclosure of trading activities to the market, based on the recommendations of SMAC, SEBI has advised stock exchanges to disseminate market integrity related disclosures of trading activities to the market. In this regard, NSE and BSE started disseminating market integrity related disclosures on their web sites since January 2, 2012.

g) Introduction of derivative contracts on Foreign Stock Indices

Pursuant to SEBI circular dated January 11, 2011 on permitting stock exchanges to introduce derivative contracts on global indices, permission/approval has been granted to NSE for introduction of futures and options contracts on S&P 500 Index and FTSE 100 Index and futures contracts on DJIA. In addition,

BSE has been permitted to introduce futures contracts on FTSE/JSE Top 40 Index (Africa), Hang Seng Index (Hong Kong), iBovespa Index (Brazil) and MICEX Index (Russia).

xix. Simplification and Rationalisation of Trading Account Opening and Know Your Client (KYC) Process

a) SEBI had been getting feedback from the investors that the trading account opening process with the stock broker was very cumbersome and required a large number of signatures on different documents. SEBI simplified the trading account opening process in consultation with the stock exchanges and market participants. In this improved mechanism, all client-broker agreements have been replaced with the ‘Rights and Obligations’ documents, which shall be mandatory and binding on all parties. There is now no separate requirement for the client to enter into agreements with the stock broker. Further, the number of client signatures will reduce substantially and the cost of compliance for both clients and brokers will come down.

b) SEBI had been getting feedback from the investors that various SEBI registered intermediaries follow different KYC requirements and documents. With a view to bring in uniformity, SEBI vide circular dated October 5, 2011 standardised the Know Your Client (KYC) requirements for investors while opening accounts with the intermediaries in securities markets.

c) Earlier, if a client intended to open accounts with different intermediaries for the purpose of trading / investment in the securities market, he had to undergo the process of KYC again and again. Therefore, to avoid duplication

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of KYC process in securities markets, a mechanism for centralisation of the KYC records in the securities market has been developed. As a result, the KYC form filled up by the client with an intermediary can be used through the centralized system when the client approaches another intermediary registered with SEBI. The system was made applicable for the new clients with effect from January 1, 2012.

xx. More Investor Grievance Redressal Mechanism Centres at Ahmedabad, Hyderabad, Kanpur and Indore

The stock exchanges have been providing investor grievance redressal mechanism and arbitration facility at the four metro cities (Delhi, Mumbai, Kolkata and Chennai). With a view to increase investor confidence in the securities market and in order to make it more convenient to investors to file their grievances and arbitration cases near to their places, SEBI advised NSE and BSE to step up investor grievance redressal mechanism by opening such centres at Ahmedabad and Hyderabad by March 31, 2012 and at Kanpur and Indore by September 30, 2012. The names of new centres were decided after examining the data on complaints and arbitrations filed by investors from various regions of the country.

xxi. Mandated Stock Exchanges to send SMS and E-mail Alerts to the Investors on the Transactions carried out by them

There had been complaints from the investors against the stock brokers that they executed transactions in their accounts without any instructions by them. SEBI has taken certain measures in the past to avoid such complaints. As an additional measure to safeguard against unauthorized trading, SEBI vide circular dated August 2, 2011 mandated that the stock exchanges shall send details of the transactions in cash and derivative to the

investors, by the end of trading day, through SMS and E-mail alerts. It is anticipated that the number of instances of unauthorised trading may be reduced.

xxii. Strengthening the Fund Transfer Mechanism/ Pre-Funded Instruments

Stock brokers while receiving funds from clients through pre-funded instruments such as pay order, demand draft, banker’s cheque etc. were unable to maintain an audit trail of the funds so received, as the details of the name of the client and bank account-number are not mentioned on such instruments. This may result in flow of third party funds/unidentified money affecting the integrity of securities market. Therefore, with a view to address these concerns and in order to ensure that the funds are received from their clients only, SEBI vide circular dated June 9, 2011 mandated that in case the value of pre-funded instruments is more than ̀ 50,000/- per day per client, the stock broker shall obtain the name of the bank account holder and number of the bank account debited and in case of electronic transfers, the brokers shall maintain an audit trail of the funds received through electronic fund transfers. This step would prevent money-laundering in securities markets.

xxiii. Processing of investor complaints in SEBI Complaints Redress System

SEBI has commenced processing of investor grievances against the intermediaries and listed companies in a centralized web-based complaints redress system, SEBI Complaints Redress System (SCORES). This will assist the investors in easily lodging their complaints as well as track their status. The salient features of this system are: Centralised database of all complaints; online movement of complaints to the concerned entities; online upload of Action Taken Reports (ATRs) by the concerned entities; and online tracking of

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status of complaints by investors.

xxiv. Due Diligence Records to be Maintained by Merchant Bankers

SEBI (ICDR) Regulations, 2009 inter alia require the merchant bankers (MBs) to exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosures in the offer documents, to co-ordinate with other intermediaries involved in the issue process and to redress investor grievances. Further, MBs are required to submit due diligence certificates to SEBI at various stages of issue, based on examination of certain records and documents. Offer documents that carry disclosures made after an effective due diligence are the basis upon which investment decisions are taken by investors.

However, during inspections by SEBI, it was observed that MBs were not maintaining adequate supporting documents and records in respect of due diligence exercised by them, making it difficult for SEBI to ascertain the level of due diligence conducted by them. Further, SEBI (Merchant Bankers) Regulations, 1992, also did not prescribe any records to be maintained in relation to the important aspect of due diligence which is the core activity of merchant bankers.

In view of the same, SEBI (Merchant Bankers) Regulations, 1992 were amended vide notification dated August 16, 2011, requiring MBs to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management, and in case of takeover, buyback and delisting of securities. This will not only improve the compliance standards in the industry but also strengthen the inspections conducted by SEBI.

III. Corporate Debt Market

i. Shut Period

To bring about uniformity in shut periods for corporate bonds, SEBI in June 2011 directed exchanges to do away with shut period for interest payments or for part-redemptions. Further, SEBI directed exchanges to ensure that issuers have a record date not more than 15 days prior to book closure for all prospective privately placed issues of corporate bonds.

ii. Structured Products

In September 2011, SEBI put in place framework for issue of Structured Products. Structured products are issued in India as debt instruments with returns linked to equity or other underlying assets. In view of the nature of risk profile of such securities, additional disclosures were specified in offer documents for issue of structured products that seek listing on stock exchanges. Only issuers that have a minimum net-worth of ` 100 crore are eligible to issue such instruments. Minimum ticket size for subscribing to such securities is ` 10 lakh. Other norms include additional disclosures pertaining to riskiness of such instruments, scenario analysis showing its value under various market conditions, commission structure embedded therein and requirements for primary issuance and sale of securities to retail investors. Third party valuation of such securities by a credit rating agency has been made mandatory and the same shall be disclosed to public.

iii. Ban on Incentives in Public Issue of Debt

In December 2011, SEBI advised that in respect of public issues of debt securities, no person connected with the issue shall offer any incentive, whether direct or indirect, in any manner, whether in cash or kind or services or otherwise to any person making an application for allotment of such securities.

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This was done to prevent the practice of some brokers/ distributors passing on part of their brokerage/ commission to the final investor(s) for subscription to such public issue of debt which resulted in an unfair advantage/bargaining power to a certain set of investors and distributors while on the other hand adding to the cost of issuance for the company.

IV. Mutual Funds

The year 2011-12 witnessed manifold regulatory approaches towards the development and growth of mutual funds industry in India. The developmental goals were addressed by providing provisions for infrastructure debt funds, bringing depth in terms of allowing new class of investors i.e. Qualified Foreign Investors (QFIs) and new investment avenues for fund managers by enabling repo transactions in corporate debt securities.

Other regulatory approaches were oriented towards giving fair treatment to all class of investors by providing the overarching and overriding principles of valuation to ensure fair treatment to all investors including existing investors as well as investors seeking to purchase or redeem units of mutual funds, enhancing accuracy, fairness, completeness and unambiguity in AMC communications and scheme advertisements by amending the advertisement code more towards principle based, provisioning disclosure of intended portfolio for closed ended debt schemes to enable investors to make a more informed decision, bringing transparency in performance disclosures, disclosure of commissions paid to the distributors, etc., ensuring higher standards of investor servicing by provisioning for options to all investors in all types of schemes (existing/new) for issuance of units in demat form,

making AMC responsible for due diligence of distributors, ensuring convenience to investors by way of provisioning for consolidated account statements and incentivizing distributors for mobilisation of savings from urban and smaller towns to the mutual fund industry by way of introduction of transaction charge. A detailed description of initiated steps during 2011-12 is as follows:

i. Option to hold Units in Demat Form

In order to facilitate investors, mutual funds/AMCs are advised to invariably provide an option to the investors in all schemes (existing/new) to mention demat account details in the subscription form, in case they desire to hold units in demat form while subscribing. Mutual funds/AMCs are advised to obtain ISIN for each option of the scheme and quote the respective ISIN along with the name of the scheme, in all Statement of Account/Consolidated Account Statement issued to the investors.

ii. Intended Portfolio Disclosure in Close Ended Debt Schemes

In order to enable investors to make a more informed decision regarding the quality of securities and risk associated with different close ended debt oriented schemes, mutual funds/AMCs were advised to make additional disclosures with respect to intended allocation for instruments such as CPs, CDs, NCDs, securitised debt, etc with floor ceiling within a range of five percent against each sub asset class/credit rating without indicating the portfolio or yield, directly or indirectly. This would be accompanied by credit evaluation policy for investments in debt securities and list of sectors where the scheme/s would not be investing. Variations between intended portfolio and final portfolio will not be permissible.

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iii. Transaction Charges

To enable increased reach of mutual fund products in urban areas and smaller towns, it was decided that a transaction charge per subscription of `10,000/- and above be allowed to be paid to the distributors. For existing investors, the transaction charge paid to the distributors would be of `100/- and as an incentive to attract new investors, the distributor may be paid `150/- as transaction charge for a first time investor in mutual funds. In case of SIPs, the transaction charge shall be applicable only if the total commitment through SIPs amounts to `10,000/- and above. In such cases, the transaction charge shall be recovered in 3-4 installments. However, there shall be no transaction charges on direct investments.

iv. Commission Disclosure

Mutual funds / AMCs have been required to disclose on their respective websites the total commission and expenses paid to ‘select’ distributors who have either multiple point of presence (more than 20 locations) or have AUM raised over ` 100 crore across industry in the non institutional category but including high networth individuals (HNIs) or received commission of over ` 1 crore p.a. across industry or a commission of over ` 50 lakh from a single AMC. AMFI shall consolidate data on industry basis and disseminate on its website.

v. Due Diligence on Distributors of Mutual Fund Products

It was felt in the interest of investors, that AMCs, shall, undertake a due diligence process on select ‘large’ distributors through an assessment of factors like business model, record of regulatory fines and penalties and customer compensations, review of business associates on the said factors; and

organisational controls to ensure that certain processes like customer risk evaluation and mutual fund scheme appropriateness evaluation are delinked from sales and relationship management. In that respect, all customer relationship and transactions are to be categorised as either ‘advisory’ based on principle of ‘appropriateness’ of products to that customer category or ‘execution’ only for transactions that are not booked as ‘advisory’. For ‘execution only’ transactions, the customer is not required to pay the distributor anything other than the standard flat transaction charge.

There shall be no third categorisation of customer relationship. AMCs shall also review defined management processes for compliance and risk management functions of the distributor. Due diligence of distributors is solely the responsibility of mutual funds/AMCs.

vi. Transparency in Performance Information

To enable longer horizon term performance information for investors, it was mandated that where scheme has been in existence for less than one year, past performance shall not be provided except for money market schemes and cash schemes and liquid schemes. Performance advertisement to be provided since inception and for twelve month periods for the last three years on Compounded Annual Growth Rate (CAGR) basis. Further, to enable a simple understanding of returns generated in scheme/s, additional returns are to be published in form of point-to-point returns on a standard investment of ` 10,000 and return in rupees and by way of CAGR for respective category of schemes against a common industry wide benchmark. The common benchmark for the scheme

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categories are returns on Sensex or Nifty for equity funds, returns on 10 year GoI security for long term debt funds and returns on one year T-Bills for short-term debt funds. When the performance of a particular scheme is advertised, performance data of all schemes by that fund manager or performance data of top three and bottom three schemes of that fund manager shall be advertised.

Further, for performance advertisement issued by the AMC for any scheme, details of returns of all the schemes (mutual fund, pension funds, offshore funds etc) managed by that fund manager are to be provided. For difference of more than 10 percent between the annual returns of schemes managed by same fund manager, it shall be reported to the trustee with explanation and disclosed on website. For money market schemes and cash schemes and liquid schemes, performance can be advertised by simple annualisation of yields if a performance figure is available for at least 7 days, 15 days and 30 days.

vii. Disclosure on Assets Under Management

Mutual funds are required to disclose assets under management with bifurcation of the AUM into debt/equity/ balanced etc, and percentage of AUM by geography (i.e. top 5 cities, next 10 cities, next 20 cities, next 75 cities and others) on their respective websites and to AMFI and AMFI shall disclose industry wide figures on its website.

viii. De-duplication of Folios

Mutual funds/AMCs were advised to carry out an exercise of de-duplication of folios across all mutual funds within a period of 6 months from August 22, 2012.

ix. Mailing of Annual Report/Abridged Summary and Consolidated Account Statement

In order to bring cost effectiveness in printing and dispatching the annual reports or abridged summary and as a green initiative measure, the scheme annual reports or abridged summary henceforth would only be sent by email wherever e-mail addresses are available. Where email addresses would not be available, AMCs shall communicate to unit holders to obtain their email addresses. If, however, there is a request from these unit holders for physical copies AMCs shall provide. Investors whose email addresses are not available with the mutual fund; the AMCs shall continue to send physical copies.

As per the amendments to Regulation 36 of SEBI (Mutual Fund) Regulations 1996 notified on August 30, 2011, the AMC shall identify common investor across fund houses by their permanent account number and issue the consolidated account statement for each calendar month, on or before tenth day of succeeding month, detailing all the transactions and holding at the end of the month including transaction charges paid to the distributor, across all schemes of all mutual funds, to all the investors in whose folios transaction has taken place during that month, further the AMC shall ensure that a consolidated account statement every half yearly (September/ March) is issued, on or before tenth day of succeeding month, detailing holding at the end of the six month, across all schemes of all mutual funds to all such investors in whose folios no transaction has taken place during that period.

x. Trading Desk of Mutual Fund in India

As per the amendments to Regulation 25 of SEBI (Mutual Funds) Regulations, 1996 notified on August 30, 2011, the following provisions were inserted:

a) The AMC shall not invest in any of its scheme, unless full disclosure of its

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intention to invest has been made in the offer documents, provided that an AMC shall not be entitled to charge any fee on its investment in that scheme.

b) The AMC shall not carry out its operations including trading desk, unit holder servicing and investment operations outside the territory of India. Provided the AMC having any of its operations outside India shall wind up and bring them within the territory of India within a period of one year from the date of notification of these provisions.

xi. Resolving Conflict of Interest in Fund Management

An AMC may undertake other business activities under provisions of Regulation 24 of Mutual Funds Regulations. The scope of this Regulation was restructured vide notification dated August 30, 2011 to outline a broad based activity vis-à-vis non broad based activity as also to help address potential conflicts of interest between mutual fund and other activities. As per the amended provisions, mutual funds shall not undertake any business activities other than in the nature of management and advisory services provided to pooled assets. To maintain Chinese walls between such activities and mutual fund, AMC shall inter alia ensure segregation of accounts; maintain separate capital adequacy requirements, appoint separate fund manager for each separate fund managed by it unless the investment objectives and assets allocations are the same and the portfolio is replicated across all the funds managed by the fund manager. It was further clarified that replication of minimum 70 percent of portfolio value shall be considered as adequate for the purpose of said compliance, provided that AMC has in place a written policy for trade allocation and it ensures at all points of time that the fund

manager shall not take directionally opposite positions in the schemes managed by him.

Mutual funds are also required to disclose absence of conflict of interest and make adequate disclosures for unavoidable conflict of interest situations. AMCs are required to disclose all returns provided by the said manager for all the schemes (mutual fund, pension funds, offshore funds etc) on a monthly basis. For portfolio management activity, separate capital adequacy is required besides the prescribed Chinese walls.

xii. Enabling Foreign Investors for Investment in Mutual Fund Schemes

Hon’ble Finance Minister in his budget speech for 2011-12 announced that to liberalise the portfolio investment route, SEBI registered mutual funds shall be permitted to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. To operationalise the above, SEBI in consultation with the Government and RBI has issued the detailed guidelines vide circular dated August 09, 2011, as per which foreign investors (termed as QFIs) who meet KYC requirement may invest in equity and debt schemes of mutual funds through the following two routes:a) Direct route - Holding mutual fund

units in demat account through a SEBI registered depository participant.

b) Indirect route- Holding mutual fund units via Unit Confirmation Receipt (UCR).

For the purpose of the above guidelines, QFI shall mean a person resident in a country that is compliant with Financial Action Task Force (FATF) standards and that is a signatory to IOSCO’s Multilateral MoU, provided that such person is not resident in India and is not registered with SEBI as FII or Sub-account.

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Further, mutual funds shall ensure that QFIs meet the KYC requirements as per the FATF standards, Prevention of Money Laundering Act, 2002 (PMLA) rules and regulations made there-under, and SEBI circulars issued in this regard before accepting subscriptions from QFIs.

xiii. Introduction of Provisions for Infrastructure Debt Fund Schemes

Hon’ble Finance Minister in his Budget Speech for 2011-12 had announced setting up of Infrastructure Debt Funds (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure projects for funding the Government’s ambitious programme of infrastructure development. To operationalise the above, under extant SEBI (Mutual Funds) Regulations, 1996, SEBI in consultation with the Government, RBI, industry participants, etc. has issued the regulatory guidelines for ‘Infrastructure Debt Fund Schemes’ under Chapter VI B of Mutual Fund Regulations vide notification dated August 30, 2011. As per the regulatory provisions an “Infrastructure debt fund scheme” would mean a mutual fund scheme that invests minimum 90 percent of scheme assets in the notified infrastructure debt securities. The salient features of such scheme would be either as close-ended scheme maturing after more than five years or interval scheme with lock-in of five years. Minimum size of a unit in such scheme shall be `10 lakh and minimum investment for an investor ` One crore. Units of scheme shall be listed on a recognized stock exchange, after being fully paid up. Such scheme shall have firm commitment from the strategic investor’s for contribution of an amount of at least ` 25 crore. For diversification purposes, scheme shall have minimum five investors and no single investor shall hold more than 50 percent of scheme assets. Assets held by

an infrastructure debt fund scheme shall be valued “in good faith” by the AMC on the basis of appropriate valuation methods based on principles approved by the trustees.

Accordingly, the format for monthly cumulative report (MCR) was modified to include infrastructure debt schemes and mutual funds.

xiv. Participation of Mutual Funds in Repo in Corporate Debt Securities

To widen the avenues of investment assets in debt markets, guidelines were issued to enable participation of mutual funds in repo of corporate debt securities with primary conditions that participation be only in AAA rated corporate debt securities, tenor of the transaction shall not exceed six months and that gross exposure shall not be more than 10 percent of assets of the concerned scheme. Trustees and the AMCs shall frame guidelines in the category of counterparty, its credit rating, tenor of collateral and applicable haircuts in context of these transactions. Details related to such repos shall be disclosed on half-yearly basis.

xv. Review of Advertisement Code for Mutual Funds

Focus of advertisement code has been shifted from rule based approach to move more towards principle based approach. To ensure accuracy, fairness, transparency etc. the advertisement code for mutual funds were amended vide notification dated February 21, 2012. As per the amended provisions “advertisement” of mutual funds or its schemes shall include all forms of communication issued by or on behalf of the AMC/mutual fund that may influence investment decisions of any investor/prospective investors. The advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise

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and shall not contain statements which are false, misleading, biased or deceptive, based on assumption/projections and shall not contain any testimonials or any ranking based on any criteria. The mutual funds and/or the AMC shall be liable for action in case the advertisement issued is in contravention with the advertisement code.

xvi. Review of Valuation Norms

The valuation norms were reviewed to ensure fair treatment to all investors including existing investors as well as investors seeking to purchase or redeem units of mutual funds, accordingly the overarching and overriding principles of fair valuation have been outlined vide notification dated February 21, 2012 and the effort was to move more towards principle based regulations though within the above overarching principles, the AMCs will be required to follow the valuation guidelines elaborated in the SEBI(Mutual Fund) Regulations. The valuation of investments shall be based on the principles of fair valuation i.e. valuation shall be reflective of the realizable value of the securities/assets. The valuation shall be done in good faith and in true and fair manner through appropriate valuation policies and procedures. These principles inter alia shall include reflection of realisable value of securities/assets and policies and procedures approved by the Board of the asset management company shall identify the methodologies that will be used for valuing each type of securities/assets. The AMC and the sponsor of the mutual fund shall be liable to compensate the affected investors and/or the scheme for any unfair treatment to any investor as a result of inappropriate valuation. The mutual fund and/or Asset AMC shall be liable for action in case the valuation of securities is in contravention of the principles of fair valuation specified in eighth schedule.

xvii. Valuation of Debt and Money Market Instruments

In order to move towards valuation of securities of all maturities reflective of the realisable value/ fair value, it was mandated that all the debt and money market securities across maturity shall be valued at the weighted average price at which they are traded on the particular valuation day and in case such securities are not traded on a particular valuation day then the securities with residual maturity upto 60 days shall be valued on amortisation basis and securities with residual maturity over 60 days shall be valued at benchmark yield/ matrix of spread over risk free benchmark yield obtained from agencies entrusted for the said purpose by AMFI, provided such valuation shall be reflective of the realisable value/ fair value of the securities/assets.

To further enhance transparency, the AMCs shall disclose all details of debt and money market securities transacted (including inter scheme transfers) in its schemes portfolio on AMCs’ website and the same shall be forwarded to AMFI for consolidation and dissemination.

V. Portfolio Managers

i. Minimum Investment

In October 2002, SEBI (Portfolio Managers) Regulations were amended to provide for minimum investments limit per client as ` Five lakh. Since minimum investment limit had not been revised after 2002, portfolio management services had become accessible to smaller/ retail investors, without the protection which is available to retail investors under the mutual fund framework.

In view of this and in order to achieve objectives proposed in the concept paper

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on Alternative Investment Funds (AIF) Regulations, the minimum investment amount per client was increased from the existing ` 5 lakh to ` 25 lakh by amending regulation 15(1A) of the aforesaid regulations.

ii. Segregation of Unlisted Securities

Regulation 16(8) of the SEBI (Portfolio Managers) Regulations was amended in 2008 to provide for segregation of securities of clients by the portfolio manager in separate demat accounts. However, this requirement was applicable only for listed securities. Hence, pooling was being done by portfolio managers in case of unlisted securities. In order to ensure that pooling of securities was

not done by portfolio managers, Regulation 16(8) of SEBI (Portfolio Managers) Regulations was amended to provide for segregation of securities for both listed and unlisted securities in respect of investment by new clients and any fresh investments by existing clients.

VI. Foreign Institutional Investors (FIIs)

i. Formulation of Qualified Foreign Investors framework

In line with the Union Budget speech 2011 and subsequent press release by GoI, it has been decided to allow foreign investors termed as Qualified Foreign Investors (QFI), who meet the prescribed KYC norms, to invest

Box 1.6: Alternative Investment Fund (AIF)i. Regulations for Alternative Investment Funds (AIF) Background and Rationale SEBI (Venture Capital Funds) Regulations (“VCF Regulations”) were framed in 1996 to encourage funding by entrepreneurs’ early-stage companies in India. However, over the years, it could be seen that the Venture Capital Funds (VCF) route was being used by several other funds including Private Equity (PE) funds, Real Estate funds, etc. This made it diffi cult to target concessions and incentives specifi c to VCFs without enabling other funds to avail of such incentives or concessions. Further, the investment restrictions placed on VCFs were sought to be relaxed by such funds registered as VCFs with SEBI. Hence, on one hand, there were a set of funds like VCF which required incentives and concessions and were comfortable with consequent restrictions a� ached and on the other hand there were another set of funds like PE funds which did not require incentives and concessions but required investment fl exibility. Further, since registration of VCF was not mandatory under VCF Regulations, all players in the alternative funds industry were not registered with SEBI. Hence, there was a regulatory gap which needs to be addressed.Alternative Investment Funds (AIF) SEBI proposed a Regulatory framework for Alternative Investment Funds on August 1, 2011 through the concept paper placed on SEBI website for public comments along with the dra� Alternative Investment Funds Regulations. Through this concept paper, SEBI proposed to regulate all funds established in India which are private pooled investment vehicles raising funds from Indian or foreign investors, excluding Mutual Funds and Collective Investment Schemes registered with SEBI. Further, any such pool of funds which is regulated by any other regulator in India like banks, pension funds, etc. was proposed to be excluded from the purview of the proposed Regulations. The existing SEBI (Venture Capital Funds) Regulations, 1996 were proposed to be repealed and replaced by the Alternative Investment Funds Regulations. In response to the Concept paper, more than 100 comments were received from various entities running into more than 600 pages. The comments received from the public were analysed and based on the comments, the dra� AIF Regulations were suitably revised for placing before the Board for approval.

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in equity schemes of Indian mutual funds, permitted Infrastructure Debt Fund (IDF) schemes of mutual funds and Indian equity shares subject to the prescribed terms and conditions. Vide SEBI circulars dated August 9, 2011 and January 13, 2012, the framework for QFI investment in mutual funds and equity shares has been prescribed.

The QFI framework has the objectives of reducing regulatory arbitrage on account of different categories, increase in transparency, simplification of account opening, reduction in time taken to make investment, decrease in transaction cost coupled with FATF level KYC for foreign investors to participate in Indian capital market and to encourage indirect participants to directly participate in Indian capital market. All these aspects will enhance the projection of Indian securities markets and help it make a preferred investment destination by global funds.

ii. Revision of Debt Re-investment Policy

Over a period of time SEBI has been fine tuning the allocation methodology of FII debt limits. Initially, the allocation of FII debt limit was done on a quota basis and then on first come first served basis. As a result, these debt limits were allocated to allottees without any cost. Subsequently, the allocation procedure was changed to the open bidding process. Some of the FIIs that were active participants in debt since beginning and had accumulated investment limits over a period of time continued to have opportunity to increase their share in the investment pool by participating in the subsequent bidding processes.

The FIIs were allowed to re-invest sale proceeds within a period of 5/ 15 days, in order to hold on to their purchased investment limits. This re-investment facility had the following unintended effects:

a) Allowed FIIs to retain the debt investment limits till perpetuity by rolling over their investment during the re-investment period window. The ability to retain limits till perpetuity made the phenomenon anti competitive.

b) Existing allottees continued to hoard debt limits at relatively higher costs through the stock exchange bidding platforms. These costs could be amortised by them over a long period of time, in view of the perpetual nature of limits.

c) The cost of debt seemed uneconomical for the new fund based FIIs entities to participate in the bidding.

d) Tendency to invest in short-term papers.

Due to above factors, it was felt that there is no reason to continue with the facility of re-investment window. Hence, vide SEBI circular dated January 3, 2012, it has been decided to discontinue the re-investment mechanism. Henceforth, for all new allocations of debt limits to FIIs/sub-accounts, no re-investment period shall be allowed and the limits shall come back to the pool once the investment is sold/ redeemed. These limits shall again be allocated in subsequent bidding processes.

The FIIs that have already obtained the debt limits or invested in debt were allowed to continue with the re-investment facility i.e. they may re-invest into debt securities within 5 to 15 business days of the sale or redemption of the earlier investments, until the occurrence of any of the following conditions:

a) The total sales made by an FII from its debt portfolio reaches twice the value of the entire debt portfolio (i.e. the total of the utilised and utilised limit available with the FII); or

b) A period of two years has elapsed since

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from the date of issue of the circular i.e. on January 2, 2014.

It is envisaged that once the re-investment facility is withdrawn, a schedule of auctions calendars would also be possible which would enable the foreign investors to plan their investments based on the bidding session’s calendar.

VII. Takeoversi. Notification of SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations, 2011)

The SEBI (Substantial Acquisition of Shares and Takeovers (SAST)) Regulations, 2011 were notified on September 23, 2011 by repealing the SEBI (SAST) Regulations, 1997. These regulations came into force with effect from October 22, 2011. These regulations were substantially based on the recommendations of the Takeover Regulations Advisory Committee (TRAC), headed by Late C. Achuthan, and the public comments received thereon. The salient features of the Takeover Regulations, 2011 include (a) initial threshold at 25 percent for the trigger of the mandatory open offer against 15 percent as existed earlier (b) minimum offer size of 26 percent against 20 percent as existed earlier (c) no provision for payment of non-compete fee (d) introduction of voluntary offers subject to certain conditions (e) introduction of mandatory recommendation on the open offer by the committee of independent directors of the target company (f) modification of the parameters for determining the open offer price (g) reduced timelines for various activities related to open offer process, etc. Further, a circular was issued on September 23, 2011 specifying the formats for reports/disclosures under various provisions of the takeover regulations. Frequently asked

questions on the Takeover Regulations, 2011 were uploaded on the SEBI website to provide simplistic explanation and clarification of terms and concepts.

Buybacki. Review of Tender Offer Method of

Buyback Process SEBI (Buyback of Securities) Regulations, 1998 were notified on November 14, 1998. Buyback process is being implemented by the companies through either open market purchase method or tender offer method. Over the years, with the advent of new technologies, there has been rapid development in market infrastructure. Therefore, as a part of SEBI’s constant endeavor to align regulatory requirements with the changing market realities as well as to enhance efficiency in the buyback process, the buyback regulations were reviewed and consequently amended vide notification dated February 7, 2012 to introduce certain changes in tender offer method of buyback.

The major changes introduced in the procedure for acceptance of shares in buyback through tender offer process are introduction of record date for determining the entitlement of shareholders, announcement of ratio of buyback as is done in case of rights issues, removal of restriction of shares that can be tendered, reservation to small shareholders, removal of requirement of issuance of public notice and shortened timelines for various activities.

VIII. Surveillance

i. Shareholding of Promoter/Promoter Group to be in Dematerialised Form

In order to further promote dematerialisation of securities, encourage orderly development of the securities market and to improve transparency in the dealings of

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shares by promoters including pledge / usage as collateral, SEBI in consultation with stock exchanges, mandated vide circular dated June 17, 2011 that the securities of companies shall be traded in the normal segment of the exchange if and only if, the company has achieved 100 percent of promoter’s and promoter group’s shareholding in dematerialised form latest by the quarter ended September 2011 as reported to the stock exchanges. In all cases, wherein the companies do not satisfy the above criteria, the trading in securities of such companies shall take place in trade for trade segment.

SEBI received representations from large number of companies as well as various industry bodies regarding practical difficulties being faced in dematerialising promoters holding and seeking exemptions/extension in complying with the provisions. Taking into account the representations received, SEBI vide circular dated September 30, 2011 extended the deadline of quarter ending September 2011 by one quarter i.e. quarter ending December 2011. Further, SEBI vide circular SEBI/Cir/ISD/1/2012 informed that following exemptions shall be taken into consideration while arriving at compliance with 100 percent promoter(s) holding in demat form. Such exemption shall be applicable in cases where:-

a. Promoter(s) have sold their shares in physical mode and such shares have not been lodged for transfer with the company; or

b. Matters concerning part/entire shareholding of promoters/promoter group are sub judice before any Court/Tribunal; or

c. Shares cannot be converted into demat form due to death of any promoter(s); or

d. Shares allotted to promoter(s) that await

final approval for listing from stock exchange and such pendency is less than 30 days or shares that upon receipt of final listing approval from stock exchange are pending conversion to demat and such pendency is less than 15 days.

For availing above mentioned exemptions, companies shall approach stock exchange(s) along with necessary documentary evidence.

IX. Investor Assistance and Education

i. SEBI Toll Free Helpline.

To facilitate replies to various queries of the general public on matters relating to securities market, SEBI has undertaken a new initiative and launched toll free helpline service number 1800 22 7575 on December 30, 2011. The toll free helpline service is available to investors from all over India and is in 14 languages viz. English, Hindi, Marathi, Gujarati, Tamil, Bengali, Malayalam, Telugu, Urdu, Oriya, Punjabi, Kannada, Assamese and Kashmiri. The toll free helpline service is available on all working days during Monday to Friday from 9:30 a.m to 5:30 p.m (excluding declared holidays).

The following services are available to the investors on the toll free helpline number:

a) Guidance pertaining to viz.,• Status of companies - whether unlisted,

sick, delisted, liquidated /wound up etc.• Changes in names of companies pursuant

to amalgamation/merger/demerger etc• Details of Registrar and Share Transfer

Agent of a listed company.• Details and information on names

and addresses of various registered intermediaries of SEBI

• Information on regulatory action taken by SEBI.

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• How to get information on corporate action like Dividend, Bonus, Right issue etc

• How to get latest Net Asset Value for a mutual fund scheme?

• How to lodge a complaint with SEBI?• Against whom to lodge a complaint on

SCORES?• Status of complaint lodged with SEBI.• Names and addresses of various Registrar

of Companies, Official liquidators, BIFR etc

b) Assistance in procedures viz.• How to open demat /client account etc?• Transfer of shares• Transmission of shares• Documents required for transfer/

transmission of shares• Information on what to do if shares are

lost/forged/fake.• Procedure for applying for duplicate

shares• How to apply in an IPO?• Names and address of companies of who

have filed their offer documents with SEBI.

The helpline service does not offer any legal opinion or investment advice to the investors.

X. Retrospect and Prospects

i. Retrospect

Indian economy after exhibiting strong growth for two preceding years treaded on a path to moderate growth, partly mirroring the global turmoil and partly the domestic issues. While the previous two years saw India’s GDP at factor cost growing by 8.4 percent each year, the current fiscal year ended at a growth rate of 6.5 percent. IIP growth has dropped sharply reflecting the unfavourable investment climate being faced by the sector

along with the demand side factors. Services continued driving the growth of the economy while agricultural growth also remained moderately well.

Inflationary pressures triggered monetary tightening which in turn affected the liquidity and investment. Credit growth from Banks and other sources increased while the savings rate of the economy declined marginally. The resultant fluctuating exchange rate coupled with the uncertainty in global markets has widened the current account deficit above the tolerable limit.

The securities market opened on a buoyant note with BSE Sensex at 19, 445 on March 31, 2011, but as the year progressed fading global scenario casted its effect on the Indian stock markets as well. The BSE Sensex closed at 17, 404 on March 30, 2012, while recording a high of 19, 811 in April, 2011. On a point to point basis, BSE Sensex recorded a decline of 10.5 percent compared to a growth of 10.9 percent recorded in the previous year. Similar movements were observed in the other barometer of the Indian stock market, the S&P CNX Nifty. It closed at 5,296 on March 30, 2012 while the figure for March 31, 2011 was at 5,834. The decline for Nifty stood at 9.2 percent as compared to a growth of 11.1 percent in the preceding year.

The market capitalisation of BSE Sensex shrunk by 9.1 percent in 2011-12 as against an increase of 10.9 percent recorded in the previous year. For S& P CNX Nifty , the market capitalisation shrunk by 9.0 percent in 2011-12 as compared with 11.5 percent growth that occurred in 2010-11. The turnover in volume of trade at NSE recorded a negative growth of 21.4 percent in 2011-12 as against 13.5 percent in 2010-11 while BSE recorded a near doubling in the negative growth in turnover volume of 39.6 percent in 2011-12 as against 19.9 percent

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in 2010-11.

The turnover and the number of contracts traded at both NSE and BSE in equity derivatives and currency derivative showed an increasing trend in 2011-12 as compared to 2010-11.

The primary market slowed down on account of weak investment climate with fewer companies raising capital. The number of companies which accessed the primary market was 71 in 2011-12 compared to 91 in 2010-11. Amount mobilised in 2010-11 was ` 58, 157 crore registered a sharp downfall to ` 12, 857 crore mobilised during 2011-12. The number of rights issue has declined to 16 from 23 during the same period. Resource mobilisation through the Qualified Institutions’ Placement Mode (QIP) fell down from 49 issues raising ̀ 24,759 crore in 2010-11 to 15 issues raising only ` 2,163 crore during 2011-12.

Mutual funds saw a continuing trend of net outflow of resources during 2011-12. Private sector mutual funds contributed majorly to the redemption, with a net outflow of resources from all mutual funds at ` 22,023 crore in 2011-12 compared to a net outflow of resources of ̀ 49, 406 crore in 2010-11. The FIIs stayed invested in Indian markets with their SEBI registered number moving up to 1,765 by end March 2012 compared to 1,722 by end March 2011. Their net investment was ` 93, 725 crore in 2011-12 against ` 1, 46, 438 crore in the previous year.

ii. Prospects

The overall health of securities markets depends on several factors such as macroeconomic environment, trading and settlement infrastructure, and belief in the integrity of the markets. Among these factors, the latter two continue to be robust with several

forward looking steps being taken by SEBI. The macroeconomic factor has contributed to slightly negative sentiment in the markets. It may however be emphasized that this is more likely to be a temporary phenomenon as the economy shifts from a very high growth path to merely a high growth path. Other factors remaining constant, the securities markets are expected to resume their original trendline. However, SEBI in its endeavour to maintain the integrity of the market and promoting seamless trading, clearing and settlement process in the securities market, has continuously harped on improving the conditions of systemic factors in a persistent manner.

Keeping in view the changing scope and nature of the market structure, SEBI has in the past and in future, will continue to make rules and regulations to preserve and maintain a safe, fair and orderly market to protect the interest of investors, development of the securities market and supervision. Towards achieving the same, SEBI conducts investor awareness and education programme in various parts of the country to make investor an informed investor. SEBI is in constant upgradation of its surveillance mechanism and updates its system to keep pace with the evolving demands of a growing market.

Currently, participation of retail investors in the securities market is insignificant. In view of this, investor assistance and education will continue to be SEBI’s priority area in the future. This would help in developing wide and deep markets aimed at increasing base of savvy investors and thus also help in achieving financial inclusion for the investors in the country. Enhancing the retail participation in mutual funds is a challenge, which can contribute not only to the financial inclusion and can play a balancing role

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vis-a vis potential destabilising effect of varying foreign institutional investments. Introduction of Rajiv Gandhi Equity Saving Scheme proposed in the Union Budget 2012-13 is expected to enhance the retail investor participation directly and through mutual funds.

SEBI has revamped the consent order framework, notified AIF regulations and the exit route for unviable MIIs. Setting up of unified filing and dissemination platform called SEBI Unified Platform for Electronic Reporting - Dissemination (SUPER-D) is under progress and is expected to enhance the disclosures to investors and stakeholders. Implementation of budget proposal for mandatory issue in electronic form of IPOs of Rupees ten crore and above through nation-wide broker network of stock exchanges would further improve the investor participation in primary markets. The KYC process and the KRA put into operation is being strengthened and is contemplated to be applied for the entire financial sector in co-operation with other financial regulators.

Latest budget announcement of allowing Qualified Foreign Investors (QFIs) to access corporate bond market apart from investments in Indian mutual fund schemes and equity market directly is expected to augment the much required flow of foreign capital into the country. It is in this regard; Govt. of India has announced a separate sub-limit of USD One billion for QFIs investment in corporate bonds and mutual fund debt schemes.

In the international forums like IOSCO, SEBI is assuming a larger role as it heads APRC, and is also member of various other committees. This will enhance the knowledge sharing and co-operation in resolving complex cross-border trading issues.

It is, however, to be emphasised that in a dynamic market like securities market, the robustness of the markets is to be preserved through constant endeavour. SEBI will continue to ensure that the markets remain vibrant, fair and safe. Emerging trends such as relative dominance of derivatives market segment over the cash market segment will require effort and attention on the part of the regulator.

PART TWO: REVIEW OF TRENDS AND OPERATIONS

Indian equity markets were impacted by developments in the global macroeconomic space during 2011-12. The unfolding of Eurozone sovereign debt crisis, unprecedented event like US downgrade, the impasse over fiscal and debt problems in the USA, high oil and commodity prices, earthquake in Japan and Middle-east crisis derailed global growth prospects and undermined business and consumer confidence. Indian equity markets were sluggish and bearish trend prevailed for major part of the year. Intensifying concerns over the fragile global economy and its possible transmissions to the domestic front, elevated levels of inflation and depreciation dominated the domestic scene. India’s investment cycle, which was on an upturn since 2003-04, moderated to a soft patch. Anti-inflationary monetary stance by the central bank through monetary tightening measures and resultant firming up of interest rates and growth moderating effects of a persistently high inflation impacted business sentiments. Reflecting the same, business confidence reached a lower level and coupled with wealth effect of correction in equity prices overthrew the investment and expansion plans of corporates.

The primary market for equity issuances was largely restrained in 2011-12 from both demand and supply side. On the demand side, there was a tepid response from investors to issues due to low risk appetite emanating from poor returns of previously listed IPOs and volatile secondary market. From the supply perspective, corporates exhibited cautiousness and abstained from resource mobilisation with the signs of slowdown in global and domestic economy. The amount raised through IPOs and FPOs was substantially lower during 2011-12 compared to previous years. However, the number of and amount mobilised through

public debt issues outstripped those of the earlier years.

Concomitant with the dampened equity investment climate was the moderation in foreign institutional inflows into India on the backdrop of adverse external economic environment and depreciation of Indian rupee. Notwithstanding these, the FII flows were positive in both the equity and debt segments.

Commensurate with the secondary market downtrend, the mutual fund segment faced redemptions pushing the net resource mobilisation to the negative zone. Except for the gold exchange traded funds, balanced schemes and equity schemes other than ELSS, all other schemes faced huge redemptions. Nonetheless, there lies a respite to the segment as the unit holding pattern data of mutual funds for 2011-12 shows considerable improvement in the share of retail investors in the net assets of mutual funds.

1. PRIMARY MARKET

The primary market activities were subdued during 2011-12. Weak macroeconomic and investment environment slackened expansion plans of corporates. This was exacerbated by the negative returns from the previously listed IPOs and declining trend in equity markets. In consonance with dampened returns, the lukewarm investor response for the existing primary market issues adversely affected investor and promoter sentiments. Resource mobilisation by companies through IPOs and FPOs was substantially lower in 2011-12 compared to the previous years. The year was dominated by the non-convertible debenture issues of the public financial and infrastructure institutions.

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Part Two: Review of Trends and Operations

I. Resource Mobilisation

During 2011-12, 71 companies accessed the primary market and raised ` 48,468 crore through public (55) and rights issues (16) as against 91 companies which raised ` 67,609 crore in 2010-11 through public (68) and rights issues (23) (Table 2.1). The weak investment climate led to fall in the number of IPOs and amount raised from new issues market. There were 34 IPOs during 2011-12 as against 53 during 2010-11. The amount raised through IPOs during 2011-12 was considerably lower at ` 5,904 crore as compared to ` 35,559 crore during 2010-11. Of the amount raised through IPOs and FPOs, ` 2,054 crore was through

offer for sale by existing shareholders and five issues used this mechanism to raise resources. The share of public issues in the total resource mobilisation increased to 95.1 percent during 2011-12 from 85.9 percent in 2010-11 whereas share of rights issues declined from 14.1 percent in 2010-11 to 4.9 percent in 2011-12 (Chart 2.1). Of the public issues, the share of debt issues was the largest at 73.5 percent during 2011-12, which is one of the highest in the history of Indian securities market. This is a positive sign for the corporate bond markets as firms are increasingly resorting to public issue of debentures for raising resources.

Table 2.1: Resource Mobilisation through Public and Rights Issues

Particulars 2010-11 2011-12 Percentage share in total amount

No. of issues

Amount (` crore)

No. of issues

Amount (` crore)

2010-11 2011-12

1 2 3 4 5 6 7

1. Public Issues (i)+(ii) 68 58,105 55 46,093 85.9 95.1

(i) Public Issues 58 48,654 35 10,482 72.0 21.6

(Equity/ PCD /FCD)

of which

IPOs 53 35,559 34 5,904 52.6 12.2

FPOs 5 13,095 1 4,578 19.4 9.4

(ii) Public Issues (Bond / NCD) 10 9,451 20 35,611 14.0 73.5

2. Rights Issues 23 9,503 16 2,375 14.1 4.9

Total Equity Issues (1(i)+2) 81 58,157 51 12,857 86.0 26.5

Total Equity and Bond (1+2) 91 67,609 71 48,468 100.0 100.0

Memo Items: Offer for Sale 12 19,036 5 2,054 28.2 4.2

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Chart 2.1 represents the relative share of the four modes of resource mobilisation namely, IPOs, FPOs, bonds and rights issues since 2005-06. It is observed that the share of IPOs has ranged from 12.2 percent to 85.1 percent; FPOs from zero percent to 45.1 percent, bonds from zero percent to 73.5 percent and rights issues from 4.9 percent to 77.9 percent.

Chart 2.1: Share of Broad Category of Issues in Resource Mobilisation (%)

To facilitate quicker resource mobilisation by companies from institutional investors in the domestic market, listed companies resort to Qualified Institutions’ Placement (QIP). Since its introduction, a large number of companies have utilized QIP for raising the much needed funds as is evident in Table 2.2. Securities which can be issued through QIP are equity shares or any securities other

Table 2.2: Resource Mobilisation through Qualified Institutions’ Placement

Particulars 2008-09 2009-10 2010-11 2011-12No.of issues

Amount (` crore)

No.of issues

Amount (` crore)

No.of issues*

Amount (` crore)

No.of issues**

Amount (` crore)

1 2 3 4 5 6 7 6 7Total 2 189 67 42,729 59 25,860 16 2,163of whichCompanies listed at BSE 2 189 66 42,729 50 25,761 16 2,163Companies listed at NSE 2 189 62 38,284 49 23,048 15 2,154

* Includes Equity Shares allotted on conversion of convertible securities issued on QIP basis** Includes one issue of Institutional Placement Programme (Issue Size of ` 470.74 crore) and also equity shares allotted on conversion of convertible securities.Data is revised in few instancesSource: BSE and NSE

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than warrants, which are convertible into or exchangeable with equity shares.

Fewer corporates mobilised resources through QIP during 2011-12 compared to earlier years (Table 2.2). During 2011-12, issuers raised ` 2,163 crore through 16 QIP issues (including one IPP issue that raised ` 470.74 crore) compared to ` 25,850 crore raised through 59 issues during 2010-11. The decline in resource mobilisation through QIP was a reflection of the subdued state of primary markets and postponement of expansion plans of corporates.

The amended Securities Contracts (Regulation) Rules 1957 require the listed companies to achieve and maintain minimum public shareholding, at 25 percent (10 percent for PSUs) by June 2013. SEBI introduced two new avenues for listed companies to increase their level of public shareholding to the specified minimum level viz., Institutional Placement Program (IPP) and Offer for Sale by promoters through stock exchanges. Data for QIP also includes one issue through IPP for 2011-12.

Table 2.3: Sector-wise Resource Mobilisation Sector 2010-11 2011-12 Percentage share in

total amount

No.of issues

Amount (` crore)

No.of issues

Amount (` crore)

2010-11 2011-12

1 2 3 4 5 6 7Private 77 29,385 60 14,293 43.5 29.5Public 14 38,223 11 34,175 56.5 70.5Total 91 67,609 71 48,468 100.0 100.0

Chart 2.2: Sector-wise Resource Mobilisation

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II. Sector-wise Resource Mobilisation

Sector-wise classification reveals that 60 private sector and 11 public sector issues mobilised resources through primary market during 2011-12 as compared to 77 private sector issues and 14 public sector issues in 2010-11. Even though the private sector issues were more in number, the amount raised by them was substantially smaller (`14,293 crore) compared to the public sector issues (Table 2.3). The share of private sector in total resource mobilisation was 29.5 percent in 2011-12 compared to 43.5 percent in 2010-11 (Chart 2.2). The amount raised through public sector issues was 70.5 percent of the total resource mobilisation. This is the third consecutive financial year wherein the public sector issues garnered a larger share of the resource mobilisation in the primary market.

III. Size-wise Resource Mobilisation

Large issues dominated the primary market resource mobilisation in 2011-12 as

about 89.7 percent of resource mobilisation was through issues above ` 500 crore (Table 2.4). However, the number of issues under category of issues having size of ` 500 crore or above declined to 19 in 2011-12 from 26 in 2010-11. The average size of the issue declined to ` 683 crore in 2011-12 from ` 743 crore in 2010-11.

There were 22 mega issues in 2011-12 as compared to 36 mega issues in 2010-11 (Table 2.5). The mega issues mobilised ` 44,852 crore which amounts to 92.5 percent of ` 48,468 crore total resource mobilisation during the year.

The largest issue during 2011-12 was that of the debt issues of National Highway Authority of India (` 10,000 crore) which was followed by Indian Railways Finance Corporation Ltd. (` 6,269 crore) and Hudco Ltd (` 4,685 crore). Power Finance Corporation with its FPO and debt issues garnered more than ` 8,600 crore during 2011-12.

Table 2.4: Size-wise Resource Mobilisation

Issue Size 2010-11 2011-12 Percentage share in total amount

No.of issues

Amount (` crore)

No.of issues

Amount (` crore)

2010-11 2011-12

1 2 3 4 5 6 7

< ` 5 crore 1 2 2 9 0.0 0.0

≥ ` 5 crore & < ` 10 crore 2 11 2 14 0.0 0.0

≥ ` 10 crore & < ` 50 crore 13 455 19 535 0.7 1.1

≥ ` 50 crore & < ` 100 crore 20 1,406 14 1,018 2.1 2.1

≥ ` 100 crore & < ` 500 crore 29 8,479 15 3,438 12.5 7.1

≥ ` 500 crore 26 57,256 19 43,453 84.7 89.7

Total 91 67,609 71 48,468 100.0 100.0

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Table 2.5: Mega Issues in 2011-12*

No. Name of the entity Type of issue

Type of instrument

Date of opening of

issue

Offer size

( ` crore)

Percentage share

in total amount

1 2 3 4 5 6 7

1 Muthoot Finance Ltd IPO Equity 18-Apr-11 901 2.01

2 Future Ventures India Ltd IPO Equity 25-Apr-11 750 1.67

3 Power Finance Corporation Ltd FPO Equity 10-May-11 4,578 10.21

4 L&T Finance Holdings Ltd IPO Equity 27-Jul-11 1,245 2.78

5 Bajaj Hindusthan Ltd Rights Equity 29-Sep-11 1,644 3.67

6 Multi Commodity Exchange of India Ltd IPO Equity 22-Feb-12 663 1.48

7 Shriram Transport Finance Company Ltd. Bond Debt 27-Jun-11 1,000 2.23

8 India Infoline Investment Services Ltd. Bond Debt 4-Aug-11 750 1.67

9 Shriram City Union Finance Ltd. Bond Debt 11-Aug-11 750 1.67

10 Muthoot Finance Ltd. Bond Debt 23-Aug-11 693 1.55

11 Mannapuram Finance Bond Debt 18-Aug-11 442 0.98

12 Religare Finvest Ltd. Bond Debt 9-Sep-11 754 1.68

13 Infrastructure Development Finance Company Ltd. (Tranche 1)

Bond Debt 21-Nov-11 533 1.19

14 L&T Infrastrcture Finance Company Ltd. - Tranche 1

Bond Debt 25-Nov-11 529 1.18

15 Muthoot Finance Ltd.- Tranche 1 Bond Debt 22-Dec-11 459 1.02

16 National Highway Authority of India Bond Debt 28-Dec-11 10,000 22.30

17 Power Finance Corporation Ltd. - Tranche 1 Bond Debt 30-Dec-11 4,033 8.99

18 Infrastructure Development Finance Company Ltd. (Tranche 2)

Bond Debt 11-Jan-12 687 1.51

19 L&T Infrastructure Finance Company Ltd. (Tranche -2)

Bond Debt 10-Jan-12 486 1.07

20 Indian Railways Finance Corporation Ltd. Bond Debt 27-Jan-12 6,269 13.98

21 Housing and Urban Development Corporation Ltd.

Bond Debt 27-Jan-12 4,685 10.44

22 Rural Electification Corporation Ltd. Bond Debt 6-Mar-12 3,000 6.69

*Mega issues include issues above ` 300 crore

IV. Industry-wise Resource Mobilisation

Industry-wise classification reveals that banks/financial institutions raised largest amount of resources during 2011-12. The share of banks/financial institutions was 42.3 percent

of the total resource mobilisation (Table 2.6). The number of issues was the highest for finance sector which through 18 issues raised 26.4 percent of total resource mobilisation.

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Table 2.6: Industry-wise Resource Mobilisation

Industry 2010-11 2011-12 Percentage share in total amount

No. of issues

Amount (` crore)

No. of issues

Amount (` crore)

2010-11 2011-12

1 2 3 4 5 6 7

Banks/Fls 18 17,248 11 20,503 25.5 42.3

Cement & Construction 3 2,841 2 187 4.2 0.4

Chemical 5 247 0 0 0.4 0.0

Electronics 0 0 1 121 0.0 0.2

Engineering 5 1,394 1 217 2.1 0.4

Entertainment 4 715 1 89 1.1 0.2

Finance 3 2,210 18 12,816 3.3 26.4

Food Processing 1 1,245 0 0 1.8 0.0

Healthcare 3 292 1 65 0.4 0.1

Information Technology 1 170 2 138 0.3 0.3

Paper & Pulp 0 0 2 306 0.0 0.6

Plastic 0 0 1 11 0.0 0.0

Power 4 9,469 0 0 14.0 0.0

Printing 1 52 2 71 0.1 0.1

Telecom 0 0 0 0 0.0 0.0

Textile 3 207 0 0 0.3 0.0

Miscellaneous 40 31,519 29 13,943 46.6 28.8

Total 91 67,609 71 48,468 100.0 100.0

2. SECONDARY MARKET

I. Equity Market in India

The equity markets continued their declining trend fuelled by the global crisis spillovers and weak macro-economic trends and forecasts. Investment climate in India remained dampened due to a confluence of worsening cyclical and global factors, as well as by concerns about structural impediments. Inflation remained at an elevated level for major part of the year. RBI has raised its policy rates on 13 occasions since March 2010 amounting to an increase of 350 basis points. As a result, inflation has moderated

significantly since January 2012. The anti-inflationary monetary policy stance has had a dampening effect on investment demand as well as on interest-sensitive components of private consumption. Hardening of interest rates and the sharp depreciation of rupee heavily impacted the corporates. Rupee was one of the most depreciated currencies among major Asian currencies in 2011, partly due to India’s current account deficit. In addition, capital flows moderated and turned more volatile fuelled by risk aversion and sharp shifts in risk appetite.

Even though Indian equity markets faced

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severe pressures during 2011-12, it closed on a positive note. There was a strong pickup in the last quarter led by the rebound in the global equity markets, sustained FII inflows, fall in inflation and softening interest rates.

During 2011-12, the BSE Sensex and S&P CNX Nifty declined by 10.5 percent and 9.2 percent, respectively, over March 31, 2011 (Chart 2.3). The BSE Sensex declined by 2014 points to close at 17,404 on March 30, 2012 compared to 19,445 on March 31, 2011. The S&P CNX Nifty also declined 538 points to close at 5296 at the end of March 2012 over 5834 at the end of March 2011.

BSE Sensex and S&P CNX Nifty reached their maximum on April 6, 2011, when the indices touched the levels of 19811 and 5944 respectively. The lowest level for the financial year was reached on December 20, 2011 when BSE Sensex and S&P CNX Nifty touched 15136 and 4531, respectively.

In tandem with the decline in stock prices in 2011-12, there was a significant decline in turnover and market capitalisation across the board. In the cash segment, the turnover at BSE and NSE declined by 39.6 percent and 21.4 percent respectively during 2011-12 as compared to a rise of 0.5 percent and 30 percent, increase during 2010-11. While derivatives turnover at BSE showed an exponential rise as compared to previous year but NSE gained by 7.2 percent over the previous year. During 2011-12, market capitalisation at BSE witnessed a decline of 9.1 percent and that at NSE witnessed a decline of 9.0 percent. Although there was a decline in P/E ratios over the past year, they still reigned high in comparison with other emerging markets. In spite of the bearish trend in the stock markets and the comparatively high PE ratios, FIIs were bullish on Indian stock markets. Volatility, measured by annualised

Chart 2.3 Movements of Benchmark Stock Indices

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Table 2.7: Major Indicators of Indian Stock MarketsItem 2008-09 2010-11 2011-12 Percentage Variation over

the Previous Year2010-11 2011-12

1 2 2 3 4 5A. Indices BSE Sensex Year-end 9709 19445 17404 100.3 -10.5 Average 12366 18605 17423 50.5 -6.4 S&P CNX Nifty Year-end 3021 5834 5296 93.1 -9.2 Average 3731 5584 5243 49.7 -6.1 S&P CNX 500 Year-end 2295 4626 4222 101.6 -8.7 Average 2951 4578 4186 55.1 -8.6B. Annualised Volatility (percent) BSE Sensex 43.58 21.1 20.2 -51.5 -4.2 S&P CNX Nifty 41.54 21.4 20.4 -48.6 -4.4C. Total Turnover ( ` crore) Cash Segment (All-India) 38,52,097 46,82,437 34,84,381 21.6 -25.6 of which BSE 11,00,074 11,05,027 6,67,498 0.5 -39.6 NSE 27,52,023 35,77,410 28,10,892 30.0 -21.4 Equity Derivatives Segment 1,10,22,257 2,92,48,375 3,21,58,208 165.4 9.9 of which BSE 11,775 154 8,08,476 -98.7 * NSE 1,10,10,482 2,92,48,221 3,13,49,732 165.6 7.2D. Market Capitalisation ( ` crore) BSE 30,86,075 68,39,083 62,14,941 121.6 -9.1 NSE 28,96,194 67,02,616 60,96,518 131.4 -9.0E. P/E Ratio BSE Sensex 13.65 21.2 17.8 54.9 -15.9 S&P CNX Nifty 14.3 22.1 18.7 54.8 -15.5 S&P CNX 500 13.13 20.2 18.3 53.6 -9.1

* indicates an exponential growth rate for BSE due to lower base.Source: BSE and NSE

standard deviation, declined marginally in 2011-12 compared to the previous year.

The downturn witnessed in the stock markets was widespread in all the sectors including mid-cap and small cap. The highest fall in BSE Sensex was observed on September 22, 2011 (4.1 percent), followed by February 27, 2012 (2.7 percent) and November 21, 2011

(2.6 percent). The highest gain of 3.6 percent was observed on August 29, 2011 for BSE Sensex.

International comparison indicates that the majority of the indices witnessed major corrections during 2011-12. Global economy was hit by a barrage of shocks during 2011-12 in the form of earthquake and tsunami in

49


Japan, unrest in the Middle East oil producing countries, high oil and commodity prices and downgrading of USA by S&P. Yet again, the year was unprecedented as it entered a dangerous phase. Intensifying concerns on the deteriorating Euro crisis transmitted market stress across the world posing severe threat to financial stability. Slowdown in global growth, in particular of advanced economies portended, the onset of an imminent recession for the world.

Emerging economies and their stock markets could not remain immune to these developments. The uncertainties in the financial markets, changing risk appetite, slowdown in exports due to low growth in US and Euro area, consequences of de-leveraging in the Euro area and hugely volatile capital

flows intensified the risks for the emerging markets. However, owing to a vast set of collective policy actions in the Euro area, fiscal adjustments plans, and infusion of fiscal discipline, outlook has improved since the beginning of 2012. The recent growth statistics of USA has also shown improvements. As a result there has been a rebound in the equity markets towards the end of 2011-12.

Among the emerging markets the annual return on a point-to-point basis was the highest in Thailand (12.4 percent), followed by Indonesia (11.9 percent) and Mexico (5.5 percent). India’s stock return was negative as BSE Sensex and S&P CNX Nifty registered a decline of 10.5 percent and 9.2 percent respectively (Chart 2.4).

Chart 2.4: Year-on-Year Return of International Indices

Source: Bloomberg Services

50


Of the developed markets, only gain was recorded by USA (10.8 percent) and Japan (3.9 percent). Ironically, both countries had faced crises of historic dimensions during the year. The highest decline, among various markets was witnessed in China (23.7 percent) followed by Russia (20.7 percent) and Hungary (19.4 percent).

II. Performance of Major Stock Indices and Sectoral Indices

The downtrend in the stock markets was not confined to frontline indices. Majority of the indices declined significantly during 2011-12 as shown in Tables 2.8 & 2.9 and Charts 2.5 & 2.6. Among the broad-based BSE indices, BSE 100, BSE 200 and BSE 500 recorded a decline of 9.2 percent, 9.3 percent and 9.1 percent respectively over the previous year.

Table 2.8: Major Stock Indices and their Percentage Variation

Year/ Month

BSE Sensex

Percentage Variation

BSE 100


S&P CNX Nifty


CNX Mid-cap


S&P CNX 500


1 2 3 4 5 6 7 8 9 10 11

2008-09 9709 -37.9 4943 -40.0 3021 -36.2 3408 -45.4 2295 -40.0

2009-10 17528 80.5 9300 88.1 5249 73.8 7705 126.1 4313 87.9

2010-11 19445 10.9 10096 8.6 5834 11.1 8040 4.3 4626 7.3

2011-12 17404 -10.5 9164 -9.2 5296 -9.2 7711 -4.1 4222 -4.1

Apr-11 19136 -1.6 9992 -1.0 5750 -1.4 8201 2.0 4615 -0.2

May-11 18503 -3.3 9721 -2.7 5560 -3.3 8065 -1.7 4493 -2.7

Jun-11 18846 1.9 9804 0.9 5647 1.6 7972 -1.2 4523 0.7

Jul-11 18197 -3.4 9537 -2.7 5482 -2.9 8017 0.6 4424 -2.2

Aug-11 16677 -8.4 8728 -8.5 5001 -8.8 7295 -9.0 4038 -8.7

Sep-11 16454 -1.3 8613 -1.3 4943 -1.2 7094 -2.8 3978 -1.5

Oct-11 17705 7.6 9197 6.8 5327 7.8 7267 2.4 4216 6.0

Nov-11 16123 -8.9 8331 -9.4 4832 -9.3 6641 -8.6 3811 -9.6

Dec-11 15455 -4.1 7928 -4.8 4624 -4.3 6112 -8.0 3598 -5.6

Jan-12 17194 11.2 8970 13.1 5199 12.4 7101 16.2 4083 13.5

Feb-12 17753 3.3 9321 3.9 5385 3.6 7706 8.5 4276 4.7

Mar-12 17404 -2.0 9164 -1.7 5296 -1.7 7711 0.1 4222 -1.3Source: BSE and NSE

The BSE Small-cap index recorded a decline of 18.9 percent during 2011-12. Similarly, among the NSE indices, the S&P CNX 500, CNX Nifty Junior and CNX Mid-cap declined by 8.8 percent, 4.1 percent and 4.1 percent respectively in 2011-12.

Only few sectoral indices exhibited a positive return during 2011-12. The highest increase among sectoral indices during 2011-12 was recorded by BSE FMCG index (24.9 percent) followed by BSE Healthcare index (10.0 percent), BSE Auto index (9.1 percent) and BSE Consumer Durables index (2.6 percent). Among the sectoral indices of BSE, decline was the highest for BSE Metal index (29.2 percent), followed by BSE Capital Goods index (24.2 percent), BSE Realty index (24.0 percent) and BSE oil index (21.0 percent) (Chart 2.5).

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Chart 2.5: Movement of Sectoral Indices of BSE

Source: BSE

Table 2.9: Sectoral Stock Indices and their Returns

Year/ Month

CNX IT


CNX Bank


CNX PSE


BSE Oil and Gas


BSE FMCG


1 2 3 4 5 6 7 8 9 10 112008-09 2319 -55.3 4133 -22.2 2454 -1.2 7053 9.9 2036 17.12009-10 5856 152.6 9460 128.9 3766 53.5 10159 44.0 2831 39.12010-11 7148 22.1 11705 23.7 3567 -5.3 10241 0.8 3596 27.02011-12 6516 -8.8 10213 -12.8 2900 -18.7 8088 -21.0 4493 24.9Apr-11 6718 -6.0 11484 -1.9 3566 0.0 10008 -2.3 3755 4.4May-11 6539 -2.7 11021 -4.0 3359 -5.8 9594 -4.1 3858 2.7Jun-11 6625 1.3 11245 2.0 3394 1.0 9208 -4.0 4045 4.9Jul-11 6335 -4.4 10894 -3.1 3294 -2.9 8799 -4.4 4093 1.2Aug-11 5451 -14.0 9533 -12.5 3087 -6.3 8353 -5.1 3950 -3.5Sep-11 5679 4.2 9468 -0.7 3051 -1.2 8494 1.7 3910 -1.0Oct-11 6279 10.6 9990 5.5 3095 1.4 8988 5.8 4197 7.3Nov-11 5893 -6.1 8564 -14.3 2838 -8.3 8153 -9.3 4041 -3.7Dec-11 6139 4.2 7969 -7.0 2654 -6.5 7529 -7.6 4035 -0.1Jan-12 6194 0.9 9919 24.5 2886 8.7 8500 12.9 4074 1.0Feb-12 6607 6.7 10414 5.0 3097 7.3 8712 2.5 4167 2.3Mar-12 6516 -1.4 10213 -1.9 2900 -6.3 8088 -7.2 4493 7.8

Source: BSE and NSE

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Chart 2.6: Movement of Sectoral Indices of NSE

Source: NSE

The movement of sectoral indices at NSE is depicted in Chart 2.6. During 2011-12, the highest increase was witnessed in CNX FMCG (24.4 percent), followed by CNX Petrochemicals (11.3 percent) and CNX MNC (7.8 percent). Of the other indices at NSE, the highest decline was witnessed in CNX PSE index (18.7 percent), CNX Bank (12.8 percent) and CNX Finance index (10.5 percent).

III. Turnover in Indian Stock Market

In consonance with the declining trend in equity prices, there was a fall in the trading volumes in stock exchanges in 2011-12. The turnover of all stock exchanges in the cash segment declined by 25.6 percent from ` 46,85,034 crore to ` 34,84,381 crore in 2011-12 (Table 2.10). BSE and NSE together contributed 99.8 percent of the turnover, of

which NSE accounted for 80.7 percent in the total turnover in cash market whereas BSE accounted for 19.2 percent of the total. Apart from NSE and BSE, the only stock exchange which recorded turnover during 2011-12 was Calcutta Stock Exchange. There was hardly any transaction on other stock exchanges. The turnover at BSE and NSE declined by 39.6 percent and 21.4 percent, respectively in 2011-12 over the levels recorded in 2010-11. Month-wise, BSE and NSE together recorded the highest turnover in February 2012 followed by March 2012 and April 2011 (Table 2.11).

Broadening and widening of the geographical reach of the capital market could be observed from the city-wise turnover(Table 2.12). About 60.4 percent of the total turnover of NSE and 39.4 percent of BSE was concentrated in Mumbai and Thane, the

53


Table 2.10: Exchange-wise Cash Segment Turnover (` crore)

Stock Exchange 2009-10 2010-11 2011-12 Percentage Share1 2 3 3 4

Recognized Stock ExchangesAhmedabad Nil Nil Nil NilBSE 13,78,809 11,05,027 6,67,498 19.2Bangalore Nil Nil Nil NilBhubaneswar Nil Nil Nil NilCochin Nil Nil Nil NilCoimbatore Nil Nil Nil NilDelhi Nil Nil Nil NilGauhati Nil Nil Nil NilISE Nil Nil Nil NilJaipur Nil Nil Nil NilCalcutta 1,612 2,597 5,991 0.2Ludhiana Nil Nil Nil NilMadras Nil Nil Nil NilMPSE Nil Nil Nil NilNSE 41,38,023 35,77,410 28,10,892 80.7OTCEI Nil Nil Nil NilPune Nil Nil Nil NilUPSE 25 0.12 Nil NilVadodara Nil Nil Nil NilTotal 55,18,469 46,85,034 34,84,381 100.00

Source: Various Stock Exchanges

Table 2.11: Turnover at BSE and NSE: Cash SegmentYear / Month BSE NSE Total Turnover

(` crore)Turnover (` crore)


Turnover (` crore)


1 2 3 4 5 62008-09 11,00,074 -30.3 27,52,023 -22.5 38,52,0972009-10 13,78,809 25.3 41,38,023 50.4 55,16,8332010-11 11,05,027 -19.9 35,77,410 -13.5 46,82,4372011-12 6,67,498 -39.6 28,10,893 -21.4 34,78,390Apr-11 69,337 -4.3 2,28,348 -10.7 2,97,685May-11 59,494 -14.2 2,33,876 2.4 2,93,370Jun-11 59,337 -0.3 2,22,457 -4.9 2,81,794Jul-11 59,555 0.4 2,30,003 3.4 2,89,558Aug-11 53,301 -10.5 2,35,253 2.3 2,88,554Sep-11 54,360 2.0 2,35,270 0.0 2,89,630Oct-11 43,515 -19.9 1,93,293 -17.8 2,36,808Nov-11 43,872 0.8 2,06,344 6.8 2,50,216Dec-11 39,492 -10.0 1,88,886 -8.5 2,28,378Jan-12 52,571 33.1 2,36,872 25.4 2,89,443Feb-12 69,947 33.1 3,27,808 38.4 3,97,755Mar-12 62,717 -10.3 2,72,482 -16.9 3,35,199

Source: BSE and NSE

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Table 2.12: City-wise Turnover of Top 20 Cities in Cash Segment during 2011-12BSE NSE

City Turnover (` crore)

Percentage Share in

CashTurnover

City Turnover (` crore)

Percentage Share in

Cash Turnover1 2 3 4 5 6

Mumbai / Thane 2,63,275 39.4 Mumbai / Thane 16,98,837 60.4Delhi/Ghaziabad 72,707 10.9 Calcutta / Howrah 2,41,552 8.6Ahmedabad 63,130 9.5 Delhi/Ghaziabad 2,36,551 8.4Calcutta / Howrah 33,381 5.0 Ahmedabad 1,71,378 6.1Rajkot 32,891 4.9 Cochin/Ernakulam/Parur/

Kalamserry/Alwaye47,370 1.7

Baroda 12,733 1.9 Hyderabad/Secunderabad/Kukatpally

39,968 1.4

Ghaziabad 6,325 0.9 Rajkot 39,693 1.4Jaipur 6,136 0.9 Chennai 39,162 1.4Pune 4,073 0.6 Bangalore 13,605 0.5Indore 2,898 0.4 Baroda 11,836 0.4Chennai 2,551 0.4 Indore 11,804 0.4Hyderabad/Secunderabad/Kukatpally

2,137 0.3 Jaipur 9,937 0.4

Bangalore 2,009 0.3 Pune 6,477 0.2Ludhiana 1,015 0.2 Coimbatore 6,394 0.2Cochin/Ernakulam/Parur/Kalamserry/Alwaye

949 0.1 Kanpur 3,784 0.1

Gurgaon 692 0.1 Ludhiana 2,413 0.1Chandigarh/Mohali/Panchkula

451 0.1 Patna 642 0.0

Coimbatore 416 0.1 Guwahati 147 0.0Gajuwaka/Vishakapatanam

109 0.0 Mangalore 92 0.0

Noida 50 0.0 Bhubaneshwar 18 0.0Others 1,59,570 23.9 Others 2,29,234 8.2

Total 6,67,498 100.0 28,10,894 100.0

Source: BSE and NSE

financial hub of the country. At NSE, Calcutta /Howrah contributed 8.6 percent and Delhi/Ghaziabad accounted for 8.4 percent of the turnover. On the other hand at BSE, Delhi/Ghaziabad and Ahemedabad accounted 10.9 percent and 9.5 percent respectively. The top five cities accounted for 85.2 percent of turnover at NSE during 2011-12 compared to 84.8 percent in 2010-11. At BSE, 69.7 percent of turnover is contributed by top five cities.

IV. Market Capitalisation

Market capitalisation is a major indicator that indicates size of the stock market. A higher market capitalisation reflects growing stock market activities and an upward trend in stock markets. The market capitalisation of BSE has been higher than that of NSE in India reflecting large number of shares being listed in BSE. The market capitalisation of BSE

55


declined by 9.1 percent to ` 62,14,941 crore in 2011-12 from ` 68,39,084 crore at the end of March 2011. On the other hand, at NSE market capitalisation declined by 9.0 percent to ` 60,96,518 crore in 2011-12 from ` 67,02,616 crore at the end of March 2011. Reflecting fall in stock prices, the market capitalisation of BSE witnessed downturn in every month except in April 2011, November 2011, January 2012 and February 2012, when there was an increase over the previous month. At NSE, market capitalisation increased during the months of April 2011, June 2011, November 2011, January 2012 and February 2012.

During 2011-12, market capilatisation of BSE Sensex declined by 6.2 percent whereas

that of BSE Teck, BSE Bankex and BSE PSU declined by 6.9, 10.7 and 17.7 percent respectively (Table 2.13).

Market capitalisation of the shares included in S&P CNX Nifty declined by 7.0 percent during the financial year. At NSE, market capitalisation of Nifty (except CNX Midcap), declined during 2011-12 compared to the previous year. The market capitalisation of CNX Midcap rose by 1.9 percent in 2011-12 on top of a decline of 1.5 percent in the previous year. At NSE, among sectoral indices, decline in market capitalisation was the highest for CNX Bank (10.9 percent) followed by CNX IT (8.4 percent) (Table 2.14).

Table 2.13: Market Capitalisation at BSE (` crore)

Year/ Month

All Listed Companies


BSE Sensex Percentage Variation

BSE- Teck Percentage Variation

Bankex Percentage Variation

BSE PSU Percentage Variation

1 2 3 4 5 6 7 8 9 10 11

2010-11 68,39,084 10.9 15,55,322 17.0 3,71,709 17.4 4,37,544 24.5 19,48,555 12.4

2011-12 62,14,941 -9.1 14,59,141 -6.2 3,45,958 -6.9 3,90,614 -10.7 16,03,085 -17.7

Apr-11 69,08,086 1.0 15,31,657 -1.5 3,57,513 -3.8 4,31,282 -1.4 19,75,124 1.4

May-11 67,31,868 -2.6 14,81,218 -3.3 3,49,405 -2.3 4,14,034 -4.0 18,81,568 -4.7

Jun-11 67,30,946 0.0 15,08,980 1.9 3,55,625 1.8 4,23,483 2.3 18,73,931 -0.4

Jul-11 66,17,272 -1.7 14,57,241 -3.4 3,50,928 -1.3 4,11,329 -2.9 18,22,502 -2.7

Aug-11 60,61,625 -8.4 13,70,468 -6.0 3,11,205 -11.3 3,62,418 -11.9 16,70,714 -8.3

Sep-11 59,53,887 -1.8 13,52,536 -1.3 3,15,793 1.5 3,60,755 -0.5 16,24,248 -2.8

Nov-11 62,40,155 4.8 13,21,153 7.6 3,25,613 8.4 3,27,133 5.6 16,57,431 2.0

Nov-11 56,72,255 -9.1 13,21,153 -9.2 3,25,613 -4.9 3,27,133 -14.1 15,04,630 -9.2

Dec-11 53,48,645 -5.7 12,66,639 -4.1 3,28,296 0.8 3,03,999 -7.1 13,96,327 -7.2

Jan-12 60,59,347 13.3 14,23,862 12.4 3,38,852 3.2 3,78,383 24.5 16,12,998 15.5

Feb-12 63,56,697 4.9 14,70,318 3.3 3,53,079 4.2 3,97,869 5.1 17,02,314 5.5

Mar-12 62,14,941 -2.2 14,59,141 -0.8 3,45,958 -2.0 3,90,614 -1.8 16,03,085 -5.8

Note : Market Capitalisation of all listed companies of BSE PSU index is computed using total market cap. methodology whereas that of BSE Sensex, BSE Teck, BSE Bankex is calculated using free float methodology.Source: BSE

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Table 2.14: Market Capitalisation at NSE(` crore)

Year/ Month

All listed Companies


S&P CNX Nifty


CNX Mid Cap


CNX IT Percentage Variation

CNX Bank Percentage Variation

1 2 3 4 5 6 7 8 9 10 112010-11 67,02,616 11.5 17,55,468 15.1 3,12,736 -1.5 2,78,848 22.0 4,03,234 27.12011-12 6,096,518 -9.0 16,32,058 -7.0 3,18,794 1.9 2,55,463 -8.4 3,59,370 -10.9Apr-11 6,753,614 0.8 17,29,684 -1.5 3,16,701 1.3 2,62,166 -6.0 3,96,093 -1.8May-11 6,569,743 -2.7 16,66,184 -3.7 3,10,579 -1.9 2,54,477 -2.9 3,80,006 -4.1Jun-11 6,574,743 0.1 16,92,504 1.6 3,11,646 0.3 2,57,855 1.3 3,87,896 2.1Jul-11 6,462,238 -1.7 16,43,348 -2.9 3,13,957 0.7 2,46,633 -4.4 3,76,009 -3.1Aug-11 5,921,684 -8.4 15,00,226 -8.7 2,86,186 -8.8 2,12,147 -14.0 3,29,812 -12.3Sep-11 5,820,334 -1.7 14,83,344 -1.1 2,79,644 -2.3 2,21,031 4.2 3,27,657 -0.7Nov-11 6,101,891 4.8 16,17,972 9.1 2,98,655 6.8 2,45,877 11.2 3,51,452 7.3Nov-11 5,547,723 -9.1 14,67,897 -9.3 2,71,799 -9.0 2,30,964 -6.1 3,01,131 -14.3Dec-11 5,232,273 -5.7 14,05,066 -4.3 2,52,304 -7.2 2,40,608 4.2 2,80,203 -6.9Jan-12 5,937,039 13.5 15,79,993 12.4 2,93,219 16.2 2,42,774 0.9 3,48,873 24.5Feb-12 6,233,250 5.0 16,36,390 3.6 3,18,540 8.6 2,59,016 6.7 3,66,308 5.0Mar-12 6,096,518 -2.2 16,32,058 -0.3 3,18,794 0.1 2,55,463 -1.4 3,59,370 -1.9

Note : Market cap. of all NSE indices is based on free float methodology. However, market cap. of all listed companies represent total market cap. of all listed companies at NSE.Source: NSE

V. Stock Market Indicators

The market capitalisation to GDP ratio is an important parameter for evaluation of stock markets. The liquidity of the market can be measured by the traded value to GDP i.e., ratio of value of the shares traded to GDP at current market prices. The all-India cash turnover to GDP ratio declined to 39.1 percent in 2011-12 from 61.1 percent in 2010-11. In the derivative segment also, there was a marginal

decline in the turnover-GDP ratio from 381.1 percent in 2010-11 to 358.7 percent in 2011-12. The market capitalisation to GDP ratio has declined for the second consecutive year in 2011-12. The BSE market capitalisation to GDP ratio has declined from 89.1 percent in 2010-11 to 70.2 percent in 2011-12. Similarly, at NSE also the ratio has declined from 87.3 percent to 68.8 percent over the same period (Table 2.15).

Table 2.15: Select Ratios Relating to Stock Market (Percent)Year BSE Market

Capitalisation to GDP Ratio

NSE Market Capitalisation to

GDP Ratio

Total Turnover to GDP RatioCash Segment

(All-India)Derivatives Segment

(BSE+NSE)1 2 3 4 5

2003-04 43.4 40.5 58.7 77.62004-05 54.3 50.7 53.4 82.12005-06 84.4 78.6 66.8 134.72006-07 85.5 81.2 70.0 178.92007-08 109.5 103.5 109.3 284.12008-09 55.3 51.9 69.0 197.42009-10 95.5 93.1 85.4 273.52010-11 89.1 87.3 61.1 381.12011-12 70.2 68.8 39.3 358.7

Source: CSO and Various Stock Exchange

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The valuation of the shares can be gauged from the price-earning ratio. In contrast to the trend in the previous two years, the P/E ratios of the major indices scaled downward in 2011-12 (Table 2.16). At the end of March 2012, the P/E ratio of BSE Sensex and S&P CNX Nifty were 17.8 and 18.7 respectively as compared to 21.2 and 22.1 respectively as on March 31, 2011. Month-wise data indicate P/E ratios of benchmark indices was lowest in December 2011. During 2011-12, there was a fall in the P/E ratios of all the indices, except CNX PSE.

Nevertheless, CNX IT had the highest P/E ratio compared to other sectoral and mid-cap indices.

A global comparison of the indices shows that India’s PE ratio was moderately low among the emerging markets. The Nikkei index of Japan, IPSA index of Chile, NASDAQ of USA, KOSPI index of Korea, JCI index of Indonesia, TWSE index of Taiwan and MEXBOL index of Mexico had higher P/E ratios in 2011-12 than that of Indian benchmark indices.

Table 2.16: Price to Earnings Ratio

Year/ Month

BSE Sensex BSE 100 S&P CNX Nifty

CNX Mid Cap

CNX IT CNX Bank CNX PSE

1 2 3 4 5 6 7 8

2008-09 13.7 15.3 14.3 9.8 11.5 7.7 18.1

2009-10 21.3 21.1 22.3 15.0 23.5 17.7 15.3

2010-11 21.2 20.7 22.1 17.7 26.6 18.5 15.0

2011-12 17.8 18.8 18.7 18.1 20.9 15.3 15.4

Apr-11 20.5 20.8 21.4 17.7 23.9 17.5 14.9

May-11 19.7 20.0 20.5 16.3 23.4 17.3 13.6

Jun-11 19.9 20.2 20.8 16.2 23.8 17.7 13.7

Jul-11 18.9 19.4 19.8 16.1 22.0 16.9 13.1

Aug-11 18.4 17.4 18.1 15.0 18.9 15.0 13.1

Sep-11 18.0 17.1 17.9 14.6 19.7 14.9 12.9

Oct-11 18.8 17.8 18.9 14.5 20.8 15.7 13.6

Nov-11 17.1 17.8 17.5 15.7 19.8 13.2 19.6

Dec-11 16.4 16.9 16.8 14.6 20.7 12.3 18.4

Jan-12 17.7 18.6 18.5 16.8 19.5 15.0 19.9

Feb-12 18.3 19.3 19.1 18.0 21.1 15.5 16.9

Mar-12 17.8 18.8 18.7 18.1 20.9 15.3 15.4

Source: BSE and NSE

The price to book value (P/B) ratio is another important indicator which measures the returns left for the shareholders after providing for liabilities of a company. The P/B

ratio was the highest for the CNX IT index at 5.9, followed by BSE Sensex at 3.5, and BSE 100 and S&P CNX Nifty at 3.1 and 3.0, respectively (Table 2.17).

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Chart 2.7: P/E ratio of International Stock Market Indices

Source: Bloomberg Services

Table 2.17: Price to Book-Value RatioYear/

MonthBSE Sensex BSE 100 S&P CNX

NiftyCNX Mid

CapCNX IT CNX Bank CNX PSE

1 2 3 4 5 6 7 82008-09 2.7 2.5 2.5 1.3 3.5 1.2 2.22009-10 3.9 4.0 3.7 2.7 7.2 2.5 3.12010-11 3.7 3.7 3.7 2.3 7.4 2.8 2.82011-12 3.5 3.1 3.0 1.9 5.9 2.3 2.1Apr-11 3.6 3.8 3.7 2.4 6.9 2.8 2.8May-11 3.6 3.8 3.5 2.4 6.3 2.7 2.6Jun-11 3.5 3.4 3.5 2.3 6.2 2.7 2.6Jul-11 3.4 3.3 3.4 2.3 6.0 2.6 2.5Aug-11 3.4 3.0 3.0 1.9 5.1 2.1 2.3Sep-11 3.3 2.9 2.9 1.8 5.3 2.1 2.3Oct-11 3.5 3.1 3.2 1.8 5.9 2.3 2.6Nov-11 3.3 2.8 2.9 1.6 5.5 1.9 2.3Dec-11 3.1 2.7 2.8 1.5 5.7 1.8 2.1Jan-12 3.4 3.0 3.0 1.7 5.6 2.2 2.1Feb-12 3.6 3.2 3.0 1.9 5.9 2.4 2.3Mar-12 3.5 3.1 3.0 1.9 5.9 2.3 2.1

Source: BSE and NSE

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VI. Volatility in Stock Markets

Intermittent corrections in the stock prices throughout the year marked the stock market trend during 2011-12. The annualised volatility of BSE Sensex, measured by standard deviation of log returns, declined to 20.2 percent in 2011-12 from 21.1 percent in the previous year. Similar trend was also observed for S&P CNX Nifty which declined to 20.4 percent from 21.4 percent during the same period. Month-wise, volatility in the benchmark indices and the large-cap index, S&P CNX 500, was the highest in September 2011, October 2011 and August 2011, coinciding with significant correction of indices during the months (Table 2.18). The lowest volatility in the benchmark indices was noticed during June 2011 and July 2011. In case of the BSE Mid-cap and BSE Small-cap, the highest volatility was observed

in August 2011 and September 2011. The volatility was high in BSE Small cap index in February 2012 also.

An international comparison of volatility in stock returns indicates that stock prices in emerging markets were generally more volatile than those in developed markets during 2011-12 (Table 2.19 and Chart 2.8). Among the emerging markets, Russia depicted the highest volatility (36.6 percent), followed by Hungary (28.2 percent) and Argentina (26.2 percent). Compared to other emerging markets, India’s stock price volatility was considerably lower during 2011-12. Among the developed markets, the annualised volatility was high in Germany (29.3 percent) followed by the Euro region (29.2 percent), France (29.1 percent) and Hong Kong (25.5 percent).

Chart 2.8: Annualised Volatility of International Stock Market Indices

Source: Bloomberg ServicesNote: Annualised volatility is calculated as daily volatility for the financial year multiplied by the square root of number of trading days during

the period

60


Table 2.18: Daily Volatility of Benchmark IndicesMonth BSE Sensex S&P CNX Nifty BSE 100 BSE Small Cap S&P CNX 500

1 2 3 4 5 6Apr-11 1.1 1.0 1.0 1.2 0.9May-11 1.1 1.1 1.1 0.9 1.1Jun-11 1.0 1.0 0.9 1.0 0.9Jul-11 1.0 1.0 0.9 0.7 0.9Aug-11 1.5 1.5 1.5 1.6 1.4Sep-11 1.6 1.6 1.5 1.2 1.4Nov-11 1.6 1.6 1.5 0.8 1.4Nov-11 1.3 1.3 1.3 1.1 1.2Dec-11 1.5 1.5 1.5 1.1 1.4Jan-12 1.1 1.1 1.1 1.0 1.1Feb-12 1.1 1.1 1.2 1.5 1.3Mar-12 1.3 1.3 1.3 1.0 1.3

Source: BSE and NSE

Table 2.19: Trends in Daily Volatility of International Stock Market Indices during 2011-12

Country Index Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

Ann

ualis

ed

Vola

tility

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15DEVELOPED MARKETS

USA DJIA 0.6 0.6 1.0 0.9 2.6 1.8 1.6 1.8 1.1 0.5 0.5 0.7 20.7USA Nasdaq 0.7 0.9 1.2 1.2 3.2 1.8 2.0 2.1 1.3 0.6 0.7 0.8 24.8UK FTSE 100 0.6 0.6 1.0 0.9 2.6 1.8 1.6 1.8 1.1 0.5 0.5 0.7 21.1Europe DJ Stoxx 1.1 1.0 1.3 1.3 2.7 3.0 2.4 2.5 1.6 1.2 0.9 1.3 29.2France CAC 1.1 1.0 1.3 1.2 2.7 2.9 2.4 2.5 1.6 1.2 0.8 1.3 29.1Germany DAX 1.1 1.1 1.1 0.9 2.7 3.1 2.5 2.5 1.5 1.1 0.9 1.3 29.3Australia AS30 0.8 0.9 1.0 1.0 1.9 1.7 1.6 1.2 1.3 0.8 0.8 0.7 19.2Japan NKY 1.0 1.0 1.0 0.8 1.4 1.7 1.3 1.4 1.1 0.9 0.7 1.0 17.9Hong Kong HIS 0.9 1.0 0.9 1.2 2.2 2.1 2.7 2.0 1.7 1.2 0.9 1.0 25.5Singapore STI 0.6 0.9 0.7 0.7 1.9 1.4 1.7 1.3 1.1 1.0 0.7 0.9 18.1

EMERGING MARKETSTaiwan TWSE 0.9 0.7 0.9 1.0 2.2 2.0 1.4 1.6 1.7 1.1 1.0 0.9 21.6Russia CRTX 1.8 1.8 1.4 1.3 3.1 3.2 3.2 2.8 2.1 1.6 1.7 1.9 36.6Malaysia KLCI 0.5 0.5 0.3 0.4 0.9 1.3 0.9 0.9 0.6 0.5 0.5 0.4 10.9South Korea KOSPI 0.9 1.5 1.0 0.9 2.8 2.8 1.9 1.9 1.7 1.1 0.9 0.7 25.9Thailand SET 0.7 1.2 1.0 1.3 1.6 2.1 2.4 1.2 0.8 0.7 0.7 0.8 21.1China SHCOMP 0.9 1.0 1.1 1.0 1.4 1.3 1.4 1.3 1.1 1.8 1.0 1.1 18.6S. Africa JALSH 1.1 1.0 1.0 0.6 1.7 1.8 1.2 1.5 0.6 0.8 0.7 0.7 17.6Brazil IBOV 1.0 1.0 1.0 1.1 3.0 2.0 2.0 1.5 1.4 0.9 1.2 1.3 25.0Colombia IGBC 1.0 0.8 0.6 1.4 1.7 1.2 1.3 1.5 1.1 1.0 0.8 1.2 18.2Hungary BUX 1.6 1.1 0.6 1.4 2.5 2.6 2.2 2.4 1.4 1.8 1.3 1.0 28.2Egypt HERMES 1.5 1.1 1.0 1.4 1.9 1.5 1.3 2.2 1.2 1.5 1.6 1.4 23.9Indonesia JCI 0.6 0.8 0.8 0.8 3.1 2.8 2.3 1.4 0.9 0.8 1.0 0.6 22.0Argentina IBG 0.9 0.7 1.0 1.0 3.0 1.7 2.5 2.2 1.2 1.4 1.0 1.2 26.2Chile IPSA 0.8 0.5 1.0 0.8 2.6 1.9 2.2 1.4 0.7 0.4 0.6 0.6 20.8Mexico MEXBOL 0.7 0.8 0.8 0.6 2.3 1.9 1.3 1.7 1.1 0.9 0.6 0.7 19.7India BSE Sensex 1.1 1.1 1.0 1.0 1.5 1.6 1.6 1.3 1.5 1.1 1.1 1.3 20.2India S&P CNX Nifty 1.0 1.1 1.0 1.0 1.6 1.6 1.6 1.3 1.5 1.1 1.1 1.3 20.4

Source: Bloomberg, BSE and NSE

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VII. Trading Frequency

Liquidity in stock markets is measured by the trading frequency of listed stocks at BSE and NSE. The number of companies listed at BSE at the end of March 2012 was 5,133. At NSE, the number of companies listed was 1,646 as on March 31, 2012. Trading frequency improved at both the stock exchanges in 2011-12 over the previous financial year. During 2011-12, the number of securities traded in BSE was 3,923 as compared to 3,752 in 2010-11 (Table 2.20). Similarly, the number of securities traded in NSE was higher at 1,627 in 2011-12 compared to 1,541 in 2010-11. The percentage share of securities traded at BSE above 100 days marginally decreased from 85.4 percent in 2010-11 to 81.3 percent in 2011-12. At NSE, this percentage increased from 93.7 percent in 2010-11 to 94.0 percent in 2011-12. The percentage share of securities traded for less than 10 days was 8.2 percent at BSE and 2.7 percent at NSE in 2011-12.

Share of top 10 brokers in annual cash market turnover in 2011-12 at NSE and BSE was 25.3 and 24.6 percent respectively. Share of top 10 securities in annual cash market turnover in 2011-12 at NSE and BSE was 27.1 and 20.0 percent respectively. At NSE, contribution in annual cash market turnover in 2011-12 reveals that proprietary trades, domestic institutions (excluding mutual funds), FIIs, and mutual funds contributed 23.8 percent, 4.3 percent, 19.7 percent and 4.5 percent respectively whereas others (including individuals, partnership firms, HUFs, Trusts, NRIs, etc) contributed 47.7 percent. Similarly at BSE annual cash market turnover data for 2011-12 shows that proprietary trades, domestic institutions (excluding mutual funds), FIIs, and mutual funds contributed 20.7 percent, 2.1 percent, 8.7 percent and 2.3 percent respectively whereas others (including individuals, partnership firms, HUFs, Trusts, NRIs, etc) contributed 66.2 percent (Table 2.21).

Table 2.20: Trading Frequency of Listed Stocks

Trading Frequency (Range of

Days)

2010-11 2011-12BSE NSE BSE NSE

No. of scrips

Traded

Percentage of Total

No. of scrips

Traded

Percentage of Total

No. of scrips

Traded

Percentage of Total

No. of scrips

Traded

Percentage of Total

1 2 3 4 5 6 7 8 9Above 100 3,203 85.4 1,444 93.7 3,190 81.3 1,530 94.0

91-100 28 0.7 7 0.5 37 0.9 5 0.3

81-90 21 0.6 5 0.3 43 1.1 8 0.5

71-80 31 0.8 7 0.5 39 1.0 7 0.4

61-70 35 0.9 11 0.7 35 0.9 5 0.3

51-60 33 0.9 5 0.3 45 1.1 6 0.4

41-50 26 0.7 6 0.4 56 1.4 3 0.2

31-40 29 0.8 8 0.5 53 1.4 3 0.2

21-30 19 0.5 8 0.5 53 1.4 8 0.5

11-20 57 1.5 11 0.7 50 1.3 8 0.5

1-10 270 7.2 29 1.9 322 8.2 44 2.7

Total 3,752 100.0 1,541 100.0 3,923 100.0 1,627 100.0Source: BSE and NSE

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Table 2.21: Share of Brokers, Securities and Participants in Cash Market Turnover (2011-12)S. No. Particulars Percentage Share

NSE BSE1 Share of Top 10 Brokers in annual cash market turnover 25.3 24.6 2 Share of Top 10 Scrips/securities in annual cash market turnover 27.1 20.0 3 Share of participants in annual cash market turnover

i) Proprietary trades 23.8 20.7 ii) Domestic Institutions (excluding MFs) 4.3 2.1 iii) FIIs 19.7 8.7 iv) MFs 4.5 2.3 v) Others 47.7 66.2 Total of (i) to (v) 100.0 100.0

Note: Domestic Institutions (excluding MFs) includes Banks, DFIs, Insurance companies and New Pension Scheme. Others Include Retail, NRI and QFI.

Source: BSE and NSE

VIII. Activities of Stock Exchanges

Over the years, NSE and BSE have emerged as the nation-wide stock exchanges of the country contributing more than 99 percent

of the total turnover. Apart from NSE and BSE, only Calcutta stock exchange reported some transactions during 2011-12 (Table 2.22).

Table 2.22: Trading Statistics of Stock ExchangesStock Exchange Quantity of Shares Value of Shares Delivered

(` crore) Traded (lakh) Delivered (lakh)2010-11 2011-12 2010-11 2011-12 2010-11 2011-12

1 2 3 4 5 6 7Recognized Stock Exchanges

Ahmedabad Nil Nil Nil Nil Nil NilBSE 9,90,776 6,54,137 3,76,710 2,55,999 3,02,126 1,81,560

(35.4) (28.9) (43.1) (36.5) (23.6) (18.7)Bangalore Nil Nil Nil Nil Nil NilBhubaneswar Nil Nil Nil Nil Nil NilCalcutta 778 1,681 601 1,380 1,299 3,119

(0.0) (0.1) (0.1) (0.2) (0.1) (0.3)Cochin Nil Nil Nil Nil Nil NilCoimbatore Nil Nil Nil Nil Nil NilDelhi Nil Nil Nil Nil Nil NilGauhati Nil Nil Nil Nil Nil NilISE Nil Nil Nil Nil Nil NilJaipur Nil Nil Nil Nil Nil NilLudhiana Nil Nil Nil Nil Nil NilMadras Nil Nil Nil Nil Nil NilMPSE Nil Nil Nil Nil Nil NilNSE 18,10,910 16,05,205 4,97,367 4,43,232 9,78,015 7,84,407

(64.6) (71.0) (56.9) (63.3) (76.3) (80.9)OTCEI Nil Nil Nil Nil Nil NilPune Nil Nil Nil Nil Nil NilUPSE 0.035 Nil 0.0003 Nil 0.002 Nil

(0.0) (0.0)Vadodara Nil Nil Nil Nil Nil NilTotal 28,02,464 22,61,023 8,74,678 7,00,611 12,81,441 9,69,086

Note: Figures in parentheses indicate percentage share to total.Source: BSE, NSE

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Table 2.23: Turnover of Subsidiaries of Stock Exchanges

Stock Exchange

No. of Subsidiary/

ies

Name of the Subsidiary Turnover of Subsidiary (` crore)


2010-11 2011-121 2 3 4 5 6

Recognised Stock ExchangesAhmedabad 1 ASE Capital Markets Ltd. 27,925 24,671 -11.7Bangalore 1 BgSE Financials Ltd. 18,870 13,197 -30.1Cochin 1 Cochin Stock Brokers Ltd. 5,226 4,045 -22.6Delhi 1 DSE Financial Services Ltd. 5,981 6,817 14.0ISE 1 ISE Securities and Services Ltd. 33,619 31,962 -4.9Jaipur 1 JSEL Securities Ltd. 6,625 3,812 -42.5Ludhiana 1 LSE Securities Ltd. 1,18,728 97,504 -17.9Madras 1 MSE Financial Services Ltd. 1,096 574 -47.7MPSE 1 MPSE Securities Ltd. 10,172 3,681 -63.8

OTCEI 1 OTCEI Securities Ltd. 969 331 -65.8Pune 1 PSE Securities Ltd. 3,436 2,159 -37.2UPSE 1 UPSE Securities Ltd. 3,316 2,749 -17.1Vadodara 1 VSE Stock Services Ltd. 20,928 14,971 -28.5Total 2,56,893 2,06,472 -19.6

Source: Various Stock Exchange

During 2011-12, the all India turnover at the stock exchanges declined by 25.6 percent over the previous year. The number of shares traded and delivered and value of shares delivered decreased at BSE, NSE, and Calcutta stock exchange. Of the total quantity of shares traded, NSE had a lion’s share of 71.0 percent, followed by BSE (28.9 percent). NSE had a share of 63.3 percent in the quantity of shares delivered followed by BSE (36.5 percent). In the total value of shares delivered, share of NSE was 80.9 percent, followed by BSE at 18.7 percent.

As many of the RSEs are dormant, their activities are mainly routed through the subsidiaries which have taken up trading membership of BSE and NSE. During 2011-12, all the subsidiaries recorded decline in the volume of transactions except DSE Financial Services Ltd., the subsidiary of Delhi Stock Exchange Association Limited. The total

turnover of all the subsidiaries recorded a decline of 19.6 percent to ` 2,06,472 crore during 2011-12 from ` 2,56,893 crore during the previous year.

IX. Dematerialisation

Dematerialisation of securities is a significant milestone which has transformed the market microstructure of Indian securities markets. There are two depositories in India viz., National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The depositories have set up nation-wide network with proper infrastructure to handle the securities deposited or settled in dematerialised mode in the Indian stock markets.

As on March 30, 2012, 9,741 companies have signed up for dematerialisation at NSDL and 8,329 at CDSL (Table 2.24). At NSDL, quantity of dematerialised securities increased by 23.0 percent to 57,98,010 lakh in

64


2011-12 from 47,13,045 lakh in 2010-11. At CDSL too, the quantity of dematerialised securities increased by 26.4 percent from 10,53,100 lakh in 2010-11 to 13,35,700 lakh in 2011-12. While the quantity of dematerialised shares increased at the depositories, the quantity and value of shares settled in demat declined, primarily following the market downturn and consequent fall in traded value. The total value of demat settled shares declined by 19.4 percent from ` 15,47,196 crore in 2010-11 to ` 12,47,249 crore in 2011-12 at NSDL. The same in case of CDSL declined by 34.0 percent from ` 4,39,931 crore in 2010-11 to ` 2,90,572 crore in 2011-12.

Apart from the equity shares,

Table 2.24: Depository Statistics: Equity Shares

Particulars NSDL CDSL

2010-11 2011-12 2010-11 2011-12

1 2 3 4 5

No. of Companies Signed up (listed and unlisted) 8,842 9,741 7,490 8,329

No. of Companies Available for Demat (listed and unlisted) 8,842 9,741 7,490 8,329

Demat Quantity of Securities* (lakh) 47,13,045 57,98,010 10,53,100 13,35,700

No. of Shares Settled in Demat (lakh) 8,64,169 7,20,656 4,99,336 3,78,325

Value of Shares Settled in Demat ( ` crore) 15,47,196 12,47,249 4,39,931 2,90,572

Market Capitalisation of Companies in Demat ( ` crore)** 78,19,625 62,65,157 66,97,504 63,10,530Note: * Securities includes shares of listed and unlisted companies,mutual fund units,debentures and commercial paper ** CDSL includes both listed and unlisted equity where as NSDL includes only listed equity.Source: NSDL, CDSL

dematerialisation facility is also offered for other instruments like commercial paper and bonds. The total dematerialised value of the commercial papers increased at both NSDL and CDSL (Table 2.25). At NSDL, dematerialised value of commercial paper rose from ` 80,312 crore in 2010-11 to ` 90,019 crore in 2011-12. However, the dematerialised value of commercial paper at CDSL declined from ` 1,324 crore in 2010-11 to ` 1,299 crore in 2011-12. The number of active instruments and dematerialised value of debentures/bonds increased at NSDL in 2011-12 over 2010-11. In CDSL, even though number of active instruments under debentures/bonds declined, the demat value increased in 2011-12.

Table 2.25: Depository Statistics: Debentures / Bonds and Commercial Paper

Particulars Debentures / Bonds Commercial Papers

2010-11 2011-12 2010-11 2011-12

NSDL CDSL NSDL CDSL NSDL CDSL NSDL CDSL

1 2 3 4 5 6 7 8 9

No. of Issuers 590 370 606 410 165 23 197 19

No. of Active Instruments 6,972 4,975 7746 5,687 1,047 68 1,263 75

Demat Value ( ` crore) 8,63,955 30,830 10,29,389 28,443 80,312 1,324 90,019 1,299

Source: NSDL,CDSL

65


Depository participants as a class of intermediary form the backbone of the dematerialised framework in Indian securities market. The geographical coverage of depository participants (DPs) of NSDL and CDSL widened in 2011-12. The DP locations for NSDL were available at 1,554 cities in 2011-12 as compared to 1,422 cities in 2010-11 (Table 2.26). The number of DP locations improved considerably for CDSL also from 1,572 in 2010-11 to 2,104 in 2011-12.

X. DERIVATIVES SEGMENT

The presence and role of derivatives in India, both OTC and exchange traded, has been increasing steadily over the years. These instruments are an important component of the overall financial sector strategy and the broad regulatory objective is to ensure that they are used to their potential in ways that are consistent with both financial development and the contribution of financial markets to economic growth.

A. Equity Derivatives Segment

The equity derivatives segment is the most active derivatives market in India. During 2011-12, turnover of derivatives market exceeded the all-India cash market turnover by over 11 times (Chart 2.9). Trading in derivatives segment is dominated by NSE, which has a share of more than 99 percent of

Table 2.26: Cities according to Number of DP Locations: Geographical SpreadNo. of DP Locations NSDL CDSL

2010-11 2011-12 2010-11 2011-121 2 3 4 5

0 > 10 1,240 1,361 1,443 1,90610-20 84 86 51 8621-50 61 66 50 7451-100 22 24 12 20> 100 15 17 16 18Total 1,422 1,554 1,572 2,104

Note: The number of DP locations at CDSL, includes locations that have back office connected centres of the DPs.Source: NSDL, CDSL

the total turnover.

The total number of contracts traded in the derivative segment of NSE increased by 16.5 percent to 120,50,45,464 in 2011-12 from 103,42,12,062 in 2010-11, whereas, at BSE, the number of contracts traded increased exponentially from 5,623 in 2010-11 to 2,50,55,608 in 2011-12. The value of the contracts traded in the derivative segment of NSE increased by 7.2 percent to ` 3,13,49,732 crore in 2011-12 from ̀ 2,92,48,221 crore in 2010-11, whereas the turnover at the derivatives segment of BSE increased exponentially to ` 8,08,476 crore in 2011-12 from ` 154 crore in 2010-11. The open interest in the derivative segment of NSE declined by 12.5 percent to ` 89,049 crore at the end of 2011-12 from ` 1,01,816 crore at the end of 2010-11.

The monthly turnover in the derivatives segment at NSE recorded a mixed trend during 2011-12 (Table 2.27). The highest turnover was recorded in March 2012 (` 29,79,231 crore) followed by August 2011 (` 29,63,749 crore) and September 2011 (` 28,35,264 crore). Growth in the derivates turnover at NSE was the highest in November 2011 when turnover rose by 21.6 percent, followed by February 2012 (17.3 percent) and August 2011 (15.5 percent). The average daily turnover at NSE in 2011-12 increased by 9.7 percent to ` 1, 26,410

66


Chart 2.9: Derivatives Turnover vis-à-vis Cash Market Turnover

Source: BSE, NSE

Table 2.27: Trends in Turnover and Open Interest in Equity Derivatives Year/

MonthNo. of Contracts Turnover (` crore) Open Interest at the End of the Year / Month

No. of Contracts Value(` crore)

NSE BSE NSE BSE NSE BSE NSE BSE1 2 3 4 5 6 7 8 9

2008-09 65,73,90,497 4,96,502 1,10,10,482 11,775 32,27,759 22 57,705 02009-10 67,92,93,922 9,026 1,76,63,665 234 34,89,790 0 97,978 02010-11 103,42,12,062 5,623 2,92,48,221 154 36,90,373 4 1,01,816 02011-12 120,50,45,464 3,22,22,825 3,13,49,732 8,08,476 33,44,473 28,176 89,049 736Apr-11 8,15,40,014 4,925 23,51,300 148 40,07,516 1 1,09,326 0May-11 9,60,41,825 9,054 26,05,138 283 42,40,222 1 1,12,112 0Jun-11 9,07,44,339 2,418 24,38,177 72 32,77,324 38 91,467 1Jul-11 9,13,77,746 1,268 25,64,965 36 37,78,040 18 1,02,002 0Aug-11 11,68,85,761 2,164 29,63,749 58 44,46,681 3 1,09,023 0Sep-11 11,43,05,645 31,782 28,35,264 840 38,68,965 633 93,359 16Oct-11 8,91,40,784 1,88,502 22,33,221 5,061 43,72,207 2,625 1,13,207 71Nov-11 11,03,62,429 8,98,268 27,16,559 23,072 44,95,500 21,553 1,04,196 521Dec-11 11,67,48,014 19,24,485 27,68,863 46,615 35,31,984 45,176 79,867 1,218Jan-12 9,13,96,342 27,92,865 22,51,487 69,155 41,24,155 34,040 1,07,672 1,084Feb-12 9,59,39,660 1,77,03,449 26,41,778 4,34,419 41,30,573 22,172 1,13,452 592Mar-12 11,05,62,905 86,63,645 29,79,231 2,28,718 33,44,473 28,176 89,049 736

Source: BSE and NSE

67


Chart 2.10: Product-wise Share in Derivatives Turnover at NSE and BSE

Source: BSE, NSE

Table 2.28: Product-wise Derivatives Turnover at NSE and BSE(Percent)

Year / Month Index Futures Index Options Single Stock Options Single Stock Futures Total

1 2 3 4 5 6

2008-09 32.4 33.9 2.1 31.6 100.0

2009-10 22.3 45.5 2.9 29.4 100.0

2010-11 14.9 62.8 3.5 18.8 100.0

2011-12 11.7 72.6 3.0 12.7 100.0

Apr-11 12.0 70.0 3.0 15.0 100.0

May-11 11.7 72.7 2.7 12.9 100.0

Jun-11 10.9 73.2 2.7 13.2 100.0

Jul-11 10.4 72.8 3.2 13.6 100.0

Aug-11 11.7 74.6 2.5 11.3 100.0

Sep-11 12.2 73.5 2.7 11.5 100.0

Oct-11 12.0 72.5 3.0 12.6 100.0

Nov-11 12.1 74.1 2.6 11.2 100.0

Dec-11 12.2 75.1 2.6 10.0 100.0

Jan-12 12.8 67.4 4.6 15.2 100.0

Feb-12 10.6 70.7 4.0 14.7 100.0

Mar-12 11.7 73.1 3.1 12.0 100.0

Source: BSE and NSE

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crore from ` 1,15,151 crore in 2010-11.

The product composition of the derivatives market has undergone drastic change in the past one decade (Table 2.28). Prior to 2007, Futures in general and single stock futures, in particular, used to dominate derivatives product in India with an average 58 percent share in total derivatives turnover. But of late, Indian markets are dominated by the index options. During 2011-12, the largest share in the total derivatives turnover has been contributed by index

options with 72.4 percent share in it whereas the share of index options in the total turnover in 2010-11 was 62.8 percent. Share of single stock futures have declined substantially over the years and now constitute a mere 12.8 percent in 2011-12. Index futures share constituted 11.8 percent of the turnover of derivatives market in 2011-12. The share of single stock options declined marginally from 3.5 percent in 2010-11 to 3.1 percent in 2011-12 (Chart 2.10).

Table 2.29: Trends in Index Futures at NSE and BSE

Year / Month

No. of Contracts Notional Turnover (` crore)

Open Interest at the End of the Year / Month

No. of Contracts Value(` crore)

NSE BSE NSE BSE NSE BSE NSE BSE

1 2 3 4 5 6 7 8 9

2008-09 21,04,28,103 4,95,830 35,70,111 11,757 8,28,369 22 12,060 0.3

2009-10 17,83,06,889 3,744 39,34,389 96 5,81,510 0 14,979 0.0

2010-11 16,50,23,653 5,613 43,56,755 154 6,18,576 4 16,941 0.1

2011-12 14,61,88,740 70,73,334 35,77,998 1,78,449 5,71,933 11,693 14,341 305

Apr-11 1,02,71,439 353 2,82,303 10 5,82,528 1 15,948 0

May-11 1,18,88,838 39 3,05,745 1 5,80,131 1 15,311 0

Jun-11 1,03,13,335 487 2,65,178 13 5,01,945 38 13,511 1

Jul-11 1,00,48,859 706 2,65,641 20 4,88,103 18 12,669 0

Aug-11 1,45,85,694 428 3,47,177 11 5,92,303 3 14,047 0

Sep-11 1,47,96,435 19,303 3,46,826 474 5,34,927 193 12,558 5

Oct-11 1,12,89,988 1,07,417 2,65,945 2,730 7,25,872 1,025 18,359 27

Nov-11 1,34,69,578 7,72,190 3,12,139 19,253 6,27,312 12,128 14,103 293

Dec-11 1,38,86,601 15,69,569 3,07,198 37,545 5,59,818 10,857 12,067 252

Jan-12 1,08,56,475 18,99,450 2,50,738 46,639 6,59,119 5,058 16,220 130

Feb-12 1,12,89,436 12,68,794 2,91,138 34,075 6,57,716 10,454 17,144 278

Mar-12 1,34,92,062 14,34,598 3,37,972 37,678 5,71,933 11,693 14,341 305

Source: BSE and NSE

69


Table 2.30: Trends in Single Stock Futures at NSE and BSEYear /

MonthNo. of Stocks Traded

No. of Contracts Notional Turnover (` crore)

Open Interest at the End of the Year / MonthNo. of Contracts Value

(` crore)

NSE BSE NSE BSE NSE BSE NSE BSE NSE BSE1 2 3 4 5 6 7 8 9 10 11

2008-09 250 3 22,15,77,980 299 34,79,642 9 5,11,334 0 15,722 0.02009-10 190 0 14,55,91,240 6 51,95,247 0 9,90,917 0 32,053 0.02010-11 223 0 18,60,41,459 0 54,95,757 0 11,26,190 0 28,354 0.02011-12 217 219 15,83,44,617 3,26,342 40,74,671 10,216 8,86,326 19 24,663 1Apr-11 224 89 1,28,80,705 82 3,53,159 3 13,09,136 0 32,808 0May-11 224 87 1,34,74,455 0 3,36,689 0 12,78,976 0 31,004 0Jun-11 223 87 1,29,93,351 2 3,22,695 0 10,80,354 0 30,152 0Jul-11 229 84 1,22,60,020 532 3,49,891 16 11,90,574 0 31,934 0Aug-11 230 217 1,33,66,537 1,736 3,33,791 47 11,15,081 0 26,659 0Sep-11 228 229 1,33,29,926 7,759 3,26,290 241 10,76,689 51 25,108 1Oct-11 227 228 1,13,58,625 46,749 2,79,971 1,378 12,62,266 198 31,471 6Nov-11 226 228 1,33,98,165 33,048 3,05,421 1,222 11,51,744 1,177 24,838 29Dec-11 226 225 1,27,55,993 73,314 2,79,921 2,152 10,29,721 27,628 22,972 812Jan-12 225 226 1,39,58,030 64,293 3,50,848 1,940 10,54,809 18,451 28,671 682Feb-12 220 224 1,53,06,021 46,795 4,51,869 1,730 10,72,341 59 31,313 2Mar-12 217 219 1,32,62,789 52,032 3,84,126 1,488 8,86,326 19 24,663 1

Source: BSE and NSE

Table 2.31: Trends in Index Options at NSE and BSEYear /

MonthNo. of Contracts Notional Turnover

(` crore)Open Interest at the End of the Year / Month

No. of Contracts Value (` crore)


2008-09 21,20,88,444 373 37,31,502 9 18,09,483 0 27,402 0.02009-10 34,13,79,523 5,276 80,27,964 138 18,19,841 0 47,808 0.02010-11 65,06,38,557 0 1,83,65,366 0 18,90,463 0 55,022 0.02011-12 86,40,17,736 2,47,75,644 2,27,20,032 6,18,342 17,96,546 16,464 47,540 430Apr-11 5,60,31,353 3,348 16,45,881 99 20,19,787 0 58,049 0May-11 6,80,34,536 0 18,92,896 0 22,53,816 0 62,639 0Jun-11 6,48,33,325 0 17,84,570 0 16,23,471 0 45,829 0Jul-11 6,62,68,437 30 18,67,725 1 19,84,471 0 54,377 0Aug-11 8,61,41,851 0 22,09,524 0 26,20,787 0 65,486 0Sep-11 8,31,22,036 4,627 20,85,730 122 21,54,251 386 53,230 10Oct-11 6,39,50,603 21,570 16,21,119 556 22,64,985 1,402 60,293 37Nov-11 8,05,42,787 81,333 20,27,236 2,186 25,67,698 8,247 61,981 199Dec-11 8,68,80,013 2,81,600 21,08,751 6,918 18,39,187 6,691 42,468 155Jan-12 6,24,24,041 8,29,122 15,42,542 20,577 22,43,938 10,531 58,280 272Feb-12 6,53,16,148 1,63,86,797 17,77,220 3,98,579 22,34,206 11,431 60,124 304Mar-12 8,04,72,606 71,67,217 21,56,837 1,89,304 17,96,546 16,464 47,540 430

Source: BSE and NSE

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Table 2.32: Trends in Stock Options at NSE and BSEYear /

MonthNo. of Contracts Notional Turnover

(` crore)Open Interest at the End of the Year / Month

No. of Contracts Value (` crore)


2008-09 1,32,95,970 0 2,29,227 0 78,573 0 2,521 0.02009-10 1,40,16,270 0 5,06,065 0 97,522 0 3,137 0.02010-11 3,25,08,393 0 10,30,344 0 55,144 0 1,499 0.02011-12 3,64,94,371 47,505 9,77,031 1,469 89,668 0 2,504 0Apr-11 23,56,517 1,142 69,958 36 96,065 0 2,522 0May-11 26,43,996 9,015 69,808 282 1,27,299 0 3,158 0Jun-11 26,04,328 1,929 65,733 58 71,554 0 1,975 0Jul-11 28,00,430 0 81,708 0 1,14,892 0 3,022 0Aug-11 27,91,679 0 73,258 0 1,18,510 0 2,831 0Sep-11 30,57,248 93 76,418 2 1,03,098 3 2,463 0Oct-11 25,41,568 12,766 66,187 397 1,19,084 0 3,084 0Nov-11 29,51,899 11,697 71,762 411 1,48,746 1 3,274 0Dec-11 32,25,407 2 72,993 0 1,03,258 0 2,359 0Jan-12 41,57,796 0 1,07,359 0 1,66,289 0 4,500 0Feb-12 40,28,055 1,063 1,21,551 34 1,66,310 228 4,872 7Mar-12 33,35,448 9,798 1,00,296 248 89,668 0 2,504 0

Source: BSE and NSE

Table 2.33: Shares of Various Classes of Members in Derivative Turnover at NSE and BSEYear/Month Turnover ( ` crore) Percentage Share

Trading Members

Trading cum

Clearing Members

Trading cum Self Clearing Members

Total Trading Members

Trading cum

Clearing Members

Trading cum Self Clearing Members

1 2 3 4 5 6 7 82008-09 33,99,848 1,24,60,554 61,84,083 2,20,44,486 15.4 56.5 28.12009-10 48,99,892 2,02,12,013 1,02,15,902 3,53,27,807 13.9 57.2 28.92010-11 75,50,080 3,35,63,069 1,74,04,062 5,85,17,211 12.9 57.4 29.72011-12 79,81,555 3,45,47,595 2,05,54,043 6,30,83,193 12.7 54.8 32.6Apr-11 6,23,294 25,63,359 15,15,977 47,02,630 13.3 54.5 32.2May-11 6,46,422 28,51,315 17,12,547 52,10,283 12.4 54.7 32.9Jun-11 5,83,542 26,55,162 16,37,675 48,76,379 12.0 54.4 33.6Jul-11 5,95,117 28,29,096 17,05,788 51,30,000 11.6 55.1 33.3Aug-11 6,56,922 32,56,825 20,13,858 59,27,605 11.1 54.9 34.0Sep-11 6,29,013 30,95,866 19,47,083 56,71,962 11.1 54.6 34.3Oct-11 5,05,510 24,66,113 15,02,409 44,74,033 11.3 55.1 33.6Nov-11 6,80,699 29,99,799 17,93,730 54,74,228 12.4 54.8 32.8Dec-11 7,61,444 30,81,709 17,74,095 56,17,248 13.6 54.9 31.6Jan-12 6,71,921 25,07,856 14,20,628 46,00,405 14.6 54.5 30.9Feb-12 7,85,153 29,67,397 16,03,610 53,56,160 14.7 55.4 29.9Mar-12 8,42,519 32,73,098 19,26,643 60,42,260 13.9 54.2 31.9

Source: MCX - SX, USE, BSE and NSE

71


Product-wise share in the open interest shows that the notional value of outstanding contracts was the highest for index options (` 47,540 crore) followed by single Stock futures (` 24,663 crore), index futures (` 14,341 crore), and stock options (` 2,504 crore). The tables 2.29 to 2.32 show the product-wise trends in the derivative market in India during the recent years.

The transactions undertaken by trading-cum-clearing members contributed 54.8 percent of the total turnover of the F&O segment in 2011-12. The percentage share in the traded value by trading-cum-self clearing members and trading members was 32.6 percent and 12.7 percent, respectively (Table 2.33).

B. Trend in Currency Derivatives Market

Currency futures trading commenced

in India on August 29, 2008 at NSE. Later, MCX-SX and BSE were also granted permission on October 7, 2008 and October 8, 2008 respectively to start trading in currency derivatives. Subsequently, BSE has stopped its operations in the currency derivatives segment from April 7, 2010. On the other hand, the third exchange, USE started the currency futures trading on September 20, 2010. Even though initially only USD-INR futures were traded, currency futures segment was expanded with the introduction of EURO: INR, GBP: INR and JPY: INR. A new product, currency options was introduced at NSE and USE from October 29, 2010. The currency options was introduced on only USD-INR pair. During 2011-12, total turnover was the highest at NSE (` 46,74,990 crore) followed by MCX-SX (` 37,32,446 crore) and USE (` 14,88,978 crore) (Table 2.34).

Table 2.34: Trends in the Currency Derivatives SegmentMonth/

YearMCX-SX NSE USE

No. of Contracts

Traded

Turnover (` crore)

Open interest at the end of

Month (` crore)

No. of Contracts

Traded

Turnover (` crore)


Month (` crore)

No. of Contracts

Traded

Turnover (` crore)


Month (` crore)

1 2 3 4 5 6 7 8 9 10

2008-09 2,98,47,569 1,48,826 990 3,27,38,566 1,62,563 1,313 NA NA NA2009-10 40,81,66,278 19,44,654 1,951 37,86,06,983 17,82,608 1,964 NA NA NA2010-11 90,31,85,639 41,94,017 3,706 74,96,02,075 34,49,788 13,690 16,77,72,367 7,62,501 1092011-12 77,03,25,229 37,32,446 4,494 97,33,44,132 46,74,990 15,328 31,53,95,543 14,88,978 125Apr-11 5,96,20,093 2,70,381 3,844 7,72,53,546 3,48,467 14,673 2,25,58,731 1,03,427 221May-11 7,76,11,606 3,57,484 3,519 9,45,42,712 4,32,502 15,437 4,50,80,625 2,10,512 252Jun-11 7,91,93,828 3,67,456 5,075 9,66,22,415 4,42,877 19,505 4,97,75,972 2,28,677 886Jul-11 8,83,88,424 4,08,314 7,218 12,22,72,205 5,55,282 27,081 6,19,37,550 2,79,711 1,504Aug-11 9,67,04,293 4,50,762 5,943 12,72,39,855 5,85,123 20,465 7,06,21,231 3,29,582 1,083Sep-11 7,60,98,239 3,71,558 4,836 8,51,42,803 4,11,553 18,213 3,70,34,758 1,94,820 666Oct-11 4,65,31,165 2,33,541 5,484 5,47,05,444 2,73,114 18,247 1,37,36,318 71,145 529Nov-11 5,32,01,472 2,75,674 6,326 6,22,96,040 3,21,666 19,339 77,27,360 38,840 313Dec-11 4,93,36,944 2,64,005 5,269 6,21,58,879 3,31,805 12,886 22,54,601 12,580 168Jan-12 4,72,68,155 2,45,250 5,132 6,94,56,293 3,59,481 15,513 11,31,958 6,609 104Feb-12 4,31,30,073 2,15,374 5,269 5,96,69,874 2,96,896 15,149 9,45,473 5,653 114Mar-12 5,32,40,937 2,72,645 4,494 6,19,84,066 3,16,224 15,328 25,90,966 7,423 124

Source: MCX - SX, BSE and NSE

72


The product-wise share in currency derivatives volume shows that USD-INR futures dominated the currency futures market with an average share of 82.0 percent followed by USD-INR options at 13.7 percent and Euro-INR futures at 2.7 percent (Table 2.35).

Table 2.35: Product-wise market share in Currency Derivatives Volume

(Percent)

Year/Month

USD-INR

Futures

EURO-INR

Futures

GBP-INR

Futures

JPY-INR

Futures

USD-INR

Options

2011-12 82.0 2.7 0.9 0.7 13.7

Apr-11 81.9 2.9 0.7 0.5 14.0

May-11 83.5 3.5 0.8 0.4 11.9

Jun-11 83.1 3.8 1.4 0.5 11.1

Jul-11 80.0 4.5 1.4 0.6 13.5

Aug-11 81.1 3.6 1.0 1.1 13.2

Sep-11 83.0 2.7 0.8 0.8 12.8

Oct-11 83.6 2.2 0.8 0.7 12.7

Nov-11 81.6 1.8 0.8 0.6 15.1

Dec-11 81.4 1.7 1.0 0.6 15.3

Jan-12 80.8 1.7 0.8 0.5 16.2

Feb-12 82.2 1.7 0.9 0.7 14.6

Mar-12 82.3 1.7 0.9 0.8 14.2

Source: MCX-SX, NSE,USE

C. Trends in Interest Rates Derivatives

Trading in ten year notional coupon bearing Government of India (GoI) bond futures started at NSE on August 31, 2009. Further, interest rate futures on 91 day Government of India (GoI) treasury bills (T-bills) started at NSE on July 4, 2011. The trends in turnover and open interest in Interest Rate Derivatives (Ten Year Notional coupon and 91 day T-bill bearing GoI bond futures) at NSE is depicted in Table 2.36. During 2011-12, the total turnover in the interest rate derivatives segment was ` 3,959 crore compared to ` 62 crore in 2010-11.

Table 2.36: Trends in Interest Rate Derivatives at NSE

Year/ Month

Total Open Interest at the end of the year/

month

No. of contracts

Turnover (` crore)

No. of Contracts

Value (` crore)

1 2 3 4 5

2009-10 1,60,894 2,975 758 14

2010-11 3,348 62 1 0

2011-12 2,15,200 3,959 0 0

Apr-11 5 0 0 0

May-11 0 0 0 0

Jun-11 0 0 0 0

Jul-11 1,97,217 3,629 2,963 58

Aug-11 16,927 311 501 10

Sep-11 1,050 19 1 0

Oct-11 1 0 2 0

Nov-11 0 0 1 0

Dec-11 0 0 0 0

Jan-12 0 0 0 0

Feb-12 0 0 0 0

Mar-12 0 0 0 0

3. TRENDS IN THE BOND MARKET

I. Corporate Bond Market

Debt Markets are a vital component of the financial markets particularly for a developing economy like India. Indian debt markets are dominated by the government securities markets. The scope for corporate bond market in India is tremendous as they can act as effective buffers vis-a vis banks financing in infrastructure and power projects. Since 2007, SEBI has taken concerted efforts to revive and develop the hitherto moribund state of the corporate bond markets.

73


The trends in corporate bond markets, viz., OTC trades and trades reported on the exchanges are shown in Table 2.37. While FIMMDA is the reporting platform for the OTC deals in the corporate bond market, BSE and NSE serve as both trading and reporting platform. During 2011-12, the total value of the corporate bond trades at BSE rose by 25.9 percent to ` 49,842 crore from ` 39,581 crore in 2010-11. In NSE, the value of trades for 2011-12 rose by 24.0 percent to ` 1,93,435 crore from ̀ 1,55,951 crore in 2010-11. While the total number of trades reported at FIMMDA has risen in 2011-12 to 33,136, the value of trades reported declined by 14.5 percent to ` 3,50,506

crore over the previous financial year.

With effect from December 1, 2009, it has been made mandatory for all trades in corporate bonds between mutual funds, FIIs/sub-accounts, venture capital funds, foreign venture capital investors, portfolio managers, and RBI regulated entities as specified by RBI to be cleared and settled through the exchange clearing corporations, NSCCL or ICCL. IRDA has also issued similar directions. The value of corporate bond trades settled through the clearing corporations has declined by 10.7 percent to ` 4,01,811 crore in 2011-12 from ` 4,50,123 crore in 2010-11(Table 2.38).

Table 2.37: Secondary Market: Corporate Bond TradesMonth/

YearBSE NSE FIMMDA

No. of Trades Amount ( ` crore)



1 2 3 4 5 6 7

2008-09 8,327 37,320 4,902 49,505 9,501 61,535

2009-10 7,408 53,323 12,522 151,920 18,300 195,955

2010-11 4,465 39,581 8,006 1,55,951 31,589 4,09,742

2011-12 6,424 49,842 11,973 1,93,435 33,136 3,50,506

Apr-11 339 3,060 499 11,886 2,327 22,968

May-11 378 2,613 370 8,205 2,264 19,629

Jun-11 714 4,645 719 15,960 2,997 30,769

Jul-11 665 4,107 915 15,852 2,959 30,776

Aug-11 737 5,730 718 13,658 3,035 33,772

Sep-11 535 3,601 710 10,543 3,618 30,738

Oct-11 350 3,056 913 12,699 2,444 27,510

Nov-11 484 5,304 589 14,552 2,448 27,457

Dec-11 684 6,233 888 17,365 3,323 39,468

Jan-12 574 3,407 1,600 19,152 2,780 28,936

Feb-12 499 4,846 1,878 29,472 2,347 33,696

Mar-12 465 3,239 2,178 24,207 2,594 24,787

Source: BSE, NSE and FIMMDA

74


Table 2.38: Settlement of Corporate BondsMonth NSE BSE Total

No. of Trades Settled

Settled Value (` crore)





1 2 3 4 5 6 72009-10$ 8,922 1,20,006 464 5,482 9,386 1,25,4882010-11 30,948 4,32,632 1,714 17,492 32,662 4,50,1232011-12 34,697 3,91,120 2,930 10,690 37,627 4,01,811Apr-11 2,308 26,157 162 791 2,470 26,948May-11 2,271 22,140 212 444 2,483 22,584Jun-11 2,976 35,009 263 755 3,239 35,764Jul-11 2,919 32,985 286 797 3,205 33,783Aug-11 3,006 35,434 214 1,343 3,220 36,777Sep-11 3,622 32,948 216 848 3,838 33,796Oct-11 2,426 28,009 189 675 2,615 28,684Nov-11 2,467 30,638 269 1,520 2,736 32,159Dec-11 3,201 39,748 279 1,443 3,480 41,191Jan-12 3,227 33,069 249 806 3,476 33,874Feb-12 2,900 41,026 256 503 3,156 41,528Mar-12 3,374 33,958 335 765 3,709 34,723

$ indicats December 2009- March 2010Source: BSE and NSE

Table 2.39: Private Placement of Corporate Bonds Reported to BSE and NSEMonth/

YearListed only on NSE Listed only on BSE Listed Both on NSE and

BSETotal

No. of Issues

Amount (` crore)

No. of Issues

Amount (` crore)

No. of Issues

Amount (` crore)

No. of Issues

Amount (` crore)

1 2 3 4 5 6 7 8 92007-08 580 90,718 120 11,711 44 16,056 744 1,18,4852008-09 699 1,24,810 285 17,045 57 31,426 1,041 1,73,2812009-10 647 1,43,286 597 49,739 34 19,610 1,278 2,12,6352010-11 774 1,53,370 591 52,591 39 12,825 1,404 2,18,7852011-12 1,152 1,89,803 783 56,974 18 14,505 1,953 2,61,283Apr-11 88 10,322 67 8,316 0 0 155 18,639May-11 51 7,405 61 1,543 2 4,650 114 13,598Jun-11 74 17,508 45 1,514 0 0 119 19,022Jul-11 84 15,127 60 7,557 1 100 145 22,785Aug-11 78 16,690 47 3,779 1 1,500 126 21,969Sep-11 106 15,725 60 4,054 2 584 168 20,363Oct-11 92 12,223 57 6,992 0 0 149 19,215Nov-11 99 15,949 96 5,055 1 40 196 21,044Dec-11 137 22,639 91 5,611 4 3,646 232 31,896Jan-12 110 21,992 46 2,572 2 850 158 25,414Feb-12 127 19,278 82 5,814 4 2,635 213 27,727Mar-12 106 14,943 71 4,167 1 500 178 19,610

Source: BSE and NSE

75


The private placement of corporate bonds reported at the exchanges is presented in table 2.39. The issuers have raised ̀ 2,61,283 crore through private placement during 2011-12 which is 19.4 percent higher compared to ` 2,18,785 crore in 2010-11. Although the year has seen a number of public issues, private placements have also remained as one of the preferred modes of raising debt funds. The rise in funds mobilised could also be possibly attributed to issuers preferring the domestic debt markets as a primary source of corporate debt.

II. Wholesale Debt Market

During 2011-12, turnover in the Wholesale Debt Market (WDM) segment increased to ` 6,33,179 crore from ` 5,59,447

crore in 2010-11. The net traded value and average daily traded value increased by 13.2 percent and 17.4 percent, respectively during the same period (Table 2.40). Also, the number of trades increased by 15.0 percent to 23,447 in 2011-12 from 20,383 in 2010-11. The net traded value started increasing towards the end of third quarter and in the fourth quarter. The highest turnover was recorded in December 2011 (` 89,337 crore) followed by January 2012 (` 75,125 crore) and February 2012 (` 55,793 crore). Number of trades was the highest for January 2012 followed by December 2011.

Instrument-wise break-up of the securities traded at the WDM segment of NSE indicates that the share of G-sec in the traded value has been declining in the past few years. Notwithstanding the decline, G-sec still is the

Table 2.40: Business Growth on the Wholesale Debt Market Segment of NSE

Month/Year No. of Trades Net Traded Value (` crore)

Average Daily Traded Value ( ` crore)

1 2 3 4

2008-09 16,129 3,35,950 1,419

2009-10 24,069 5,63,816 2,359

2010-11 20,383 5,59,447 2,256

2011-12 23,447 6,33,179 2,649

Apr-11 1,194 39,752 2,484

May-11 1,136 36,350 1,731

Jun-11 1,791 50,823 2,310

Jul-11 2,012 46,973 2,237

Aug-11 2,411 54,826 2,741

Sep-11 2,122 50,314 2,516

Oct-11 1,643 36,282 2,016

Nov-11 1,567 43,847 2,192

Dec-11 2,971 89,337 4,254

Jan-12 2,999 75,125 3,577

Feb-12 1,979 55,793 2,936

Mar-12 1,622 53,757 2,688

Source: NSE

76


most dominant product in the WDM segment. The share of G-sec in the traded value was 50.4 percent in 2011-12 (Table 2.41). The share of Treasury bills increased from 17.6 percent in 2010-11 to 22.0 percent in 2011-12. The percentage share of PSU/ institutional bonds and ‘others’ which include mainly corporate debt securities, remained almost the same as in the previous financial year, at 19.6 percent and 8.0 percent respectively.

Trading members dominated the WDM segment with a share of 55.5 percent in total turnover in 2011-12 as compared to 53.5 percent in 2010-11 (Table 2.42). The share of financial institutions/mutual funds/corporate almost doubled to 4.2 percent in 2011-12 from 2.4 percent in 2010-11. While the share of Indian banks marginally increased to 14.7 percent in 2011-12, that of, primary dealers and foreign banks declined to 21.4 percent over the previous year.

4. MUTUAL FUNDS

Mutual funds as an intermediation mechanism and products play an important role in India’s financial sector development. Apart from pooling resources from small investors, they also provide informed decision making mechanism to them. Thus they contribute to not only financial sector participation, but also financial inclusion and thereby enhance market efficiency. Additionally they contribute to financial stability and help in enhancing market transparency.

The gross mobilisation of resources by all mutual funds during 2011-12 was at ` 68,19,678 crore compared to ` 88,59,515 crore during the previous year indicating a decline of 23.0 percent over the previous year (Table 2.43). Redemption also declined by 23.2 percent to ` 68,41,702 crore in 2011-12 from

Table 2.41: Instrument-wise Share of Securities Traded in the Wholesale Debt Market Segment of NSE

(Percent)

Month/Year Govt. Dated Securities

Treasury Bills PSU / Institutional Bonds

Others

1 2 3 4 52008-09 69.7 16.9 8.9 4.42009-10 58.2 16.5 15.4 10.02010-11 54.5 17.6 19.6 8.32011-12 50.4 22.0 19.6 8.0Apr-11 45.9 24.2 19.6 10.3May-11 45.7 31.7 14.7 7.8Jun-11 46.4 22.2 20.7 10.7Jul-11 39.4 26.8 21.4 12.4Aug-11 66.0 9.1 18.3 6.6Sep-11 62.9 16.2 16.1 4.8Oct-11 49.2 15.8 27.6 7.4Nov-11 41.4 25.4 26.3 6.9Dec-11 51.0 29.6 14.5 4.9Jan-12 62.9 18.3 13.7 5.1Feb-12 51.4 15.4 23.0 10.3Mar-12 42.0 29.4 19.4 9.2

Source: NSE

77


Table 2.42: Share of Participants in Turnover of Wholesale Debt Market Segment of NSE(Percent)

Month Trading Members

Fls / MFs / Corporates

Primary Dealers

Indian Banks

Foreign Banks

1 2 3 4 5 62008-09 44.7 3.4 6.6 18.1 27.32009-10 49.2 2.6 4.6 19.8 23.72010-11 53.5 2.4 4.2 13.1 26.82011-12 55.5 4.2 4.2 14.7 21.4Apr-11 66.6 0.9 4.8 8.8 18.9May-11 62.6 0.9 5.0 11.7 19.8Jun-11 54.1 2.3 5.8 15.9 22.0Jul-11 58.5 4.2 4.8 13.3 19.2Aug-11 49.0 5.9 6.5 14.5 24.1Sep-11 48.8 5.6 4.3 17.7 23.7Oct-11 58.0 3.4 3.3 11.9 23.4Nov-11 61.4 1.9 2.9 13.1 20.8Dec-11 53.0 4.6 4.4 16.7 21.3Jan-12 48.8 6.1 3.3 16.9 24.9Feb-12 49.2 7.7 2.7 21.4 19.0Mar-12 56.1 6.7 2.5 15.0 19.7

Source: NSE

Table 2.43: Mobilisation of Resources by Mutual Funds (` crore)

Period Gross Mobilisation Redemption Net Inflow Assets at the end of period

1 2 3 4 51999-00 61,241 42,271 18,970 1,07,9462000-01 92,957 83,829 9,128 90,5872001-02 1,64,523 1,57,348 7,175 1,00,5942002-03 3,14,706 3,10,510 4,196 1,09,2992003-04 5,90,190 5,43,381 46,808 1,39,6162004-05 8,39,708 8,37,508 2,200 1,49,6002005-06 10,98,149 10,45,370 52,779 2,31,8622006-07 19,38,493 18,44,508 93,985 3,26,2922007-08 44,64,376 43,10,575 1,53,802 5,05,1522008-09 54,26,353 54,54,650 -28,296 4,17,3002009-10 1,00,19,022 99,35,942 83,080 6,31,9792010-11 88,59,515 89,08,921 -49,406 5,92,2502011-12 68,19,678 68,41,702 -22,024 5,87,217

` 89,08,921 crore in 2010-11. The mutual fund segment recorded a net outflow of ` 22,024 crore in 2011-12 as compared to an outflow of ` 49,406 crore in 2010-11.

The assets under management by all

mutual funds decreased by 0.8 percent to ` 5,87,216 crore at the end of March 2012 from `5,92,250 crore at the end of March 2011.

Private sector mutual funds dominated resource mobilisation efforts during 2011-12.

78


However, the net outflow was larger from private sector mutual funds compared to UTI mutual fund and public sector mutual fund. Nonetheless, net outflows were smaller compared to the previous financial year. The net outflow from private sector mutual funds during 2011-12 at ` 15,446 crore as against a net outflow of ` 19,215 crore in 2010-11 (Table 2.44). UTI mutual fund recorded a net outflow of ` 3,184 crore in 2011-12 compared to net outflow of ` 16,636 crore in 2010-11. Net outflows recorded by public sector mutual funds in 2011-12 was ` 3,394 crore compared to ` 13,555 crore in the previous year. While all the open-ended and interval schemes of mutual funds recorded net outflows, the close-ended schemes of public and private sector mutual funds witnessed net inflows during the financial year.

Gross mobilisation of resources under open-ended schemes during 2011-12 was ` 66,70,526 crore, of which, about 83.4 percent was raised by the private sector mutual funds followed by public sector funds (8.9 percent) and UTI mutual fund (7.7 percent). Similarly, gross resources mobilised under close-ended

schemes stood at ` 1,35,513 crore in 2011-12, of which private sector accounted for 84.9 percent followed by public sector funds (11.6 percent) and UTI mutual fund (3.5 percent).

Scheme-wise pattern reveals that there were huge redemptions from income/debt oriented schemes during 2011-12 (Table 2.45). But the net redemptions from these schemes was lesser than the previous financial year. Among the income/debt oriented schemes, redemptions were highest from debt schemes, followed by money market schemes and gilt schemes. Net resources mobilised were positive for exchange traded funds, balanced funds, fund of funds and equity schemes other than ELSS. Notwithstanding the market downturn, growth/equity oriented schemes witnessed net inflows of ` 121 crore during 2011-12. In the previous financial year, there was a net redemption of `13,138 crore from these schemes. GETFs witnessed a net increase of 62.1 percent to ` 3,646 crore in 2011-12 from ` 2,249 crore in 2010-11. Fund of funds investing overseas mobilised a net amount of `102 crore during 2011-12 as against a net redemption of ` 907 crore during 2010-11.

Table 2.44: Sector-wise Resource Mobilisation by Mutual Funds during 2011-12 (` crore)

Particulars Private Sector MFs Public Sector MFs UTI MF Grand TotalOpen-

endedClose-ended

Interval Total Open-ended

Close-ended

Interval Total Open-ended

Close-ended

Interval Total

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Mobilisation of Funds

55,59,558 1,15,116 9,069 56,83,744 5,96,696 15,695 1,091 6,13,482 5,14,272 4,702 3,479 5,22,453 68,19,679

(67,61,888) (1,12,255) (48,781) (69,22,924) (11,34,871) (13,976) (3,887) (11,52,733) (7,68,968) (2,643) (12,247) (7,84,176) (88,59,515)

Repurchases / Redemption

55,67,914 1,13,318 17,957 56,99,189 6,01,662 13,926 1,289 6,16,877 5,15,947 4,829 4,861 5,25,637 68,41,702

(68,48,705) (46,801) (46,634) (69,42,139) (11,56,064) (6,395) (3,830) (1,66,288) (7,84,176) (4,021) (12,296) (8,00,493) (89,08,921)

Net Inflow / Outflow of Funds

-8,356 1,799 -8,888 -15,446 -4,965 1,769 -198 -3,394 -1,675 -126 -1,382 -3,184 -22,024

(-86,816) (65,454) (2,147) (-19,215) (-21,193) (7,581) (57) (-13,555) (-15,209) (-1,377) (-50) (-16,636) (-49,406)

Note: Figures in parantheses indicate corresponding figures for 2010-11.

79


Table 2.45: Scheme-wise Resource Mobilisation and Assets under Management by Mutual Funds as on March 30, 2012

Schemes No. of Schemes

Gross Funds Mobilised ( ` crore)

Repurchase/Redemption

( ` crore)

Net Inflow/ Outflow of

Funds ( ` crore)

Assets Under Management as on March

30, 2012 ( ` crore)


over March 31, 2011

1 2 3 4 5 6 7

A. Income/ Debt Oriented Schemes

i) Liquid/ Money Market 55 59,46,498 59,53,603 -7,104 80,354 9.1

ii) Gilt 42 4,050 4,070 -20 3,659 7.3

iii) Debt (other than assured returns)

775 8,03,565 8,22,094 -18,529 2,90,844 -0.4

Sub total (i+ii+iii) 872 67,54,113 67,79,766 -25,653 3,74,857 1.6

B. Growth/ Equity Oriented Schemes

i) ELSS 49 2,698 2,841 -143 23,644 -7.5

ii) Others 303 47,921 47,657 264 158,432 -6.7

Sub total (i+ii) 352 50,619 50,498 121 1,82,076 -6.8

C. Balanced Schemes

Balanced schemes 30 5,027 4,645 382 16,261 -11.8

D. Exchange Traded Fund

i) Gold ETF 14 5,265 1,619 3,646 9,886 124.7

ii) Other ETFs 21 3,298 3,921 -623 1,607 -36.2

Sub total (i+ii) 35 8,563 5,540 3,024 11,493 66.1

E. Fund of Funds Investing Overseas

Fund of Funds investing overseas

20 1,356 1254 102 2,530 0.6

TOTAL (A+B+C+D+E) 1,309 68,19,679 68,41,702 -22,024 5,87,217 -0.9

Note: Net Assets of ` 6169.2 crore pertaining to Fund of Funds as on March 30, 2012 is not included in the above data.

The assets under management (AUM) of all the mutual funds declined to ` 5,87,217 crore as on March 30, 2012 from ` 5,92,250 crore a year ago. The AUM was the highest for income/debt oriented schemes at ` 3,74,857 crore while the AUM under growth/equity oriented scheme was ` 1,82,076 crore. In terms of growth in AUM, Gold ETFs (124.7 percent) achieved the highest increase followed by

liquid/money market schemes (9.1 percent) and gilt schemes (7.3 percent) during the year. Even though the net mobilisation was positive for growth /equity oriented schemes their AUM declined by 6.8 percent during 2011-12. Same was the case for balanced funds which faced a decline in AUM of 11.9 percent. The highest decline in AUM was in the ETF category other than gold at 36.2 percent.

80


Table 2.46: Number of Schemes by Investment Objective as on March 30, 2012Schemes Open-ended Close-ended Interval Total

1 2 3 4 5A. Income/ Debt Oriented Schemes i) Liquid/ Money Market 55

(51)0

(0)0

(0)55

(51) ii) Gilt 42

(37)0

(0)0

(0)42

(37) iii) Debt (other than assured returns) 229

(210)512

(346)34

(35)775

(591) iv) Debt ( assured returns) 0 0 0 0Sub total (i+ii+iii) 326

(298)512

(346)34

(35)872

(679)B. Growth/ Equity Oriented Schemes i) ELSS 36

(36)13

(12)0

(0)49

(48) ii) Others 299

(318)4

(9)0

(1)303

(328)Sub total (i+ii) 335

(354)17

(21)0

(1)352

(376)C. Balanced Schemes Balanced schemes 29

(31)1

(1)0

(0)30

(32)D. Exchange Traded Fund i) Gold ETF 14

(10)0

(0)0

(0)14

(10) ii) Other ETFs 21

(18)0

(0)0

(0)21

(18)Sub total (i+ii) 35

(28)0

(0)0

(0)35

(28)E. Fund of Funds Investing Overseas Fund of Funds investing overseas 20

(16)0

(0)0

(0)20

(16)TOTAL (A+B+C+D+E) 745

(727)530

(368)34

(36)1,309

(1,131)Note: Figures in parantheses indicate corresponding figures for 2010-11.

As on March 30, 2012, there were 1,309 mutual fund schemes of which, 872 were income/debt oriented schemes, 352 were growth/equity oriented schemes and 30 were balanced schemes (Table 2.46). In addition, there were 35 Exchange Traded Funds, of which 14 were Gold ETFs and 21 other ETFs. Also, there were 20 schemes operating as Fund of Funds which invested in overseas securities. Maturity-wise there were 745 open-ended schemes and 530 close-ended schemes as on March 30, 2012. For the income/debt oriented schemes category, the number of close-ended schemes exceeded open-ended schemes.

The mutual funds were one of the major investors in the debt segment of the Indian securities market. During 2011-12, the combined net investments by the mutual funds in debt and equity was ` 3,33,463 crore compared to ` 2,29,352 crore in 2010-11, registering an increase of 45.4 percent (Table 2.47). Mutual Funds were net sellers in equity segment with ` 1,357 crore, whereas, their net investments in the debt segment rose to ` 3,34,820 crore during the same period. The combined net investment was positive for all months in 2011-12 except May 2011 and August 2011.

81


Table 2.47: Trends in Transactions on Stock Exchanges by Mutual Funds ( ` crore)

Year/ Month

Equity Debt Total

Gross Purchases

Gross Sales

Net Purchases

/ Sales

Gross Purchases

Gross Sales

Net Purchases/

Sales

Gross Purchases

Gross Sales

Net Purchases/

Sales

1 2 3 4 5 6 7 8 9 10

2008-09 1,44,069 1,37,085 6,984 3,27,744 2,45,942 81,803 4,71,815 3,83,026 88,787

2009-10 1,95,662 2,06,173 -10,512 6,24,314 4,43,728 1,80,588 8,19,976 6,49,901 1,70,076

2010-11 1,54,217 1,74,018 -19,802 7,62,644 5,13,493 2,49,153 9,16,861 6,87,511 2,29,352

2011-12 1,32,137 1,33,494 -1,357 11,16,760 7,81,940 3,34,820 12,48,897 9,15,434 3,33,463

Apr-11 9,630 10,094 -464 1,01,333 38,373 62,960 1,10,963 48,467 62,496

May-11 12,206 11,771 435 46,961 51,133 -4,172 59,167 62,904 -3,737

Jun-11 10,517 9,693 823 92,156 56,973 35,183 1,02,672 66,666 36,006

Jul-11 11,643 10,991 652 66,196 50,981 15,215 77,839 61,972 15,867

Aug-11 13,640 11,117 2,524 59,739 63,697 -3,958 73,380 74,814 -1,434

Sep-11 9,649 10,427 -777 86,021 62,815 23,206 95,670 73,242 22,429

Oct-11 9,308 9,670 -362 58,012 43,148 14,864 67,320 52,818 14,502

Nov-11 10,789 9,980 810 73,295 63,476 9,819 84,084 73,456 10,629

Dec-11 8,808 8,228 580 1,51,983 1,01,005 50,979 1,60,792 1,09,233 51,559

Jan-12 10,421 12,280 -1,858 94,404 84,963 9,441 1,04,825 97,243 7,582

Feb-12 14,940 17,112 -2,171 88,580 67,867 20,712 1,03,520 84,979 18,541

Mar-12 10,585 12,134 -1,549 1,98,080 97,508 1,00,573 2,08,665 1,09,642 99,023

Despite a long history, penetration of mutual funds in Indian financial markets is quite low. Assets of mutual funds in India constitute 6.6 percent of GDP which is relatively low in comparison with other emerging market economies. Their low presence in financial portfolios of households other than metro cities is a cause for concern from the financial inclusion perspective.

Table 2.48 shows unit holding pattern of all mutual funds as on March 30, 2012. There was significant improvement in the holding by retail investors in the net assets of mutual

funds. Individual investors accounted for 94.5 percent of the total number of investors’ accounts and contributed 48.2 percent to total net assets compared to 23.4 percent of total net assets a year ago. Corporates and institutions which formed only 3.6 percent of the total number of investors accounts in the mutual fund industry, contributed a sizeable 44.9 percent of the total net assets in the mutual funds industry. NRIs and FIIs constituted a very small percentage of investors’ accounts (1.9 percent) and contributed 6.9 percent to net assets.

82


Table 2.48: Unit Holding Pattern of All Mutual Funds as on March 30, 2012

Category Percentage to Total Investors Percentage to Total Net Assets

1 2 3

Individuals 94.5 48.2

(97.0) (23.4)

NRIs 1.9 6.0

(1.9) (2.0)

FIIs 0.0 0.9

(0.0) (1.8)

Corporates/Institutions/Others 3.6 44.9

(1.1) (72.8)

Total 100.0 100.0Note: Figures in parantheses indicate corresponding figures for 2010-11.

The unit holding pattern of public and private sector mutual funds as on March 30, 2012 shows the dominance of private sector mutual funds in the number of investor accounts as well as share in net assets (Table 2.49). The private sector mutual funds had 65.6 percent of the total investors account compared to 34.4 percent in public sector

mutual funds. The private sector mutual funds managed 82.4 percent of the net assets as against 17.6 percent of net assets managed by public sector mutual funds. While individual investors held 51.2 percent of the net assets in public sector mutual funds, their share in private sector mutual funds was 47.4 percent as on March 30, 2012.

Table 2.49: Unit Holding Pattern of Private and Public Sector Mutual Funds as on March 30, 2012

Category Percentage to Total Investors

Percentage to Total Net Assets

1 2 31. Private Sector Mutual Funds 65.6 82.4 Individuals 63.2 39.0 NRIs 1.6 5.4 FIIs 0.0 1.0 Corporates/Institutions/Others 0.7 36.9

2. Public Sector Mutual Funds (including UTI Mutual Fund)

34.4 17.6

Individuals 31.2 9.0 NRIs 0.3 0.6 FIIs 0.0 0.0 Corporates/Institutions/Others 2.9 8.0

Total (1 + 2) 100.0 100.0

83


4.1 PORTFOLIO MANAGEMENT

Portfolio Managers are registered and regulated under the SEBI (Portfolio Managers) Regulations 1993. A portfolio manager is a body corporate which, pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the client. In India, portfolio managers provide three types of services – discretionary, non-discretionary and advisory. The portfolio management services in India have increased considerably over the years and the assets

managed by portfolio managers have risen exponentially. During 2011-12, the total assets managed by the portfolio managers for providing discretionary services was ` 4,23,774 crore up by 46.0 percent over ` 2,84,980 crore in 2010-11 (Table 2.50). The Assets managed by portfolio managers under non-discretionary services category was ` 18,759 crore and advisory services category was ` 73,914 crore at the end of March 2012. The combined assets managed by portfolio managers for the three services was `5, 16,447 crore compared to AUM of mutual funds which was ` 5,87,565 crore, a shortfall of 13.7 percent.

Table 2.50: Assets managed by Portfolio ManagersParticulars 2009-10 2010-11 2011-12

Discretionary Non-Discretionary

Advisory Discretionary Non-Discretionary

Advisory Discretionary Non-Discretionary

Advisory

1 2 3 4 5 6 7 8 9 10

No. of Clients 54,520 3,771 5,734 69,691 3,748 8,770 65,600 5,712 9,296AUM (` in crore)

Listed Equity 16,358 1,355 - 17,241 2,234 86,016 * 15,171 3,602 73,914*

Unlisted Equity - - 1,286 47 1,725 51

Plain Debt 2,52,636 7,761 2,55,502 5,207 3,92,566 11,112

Structured Debt - - 1,171 888 1,692 756Equity Derivative

- - 49 - 152 0

Mutual Fund - - 5,388 1,831 3,770 2,857

Others 4,426 185 4,343 249 8,699 381

Total 2,73,420 9,301 2,84,980 86,016 4,23,774# 18,759 73,914Note : *Value of Assets for which Advisory Services are being given.#Of the above AUM ` 386409.72 crore is contributed by funds from EPFO/PFs.- implies not available.

5. FOREIGN INSTITUTIONAL INVESTMENT

Foreign capital flows are indispensable to growth of emerging market economies to finance the capital needed for excess of investment over the domestic savings. They help in developing nascent financial markets and overall financial development. Foreign

institutional investment is an important component in the capital flows available to a country to pursue its trajectory of economic growth. Foreign Institutional investment brings in a flow of non debt creating foreign inflows into any market. Since 1992 when FIIs were allowed to invest in the country, FII flows into India has increased manifold.

84


The gross purchases of debt and equity by FIIs declined by 7.2 percent to ` 9,21,285 crore in 2011-12 from ` 9,92,599 crore in 2010-11 (Table 2.51). The combined gross sales by FIIs declined by 2.2 percent to ` 8,27,562 crore from ` 8,46,161 crore during the same period in previous year. The total net inflow of FII was ` 93,725 crore in 2011-12 compared to ` 1,46,438 crore in 2010-11.

During 2011-12, there was a net inflow in the equity segment by FIIs amounting to ` 43,738 crore (Table 2.52). The debt segment also witnessed a positive net inflow of ̀ 49,988 crore.

Month-wise, the net FII inflow was the highest in equity segment during the last

quarter of 2011-12 particularly in February 2012 (` 25,212 crore) followed by January 2012 (` 10,358 crore) and March 2012 (` 8,381 crore). In the equity segment, FII investment was negative in for three months viz., August 2011 (` 10,834 crore), May 2011(` 6,614 crore) and November 2011 (` 4,198 crore). In the debt segment, inflow was the highest in December 2011 (` 21,775 crore) followed by January 2012 (` 15,971 crore) and February 2012 (` 10,016 crore) (Chart 2.12). Net investment by FII increased from December 2011 and reached the highest in February 2012. The cumulative investment by FIIs at acquisition cost, which was USD 121.6 billion at the end of March 2011, increased to USD 140.5 billion at the end of March 2012 (Chart 2.11).

Table 2.51: Investment by Foreign Institutional lnvestorsYear Gross Purchase

(` crore)Gross Sales

(` crore)Net Investment

(` crore)Net Investment

(US $ mn.)Cumulative Investment (US $ mn.)

1 2 3 4 5 61992-93 18 4 13 4 41993-94 5,593 467 5,127 1,634 1,6381994-95 7,631 2,835 4,796 1,528 3,1671995-96 9,694 2,752 6,942 2,036 5,2021996-97 15,554 6,980 8,575 2,432 7,6351997-98 18,695 12,737 5,958 1,650 9,2851998-99 16,116 17,699 -1,584 -386 8,8991999-00 56,857 46,735 10,122 2,474 11,3732000-01 74,051 64,118 9,933 2,160 13,5322001-02 50,071 41,308 8,763 1,839 15,3722002-03 47,062 44,372 2,689 566 15,9372003-04 1,44,855 99,091 45,764 10,005 25,9432004-05 2,16,951 1,71,071 45,880 10,352 36,2942005-06 3,46,976 3,05,509 41,467 9,363 45,6572006-07 5,20,506 4,89,665 30,841 6,820 52,4772007-08 9,48,018 8,81,839 66,179 16,442 68,9192008-09 6,14,576 6,60,386 -45,811 -9,837 59,0812009-10 8,46,438 7,03,780 1,42,658 30,251 89,3332010-11 9,92,599 8,46,161 1,46,438 32,226 1,21,5592011-12 9,21,285 8,27,562 93,725 18,923 1,40,482

85


Chart 2.11: Trends in Foreign Institutional Investment

Table 2.52: Investments by Mutual Funds and Foreign Institutional lnvestors( ` crore)

Year / Month Net Investment by Mutual Funds Net Investment by Flls

Equity Debt Total Equity Debt Total

1 2 3 4 5 6 7

2008-09 6,984 81,803 88,787 -47,706 1,895 -45,811

2009-10 -10,512 1,80,588 1,70,076 1,10,220 32,438 1,42,658

2010-11 -19,802 2,49,153 2,29,352 1,10,121 36,317 1,46,438

2011-12 -1,358 3,34,820 3,33,463 43,738 49,988 93,725

Apr-11 -464 62,960 62,496 7,213 -17 7,196

May-11 435 -4,172 -3,737 -6,614 2,338 -4,276

Jun-11 823 35,183 36,006 4,572 311 4,883

Jul-11 652 15,215 15,867 8,030 2,623 10,653

Aug-11 2,524 -3,958 -1,434 -10,834 2,931 -7,903

Sep-11 -777 23,206 22,429 -158 -1,707 -1,866

Oct-11 -362 14,864 14,502 1,677 1,401 3,079

Nov-11 810 9,819 10,629 -4,198 935 -3,263

Dec-11 580 50,979 51,559 98 21,775 21,873

Jan-12 -1,858 9,441 7,582 10,358 15,971 26,329

Feb-12 -2,171 20,712 18,541 25,212 10,016 35,228

Mar-12 -1,549 100,573 99,023 8,381 -6,589 1,793

86


Chart 2.12 shows the FII and Mutual fund investments and market movement as

measured by average Nifty levels.

Chart 2.12: Net Institutional Investment and Monthly Average Nifty Values

Table 2.53: Notional Value of Open Interest of Foreign Institutional lnvestors in Derivatives during 2011-12

( ` crore)

Items Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

1 2 3 4 5 6 7 8 9 10 11 12 13Index Futures

3,02,343 4,01,995 3,64,268 2,65,530 2,71,579 3,47,951 2,60,016 3,02,420 2,55,651 2,72,626 2,96,108 3,27,348

Index Options

8,16,797 9,44,951 10,05,194 7,96,945 8,77,030 11,65,828 8,29,968 8,74,632 9,59,397 6,99,267 8,00,856 10,20,526

Stock Futures

5,75,339 6,28,110 6,69,905 6,70,566 5,91,920 6,08,895 5,22,204 5,62,296 5,36,191 5,72,353 5,89,743 6,39,131

Stock Options

8,728 9,486 11,739 18,506 9,259 26,574 16,525 14,953 18,143 24,370 27,664 32,362

Interest rate Futures

0 0 0 0 0 0 0 0 0 0 0 0

Total 17,03,208 19,84,542 20,51,106 17,51,548 17,49,787 21,49,248 16,28,714 17,54,300 17,69,382 15,68,616 17,14,371 20,19,367

Change in open position

-3,59,942.2 2,81,334 66,564 -2,99,558 -1,761 3,99,460 -5,20,534 1,25,586 15,082 -2,00,767 1,45,755 3,04,996

% Change -17.4 16.5 3.4 -14.6 -0.1 22.8 -24.2 7.7 0.9 -11.3 9.3 17.8

87


Table 2.54: Allocation of Debt Investment limits to FIIs and Sub-accounts during 2011-12

Date Govt. Debt (` crore)

Govt. Debt Long Term (` crore)

Corporate Debt (` crore)

Corporate Debt Long Term Infra (` crore)

August 05, 2011 - Bidding 6,600

August 05, 2011 - FCFS 457

October 07, 2011 - Bidding 22,419

November 30, 2011 -Bidding 25,328 2,248 26,116

February 29, 2012 - Bidding 12,870

March 16, 2012 - Bidding 4,790 4,601

Grand Total 25,328 14,095 30,717 35,289

Table 2.55: Category-wise Utilization of Debt limit by FIIs/sub-accounts as on March 30, 2012

S. No.

Type of Instrument Upper Cap (in USD

bn)

Limit (in ` Cr.)

Investment (` crore)

Limit available with the

entity

Utilized limit

Unutilized limit

1 Government Debt –old 10 46,216 41,187 3,956 45,143 1,073

2 Government Debt –Long term 5 22,795 15,869 5,516 21,385 1,410

3(a) Corporate Debt – old 20 99,777 81,387 9,694 95,230 4,547

3(b) Debt oriented Mutual Fund 4,149 0

4(a) QFI investment in debt (Including investment in IDF)

3 13,451 0 0 0 13,451

4(b) Corporate debt long term infra - One year lock in with one year residual maturity by FIIs

5 22,419 11,092 11,127 22,219 200

4(c) Corporate debt long term infra - Three year lock in with three year residual maturity by FIIs (including investment in IDF)

17 76,225 1,111 NA 1,111 75,114

Total 60 2,80,883 1,54,795 30,294 1,85,089 95,794

The FIIs were permitted to trade in the derivatives market since February 2002. The notional value of open interest held by FIIs in derivatives was ` 20,19,367 crore as on March 31, 2012 as compared to ̀ 20,63,150 crore as on March 31, 2011. Open interest position of FIIs

in index options was the highest at ` 10,20,526 crore by end-March 2012, followed by Stock futures (` 6,39,131 crore), Index futures (` 3,27,348 crore) and Stock options (` 32,362 crore) (Table 2.53).

The composition of FII investment in different financial instruments is shown in the Table 2.56. Investment in long term instruments accounted for ` 94,168 crore and that in short term instruments ` 48,066 crore.

Of the long term instruments their investment in corporate debt securities was ` 67,488 crore followed by government securities at ` 26,914 crore (Table 2.56).

88


Table 2.56: Quarterly Reporting of external debt under FII Investment in Govt. Securities & other instruments

(As on March 30, 2012)(` crore)

I . Long Term (a+b+c) 94,168Investment in Govt dated Securities 26,914Corporate debt instruments 67,488Mutual Fund -234II. Short Term (a+b) 48,066Treasury Bills 30,915Others, if any 17,151Grand Total ( I + II) 1,42,234

Table 2.57: Trends in Corporate RestructuringYear/

MonthOpen Offers Automatic

ExemptionObjectives TotalChange in Control

of ManagementConsolidation of

HoldingsSubstantialAcquisition

No. Amount (` crore)

No. of issue

Amount (` crore)




1 2 3 4 5 6 7 8 9 10 112008-09 80 3,713 13 598 6 400 99 4,711 227 10,5022009-10 56 3,649 14 1,761 6 448 76 5,858 206 13,8642010-11 71 10,251 17 8,902 14 145 103 18,748 410 28,0422011-12 57 18,726 8 286 6 294 71 19,305 205 12,119Apr-11 6 15,027 0 0 0 0 6 15,027 23 4,520May-11 5 24 0 0 2 71 7 95 5 110Jun-11 4 61 0 0 1 8 5 70 17 824Jul-11 5 30 0 0 1 6 6 36 16 5Aug-11 6 295 1 3 1 202 8 499 15 181Sep-11 4 621 0 0 0 0 4 621 20 2,940Oct-11 4 934 2 40 0 0 6 973 45 1,608Nov-11 5 1,056 0 0 0 0 5 1,056 23 1,377Dec-11 9 264 0 0 0 0 9 264 23 9Jan-12 3 182 2 219 0 0 5 401 7 108Feb-12 4 2 2 24 0 0 6 26 6 160Mar-12 2 230 1 1 1 7 4 238 5 278

6. CORPORATE RESTRUCTURING

Takeovers of listed companies are regulated by SEBI. In India, regulations on takeovers seek to ensure that the takeover markets operate in a fair, equitable and transparent manner. There has been a steady increase in corporate restructuring by Indian companies to adapt to the evolving competitive landscape. This can be seen from the Table no. 2.57. During 2011-12, 71 open offers with offer

size of ̀ 19,305 crore was approved by SEBI. In the open offer size, 80.3 percent was with the objective of change in control of management. The number of offers with this objective was a sizeable 57. However, the total number of open offers was 31.1 percent lesser and the value of open offers increased by 3 percent when compared with that of previous year. During 2011-12, 205 automatic exemptions were granted, the size of which was `12,119 crore.

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Table 2.58: Investments of VCFs and FVCIsYear Cumulative net investments at the end of the period ( ` crore)

VCFs FVCIs Total investment*1 2 3 4

2006-07 11,270 7,856 17,621

2007-08 19,955 16,705 31,682

2008-09 22,771 23,047 37,578

2009-10 18,273 28,894 39,051

2010-11 25,576 35,593 52,688

2011-12 28,839 39,492 58,936*Total investment does not include investments by FVCIs through VCFs

7. Venture Capital Funds and Foreign Venture Capital Investors

The cumulative net investments by venture capital funds (VCFs) and foreign venture capital investors (FVCIs) was `58,936

crore as on March 31, 2012 compared to `52,688 crore as on March 31, 2011. Of the total investments, `39,492 crore was invested by FVCIs and `28,839 crore was by VCFs.

PART THREE: REGULATION OF SECURITIES MARKET

1. INTERMEDIARIES

I. Streamlining the Process of Registration /Renewal of Intermediaries

The process for streamlining the registration and approvals by enhancing the transparency continued during the year 2011-12. The response was sent to the applicants within 30 days. The status of registration / renewal of applications were displayed on SEBI website on a monthly basis. With a view to ensure higher level of corporate governance, it has also been mentioned on the website that in case any application remained unattended, the applicant should not hesitate to approach the concerned Division Chief or the Executive Director of the Market Intermediaries Regulations and Supervision Department. The respective e-mail IDs of concerned officials are also displayed.

The practice of seeking details of corrective measures taken by the applicant where administrative and quasi-judicial actions have been initiated by SEBI, at the time of processing the registration / renewal applications, has greatly improved the compliance culture among the intermediaries.

Further, with a view to simplify the regulatory approvals for change in status and constitution, SEBI has taken following measures:

i. Notification of Amendments in Regulation for Dispensing with Prior Approval (except Change in Control)

SEBI Board had earlier approved the proposal to do away with the requirement of obtaining prior approval from SEBI by intermediaries for change in status or constitution. Accordingly, suitable

amendments were carried out in regulations for intermediaries vide notification dated April 19, 2011.

ii. Single Window Procedure for Seeking Prior Approval for Change in Control from SEBI

With a view to expedite and simplify the process of granting prior approval for change in control of intermediaries, it has been decided to adopt a ‘single window clearance at SEBI’, for the intermediaries in case of their having multiple registrations with SEBI. Accordingly vide circular dated August 2, 2011 SEBI prescribed that an applicant who holds multiple registrations with SEBI shall make only one application to SEBI accompanied by prescribed information about itself, the acquirer and the directors/partners of the acquirer. This has reduced the time and paperwork for intermediaries applying for prior approvals in case of multiple registrations.

II. Registered Intermediaries Other than Stock Brokers and Sub-Brokers

Prior to the amendment dated July 5, 2011 to the regulations governing intermediaries other than stock brokers and sub-brokers, intermediaries were granted registration for a period of three to five years. Before the expiry of their registration, if they so desire, may apply for renewal in order to continue their business.

As per the amendment dated July 5, 2011 to the Regulations, intermediaries are granted initial registration for a period of five years. Before the expiry of their initial registration, if they so desire, may apply for permanent registration in order to continue their business.

90

This part of the Report delineates the functions of SEBI as specified in Section 11 of the SEBI Act, 1992

91

Part Three: Regulation of Securities Market

Pursuant to the above-mentioned amendment, 29 merchant bankers, seven registrars to an issue and share transfer agents, 37 depository participants (DPs), three credit rating agencies and two debenture trustees were granted permanent renewal/ registration. Overall 59 new entities were granted initial registration whereas 78 existing entities either renewed their registration or got permanent

registration (Details in Table 3.1a). The details of applications of intermediaries in the process of registration are provided in Table 3.1a.

During 2011-12, the highest increase in absolute terms for registered intermediaries was observed in case of DPs of CDSL (33) followed by DPs of NSDL (12) and merchant bankers (8) (Table 3.1).

Table 3.1: Registered Intermediaries other than Stock Brokers and Sub-Brokers(Number)

Type of Intermediary As on March 31 Absolute Variation

Percentage Variation2011 2012

1 2 3 4 5

Registrar to Issue and Share Transfer Agent 73 74 1 1.4

Merchant Banker 192 200 8 4.2

Portfolio Manager 267 250 -17 -6.4

Underwriter 3 3 0 0.0

DPs- NSDL 275* 287 12 4.4

DPs- CDSL 534* 567 33 6.2

Credit Rating Agency 6 6 0 0.0

Debenture Trustee 31* 32 1 3.2

Banker to an Issue 55 56 1 1.8

(*) Figures are updated

Table 3.1a: Intermediaries other than Stock Brokers and Sub-Brokers in the Process of Initial/ Permanent Registration

(Number)

Type of Intermediary Applications received during 2011-12

Granted during 2011-12

Pending as on March 31, 2012

Initial Permanent Initial Permanent/ Renewal

Initial Permanent

1 2 3 4 5 6 7

Merchant Banker 15 54 10 29 8 41

Registrar to an Issue and/or Share Transfer Agent

3 9 1 7 3 6

Underwriter 1 0 0 0 0 0

Depository Participant 60 107 45 37 21 110

Credit Rating Agency 1 4 0 3 1 1

Debenture Trustee 2 8 1 2 1 6

Banker to an Issue 4 3 2 0 5 3

Total 86 185 59 78 39 167

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Box 3.1 Investment Advisors

Section 11 (2)(b) of SEBI Act empowers SEBI to register and regulate working of Investment Advisors and such other intermediaries who may be associated with securities market in any other manner. Sec. 12(1) of SEBI Act, provides that investment adviser and such other intermediaries who may be associated with the securities market shall buy, sell or deal in securities except under, and in accordance with, the condition of a certifi cate of registration obtained from SEBI in accordance with regulations made under SEBI Act.

As decided by SEBI Board in its meeting dated March 22, 2007, SEBI had posted a consultative paper on the “Regulation of Investment Advisors” on its website inviting public comments. Based on public comments received on the consultative paper as also the USAID (Fire Project), a memorandum was placed before the SEBI Board proposing a regulatory approach for Investment Advisers. It was proposed that the Regulations shall be implemented through SRO. As Investment Advisors off er products across asset classes, it was felt that the respective regulators may take a view and formulate similar norms and code of conduct. Accordingly a reference was made to the HLCC on Financial and Capital Markets.

HLCCFM in its meeting held on December 22, 2008 set up the D. Swarup Commi� ee to re-examine the issue. The commi� ee submi� ed its report to government in December 2009 which was discussed in the HLCCFM meeting in March 2010. Subsequently, regulatory issues relating to Wealth Management and / Private Banking undertaken by banks were discussed by the FSDC Sub-Commi� ee in its meeting on March 4, 2011.

Pursuant to the discussions, SEBI released a Concept Paper on regulation of Investment Advisors on September 26, 2011 and invited Public Comments on the same. The concept paper envisaged regulating those entities/individuals who are involved in the act of providing advice through SRO mechanism. It was proposed that the Regulations would cover the act of giving advice on all fi nancial products across regulators. SEBI received approximately 270 comments on the same. Based on comments and responses from other regulators, the scope of the proposed regulations is being discussed and issues raised are being resolved at various levels to arrive at an appropriate framework for regulating investment advisors.

III. Registration of Stock Brokers

During 2011-12, 256 new stock brokers were registered with SEBI in cash segment whereas there were 184 cases of cancellation/ surrender of brokership during the year 2011-12 as compared to 531 and 100, respectively in

2010-11. The total number of registered stock brokers as on March 31, 2012, increased to 9,307 from 9,235 in 2010-11 (Table 3.2). Applications of brokers and sub-brokers in the process of registration are given in Table 3.2a.

Table 3.2: Registered Stock Brokers (Number)

Details 2010-11 2011-12

1 2 3

Registered Stock Brokers as on March 31 of the previous year 8,804 9,235

Addition during to the Year 531 256

Reconciliation / Cancellation/ Surrender of Memberships 100 184

Registered Stock Brokers as on March 31 9,235 9,307

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Table 3.2a: Stock Broker and Sub-Broker Applications under the Process of Registration as on March 31, 2012 *

(Number)

Category of Application Number of Applications under Process

1 2

Registration – Brokers in Cash Segment 37

Registration – Brokers in Equity Derivatives Segment 39

Registration – Brokers in Currency Derivatives Segment 43

Sub-broker 111*These applications are pending at different stages viz. Stock Exchanges/Stock Brokers for want of documents/clarifications or under process in SEBI

Table 3.3: Classification of Stock Brokers in Cash Segment on the Basis of Ownership*

S. No.

Stock Exchange

Proprietorship Partnership Corporate ** Total

2011 2012 2011 2012 2011 2012 2011 2012

Nos. Percent Nos. Percent Nos. Percent Nos. Percent Nos. Percent Nos. Percent Nos. Nos.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1 Ahmedabad 137 41.14 137 40.29 19 5.71 21 6.18 177 53.15 182 53.53 333 340

2 Bangalore 135 50.00 134 49.08 4 1.48 6 2.20 131 48.52 133 48.72 270 273

3 BSE 183 14.07 181 13.15 31 2.38 30 2.18 1087 83.55 1,164 84.59 1,301 1,376

4 Bhubaneswar 196 91.16 195 91.12 0 0.00 0 0.00 19 8.84 19 8.88 215 214

5 Calcutta 656 72.81 644 72.20 44 4.88 43 4.82 201 22.31 204 22.87 901 892

6 Cochin 351 79.59 350 79.37 9 2.04 9 2.04 81 18.37 82 18.59 441 441

7 Coimbatore 88 64.71 88 64.71 0 0.00 0 0.00 48 35.29 48 35.29 136 136

8 Delhi 181 37.63 190 38.23 32 6.65 32 6.44 268 55.72 275 55.33 481 497

9 Gauhati 93 95.88 90 95.74 1 1.03 1 1.06 3 3.09 3 3.19 97 94

10 ISE 566 60.02 552 60.20 29 3.08 28 3.05 348 36.90 336 36.64 943 917

11 Jaipur 457 95.01 447 94.90 6 1.25 6 1.27 18 3.74 18 3.82 481 471

12 Ludhiana 216 70.36 215 70.26 2 0.65 2 0.65 89 28.99 89 29.08 307 306

13 MPSE 160 78.82 162 77.88 1 0.49 1 0.48 42 20.69 45 21.63 203 208

14 Madras 112 53.08 112 51.85 14 6.64 14 6.48 85 40.28 90 41.67 211 216

15 NSE 73 5.26 72 5.06 77 5.54 80 5.62 1,239 89.20 1,269 89.18 1,389 1,423

16 OTCEI 147 20.97 145 20.98 18 2.57 18 2.60 536 76.46 528 76.41 701 691

17 Pune 124 67.03 123 67.58 7 3.78 7 3.85 54 29.19 52 28.57 185 182

18 UPSE 252 76.83 244 76.97 3 0.91 3 0.95 73 22.26 70 22.08 328 317

19 Vadodara 245 78.53 245 78.27 3 0.01 3 0.96 64 20.51 65 20.77 312 313

* As on March 31 of the respective year.** The categories of Financial Institutions and Composite Corporate are clubbed within the category of corporate broker.Note: Percent is to the total number of brokers in the respective exchanges

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The number of registered brokers was highest in NSE (1,423) followed by BSE (1,376), Inter-Connected Stock Exchange (ISE) (917) and Calcutta Stock Exchange (CSE) (892) (Table 3.3). The number of corporate brokers were also highest in NSE (1,269) followed by BSE (1,164) and OTCEI (528). Corporate brokers constitute 89.18 percent of the total stock brokers at NSE whereas the corporate brokers constituted 84.59 percent and 76.41 percent at BSE and OTCEI, respectively. Number of corporate brokers as a percentage of total brokers was more than 50 percent in five out of 19 recognised exchanges. Highest number of stock brokers in ‘proprietorship’ category was at CSE (644), followed by ISE (552). NSE had the lowest number of brokers in proprietorship category (72) which was 5.1 percent of the total stock brokers registered with NSE.

Stock brokers in ‘partnership’ category were highest in NSE (80), followed by CSE (43). Bhubaneswar and Coimbatore Stock Exchanges did not have any brokers in the ‘partnership’ category.

Details regarding classification of brokers on the basis of ownership in cash segment as proprietary, partnership and corporate are provided in Table 3.3, Chart 3.1 and Chart In equity derivative segment, 41 trading members, eight clearing members and 50 self-clearing members were granted registration at NSE Futures and Options (F&O) segment during 2011-12. In case of BSE F&O segment, the corresponding figures were 143, 10 and 10 respectively. 13 trading members were granted registration at Madras Stock Exchange (MSE) during 2011-12. The details regarding the same are provided in Tables 3.4.

Chart 3.1: Ownership Pattern of Stock Brokers (As on March 31, 2012)

95


Table 3.4: Number of Registered Members in Equity Derivatives Segment during 2011-12(Number)

Type of Member NSE BSE MSE MPSE

Registrations during 2011-12

Registrations at the end of March 2012







1 2 3 4 5 6 7 8 9

Trading Member 41 1,340 143 930 13 26 30 30

Clearing Member 8 267 10 141 0 0 0 0

Self Clearing Member 50 446 10 38 0 0 0 0

Total 99 2,053 163 1,109 13 26 30 30

In the currency derivatives segment, total number of registered members with NSE, BSE, MCX-SX and USE were 833, 158, 773 and

Chart 3.2: Percentage Share of Stock Brokers (By Ownership) (As on March 31, 2012)

402 respectively at the end of March 31, 2012. Details of members in the currency derivative segment are provided in Table 3.5.

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Table 3.5: Number of Registered Members in Currency Derivatives Segment during 2011-12(Number)

Type of Member NSE BSE MCX-SX USE









1 2 3 4 5 6 7 8 9

Trading Member 73 833 1 158 31 773 63 402

Clearing Member 9 181 0 31 8 122 7 56

Self Clearing Member 0 8 0 0 0 1 0 3

IV. Registration of Sub-brokers

The number of registered sub-brokers has declined by 8.1 percent from 83,952 as on March 31, 2011 to 77,165 as on March 31, 2012. However, the number of Authorised Persons (APs) as approved by the stock exchanges in accordance with SEBI Guidelines, has increased substantially (76.5 percent) during the year (from 55,818 as on March 31, 2011 to

98,533 as on March 31, 2012). Stock brokers were allowed to provide market access to clients through APs, in addition to sub-brokers, with a view to expand the reach of the markets for exchange traded products, vide SEBI circular dated November 6, 2009. Thus, while number of sub-brokers has come down, the increased presence of APs has ensured the increase in reach of the markets for exchange traded products as intended.

Table 3.6: Registered Sub-brokersSl. No. Stock Exchange Sub-brokers as on March 31

2011 2012

Number Percentage of Total*

Number Percentage of Total*

1 2 3 4 5 61 Ahmedabad 93 0.11 81 0.102 Bangalore 158 0.19 158 0.203 BSE 38,124 45.41 33,852 43.874 Bhubaneswar 16 0.02 16 0.025 Calcu� a 79 0.09 71 0.096 Cochin 41 0.05 41 0.057 Coimbatore 20 0.02 20 0.038 Delhi 239 0.28 222 0.299 Gauhati 4 0.00 4 0.0110 ISE 1 0.00 1 0.0011 Jaipur 32 0.04 30 0.0412 Ludhiana 35 0.04 28 0.0413 MPSE 5 0.01 5 0.0114 Madras 109 0.13 107 0.1415 NSE 44,783 53.34 42,327 54.8516 OTCEI 17 0.02 14 0.0217 Pune 156 0.19 156 0.2018 UPSE 3 0.00 3 0.0019 Vadodara 37 0.04 29 0.04

Total 83,952 100.00 77,165 100.00

* Percentage of sub-brokers in the recognized stock exchanges to total sub-brokers.

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V. Recognition of Stock Exchanges

The stock exchanges are granted recognition by SEBI under Section 4 of the Securities Contracts (Regulation) Act, 1956. Presently, there are 21 stock exchanges

recognised under SC(R)A. Out of which, eight stock exchanges have permanent recognition (Table 3.7). During the year, renewal of recognition was granted to 12 stock exchanges. Application of Coimbatore Stock Exchange Ltd. for exit is under examination (Table 3.8).

Table 3.7: Stock Exchanges with Permanent Recognition

Sr. No. Exchanges Recognition

1 2 3

1 Ahmedabad Stock Exchange Ltd. Permanent

2 Bangalore Stock Exchange Ltd. Permanent

3 Bombay Stock Exchange Ltd. Permanent

4 Calcu� a Stock Exchange Ltd. Permanent

5 Delhi Stock Exchange Ltd. Permanent

6 Madhya Pradesh Stock Exchange Ltd. Permanent

7 Madras Stock Exchange Ltd. Permanent

8 National Stock Exchange of India Ltd. Permanent

Table 3.8: Renewal of Recognition Granted to Stock Exchanges during 2011-12

Sr. No.

Exchanges Date of Notification Period

1 2 3 4

1. Ludhiana Stock Exchange Ltd. April 19, 2011 April 28, 2011 to April 27, 2012

2. Gauhati Stock Exchange Ltd. April 28, 2011 May 1, 2011 to April 30, 2012

3. Uttar Pradesh Stock Exchange Association Ltd. May 18, 2011 June 03, 2011 to June 02, 2012

4. Bhubaneswar Stock Exchange Ltd. May 18, 2011 June 05, 2011 to June 04, 2012

5. OTC Exchange of India August 23, 2011 August 23, 2011 to August 22, 2012

6. MCX Stock Exchange Ltd September 14, 2011 September 16, 2011 to September 15, 2012

7. Pune Stock Exchange Ltd. August 30, 2011 September 02, 2011 to September 01, 2012

8. Cochin Stock Exchange Ltd. November 4, 2011 November 08, 2011 to November 07, 2012

9. Interconnected Stock Exchange of India Ltd. November 17, 2011 November 18, 2011 to November 17, 2012

10. Vadodara Stock Exchange Ltd. January 3, 2012 January 04, 2012 to January 03, 2013

11. Jaipur Stock Exchange Ltd. January 2, 2012 January 09, 2012 to January 08, 2013

12. United Stock Exchange of India Ltd. March 21, 2012 March 22, 2012 to March 21, 2013

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VI. Platform / Stock Exchanges for Small and Medium Enterprises:

SEBI has granted approval to BSE and NSE for setting up of platform for SME. Subsequent to grant of approval, both the exchanges have launched the platform for SME on March 13, 2012.

VII. Memorandum of Understanding (MoU) between Stock Exchanges:

Pursuant to Section 13 of Securities Contracts (Regulation) Act, 1956, stock exchanges can enter into a MoU for trading. In this regard, Madhya Pradesh Stock Exchange Ltd. operationalised trading under such MoU with NSE and BSE; and Calcutta Stock Exchange Ltd. operationalised trading with NSE.

VIII. Registration of Foreign Institutional Investors and Custodians of Securities

i. Registration Granted to Custodians during 2011-12

The registration process for custodians is a two stage process. During the initial stage, the applicant is provided in-principle registration subject to fulfillment of certain conditions in a time bound manner. At the second stage, after due verification of those conditions, the applicant is provided certificate of registration. During the financial year, M/s. Quant Transactional Services Private Ltd. was granted in-principle registration

ii. Renewal of Registration for Custodians during 2011-12

As per SEBI (Custodian of Securities) (Second Amendment) Regulations, 2006, w.e.f. October 31, 2006, the validity of the registration is for a period of three years. During the financial year, the certificate of

registration of M/s Orbis Financial Corporate Limited was renewed w.e.f June 16, 2011 for a period of three years. The number of custodians registered with SEBI under the SEBI (Custodian of Securities) Regulations, 1996 remained unchanged at 19, as on March 31, 2012 (Table 3.9).

iii. Trends in registration of FIIs, Sub-accounts and Custodians

There was a marginal increase in the number of Foreign Institutional Investors (FIIs) registered with SEBI. As on March 31, 2012, there were 1,765 FIIs registered with SEBI as compared to 1,722 a year ago, showing an increase of 2.5 percent during the year. There were 6,322 sub-accounts registered with SEBI as on March 31, 2012 as compared to 5,686 as on March 31, 2011, an increase of 11.19 percent (Table 3.9).

During the financial year, a total of 203 fresh FIIs were registered. FIIs from 60 different jurisdictions have been registered by SEBI out of which three new jurisdictions viz. Indonesia, Portugal and Croatia were added during the financial year. Status of registration of FIIs, sub-accounts and custodians during 2011-12 is provided in Table 3.9a.

Table 3.9: Number of Registered FIIs, Sub-accounts and Custodians

(Number)

Particulars As on March 31,2011

As on March 31,2012

1 2 3

Number of FIIs 1,722 1,765

Number of Sub-accounts 5,686 6,322

Number of Custodians 19 19

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Table 3.9a: Status of Registration of FII, Sub-accounts and Custodians during 2011-12Particulars FII Sub Account Custodian

Fresh Regis-tration

Re-newal

Total Fresh Regis-tration

Re-newal

Total Fresh Regis-tration

Re-newal

Total

1 2 3 4 5 6 7 8 9 10I. Application received for fresh registration / renewal

203 354 557 1,062 1,359 2,421 1 1 2

a. Applications registered/ renewed

184 326 510 1000 1,241 2,241 0 1 1

b. Applications pending# 43 40 83 137 130 267 2 0 2

c. Application rejected/ returned*

3 0 3 9 0 9

* Some of the applications that were returned due to various reasons may have been resubmitted and would have got subsequently registered or rejected.

# Represents total cumulative number of pending applications as on March 31, 2012. The figure also contains those applications which were received before FY 2011-12.

IX. Registration of Collective Investment Schemes (CIS)

As on March 31, 2012, there was only one registered CIS, viz. M/s. Gift Collective Investment Management Company Ltd. which was registered during 2008-09.

M/s. MPS Greenery Developers Ltd. (MPS) was granted provisional registration as collective investment management company under the SEBI (Collective Investment Schemes) Regulation, 1999 with effect from August 21, 2009 which has expired on August 20, 2011 and final registration has not been granted to the entity.

X. Registration of Mutual Funds

As on March 31, 2012, 49 mutual funds were registered with SEBI, of which 44 were in the private sector and five (including UTI) were in public sector.

During 2011-12, M/s. Benchmark Mutual Fund was acquired by M/s. Goldman Sachs MF following which registration of M/s. Benchmark Mutual Fund was cancelled. M/s. Aegon Mutual Fund surrendered their registration and it was subsequently cancelled (Table 3.10).

Table 3.10: Mutual Funds Registered with SEBI

(Number)Sector As on

March 31, 2011

As on March 31,

20121 2 3

Public Sector (Including UTI) 5 5Private Sector 46 44Total 51 49

XI. Registration of Venture Capital Funds

There were 207 domestic and 175 foreign venture capital funds registered with SEBI as on March 31, 2012 as compared to 184 and 153 funds respectively registered with SEBI as on March 31, 2011 (Table 3.11).

Table 3.11: Registered Venture Capital Funds

(Number)

VCFs As on March 31, 2011

As on March 31, 2012

1 2 3VCF 184 207FVCI 153 175

XII. Fees and Other Charges

Details of the amount of fees and other charges (un-audited) collected by SEBI from

100


market intermediaries on both recurring and non-recurring basis is provided in Table 3.12. During 2011-12, the total amount of fees and other charges received was ` 154.51 crore (unaudited) as against ` 193.88 crore in 2010-11 (audited). The recurring fee was 87.81 crore in 2011-12 as compared to 92.56 percent in 2010-11. The largest amount of `39.48 crore which was fully recurring in nature

was collected from derivatives members’ registration, while the second largest recurring fee of `14.48 crore was collected from stock brokers and sub-brokers. In non recurring fee category, the highest fee was collected from FIIs (` 14.12 crore) followed by fees from offer documents and prospectus filed (` 13.81 crore), mutual funds (` 11.89 crore) and sub-accounts (` 11.17 crore).

Table 3.12: Fees and other Charges(` crore)

Particulars 2010-11 2011-12 Recur-

ring fees #

Non-re-curring fees ##

Total Fees Re-ceived

(au-dited)

Recur-ring

fees #

Non-re-curring fees ##

Total Fees Re-ceived (Unau-dited)

1 2 3 4 5 6 7Offer Documents and prospectuses filed 0.00 26.47 26.47 0.00 13.81 13.81Merchant Bankers 2.25 1.85 4.10 1.53 2.57 4.10Underwriters 0.05 0.01 0.06 0.00 0.03 0.03Portfolio Managers 2.50 5.50 8.00 3.40 3.55 6.95Registrars to an Issue and Share Transfer Agents 0.37 0.09 0.46 0.10 0.04 0.14Bankers to an Issue 0.55 0.73 1.28 0.05 0.24 0.29Debenture Trustees 0.40 0.12 0.52 0.10 0.19 0.29Takeover fees 0.00 19.72 19.72 0.00 6.50 6.50Mutual Funds 2.25 10.35 12.60 2.31 11.89 14.20Stock Brokers and Sub-Brokers 20.78 0.00 20.78 14.48 0.00 14.48Foreign Institutional Investors 0.00 16.90 16.90 0.00 14.12 14.12Sub Account - Foreign Institutional Investors 0.00 13.83 13.83 0.00 11.17 11.17Depositories 0.20 0.00 0.20 0.20 0.00 0.20Depository Participants 0.22 2.64 2.86 0.29 0.92 1.01Venture Capital Funds 0.00 1.74 1.74 1.30 0.35 1.65Custodian of Securities 8.32 0.16 8.48 9.15 0.02 9.17Approved Intermediaries under Securities Lending Scheme 0.14 0.00 0.14 0.06 0.00 0.06Credit Rating Agencies 0.10 0.21 0.31 0.30 0.10 0.40Listing Fees Contribution from Stock Exchanges 5.25 0.00 5.25 7.03 0.00 7.07Foreign Venture Capital 0.00 0.95 0.95 0.00 1.15 1.15Derivatives Members registration 41.99 0.00 41.99 39.48 0.00 39.48Informal Guidance Scheme 0.00 0.05 0.05 0.00 0.05 0.05Regulatory Fees 7.19 0.00 7.19 8.19 0.00 8.19Total 92.56 101.32 193.88 87.81 66.70 154.51

# Recurring fees: Fees which is received on annual/3-yearly/5-yearly basis (includes Fee/ Service Fee/ annual fee/ Listing Fees from exchanges/ Regulatory Fees from stock exchanges).

## Non-recurring fees: Fees which is received on one time basis. Includes fee for Offer Documents Filed/ Registration Fee/ Application Fee/ Takeover Fees/ Informal Guidance Scheme/ FII Registration and FII Sub –Accounts Registration.

Notes: 1. Since the amount realised by way of penalties on or after 29.10.2002 has been credited to the Consolidated Fund of India, therefore,

the same has not been included in the fees income of SEBI since 2003-04.2. Stock brokers and sub-brokers fee includes annual fees and turnover fees.3. Stock brokers and derivatives fees are of recurring nature and depend on the trading turnover of the stock brokers and members

of derivatives segment.

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2. Corporate Restructuring

I. Substantial Acquisition of Shares and Takeovers

As on March 31, 2011, total 18 draft letters of offer for issue of observations were pending with SEBI. During the financial year 2011-12, additional 85 draft letters of offer were filed with SEBI (of which 62 were filed under old Takeover Regulations while 23 others were filed under new Takeover Regulations) and observations were issued on 71 draft letters of offer during the year and 32 draft letters of offers were pending with SEBI for issuance of observations as on March 31, 2012 (Table 3.13).

Regulation 4 of SEBI (SAST) Regulations, 1997 and Regulation 11 of SEBI (SAST) Regulations, 2011 deals with applications for seeking exemption from open offer obligations provided in Chapter III of Takeover Regulations (referred as Takeover Panel Applications). A total of 32 applications were examined during 2011-12, out of which, in nine applications, exemption was granted from open offer obligations, 11 applications were returned/ withdrawn and two applications were rejected (Table 3.13). There were ten Takeover Panel applications pending as on March 31, 2012.

Table 3.13: Status of Draft Letter of Offers for Open Offers filed under Regulation 18(1) of SEBI (SAST) Regulations, 1997 {Old Takeover Regulations} and under Regulation 16(4) of SEBI (SAST) Regulations, 2011 {New Takeover Regulations} during 2011-12

Status Number of case

Draft letters of offer for open offer Pending draft letters of offer as on March 31, 2011

18

• Draft letters of offer received during 2011-12, under Old Takeover Regulations

62

• Draft letters of offer received during 2011-12, under New Takeover Regulations

23

Total 103Observations issued by SEBI during 2011-12

71

Draft letters of offer in process as on March 31, 2012

32

Takeover Panel ApplicationsApplications as on March 31, 2011 9• Applications received during 2011-12

under Old Takeover regulations 20

• Applications received during 2011-12 under New Takeover Regulations

3

Total Applications 32Applications disposed of during 2011-12 22Applications in Process as on March 31, 2012

10

During the financial year 2011-12, a total of 71 offers were opened for the shareholders to tender their shares. In nine Takeover Panel Applications, SEBI granted exemption from open offer obligations (Table 3.14).

Table 3.14: Open offers and Exemption from Open Offers

(Number)

Period Open offers Exemptions from open offers

1 2 32008-09 113 152009-10 76 182010-11 101 162011-12 71 9

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II. Buyback

During 2011-12, a total of 29 buyback offers were received, indicating an increase of 52.6 percent over the previous financial year 2010-11. Out of these, 28 buyback offers were made through open market purchase method and one buyback offer was made through tender offer method (Table 3.15).

A total of 12 buyback offers opened and closed during 2011-12 as compared to 13 offers during 2010-11. The total buyback offer size during 2011-12 was ` 13,057.92 crore as compared to total buyback offer size of ` 5,315.8 crore in 2010-11 reflecting an increase of 145.6 percent in the offer size. It is also observed from the buyback offers which are opened and closed during 2011-12 that there was an average utilization of 41.12 percent of offer size in terms of amount. During 2011-12, the buyback under the tender offer method was fully subscribed and funds were totally utilized.

3. SUPERVISION

Effective supervision through on-site and off-site inspections, enquiry against intermediaries for violations of rules and regulations, enforcement and

prosecutions were essential features of effective enforcement of regulation by SEBI. SEBI conducts inspections either directly or through organisations like stock exchanges, depositories etc. Inspections on a periodic basis were conducted to verify the compliance levels of intermediaries. Special purpose inspections were also conducted on the basis of investor complaints, references, surveillance reports, specific concerns, etc. The inspection of the depositories was also carried out in order to examine the effectiveness and quality of audit/inspections and the action taking process of depositories.

I. Inspection of Market Intermediaries

The inspection process of intermediaries has been further reviewed with a view to expedite the inspection process as well as to improve the quality of follow up action resulting in enhanced level of compliance amongst the intermediaries. The findings of the inspections are communicated to the intermediaries and thoroughly discussed with them wherever necessary, to ascertain their views and action is initiated commensurate with the seriousness of the violation committed by the intermediary.

Table 3.15: Buyback Cases during 2011-12

Buy-back Cases No. of Cases Buy-back Size Actual Amount utilized for Buy-back of Securities

(`crore) (` crore)1 2 3 4

Buy-back through Open Market

Cases Received, Opened and Closed 11 1,140.20 463.20

Cases Received, Opened but not Closed 16 11458.1 NA

Cases Received but not Opened 1 450.00 NA

Buy-back through Tender Offer

Cases Received, Opened and Closed 1 9.62 9.62

Note: NA means Not Applicable

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Further, intermediaries were also specifically advised about the areas where improvement / corrective steps were required. They are now required to report to SEBI about the corrective steps taken by them and also place the same before their board/partners/proprietor, as the case may be. These steps taken by SEBI have improved the compliance level among the intermediaries

i. Inspection of Stock Brokers / Sub-brokers / Clearing Members

Clearing members are primarily responsible for effective clearing and settlement of transactions in equity derivatives and currency derivatives segments in the market. With a view to gauge and strengthen their compliance level and risk management systems, SEBI initiated inspection of clearing members during 2010-11. The inspections were aimed at checking whether the clearing members collect appropriate margins from the trading members, whether the collaterals collected towards margin are as prescribed by the clearing corporations and whether they reported the collection of margins correctly to the clearing corporations.

During 2011-12, the inspection of stock brokers has been substantially increased

from 46 to 81. Specific purpose risk-based inspections were also carried out during the year. The focus of the inspections included themes viz. complaints against stock brokers and their systems, verifying the compliance of specific SEBI circulars, subsidiaries of stock exchanges, brokers having internet based clients, actions initiated in the past against them by SEBI etc. The details of inspection of stock brokers and sub-brokers carried out are given in following table.

Table 3.16: Inspection of Stock Brokers/Sub-brokers/Clearing Members

Particulars 2010-11 2011-12

1 2 3

Inspections Completed – Stock Brokers

42 69

Inspections Completed - Sub - Brokers

1 12

Inspections Completed - Clearing Members

3 0

Total 46 81

In compliance with the requirement of inspecting all active members by the stock exchanges, the no. of entities inspected by the stock exchanges are given in Table 3.16a:

Table 3.16a: Inspection of Stock Brokers by Stock Exchanges(Number)

Year NSE BSE MCX-SX USE Total

1 2 3 4 5 6

2010-11 936 701 93 11 1,741

2011-12 1,044 746 133 99 2,022

Additionally, stock brokers/clearing members are required to carry out complete internal audit on a half yearly basis by independent auditors. By and large, all the

active stock brokers/clearing members of the four major stock exchanges (NSE, BSE, USE and MCX-SX) have submitted the internal audit report for the half year ended March

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31, 2011 and September 30, 2011, to the respective stock exchanges. These initiatives have improved the compliance level of stock brokers as they would not like to attract penalties again and again following internal audit by outside professionals and annual inspections by the stock exchanges.

ii. Inspection of Other Intermediaries

During the year 2010-11, SEBI carried out inspection of certain merchant bankers, to ascertain pre-issue and post-issue due diligence exercised by them in respect of issue management. During these inspections, it was observed that merchant bankers were not maintaining adequate supporting documents and records in respect of the due diligence exercised by them. To strengthen the inspections conducted by SEBI and to improve the compliance culture in the industry, SEBI (Merchant Bankers) Regulations, 1992 were amended, vide notification dated August 16, 2011, requiring merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities. Subsequent to the notification, SEBI has started carrying out inspection of the merchant bankers, after completion of every public issue, to check the due diligence exercised in respect of pre-issue and post-issue activities, and registrars to an issue to check the allotment process followed. This will help the intermediaries involved in the issue process to rectify the deficiencies, if any, immediately and avoid any kind of violation in future.

During 2011-12, regular inspections were completed for 13 depository participants, seven merchant bankers, five credit rating agencies, three debenture trustees and two RTI & STA (Table 3.17).

Table 3.17: Inspection of other Market Intermediaries

(Number)

Particulars 2010-11 2011-12

1 2 3

Registrar to an Issue & Share Transfer Agent

4 2

Merchant Banker 10 7

Others (companies) 2 0

Depository Participant 11 13

Credit Rating Agency 0 5

Debenture Trustee 4 3

Total 29 30

II. Inspection of Stock Exchanges

During the inspection of stock exchanges, a review of the market operations, organisational structure and administrative control of the stock exchange is conducted to ascertain as to whether:-

a) it provides a fair, equitable, transparent and growing market to the investors, and

b) its organisation, system and practices are in accordance with the SC( R)Act, 1956 and rules framed there under and,

c) it has implemented the directions, guidelines and instructions issued by SEBI/ Government of India from time to time and

d) it has complied with the conditions, if any, imposed on it at the time of renewal/ grant of its recognition under Section 4 of the SC(R) Act, 1956.

During the year 2011-12, comprehensive inspections were carried out at the following stock exchanges:-1) Bangalore Stock Exchange Ltd.2) Ahmedabad Stock Exchange Ltd.

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3) OTC Exchange of India4) MCX Stock Exchange Ltd.5) Vadodara Stock Exchange Ltd.6) Jaipur Stock Exchange Ltd.7) United Stock Exchange of India Ltd.8) National Stock Exchange of India Ltd.1

In addition to this, during the financial year 2011-12, compliance inspections were carried out at the following stock exchanges:-

1) Pune Stock Exchange Ltd.2) Inter connected Stock Exchange of India

Ltd.3) Cochin Stock Exchange Ltd.4) Ludhiana Stock Exchange Ltd.5) The Gauhati Stock Exchange Ltd.6) Bhubaneswar Stock Exchange Ltd.7) The Calcutta Stock Exchange Ltd.

The compliance inspections for the first six exchanges were carried out for the purpose of renewal of recognition of stock exchanges.

In addition to above a special purpose inspection of Pune Stock Exchange Ltd. was also carried out in line with Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges), Regulations 2006.

III. Follow-up Inspection Reports

Based on findings of inspection, the stock exchanges and depositories submit periodic compliance report to SEBI on periodic basis. These compliance reports are analysed and all unimplemented observations are followed up for compliance.

1 The inspection was initiated during 2011-12 and was ongoing as on March 31, 2012

4. SURVEILLANCE

I. Mechanism of Market Surveillance

Surveillance of the markets is one of the prime requirements for well functioning securities market. The primary responsibility of safe-guarding the integrity of the market and ensuring that the market is performing in accordance with the stipulated norms and practice, has been entrusted to stock exchanges, which act as first-level regulators. The exchanges, as part of their surveillance mechanism keep a watch on scrip’s price and analyze their trading pattern and appropriate actions are initiated by them in case of any discrepancies. Any suspicious incident or price movements are reported to SEBI for further examination.

The Integrated Surveillance Department (ISD) of SEBI is in charge of overall market surveillance and scope of its activities includes monitoring market movements and detecting potential breaches of regulations, analysing the trading in scrip’s and initiation of appropriate action wherever warranted. While primary inputs are received through examination reports from stock exchanges, ISD also receives inputs viz., complaints from investors, references from other departments of SEBI, regulatory bodies, and other govt. agencies as also reports in the media.

In addition, to enhance the efficacy of the surveillance function, ISD has put in place a comprehensive Integrated Market Surveillance System (IMSS) which generates alerts arising out of unusual market movements. SEBI has also implemented a Data Warehousing and Business Intelligence System (DWBIS) which support multi-dimensional historical data, have the capability for pattern recognition to quickly identify abnormal situations/ transactions, and provide an analytic

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environment that accelerates investigation functions.

ISD also keeps an oversight on the activities of the stock exchanges and depositories to promote an effective surveillance mechanism. ISD also has regular meetings with the exchanges and depositories to monitor their surveillance activities and market movements.

II. Data Warehousing and Business Intelligence System

During the year, DWBIS - Phase I was released to intended users after successful completion of User Acceptance Test (UAT). Currently, Phase I is fully operational and is released to Investigation and Surveillance Department, thereby helping in swift decision making. Also, under DWBIS - Phase II, several pattern recognition modules and predictive modeling scenarios are being developed. Some parts of DWBIS – Phase III is also complete and has been released for UAT.

Further, to leverage benefits of DWBIS warehouse capabilities, a pattern identifying software was developed by SEBI in collaboration with NISM. This software has been integrated with DWBIS and has been released to users. Similar initiatives of joint development in text analytics are also under consideration. The technologies used for such developments are evolving and SEBI has sought collaboration with technical institutes like IITs. To take advantage of the capabilities of DWBIS and provide useful information to SEBI as a whole, implementation of knowledge management practices has also been initiated.

III. Significant Market Movements during 2011-12

The top market movements in terms of percentage change are given below:

i. On September 22, 2011, the Sensex went down by 704 points (from previous day’s closing of 17,065.15) and Nifty declined by 209.60 points (from previous day’s closing of 5,133.25). Sensex and Nifty closed at 16,361.15 (-4.1 percent) and 4,923.65(-4.1 percent) respectively.

ii. On August 29, 2011, the Sensex rose by 567.50 points (from previous day’s closing of 15,848.83) and Nifty rose by 171.80 points (from previous day’s closing of 4,747.80). Sensex and Nifty closed at 16,416.33 (+3.6 percent) and 4919.60 (+3.6 percent) respectively.

iii. On December 21, 2011, the Sensex rose by 510.13 points (from previous day’s closing of 15,175.08) and Nifty rose by 148.95 points (from previous day’s closing of 4,544.20). Sensex and Nifty closed at 15,685.21 (+3.4 percent) and 4,693.15 (+3.3 percent) respectively.

IV. Surveillance Actions

Stock exchanges act as the first-level regulators for surveillance to the market and during the year 2011-12, NSE initiated preliminary examination and investigation in 116 cases and BSE initiated preliminary examination and investigation in 914 cases.

Further, as surveillance measure, during the year, NSE shifted 311 scrips to trade-to-trade (T to T) segment and BSE shifted 1053 scrips to trade-to-trade segment. On shifting the scrips into trade-to-trade segment, both legs of the transaction i.e. purchase/sale have to be settled separately on a gross basis. This leads to reduction in the amount of speculation as only those who can deliver the securities can enter into sale transactions and thereby day trading is reduced. Further, with a view to dampen the amplitude of prices, scrips shifted to T to T segment attract applicable

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circuit filters. NSE reduced circuit filter in 613 instances and BSE in 1,360 instances. Further, NSE and BSE verified 104 and 115 rumours, respectively (Table 3.18).Table 3.18: Number of Surveillance Actions

during 2011-12Nature of Action NSE BSE

1 2 3Scrips shifted to Trade to Trade segment

311.00 (259.00)

1053.00 (1219.00)

No. of scrips in which price bands were imposed (2%, 5% & 10%)

613.00 (529.00)

1360.00 (1816.00)

Preliminary Investigations taken up

116.00 (235.00)

914.00 (1345.00)

Rumours verified 104.00 (79.00)

115.00 (90.00)

Note: Figures in the parentheses pertain to 2010-11.

V. Surveillance Measures SEBI conducts meetings at regular intervals with stock exchanges and depositories to monitor their surveillance activities and market movements. In consultation with the stock exchanges and depositories, the following surveillance measures have been taken:a) SEBI has mandated that when market

value of a stock is quoting less than the face value of that stock, then there shall be no stock split in those shares. Also, it was decided that subsequent to any split/consolidation, a cooling off period of three years is mandatory before any further split/consolidation can be undertaken.

b) SEBI has stipulated that when there is substantial change in shareholding of an entity which would require disclosures under the various provisions of SEBI Act and Regulations, the depositories would provide such information to the stock exchanges. The stock exchanges would then verify whether disclosures as required have been made and in the event of any irregularities, report the

same to SEBI. It has also been decided that depositories shall display ISIN-wise information pertaining to pledged shares on their websites.

SEBI has advised the exchanges that a list of companies which are non-compliant with the Listing Agreement be displayed on the websites of BSE and NSE after notice has been sent to the companies for non-compliance of Listing Agreement. SEBI has decided that trading shall be suspended in partly paid shares of companies whose issue size is less than `500 crore and wherein the partly paid shares have been in existence for more than 12 months. The companies having issue size greater than `500 crore shall be required to include the information about partly paid shares and fully paid shares in their secretarial audit report that is submitted to stock exchanges. Failure to do so shall attract appropriate action by the stock exchanges. In addition to the above, all instruments issued by a company other than debentures and which are linked to equity shares of the company or have equity like features (warrants, etc), shall attract uniform surveillance action. For exchange traded funds, SEBI has advised the stock exchanges to apply price bands on the NAV of two days before trading day of exchange traded funds.

VI. Enforcement Actions During 2011-12, SEBI passed many orders in its enforcement capacity. Some of the important orders are given below:

i) Orders

a) Interim Order in the matter of Market Manipulation using Global Depository Receipts (GDRs)

During its routine surveillance activities, SEBI received alerts in the IMSS system

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regarding trading and off market transfers in few scrips like M/s. IKF Technologies Ltd, M/s. Avon Corporation Ltd, M/s. Cat Technologies Ltd, M/s. Asahi Infrastructure Ltd. and M/s. K Sera Sera Ltd. Examination revealed that these Indian companies were raising capital from overseas market via issuing GDRs which were converted into equity and sold in Indian markets in a short span of time after the issue. The lead manager in all of these issues was found to be common viz., M/s. Pan Asia Advisors Ltd. (PAAL), an entity registered in UK. Mr. Arun Panchariya (AP) is the founder and director of PAAL. Further investigation revealed the following:-

• All the above issues were subscribed by same set of subscribers.

• A few of the subscribers are connected with AP.

• GDRs were being purchased by FIIs or Sub-accounts to FIIs overseas, and were converted into equity and then sold in the Indian market.

• One such FII which was actively converting these GDRs and selling it in India was India Focus Cardinal Fund (IFCF), managed by AP.

• The counterparties to sale carried out by FIIs were also connected to AP.

In view of the foregoing, in order to protect the interest of investors and integrity of securities market, an ad interim ex parte order under Section 11(1), 11(4) and 11B of SEBI Act, 1992 was passed issuing directions against seven listed companies, four sub-accounts, one FII, five Indian entities along with Mr.Arun Panchariya and M/s.Pan Asia Advisors Ltd.

b) Interim Order in the scrip of M/s. Bodal Chemicals Ltd

BSE, on Aug 27, 2011, received a fax from Bodal Chemicals Ltd. on a letterhead of the company informing that the meeting of the Board of Director of the company will be held on August 29, 2011 to consider and approve bonus issue and also enclosed an undated press release issued by the company which, inter alia, stated about the disinvestments plans of the company, etc.

This news was disseminated on BSE website on Aug 29, 2011, at 8:13 hrs and 8:18 hrs. Further, through a clarification submitted to BSE, the company denied making the above disclosures to the Exchange. Amid the above disclosures followed by the denial, it was observed that the price of the scrip fluctuated with spurt in volumes, Exchanges (BSE and NSE) were asked to analyse the trading pattern in the scrip of the Company and submit a report.

On analysis, it was seen that Hemaliben Mehta, Charuben Mehta and Bhavanaben Vaghasiya were the top sellers during the crucial period of trading, which is pre-denial period when the investors were taking decisions on basis of incorrect positive news about the company. Since there was a suspicion of fraud, investigation was initiated. Pending its completion, following directions were issued through an interim order:

• Direction to BSE and NSE to withhold the pay-out of securities and funds for the trading done on their respective Exchanges on August 29, 2011 to ensure that the securities/funds are not disposed off by the alleged perpetrators of manipulation, if any.

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• Prohibit 3 persons (viz, Hemaliben Bimalkumar Mehta, Charuben Jeetendrarai Mehta and Bhavanaben Vaghasiya) from buying, selling or dealing in the securities market, in any manner whatsoever, till further directions.

c) Adjudication Order in the matter of M/s. Passport India Ltd.

During the course of SEBI investigation it was revealed that Mr. Kanaiyalal Baldevbhai Patel (KB) had placed and executed orders before the orders of Passport India Ltd. (Passport) and subsequently squared off his positions when the orders of Passport were placed in the market. It was alleged that the activity was conducted in such a manner that KB had managed to generate ill gotten profits for himself by the price movement of scrips that happened on account of the large buy/sell orders of Passport. KB has earned a total profit of `1,56,32,364.01 from the alleged trading. It was observed from the details submitted by the stock brokers who had executed orders on behalf of Passport that Mr. Dipak Patel (DP) was the portfolio manager for India of Passport and served as the point of contact between the stock brokers and Passport. Mr. Anandkumar Baldevbhai Patel (AB) is one of the relative of KB and DP and is also a recipient of ill gotten gains due to activity of KB and DP. It was alleged that the DP provided information to KB and AB with regard to the forthcoming trading activity of Passport and KB took advantage of the same and indulged in front running i.e. he placed and executed orders before the orders of Passport and subsequently squared off his positions

when the orders of Passport were placed in the market.

Adjudication order was passed against Anandkumar Baldevbhai Patel (AB), Kanaiyalal Baldevbhai Patel (KB) and Dipak Patel (DP) in the matter of Passport India Ltd. (Passport) on September 30, 2011 , wherein a penalty of ̀ 11,00,00,000/- was levied on these three entities.

d) Adjudication Order in the matter of M/s. Sarang Chemicals Ltd. (SCL)

SEBI examined the trading activity of M/s. Atlanta Share Shopee Limited, a member broker of the BSE Ltd. in the scrip of M/s. Sarang Chemicals Limited. From the shareholding pattern of the company available on the website of the stock exchanges, it was observed that M/s. Atlanta Share Shopee Limited was holding 98,03,802 shares of SCL (5.6 percent of the issued share capital/voting rights of SCL) during the quarter ending June 30, 2009. In view of the above, it was alleged that the entity had acquired and was holding more than five percent shares/voting rights in SCL. However, it failed to make the required disclosures in terms of the provisions of Regulation 7(1) of the SEBI (SAST) Regulations, 1997 and Regulation 13(1) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Further, as it is not a normal business practice of stock brokers to keep shares of its clients in their own beneficiary account for such a long period, therefore, the entity has also violated the provisions of the code of conduct for stock brokers specified in Schedule II read with regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

Adjudication order was passed against M/s. Atlanta Share Shopee Limited in

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the matter of M/s. Sarang Chemicals Limited, wherein a penalty of ̀ 3,00,000/- was levied on M/s. Atlanta Share Shopee Limited.

e) Adjudication Order in the matter of M/s. MTZ Polyfilms Ltd

M/s. MTZ Poly Films Ltd. failed to comply with various clauses of listing agreement, thereby not complying with section 21 of SC(R)A, 1956. Accordingly, adjudication proceedings were initiated on December 2, 2010 against the company, wherein a penalty of ` 1 lakh was levied on M/s. MTZ Polyfilms Ltd.

f) Adjudication Order in the matter of M/s. MTZ Industries Ltd

M/s. MTZ Industries Ltd. failed to comply with disclosure requirement under Regulation 7(1) and Regulation 7(2) of SAST Regulations 1997 and Regulation 13(3) and Regulation 13(5) of Prohibition of Insider Trading (PIT) regulations. Accordingly, adjudication proceedings were initiated on December 02, 2010 against the company, wherein a penalty of ` 3 lakh was levied on M/s. MTZ Industries Ltd.

g) Adjudication Proceedings Initiated Against Five Entities w.r.t Their Dealings in the Scrip of M/s. AV Cottex Ltd

From the examination conducted into the dealings in the scrip of M/s. AV Cottex Ltd, wherein from the analysis of the company’s submissions regarding the acquisition by its erstwhile promoter entities during April 1, 2006 to November 30, 2006, and from the details provided by the company regarding top shareholders at the end of each quarter during March 2006 to December 2006, it

was observed that several entities had not made disclosures related to the change in their shareholding as required under SEBI (Prohibition of Insider Trading) Regulations, 1992.

It prima facie appeared that erstwhile promoters of M/s. AV Cottex Ltd. comprising Lee Hotels Pvt Ltd, M/s. Conchem Construction Pvt Ltd, M/s. Jas Expoship Pvt Ltd, M/s. ADB Trade Services Pvt Ltd, M/s. Competent Surveyors Pvt Ltd. have violated Reg 13(1) and Reg 13(3) of SEBI (Prohibition of Insider Trading) Regulations, 1992 and erstwhile promoter Mr. Anuj Dewan has violated Reg 13(4) of SEBI (Prohibition of Insider Trading) Regulations, 1992. Further, M/s. Sahil Electronics Ltd. has violated Regulation 13(3) and M/s. Watta Finance & Investment Co. Ltd. has violated Regulation 13(1) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.

In this regard, adjudication proceedings were initiated against M/s. Sahil Electronics Ltd. and M/s. Watta Finance & Investment Company Ltd. on January 30, 2012, wherein a penalty of `50,000 each was levied on above entities.

ii) Consent orders:

Many proceedings are settled through consent orders as per the SEBI circular dated April 20, 2007. Some of the major consent orders passed through consent mechanism during the year are:

a) M/s. SMIFS Securities Ltd

SEBI had conducted investigations into the trading in the scrip of M/s.DSQ Software Limited during the period from October 1, 1999 to March 31, 2001. The investigation prima facie revealed

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that M/s. SMIFS Securities Limited (now known as ‘Stewart & Mackertich Wealth Management Limited’) had executed 47 synchronised transactions on behalf of Promoter associated entities of DSQ Software Ltd. Therefore, it was alleged that the applicant created artificial volume in the scrip thereby violating the provisions of the SEBI (PFUTP) Regulations, 2003, SEBI (Stock Brokers & Sub-brokers) Regulations, 1992 and the provisions of SEBI SMD circular dated September 14, 1999.

Pursuant to the investigation, SEBI initiated enquiry proceedings and a show cause notice was issued under Regulation 13(2) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. While the above proceedings were in progress, the applicant proposed settlement of the said proceedings through a consent order on payment of ` 2,50,00,000/- towards settlement charges. On payment of ` 2,50,00,000/- towards settlement charges a consent order was passed on July 18, 2011.

b) M/s. Accord Capital Markets Ltd

SEBI noticed an unusual movement in the share price of M/s. DSQ Software Ltd. Based on prima facie findings, SEBI, vide ad-interim order dated July 20, 2001 had inter alia prohibited the company and its promoter, Mr. Dinesh Dalmia from accessing capital market for certain period mentioned therein. The said interim order was confirmed by SEBI vide its order dated 20.12.2001. M/s. Accord Capital Markets Ltd. had allegedly entered into synchronised trades with other members of NSE who were trading on behalf of associates of Mr. Dinesh

Dalmia. Trades were allegedly done in the proprietary accounts of the applicant as well as its client M/s. Mehta and Ajmera, which is a partnership firm whose partners are directors/promoters of the applicant.

Pursuant to the investigations and enquiry report, a show cause notice was issued under Regulation 28 read with Regulation 38 of the SEBI (Intermediaries) Regulations, 2008 with the allegations that the applicant has violated the provisions of Regulation 4 (b), (c), (d) of SEBI (PFUTP) Regulations, 1995 read with Regulation 3 (a), (b) and 4 (2)(a) and (b) of SEBI (PFUTP) Regulations, 2003 and Regulation 7 read with Clauses A(1) to (4) of the Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations,1992 and SEBI circular dated September 14, 1999

While the above proceedings were in progress, the applicant proposed settlement of the above-mentioned proceedings through a consent order. After considering the facts and circumstances of the case and the material brought before it by SEBI, the High Powered Advisory Committee constituted by SEBI recommended that the case may be settled on following terms and conditions:-

a) On payment of ` 4,00,00,000/- towards settlement charges;

b) Voluntary debarment by theApplicant as well as its promoters viz. Mr. Girish S Mehta and Mr. Himanshu Ajmera from buying, selling or otherwise dealing in the securities market for a period of one year from the date of the consent order;

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c) Voluntary debarment of the promoters of the applicant from being promoters/directors of intermediaries registered with SEBI during the said period of debarment of one year.

On acceptance of the aforesaid recommendations and payment of ` 4,00,00,000/- towards settlement charges, a consent order was passed on June 29, 2011.

iii) Prevention of Money Laundering:

Money laundering is globally recognised as one of the largest threats posed to the financial system of a country. The fight against terrorist financing is another such emerging threat with grave consequences for both the political and economic standing of a jurisdiction. Rapid developments and greater integration of the financial markets together with improvements in technology and communication channels continue to pose serious challenges to the authorities, and institutions dealing with anti-money laundering and combating financing of terrorism (AML and CFT).

The Prevention of Money Laundering Act , 2002 (PMLA) and Rules framed there under brought into force with effect from July 1, 2005 has been a significant step towards India joining the global war against money laundering and financing of terrorism.

During 2011-12, SEBI continued its focused efforts to bolster the regulatory framework and minimise the risk emanating from money laundering and terrorist financing. Following are the further measures and steps taken in this regard:

• SEBI had issued circulars on August 22, 2011 and October 5, 2011 to strengthen the KYC related guidelines. As a result, the requirements prescribed for KYC including the documentary requirements have been made uniform for investors while opening accounts with the intermediaries in securities markets.

• SEBI had conducted 35 specific purpose inspections of stock brokers to check their KYC process, the extent of due-diligence and compliance level with current regulatory and statutory framework in this regard. Action with regard to these cases is in progress.

• Stock exchanges and depositories have also conducted inspections of their members/participants respectively to verify compliance with the AML/CFT framework and took actions where AML/CFT violations/discrepancies were observed. The tables given below provide data on the number of members/participants against whom action for AML/CFT discrepancies have been taken by the exchanges and depositories :

Table 3.19: Actions against AML/CFT Violations/Discrepancies

Particular NSE BSE CDSL NSDL

No. of members where AML discrepancies were observed and action taken

68 110 42 102

of which

Advice issued 53 110 42 96

Fines levied 15 7 Nil 23

Value of fines imposed (in `) 1,75,000 62,000 Nil 11,850

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market. SEBI is therefore constantly striving to upgrade its investigative skills by making use of Information Technology. Importance of effective and credible use of investigation has also been underscored by IOSCO in its “Principles for the Enforcement of Securities Regulation”.

Keeping the above objectives and principles of securities regulations in view, SEBI initiates investigation to examine alleged or suspected violations of laws and obligations relating to securities market. The possible violations may include price manipulation, creation of artificial market, insider trading, capital issue related irregularities, takeover related violations, non-compliance of disclosure requirements and any other misconduct in the securities markets.

I. Initiation of Investigation

There are various sources of information for initiation of investigation. SEBI initiates investigation based on reference received from sources such as stock exchanges, internal surveillance department, other government departments, information submitted by market participants and complainants. In appropriate cases, investigation may also be initiated suo moto, where there are reasonable grounds to believe that investors’ interests are being adversely affected or there is a suspected violation of the provisions of the securities laws.

II. Process of Investigation

The steps involved during investigation process include an analysis of market data (order and trade log, transaction statements etc.) and static data (KYC documents obtained from brokers, depository participants etc., bank records, financial results, events around major corporate developments etc.) The

• Stock exchanges and depositories also conducted trainings/seminars for their members to sensitize them towards the significance of AML/CFT framework and the need to ensure continuous compliance with it.

SEBI has consistently been in touch with the global bodies and other Indian regulators in its attempt to keep regulatory framework for AML robust in the Indian securities markets. SEBI officials as part of the Indian Government delegation participated in the plenary and working group meetings of FATF and ‘Eurasian Group on Combating Money Laundering and Terrorist Financing (EAG)’, which is a FATF-style regional body (FSRB) with a view to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

The Eurasian Group (EAG) had instituted a typology research project on topic “Money Laundering through the Securities Market” and India was assigned leadership of this project in March 2011. SEBI has initiated work for preparation of report on the research project. In this regard, SEBI had presented the preliminary findings of the project in the EAG plenary held on November 23, 2011.

5. INVESTIGATION

Timely completion of investigation cases and effective, proportionate and dissuasive action in case of violations of established securities laws is important for protection of investors’ interest and ensuring fair, transparent and orderly functioning of the market. It is also vital for improving the confidence in the integrity of the securities

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purpose of such investigation is to gather evidence and to identify persons/ entities behind irregularities and violations so that appropriate and suitable regulatory action can be taken, wherever required. Outcome of investigation in the form of enforcement action is a clear signal to the market players to comply with the law and expected standards of conduct in the market.

III. Trends in Investigation Cases

Since 1992-93, SEBI has undertaken 1,617 investigation cases. In 1,420 cases investigations have been completed. Apart from enforcement action, an important attendant benefit resulting from such investigations is contribution to the policy changes with a view to further strengthen the regulatory and enforcement environment.

During 2011-12, 154 new cases were taken up for investigation and 74 cases were completed (Table 3.20 and Chart 3.3).

Table 3.20: Investigations by SEBI(Numbers)

Year Cases Taken up for Investigation

Cases Completed

1 2 31992-93 2 21993-94 3 31994-95 2 21995-96 60 181996-97 122 551997-98 53 461998-99 55 601999-00 56 572000-01 68 462001-02 111 292002-03 125 1062003-04 121 1522004-05 130 1792005-06 159 812006-07 120 1022007-08 25 1692008-09 76 832009-10 71 742010-11 104 822011-12 154 74

Total 1,617 1,420

Chart 3.3: Investigation Cases

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i. Nature of Investigation Cases Taken Up

During 2011-12, about 47 percent of the cases taken up for investigation pertain to market manipulation and price rigging, as against about 54 percent of such cases in the previous year. Other cases pertain to insider trading, takeover violations, irregularities in capital issues, and other violations of securities laws. Since, several investigation cases involve multiple allegations of violations, water-tight classification under specific category becomes difficult. Therefore, cases were classified on the basis of main charge / violations.

ii. Nature of Investigation Cases Completed

During 2011-12, about 50 percent of the cases completed pertain to market manipulation and price rigging, as against about 62 percent of such cases in the previous year. Other cases in which investigation was completed pertain to capital issue related manipulation, insider trading, takeovers etc.

The details of investigation cases taken up and completed are provided in Table 3.21, Chart 3.4 and Chart 3.5.

Table 3.21: Nature of Investigations Taken up and Completed(Number)

Cases taken up Cases completedParticulars 2010-11 2011-12 2010-11 2011-12

1 2 3 4 5Market Manipulation and Price Rigging 56 73 51 37Capital "Issue" related Manipulation 6 35 2 4Insider Trading 28 24 15 21Takeovers 4 2 4 2Miscellaneous 10 20 10 10Total 104 154 82 74

Chart 3.4: Nature of Investigation Cases Taken Up (2011-12)

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Chart 3.5: Nature of Investigation Cases Completed (2011-12)

Box 3.2: SEBI Investigations in recent Initial Public Off ers (2011) SEBI had initiated preliminary investigations into certain Initial Public Off ers (IPOs) that raised funds during the year 2011 wherein it was prima facie found that, many of the prospectus / RHPs (Red herring prospectus) did not contain certain material, true and adequate disclosures so as to enable the applicants to take an informed investment decision. However, the directors and other signatories had wrongly certifi ed in the RHP that all the disclosures made in the off er document were true and correct. The Merchant Bankers Companies and respective directors had apparently colluded with the issuers or had failed to exercise the required level of due diligence. It was also observed that in some cases, the issuer companies did not make prompt, true and fair disclosure of all the material developments that took place between the date of the RHP and the date of allotment of securities through public notices, as required. Further, in some cases, funds raised by the companies had reached some traders through various layers and these traders had traded signifi cantly on the day of listing or around that time, in manipulative pa� erns.

Based on the preliminary fi ndings/observations, Shri Prashant Saran, Whole Time Member, SEBI, passed ad interim, ex-parte orders under Sections 11(1), 11(4), 11A and 11B of SEBI Act, 1992 against 208 entities inter-alia including the 7 issuer companies, their directors, 5 Merchant bankers, on December 28, 2011. The salient directions issued to these entities included;

1. Prohibition on issuer companies from raising any further capital from the securities market, in any manner whatsoever, till further directions. The issuer companies, directors and other signatories who signed the RHP were prohibited from buying, selling or dealing in the securities market in any manner whatsoever, till further directions.

2. The companies were directed to call back the money invested in ICDs and all amounts transferred / paid out of IPO proceeds to their directors or relatives of their directors or HUFs belonging to any of the directors or associate or subsidiaries or group companies and to deposit these amounts together with all of the IPO proceeds that were still lying unutilized with the companies across all their bank / deposit accounts or any investments including in mutual funds, in an interest bearing escrow account with a scheduled commercial bank, till further orders.

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3. The Book Running Lead Managers and their CEOs and Heads of Merchant Bankers were prohibited from taking up any new assignment or involvement in any new issue of capital including IPO, follow-on issue etc. from the securities market in any manner whatsoever, till further directions.

4. In some cases, stock brokers were prohibited from buying, selling or dealing in any securities, in any manner whatsoever, in their proprietary accounts, and were also prohibited from entering into any fresh agreements with new clients in their operations as stock broker till further orders. In one of the case, brokers and their directors were prohibited from buying, selling or dealing in any securities, in any manner whatsoever, till further orders.

5. Some entities who were identifi ed to have traded on the listing day and had received money through routing of IPO proceeds directly or indirectly through related entities, were prohibited from buying, selling or dealing in any securities, in any manner whatsoever, till any further orders.

IV. Regulatory Action

After completion of investigation, further penal action is initiated as per the recommendations made in the investigation reports and as approved by the competent authority. Action is decided based on the principles of objectivity, consistency, materiality and quality of evidence available, after thorough analysis and appreciation of facts.

The action included issuing warning letters, initiating enquiry proceedings for registered intermediaries, initiating adjudication proceedings for levy of monetary penalties, passing directions under Section 11 of SEBI Act, 1992 and initiating prosecution and referring matter to other regulatory agencies. As a matter of policy, SEBI has continued to lay greater emphasis on issuance of prohibitive directions under Section 11 of the SEBI Act, 1992. These directions have the strong and salutary effect of deterrence and also act as an effective tool to deal with emergent situations requiring a timely and faster response. SEBI issued 487 such directions during 2011-12. A detailed break up of all regulatory actions is given in Table 3.22 and Chart 3.6.

Table 3.22: Type of Regulatory Actions Taken During 2011-12

Particulars Number of Entities

1 2

Suspension 16

Warning issued 33

Prohibitive directions issued under Section 11 of SEBI Act * *

487

Cancellation 0

Administrative warning/Warning Letter issued

918

Deficiency observations issued 28

Advice letter issued 4

Total 1486

** Other than consent orders

V. Follow-up of Investigations

After completion of investigation, the Investigation Department is also actively involved in post-investigation enforcement actions and quasi-judicial proceedings. Such actions include issuing show cause notices to the entities, examining their replies, organising and participating in the hearings of the entities before the Whole Time Members of SEBI, co-ordination with Enforcement

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Department (EFD), preparing draft orders, issuing press releases after orders are passed, attending briefings of advocates and replying to their queries, co-ordination with Enforcement Department in the proceedings before Securities Appellate Tribunal (SAT) and before courts, co-ordination with Prosecution Department for cases filed in the courts, follow-up for collection of penalty after orders passed by Adjudicating Officers, initiating prosecution for non-payment of penalties, processing of consent proposals filed by the entities, etc. Timely and qualitative completion of such actions is also important for ensuring the effectiveness of regulatory measures taken by SEBI.

6. ENFORCEMENT OF REGULATIONS

Effective enforcement in the form of effective follow-ups and disciplinary actions makes a regulatory system effective.

I. Enforcement Mechanisms

There are five enforcement mechanisms that SEBI uses in case of any violation(s) pertaining to the laws regulating the securities market. Age-wise analysis of enforcement action details viz. actions u/s 11, 11B and 11D of SEBI Act, enquiry proceedings, adjudication proceedings, prosecution proceedings and summary proceedings as on March 31, 2012 are provided in Tables 3.23a to Table 3.23e.

i. Section 11/11B Proceedings

Under section 11/11B of SEBI Act, 1992, SEBI may issue directions or prohibitive orders such as debarment from accessing the securities market or not to deal in securities.

In 2011-12, 375 cases under section 11/11B were disposed by SEBI. In the same financial year, 348 fresh cases under the caption provision of law were initiated by SEBI. The cumulative pending cases as on March 31, 2012 were 974.

Chart 3.6: Type of Regulatory Actions Taken

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Table 3.23a: Age-wise Analysis of Enforcement Actions - U/S 11, 11B and 11D of SEBI ACT (As on March 31, 2012)

Year No. of Ac-tions Initi-ated

No. of Actions Disposed Pend-ing

Cases1995-96

1996-97

1997- 98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008- 09

2009- 10

2010-11

2011-12

Aggre-gateDis-

posal

1995-96 0 0 0 0

1996-97 3 3 0 3 0

1997-98 85 6 15 9 34 1 14 4 0 83 2

1998-99 51 9 9 26 7 0 0 51 0

1999-00 83 13 12 10 20 19 1 5 3 0 83 0

2000-01 461 269 18 45 49 28 1 2 2 15 0 3 4 436 25

2001-02 441 390 32 12 1 3 2 0 0 1 441 0

2002-03 321 58 74 30 21 8 21 30 24 7 25 298 23

2003-04 713 30 135 45 94 197 47 52 33 25 658 55

2004-05 522 2 38 39 168 105 85 19 46 502 20

2005-06 196 1 12 31 65 69 18 0 196 0

2006-07 402 34 67 65 119 54 15 354 48

2007-08 374 58 75 61 61 48 303 71

2008-09 75 8 44 23 0 75 0

2009-10 376 30 69 114 213 163

2010 -11 346 30 87 117 229

2011-12 348 10 10 338

Total 4,797 0 0 6 3 28 299 427 215 192 196 107 189 561 412 493 320 375 3,823 974

ii. Enquiry Proceedings

SEBI may suspend or cancel the certificate of registration of an intermediary through Enquiry Regulations on the recommendation of the enquiry officer/designated authority appointed for that purpose. It may also issue warning to an intermediary if it considers that the violations committed by the intermediary does not warrant suspension or cancellation or registration.

In the financial year 2011-12, 40 cases were disposed by SEBI after the due completion of enquiry proceedings. In the same financial year, 8 fresh cases were initiated where enquiry proceedings are being

followed. The cumulative pending cases as on March 31, 2012 stands at 123.

iii. Adjudication Proceedings

Under Chapter VIA of SEBI Act, 1992, SEBI may appoint an Adjudicating Officer for conducting enquiry and imposing penalties.

In 2011-12, 645 cases were disposed by SEBI under adjudicating proceedings. In the same financial year, 609 fresh cases were initiated under adjudicating proceedings. The cumulative pending cases as on March 31,2012 stands at 1,270.

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Table 3.23b: Age-wise Analysis of Enforcement Actions - Enquiry Proceedings (As on March 31, 2012)

Year No. of Actions

Initi-ated


Cases1995-96

1996-97

1997- 98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008- 09

2009-10

2010-11

2011-12

Ag-gregate

Dis-posal

1995-96 8 8 0 8 01996-97 20 1 12 7 0 20 01997-98 66 3 48 7 5 1 2 0 66 01998-99 335 48 116 12 154 2 3 0 335 01999-00 69 27 1 18 19 1 1 0 67 22000-01 267 6 33 204 6 9 2 1 5 0 266 12001-02 204 35 83 49 16 11 4 6 0 204 02002-03 371 141 56 27 27 60 20 16 4 14 6 371 02003-04 476 21 71 115 82 83 28 48 14 8 470 62004-05 190 3 17 3 57 70 30 10 0 190 02005-06 80 9 31 19 8 13 0 80 02006-07 122 4 8 28 22 27 20 109 132007-08 89 3 11 8 14 4 40 492008-09 20 4 3 1 8 122009-10 23 1 5 0 6 172010 -11 24 8 1 9 152011-12 8 0 0 8Total 2,372 0 9 15 103 150 24 87 603 134 127 172 164 216 172 125 108 40 2,249 123

Table 3.23c: Age-wise Analysis of Enforcement Actions - Adjudication Proceedings (As on March 31, 2012)

Year No. of Actions

Initi-ated


Cases1995-96

1996-97

1997- 98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008- 09

2009-10

2010-11

2011-12

Ag-gregate

Dis-posal

1995-96 2 1 1 2 0

1996-97 5 1 2 1 1 5 0

1997-98 16 3 2 1 1 7 2 16 0

1998-99 33 2 7 1 1 1 8 2 1 2 25 8

1999-00 32 9 7 3 2 4 2 2 3 32 0

2000-01 77 4 17 1 6 8 5 4 5 23 0 4 77 0

2001-02 64 16 14 4 14 2 6 5 1 1 63 1

2002-03 150 10 11 62 19 15 8 6 3 5 0 139 11

2003-04 577 52 344 55 66 8 27 9 3 0 564 13

2004-05 418 8 137 126 45 28 17 21 23 2 407 11

2005-06 283 27 47 22 66 23 56 10 251 32

2006-07 578 34 82 102 120 106 18 462 116

2007-08 1215 4 20 152 373 295 47 891 324

2008-09 546 70 101 255 42 468 78

2009-10 644 114 229 121 464 180

2010 -11 571 284 257 541 30

2011-12 609 143 143 466

Total 5820 0 0 1 6 9 16 43 29 85 581 242 218 181 473 764 1,257 645 4,550 1,270

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Table 3.23d: Age-wise Analysis of Enforcement Actions - Prosecution Proceedings (As on March 31, 2012)

Year No. of Ac-tions Initi-ated


Cases1995-

961996-

971997-

981998-

991999-

002000-

012001-

022002-

032003-

042004-

052005-

062006-

072007-

08 2008-

092009 10

2010-11

2011-12

Aggre-gate Dis-

posal1995-1996 9 1 1 1 3 61996-1997 6 1 1 2 41997- 1998 8 1 1 1 3 51998-1999 11 1 1 2 91999-2000 25 1 1 1 3 222000-2001 28 1 1 2 4 242001-2002 95 3 4 4 1 2 14 812002-2003 229 1 5 17 6 5 2 5 41 1882003-2004 480 1 5 29 29 5 15 15 33 132 3482004-2005 86 1 13 6 2 3 3 28 582005-2006 30 3 2 1 6 242006-2007 23 0 232007-2008 40 1 1 2 382008-2009 29 0 292009-2010 30 0 302010-2011 17 0 172011-2012 29 0 29Total 1,175 0 0 0 0 1 2 2 2 2 6 6 43 65 19 24 25 43 240 935

iv. Prosecution

Section 24 of the SEBI Act, 1992 empowers SEBI to launch prosecution against any person for contravention of any provision of the SEBI Act, 1992 or any rules or regulations made there under before a court of criminal jurisdiction.

In 2011-12, 43 prosecution cases filed by SEBI were disposed by courts and 29 new cases were initiated. The cumulative pending cases as on March 31,2012 stands at 935.

v. Summary Proceedings

Chapter VA of the SEBI (Intermediaries) Regulations, 2008 provides the power to conduct summary proceedings in certain specific cases. In 2011-12, two cases for summary proceedings were disposed by SEBI. It may be noted that no summary proceedings were initiated during the same period of time.

The cumulative pending cases as on March 31, 2012 stands at 83.

II. Market Intermediaries

During 2011-12, SEBI initiated 609 adjudication and eight enquiry proceedings. Further, out of 716 orders passed or reports submitted during 2011-12, 692 cases were adjudication proceedings while 24 cases were enquiry related. During 2011-12, SEBI issued 714 show cause notices and conducted 950 hearings. As on March 31, 2012, 123 enquiry proceedings and 1270 adjudication proceedings are pending with enquiry and adjudicating officers. Details of enquiry and adjudication proceedings initiated during 2011-12, enquiry and adjudication cases (action taken) during 2011-12 and pending enforcement actions as on March 31, 2012 are provided in Table 3.24a, 3.24b and 3.24c respectively.

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Table 3.23e: Age-wise Analysis of Enforcement Actions – Summary Proceedings under SEBI Act (As on March 31, 2012)

Year No. of Actions

Initi-ated


Cases1995-96

1996-97

1997- 98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008- 09

2009-10

2010-11

2011-12

Ag-gregate

Dis-posal

1995-96 0 01996-97 0 01997-98 0 01998-99 0 01999-00 0 02000-01 0 02001-02 0 02002-03 0 02003-04 47 2 3 19 4 2 30 172004-05 0 02005-06 2,296 0 230 79 11 1,820 90 0 2,230 662006-07 1 1 1 02007-08 1 1 1 02008-09 91 91 91 02009-10 0 0 02010 -11 0 0 0 02011-12 0 0 0 0Total 2,436 0 0 0 0 0 0 0 0 0 0 0 232 82 11 1,932 94 2 2,353 83

Table 3.24a: Enquiry and Adjudication Proceedings Initiated during 2011-12

Particulars No of Cases

1 2

Enquiry Related 8

Adjudications 609

Total 617

Table 3.24b: Enquiry and Adjudication during 2011-12

Particulars Enquiry Adjudi-cation

Total

Orders Passed/ Report Submitted

24 692 716

Hearings Conducted 950

Show Cause Notices Issued

714

Table 3.24c: Pending Enforcement Actions as on March 31, 2012

Pending with Enquiry and Adjudicating Offi cers

No. of Cases

1 2

Enquiry Related (excluding summary proceedings)

123

Adjudications 1270

Total 1393

During 2011-12, SEBI issued 22 warning/deficiency/advice letters to other intermediaries as listed below in Table 3.25. Out of which, 10 were issued against Merchant Bankers, six against Depository Participants (DPs) and three each against Debenture Trustees and RTI & STAs.

Moreover, SEBI has initiated enquiry proceedings against one Merchant Banker and one RTI & STA. There wasn’t any adjudication

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proceedings initialed during 2011-12 against other intermediaries (Details in Table 3.25).

Table 3.25: Enquiry and Adjudication Proceedings Initiated against other Intermediaries during 2011-12

Intermediaries Adjudi-cation

Enquiry Warning/defi-

ciency/advice

1 2 3 4Registrars to an Issue & Share Transfer Agents

0 1 3

Merchant Bankers 0 1 10Depository Participants

0 0 6

Debenture Trustees 0 0 3

III. Regulatory Actions against Mutual Funds

i. Warning and Deficiency Letters

During 2011-12, 14 warning letters and six deficiency letters were issued to mutual funds on account of violations of SEBI regulations/guidelines.

ii. Payment of Penal Interest

SEBI has made it mandatory that mutual funds must pay interest at the rate of 15 percent per annum for delays in the dispatch of repurchase/ redemption proceeds to the unit holders. The mutual funds are required to report these cases of delay to SEBI on a bimonthly basis. During 2011-12, mutual funds paid `52,41,655.28 to 1,558 investors for delay in dispatch of redemption/repurchase proceeds to the unit holders as against `23, 38,441.89 paid to 2,975 investors in 2010-11.

SEBI had also made it mandatory that, in the event of failure of dispatch of dividend, the AMC shall be liable to pay interest at the rate of 15 percent per annum to the unit holders. The mutual funds are required to

report these cases of delay to SEBI on a bi-monthly basis. During 2011-12, mutual funds paid ̀ 13,37,490.70 to 727 investors for delay in dispatch of dividend as against `9, 91,187.25 to 2,573 investors in 2010-11.

IV. Regulatory Actions against CISs

iv. Reference to MCA

SEBI made a reference to Ministry of Corporate Affairs (MCA) regarding the names the CIS entities and their directors who have carried out CIS operations in violation of the SEBI (CIS) Regulations, 1999 with a request to circulate the same as a caution list of entities and directors among all RoCs so as to prevent such entities and directors from being associated with any new company.

v. Regulatory Action against CIS entity, M/s. Sun-Plant Agro Limited

The entity claimed to be involved in the sale of trees to investors whereas in reality it was having Collective investment schemes in the guise of this business. An interim ex-parte order of SEBI under Section 11B was passed on October 21, 2010 against the company. After personal hearing, a final order was passed against M/s. Sun-Plant on May 3, 2011 by the Whole Time Member, SEBI. The company was directed to wind up its scheme and refund the money collected as per Regulation 73 of the SEBI (CIS) Regulations, 1999.

The company thereafter filed a writ petition in the Hon’ble Calcutta High Court against the order and the matter is yet to be heard.

V. Regulatory Actions under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

During 2011-12, 18 cases were referred for adjudication under Section 15 of the SEBI Act,

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1992 for alleged violation of the provisions of SEBI (SAST) Regulations, 1997 and a sum of ` 99,40,000 was recovered as monetary penalty.

VI. Regulatory Actions against FIIs

M/s. Amam Limited was granted registration as an FII subject to the condition that they would invest only on behalf of their clients to be registered with SEBI as sub-accounts. However, the FII had invested on its own behalf thereby violating the conditions of registration. Therefore, adjudication was initiated against the FII for the violation of Regulation 7A and 10(a) of the SEBI (Foreign Institutional Investors) Regulations, 1995.

The FII applied for consent which was subsequently rejected by the appropriate authority and an Adjudication Order was passed against the FII on August 29, 2011 imposing a monetary penalty of ` 25,00,000/- under Section 15HB of the SEBI Act, which has been paid by the FII.

VII. Regulatory Actions against Market Intermediaries

i. Adjudication proceedings in the matter of Delay in Dematerialisation

In 2011-12, SEBI received two adjudication orders which were passed against issuer companies for delay in dematerialisation of securities. Details of the same are as follows:

1. M/s. Padmini Technologies Ltd. - SEBI received the monthly status report and the DRN pending information from NSDL and CDSL vide emails dated August 1, 2007 and August 4, 2007 respectively. It was observed that M/s. Padmini Technologies Ltd. delayed dematerialisation of securities. Order was passed by AO on April 28, 2011 imposing penalty of ` 30,00,000 for violation of

Regulation 54(5) of the SEBI (Depositories and Participants) Regulations, 1996. Penalty was paid by the issuer company on June 08, 2011.

2. M/s. Mini Soft Limited - SEBI received the monthly status report and the DRN pending information from NSDL and CDSL vide emails dated January 15, 2008. It was observed that M/s. Mini Soft Ltd. delayed dematerialisation of securities. AO passed order dated June 27, 2011 imposing a penalty of `8,00,000/- on the issuer company for violation of Regulation 54(5) of the SEBI (Depositories and Participants) Regulations, 1996. Penalty was paid by the issuer company on July 13, 2011.

ii. Order in the matter of application made by M/s. Infomerics Valuation and Rating Pvt. Ltd. for grant of registration as a Credit rating agency

M/s. Infomerics Valuation and Rating Pvt. Ltd. submitted an application dated June 11, 2009 seeking registration as a credit rating agency under the SEBI (Credit Rating Agencies) Regulations, 1999 to SEBI. As the entity had failed to submit documents sought by SEBI, an Order dated June 24, 2011 was passed against M/s. Infomerics Valuation and Rating Pvt. Ltd, which inter alia contained the following directions for the said entity: a) Indicate as to which entity is its promoter(s) along with the basis of considering the entity as such, and submit audited annual accounts of its promoter(s) for the last five years along with the computation of networth as per the SEBI prescribed formula, at the latest by July 15, 2011 failing which the application would be deemed to be rejected. b) Further, SEBI was directed to take a decision on basis of the details provided by the applicant in pursuance to the Order, at the latest by August

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15, 2011 in accordance with the law. The entity failed to submit the required information within stipulated timeframe and hence, the registration application was deemed to be rejected. Upon an appeal by M/s. Infomerics Valuation and Rating Pvt. Ltd, the above decision was set aside by SAT Order dated November 9, 2011. The matter is presently under appeal in the Supreme Court of India.

iii. Adjudication Order in the Matter of M/S Link Intime India Pvt. Ltd.

SEBI conducted an inspection of books, records and other documents of M/s Link Intime India Pvt. Ltd. (formerly known as Intime Spectrum Registry Ltd.), a SEBI registered registrar to an issue and share transfer agent (RTI & STA) to examine its role as a RTI & STA. Subsequently, adjudication proceedings were initiated against it for alleged violation of various provisions of SEBI ((RTI & STA) Regulations, 1993 and the SEBI (Depositories and Participants) Regulations, 1996 and relevant circulars.

The Adjudicating Officer, vide order dated February 22, 2012, levied a monetary penalty of ` 3 lakh on the registrar. Pursuant to this, the entity has preferred an appeal in the Honorable Securities Appellate Tribunal (SAT).

7. PROSECUTION

I. Trends in Prosecution

i. Number of Prosecutions Launched

During 2011-12, 29 prosecution cases were launched against 60 persons/ entities as compared to 17 prosecutions launched against 67 persons/entities in 2010-11 (Table 3.26). Till 2011-12, region-wise, the highest number of prosecutions were launched in Head Office/Western Region (641) followed by the Northern Region (345) (Table 3.27).

Table 3.26: Prosecutions LaunchedYear No. of

cases in which

prosecu-tion has

been launched

No. of persons/entities against whom

prosecution has been launched

1 2 3Up to and including 1995-96

9 67

1996 -1997 6 461997 -1998 8 631998 -1999 11 921999 -2000 25 1542000 -2001 28 1282001 -2002 95 5122002 -2003 229 8642003 -2004 480 24062004 -2005 86 4322005 -2006 30 1012006 -2007 23 1522007 -2008 40 1852008 -2009 29 1142009 -2010 30 1092010-2011 17 672011-2012 29 60Total 1175 5552

Table 3.27: Region-wise Data on Prosecution Cases as on March 31, 2012

Region Number of Cases

Percentage of Total

1 2 3Head Office/Western Region 641 54.55Northern Region 345 29.36Southern Region 96 8.17Eastern Region 93 7.92Total 1,175 100.00

ii. Higher Court Proceedings

During 2011-12, 22 applications/petitions were filed in the Higher Courts viz., Sessions Courts, High Courts and Supreme Court. During the period, 30 cases were disposed and a total of 106 cases are pending.

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iii. Important Court Pronouncements in Prosecution Matters

a) SEBI vs. M/s. Vasundhara Forest Ltd. and Others (CC No. 11 of 2010) – Before the Addl. Sessions Judge, Delhi

SEBI launched prosecution against M/s. Vasundhara Forest Ltd. and its directors alleging violation of the provisions of Section 12 (1B) of SEBI Act, 1992 and Regulation Nos. 5(1) read with 68(1), 68(2), 73 and 74 of the SEBI (Collective Investment Schemes) Regulations, 1999 constituting offence punishable under Section 24(1) read with Section 27 of the SEBI Act.

The Court of Additional Sessions Judge, Delhi held that complainant(SEBI) has succeeded to prove that M/s. Vasundhara Forest Ltd. (A1) had mobilised funds in violation of Section 12 (1B) of the SEBI Act and also violated Regulation 5 & Regulation 73 of CIS Regulations which is punishable under Section 24 (1) of the SEBI Act. Complainant has also succeeded to prove that Ms. Nidhi Chopra (A2) and Mr. Umesh Chopra (A3) being the directors of company accused and Mr. Sanjay Kapoor (A6) being the zonal manager of the company accused, were in-charge of, and responsible to, the company accused for the conduct of its business at the time of committing the above violations, thus in terms of Section 27 of the Act, they are also liable for the above violations. Accordingly, the Ld. Court held that i.e., Ms. Nidhi Chopra (A2), Mr. Umesh Chopra(A3) and Mr. Sanjay Kapoor(A6) guilty for the offence punishable under Section 24 (1)read with section 27 of the SEBI Act and sentenced A3 and A6 for rigorous imprisonment for a period of six months and also

imposed a fine of `4 lakh each. In case of default, A3 and A6 shall undergo simple imprisonment for a period of three months for the offence punishable under Section 24(1) of the SEBI Act. Ms. Nidhi Chopra (A2), is burdened with a fine of `4.50 lakh for the offence punishable under Section 24(1) of the SEBI Act. However, complainant has failed to prove the guilt of Ms. Sudesh Chopra (A4), Ms. Poonam Chopra (A5), Mr. S. P. Kapoor (A7) and Mr. Swaran Kapoor (A8) beyond the shadow of all reasonable doubts, thus, the Court acquitted them from all the charges.

Further, the Court directed that the said amount of fine, if realised shall be utilised to compensate the investors proportionately under Section 357 of the Code of Criminal Procedure. After realisation of the fine amount, SEBI shall issue public notices through print media and other modes to find out the investors. After verification of documents of investors, SEBI shall submit a report in the Court for realisation of the amount to the investors. If the total amount to be paid to the investors is found more than the realised fine amount, compensation shall be made proportionately to the investors. However, amount of compensation shall be released to the investors only after the expiry of period of appeal or revision, or if any appeal or revision is filed, then after the decision of such appeal or revision.

Similar direction was given by this Hon’ble Sessions Court in the matters of SEBI vs. M/s. Parakeet Green Forests Ltd. and Others (CC No. 82/2010) and SEBI vs. M/s Alpine Agro Plantations Ltd. & Ors. (CC No. 09/2010)

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b) SEBI vs. M/s. PNG Agro Finvest Ltd. and others (CC No. 15 of 2010 ) – Before the Addl. Sessions Judge, Delhi

SEBI launched prosecution against M/s. PNG Agro Finvest Ltd. and its directors alleging violation of Section 12 (1B) of SEBI Act read with Regulations 5(1), 68(1), 68(2), 73 (1) and 74, of the SEBI (CIS) Regulation, 1999, for failure of the entity to obtain registration for its various CIS schemes or in the alternative to wind up the schemes and repay amount collected from the investors, constituting offence punishable under Section 24(1) read with Section 27 of the SEBI Act.

The Court of Additional Sessions Judge held that that the accused company neither got registered its CIS nor wound up the same and not even repaid the money to its investors as per the provisions of CIS Regulations thereby violated of Section 12 (1B) of SEBI Act read with Regulations 5(1), 73 of the SEBI (CIS) Regulation, 1999. Being the in- charge of and responsible to the conduct of accused company, Mr. Surender Deyol (A4) is also liable for the said violation committed by the the company accused in terms of the section 27 of the SEBI Act. Accordingly, the court held M/s. PNG Agro Finvest Ltd. (A1) and Mr. Surender Deyol (A4) guilty for the offence punishable under section 24(1) read with section 27 of the SEBI Act and sentenced A1 to pay a fine of `5 lakh for the offence and A4 is sentenced for a period of six months rigorous imprisonment and also burdened with a fine of ` 3 lakh. In default of fine, A4 shall undergo three months simple imprisonment. During the trial, a proceeding against Mr. Nain Singh (A2) was abated on account of his death and Mr.Lal Chand (A3) was declared proclaimed offender.

c) SEBI vs. M/s Dwaper Agrotech Ltd. (CC No. 02 of 2010) – Before the Addl. Sessions Judge, Delhi

SEBI launched prosecution against M/s. Dwaper Agrotech Ltd. and its directors alleging violation of Section 12 (1B) of SEBI Act read with Regulations 5(1), 68(1), 68(2), 73(1) and 74, of the SEBI (CIS) Regulation, 1999, constituting offence punishable under Section 24(1) read with Section 27 of the SEBI Act. The Company had mobilised ` 19 lakh through various CIS.

The Court of Additional Sessions Judge held that the complainant SEBI has succeeded to prove that accused company had mobilised the funds in violation of Section 12(IB) of the SEBI Act and also violated Regulation 5 & Regulation 73 of CIS Regulations which is punishable under Section 24 (1) of the SEBI Act. The complainant has also succeeded to prove that accused no. 2 to 12 being the directors of company accused (A1) were in-charge of, and responsible to, the company accused for the conduct of its business at the time of committing the above violations, thus in terms of Section 27 of the Act, they are also liable for the above violations. Further, The Ld. Court considered the fact that the accused company had refunded all the amount except `14,446/- as whereabouts of 68 investors were not traceable and accused company had sought permission from SEBI to deposit the said amount in the form of Fixed Deposit Receipts or to buy 68 National Savings Certificates in the name of the individual investors. Taking into the consideration of above fact , the court imposed a fine of `10,000/- each of the accused in default two months simple

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imprisonment for the offence punishable under Section 24(1) of the SEBI Act.

d) Mr. Pawan Goyal & others vs. SEBI(CRL.M.C. 82/2005) and Mr. Pawan Jindal & another vs. SEBI (CRL.M.C 132/2005) – Before the High Court of Delhi

A criminal complaint was filed by SEBI against M/s Bright Forests Ltd. and its directors alleging violation of Section 12 (1B) of SEBI Act read with Regulations 5(1), 68(1),68(2), 73 (1) and 74, of the SEBI (CIS) Regulation, 1999, constituting offence punishable under Section 24(1) read with Section 27 of the SEBI Act and taking cognizance of the same the accused i.e the company and persons stated to be its directors and in day to day control of the affairs of the company were summoned to face trial by the learned Metropolitan Magistrate..

Mr. Pawan Jindal (A7) and his wife Ms. Sunitha Devi (A9) (petitioners in Crl. M.C 132/2005), Mr. Pawan Kuman Goel (A5), Mr. Dharam Pal (A6), Mr. Kanhaiya Lal (A8), Mr. Krishan Chand (A10) and Ms. Sulochana Devi Goel (A11) (petitoners in Crl M. C 82/2005) have filed the captioned petitions.

The Hon’ble High Court of Delhi vide its order dated 16-09-2011, dismissed the petitions , observing, inter alia, that “It would thus be a continuing offence if money was not returned to the depositors upon the CIS not being registered with SEBI latest by March 31,2000 and in the complaint in question there is an averment that since the company did not register the scheme by March 31,2000. On December 7,2000, SEBI directed the company to refund the money collected under the scheme to the investors within one month and report compliance, and despite repeated directions, compliance

has not been made.. In other words, the wrong continues till the amounts collected are not returned to the depositors”. Further, the Hon’ble Court held that the offence stated to have been committed by the company is not that it did not get registered the CIS by March 31,2000, for the reason not to have got the scheme registered is not an offence. The offence is upon not getting the scheme registered retaining the amount received from the depositors and not refunding the same to them within the time prescribed”.

e) Mr. Varinder Bharti vs. SEBI( Criminal M.C. 858/2010) – Before the High Court of Delhi

This petition is filed by Mr. Varinder Bharti under Section 482 of the Code of Criminal Procedure for quashing of criminal complaint filed by respondent i.e. SEBI against M/s Janraksha Green Forests Ltd. and Others , including the petitioner under Section 24(1) and 27 of SEBI Act for the violation of Section 12 (1B) of SEBI Act read with Regulations 5(1), 68(1),68(2), 73 (1) and 74, of the SEBI (CIS) Regulation, 1999 . Quashing has been primarily on the ground that petitioner was neither a director nor a person in -charge of and responsible to the Company Janraksha Green Forests Ltd. for conduct of its business nor did he have any connection whatsoever with the said company.

The Hon’ble High Court of Delhi vide its order dated 11-07-2011, dismissed the application, observing, inter alia, that “Only plea of the petitioner is that he was neither a director nor he had any association with the accused company, namely Janraksha Green Forests Ltd. This plea is denied by the SEBI on the strength of certain communications sent by accused company and the petitioner”.

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Accordingly, the Hon’ble High Court held that the plea raised by the petitioner is a question of fact, which can be determined only on the basis of evidence, which is the subject matter of trial. Thus the Hon’ble Court concluded that no reason to invoke section 482 Cr.P.C to quash the impugned summoning order or the complaint qua the petitioner.

f) M/s. Jas One Securities Pvt. Ltd. and Others vs. SEBI (Misc Cri. Appln 1185/2008) – Before the Addl. Sessions Judge, Mumbai

M/s. Jas One Securities Pvt. Ltd. (A1) and Mr. Jaswant A. Parikh (A2) were the applicant in Criminal case No. 115/s/2003 before Additional Chief Metropolitan Magistarte 47th Court, at Esplanade Mumbai. The Magistrate passed the order for issue of summons against the accused for the charge of section 193 of the India Penal Code. The applicants claimed aggrieved by the order of the Magistrate. The applicants presented criminal revision application to the Addl. Session Court on July 18, 2008 along with delay condonation application. The Sessions Court allowed the application in favour of the applicants. The said order was challenged by SEBI by filing the criminal writ petition no.2126/2009 before Hon’ble High court of Mumbai. The Hon’ble High Court by an order dated September 22, 2011 set aside the order passed by the Addl. Sessions Court with a direction to rehear the application afresh. Consequently, the matter came up before the Addl. Sessions Court, Mumbai for fresh hearing on delay condonation.

The Court of Additional Sessions Judge, Mumbai has held that the court would take liberal approach in the matter of delay condonation, particularly for filing

of criminal rev. application in case the facts of the case indicating that accused need not be dragged for years on the allegations of prosecution. Here the situations are different. The accused have dragged respondent no.1(SEBI) for about eight /nine years to fight out different litigations before different court at the stage of process only. Further, the Court held that specific schedule is given in the Limitation Act for knocking the doors of the court by the aggrieved party against his opponent. In such cases 90 days was the period recognised by the law under limitation act, 1963 for challenging the order of issuance process within the scope of section 397(1) of the Code of Criminal Procedure but the applicants rushed to the court after lapse of four years. The Ld. Court has also observed that trial proceeding has to be disposed of by the court within reasonable period of six months but due to conduct and approach of the applicants the proceeding is at the stage of process even after lapses of four years. This is not expected in the administration of justice particularly under the Limitation Act. Accordingly, the Addl. Sessions Court vide its order dated 02/03/2012 dismissed the miscellaneous criminal application for delay condonation.

II. Nature of Prosecution

Table 3.28 represents the nature of prosecutions launched under various sections of different Acts. Prosecutions are launched by SEBI under the SEBI Act, 1992, Companies Act, 1956, Depositories Act, 1996, SC(R) Act, 1956 and the Indian Penal Code. As on March 31, 2012, 1,175 cases were launched (out of which 980 cases were launched under SEBI Act, 1992).

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Table 3.28: Nature of Prosecutions Launched as on March 31, 2012

Nature of Prosecution Launched Number of Cases

1 2

Securities and Exchange Board of India Act, 1992 (SEBI Act)

980

SEBI Act & Securities Contracts (Regulation) Act, 1956 (SCRA)

91

SEBI Act, SCRA & Companies Act 1

SEBI Act & Companies Act 1

SEBI Act & Indian Penal Code 5

Companies Act, 1956 70

Securities Contracts (Regulation) Act, 1956

5

Depositories Act, 1996 14

Indian Penal Code 8

Total 1,175

III. Disposal of Prosecution Cases

A. 240 cases were decided by the Courts till 2011-12, out of which, 131 cases resulted in convictions and 58 cases were fully compounded (Table 3.29).

Table 3.29: Number of Prosecution Cases decided by the Courts as on March 31, 2012

Type of Decision by the Courts

CIS Non-CIS

Total

1 2 3 4

Convictions 124 7 131

Compounded (fully)* 7 51 58

Abated 0 4 4

Dismissed/Discharged 23 21 44

Withdrawn 2 1 3

Total 156 84 240* In addition in 15 (5 in CIS & 10 in Non-CIS) cases the offence

has been partly compounded i.e., compounded against some of accused and the cases against others continue.

** In 37 (36 CIS & 1 Non-CIS) Prosecution cases all accused were declared as proclaimed offenders

# SEBI has challenged some of the dismissed cases in higher courts and the same are pending.

B. Disposal of Prosecution Cases in case of Collective Investment Schemes (CIS)

Since the start of launch of prosecution against erring CIS entities, criminal prosecution cases have been launched by SEBI against 552 CIS entities. Since then, court judgments have been obtained in a total of 156 CIS entities.

8. Litigations, Appeals and Court Pronouncements

During 2011-12, 149 cases were filed in different courts and 179 cases were admitted/allowed/withdrawn, cumulative 893 such cases are pending, where SEBI was a party (Table 3.30).

Table 3.30: Court Cases where SEBI was a Party during 2011-12

Subject Matter Cases Filed

Cases Pending

as on March

31, 2012

Cases Admit-ted/Al-lowed/With-drawn

1 2 3 4Stock Brokers Registration Fees Cases

2 74 5

Collective Investment Schemes

25 108 28

Consumer Forum Cases 11 117 28General Services Department

1 25 0

Investigations Enforcement And Surveillance Department

36 101 46

Primary Market Department

15 41 16

Secondary Market Department

4 71 9

Takeovers 16 39 15Depositories And Participants

0 0 1

Mutual Funds 1 24 4OIAE 5 50 5Civil/Criminal Courts 15 104 7Policy/Others 17 116 15Company Law Board 0 7 0 RTI cases 1 16 0Total 149 893 179

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During the year, 247 appeals were filed before Securities Appellate Tribunal (SAT), whereas 90 appeals were dismissed (Table 3.31).

Table 3.31: Appeals before the Securities Appellate Tribunal during 2011-12

(Number)

Status of Appeals Number of Appeals

1 2

Appeals Filed 247

Appeals Dismissed 90

Appeals Remanded 14

Appeals Allowed 44

Appeals Modified 51

Appeals Withdrawn 16

Appeals Disposed as Infructuous 1

Appeals Pending 80

Against the orders of SAT, 11 appeals were filed by SEBI, whereas 24 appeals were filed against SEBI in the Supreme Court during 2011-12 under section 15Z of the SEBI Act (Table 3.32). Disposals of appeals by SAT since 1998 are given in Table 3.31a.

Table 3.32: Appeals under Section 15Z of the SEBI Act against the Order of Securities Appellate Tribunal during 2011-12

(Number)

Subject Matter Cases filed

Cases pend-

ing

Cases dis-

missed/allowed

1 2 3 4

Appeals filed by SEBI 11 65 4

Appeals filed against SEBI 24 57 4

Total 35 122 8

Table 3.32a: Disposals of Appeals by Securities Appellate Tribunal(Number)

Appeals 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

No. of Appeals Dismissed 1 2 7 20 15 16 29 46 139 40 81 86 134 90

No. of Appeals Modified 0 0 1 7 NA 10 58 101 16 27 1 19 45 51

No. of Appeals Withdrawn 0 0 0 3 2 1 8 NA NA NA 17 19 29 16

No. of Appeals Allowed 1 2 6 8 23 13 19 72 71 32 39 30 77 44

Total 2 4 14 38 40 40 114 219 226 99 138 154 285 191NA: Not Available

9. Consent and Compounding

As on March 31, 2012, SEBI has received 2,723 applications for consent and compounding. Out of this, 1,186 applications were approved by SEBI settling various kinds of enforcement actions. An amount of

` 206,53,52,667 was collected as settlement/legal/administrative/disgorgement charges. Month-wise details of applications received and disposed under the consent and compounding scheme up to March 31, 2012 are provided in Table 3.33.

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Table 3.33: Receipt and Disposal of applications under Consent and Compounding Process during 2011-12

Month/Year No. of Applications

received

No. of Applications

Settled by passing orders

Settlement / Compound-ing Charges

(`)

Legal/Admn. Charges (`)

Disgorgement (`)

Total Amount (`)

1 2 3 4 5 6 7

2007-08 698 101 2,69,07,850 40,00,950 0 3,09,08,800

2008-09 692 440 37,29,30,786 54,90,000 8,27,84,906 46,12,05,692

2009-10 702 363 49,17,39,617 45,69,500 18,98,33,101 68,61,42,218

2010-11 359 177 70,44,96,771 4,76,500 1,71,20,811 72,20,94,082

Apr-11 37 4 25,50,000 0 0 25,50,000

May-11 13 37 2,62,04,670 0 0 2,62,04,670

Jun-11 24 15 5,10,25,000 0 0 5,10,25,000

Jul-11 32 16 3,36,50,000 37,000 0 3,36,87,000

Aug-11 33 3 25,00,000 0 0 25,00,000

Sep-11 37 13 3,48,60,205 60,000 0 3,49,20,205

Oct-11 22 9 43,50,000 0 0 43,50,000

Nov-11 12 0 0 0 0 0

Dec-11 9 1 2,65,000 0 0 2,65,000

Jan-12 9 0 0 0 0 0

Feb-12 37 3 45,00,000 0 0 45,00,000

Mar-12 7 4 50,00,000 0 0 50,00,000

Total 2011-12 272 105 16,49,04,875 97,000 0 16,50,01,875

Aggregate Total 2,723 1,186 176,09,79,899 1,46,33,950 28,97,38,818 206,53,52,667

NOTE : In addition, 769 applications were rejected and 285 applications were withdrawn/infructuous.

Of the 262 applications received during 2011-12 for consent, 104 applications were disposed by passing orders whereas 71 applications were rejected. During the year, SEBI collected `16,47,04,670 as a consent charges for settlement of cases through consent

mechanism. Further, of the 10 applications received for compounding during 2011-12, one application was fully compounded, which received `2,60, 205. Details of applications filed for consent and compounding during 2011-12 are given in Table 3.34 and 3.35.

Table 3.34 Consent Applications filed with SEBI during 2011-12No of Consent

Applications receivedNo. of applications

disposed by passing orders

Consent Charges (`) No. of applications rejected

1 2 3 4262 104 16,47,04,670 71

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Table 3.35 Compounding Applications filed by the accused in criminal courts during 2011-12

No of Compounding Applications

received

No. of applications compounded Compounding charges received by

SEBI (`)

No. of applications rejected

Fully Partly

1 2 3 4 5

10 1 0 260,205 0

10. Investor Assistance and Education

I. Redressal of Investor Grievances

SEBI has been taking various measures to expedite the redressal of investor grievances. The grievances lodged by investors are taken up with the respective listed company and are continuously monitored. The company is required to respond in prescribed format in the form of Action Taken Report (ATR). Upon the receipt of ATR, the status of grievances is updated. If the response of the company is insufficient / inadequate, follow up action is initiated. Grievances pertaining to stock brokers and depository participants are taken up with concerned stock exchange and depository for redressal and monitored by the concerned department through periodic report obtained from them. Grievances pertaining to other intermediaries are taken up with them directly for redressal and are continuously monitored by concerned department of SEBI. SEBI takes appropriate enforcement actions (adjudication, directions, prosecution etc) as provided under the law where progress in redressal of investor grievances is not satisfactory. The following paragraphs highlight SEBI’s performance and measures taken in the year 2011-12 for expediting the redressal of investor grievances.

II. SEBI Complaints Redress System:

During 2011-12, SEBI commenced a new web-based centralised grievance redress system called as SEBI Complaints Redress System (SCORES) on June 8, 2011. In the new system, all the activities starting from lodging of a complaint till its closure by SEBI would be online in an automated environment and the status of every complaint can be viewed online in the above website at any time. An investor, who is not familiar with SCORES or does not have access to SCORES, can also lodge complaints in physical form. Such complaints are scanned and uploaded in SCORES for processing. In view of above, all grievances received will be in electronic mode with facility for online updation of ATRs by the users.

SEBI has received 46,548 complaints for 2011-12 and resolved 53,841 complaints as compared to 56,670 grievances received and 66,552 grievances resolved in the year 2010-11. As on March 31, 2012, there were 23,725 complaints pending resolution as compared to 28,653 pending grievances as on March 31, 2011.

The status of investor grievances received and redressed for the past four years is given in Table 3.36:

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Table 3.36: Status of Investor Grievances Received and Redresseed

Financial Year Grievances Received Grievances Redressed Pending Grievances*

Year-wise Cumulative Year-wise Cumulative Pending (Number)

2008-09 57,580 26,74,560 75,989 25,03,560 49,113

2009-10 32,335 27,06,895 42,742 25,46,302 37,880

2010-11 56,670 27,63,565 66,552 26,12,854 28,653

2011-12 46,548 28,10,113 53,841 26,66,695 23,725

* Excludes ` 1,20,714 grievances where regulatory actions are in progress.

III. Regulatory action against companies and their directors for non-redressal of investor grievances

SEBI takes appropriate enforcement actions (adjudication, directions, prosecution etc) as provided under the law where

progress in redressal of investor grievances is not satisfactory. Accordingly, during 2011-12, the following 11 companies and its directors were restrained from accessing the securities market till all the pending investor grievances are resolved:

Table 3.37: Companies Restrained From Accessing the Securities Market

Sl No Name of the Company

1. Aashi Industries Ltd

2. AEC Enterprises Limited

3. Dharnendra Industries Ltd

4. Dharnendra Overseas Ltd

5. Enkay Texofood Industries Ltd

6. Kaleidoscope Films Ltd. (Formerly known as Gujarat Incatel Telecommunications Ltd. & Gujarat Investment Castings Ltd.)

7. Indu Nissan Oxo Chemical Industries Ltd

8. Pankaj Agro Protinex Ltd

9. Pioneer Embroideries Ltd

10. Solid Carbide Tools Ltd

11. Toheal Pharmachem Ltd

In addition to above, SEBI has levied penalty against the following seven companies through adjudication proceedings during

the year, for their failure to redress investor grievances:

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Table 3.38: Companies Penalised For Their Failure to Redress Investor Grievances

Sl. No.

Name of the Company Penalty Amount

(`)1. ICES Software ltd 30,0002. Indu Nissan Oxo Chemical

Industries Ltd 13,00,000

3. Pantaloon Retail (India) Ltd 5,00,000 4. Parsoli Corporation Ltd 1,00,000 5. Western India Shipyard Ltd 2,00,000 6. Jay Energy and S. Energies Ltd. 45,00,000

Further SEBI also initiated regulatory actions against companies for their failure to redress investor grievances during 2011-12, including suspended companies referred by BSE.

Adjudication proceedings have been initiated against five companies for levying monetary penalty for their failure to redress investor grievances. Proceedings under section 11(4)(b) of SEBI Act have been initiated against seven companies and its directors to restrain them from accessing securities market for their failure to redress investor grievances.

IV. Issuance of No-objection Certificate

Companies raising capital through public issue of securities are required to deposit one percent of the issue amount with the designated stock exchange. This deposit is released by the stock exchange only after SEBI issues a No-objection Certificate (NoC). SEBI issues NoC to companies after satisfactory redressal of complaints received by SEBI against the company.

During 2011-12, NoCs were issued to 85 applicant companies. NoCs to 47 companies were not issued as the applications were incomplete or due to unsatisfactory redressal of investor grievances.

V. Investor Assistance

SEBI provides assistance/ guidance to investors by replying to their queries received through the following modes: • E-mail ([email protected])• Investors visiting SEBI Head Office• Letters

SEBI received 3,682 queries during April 1, 2011 – March 31, 2012 and all queries were replied. Assistance so rendered to investors was augmented by providing replies to the commonly sought queries by investors on the website as FAQs. SEBI is also in the process of launching investor education and awareness campaign in the media to create awareness among the investors.

VI. Investor Education

Investor Awareness Division (IAD) of SEBI undertakes the activities of SEBI’s investor education and awareness. IAD also handles work pertaining to financial education initiatives of the Board.

To protect the interest of investors, SEBI believes that an educated investor is a protected investor. Informed investment decision by investors has been the key thrust of the investor protection initiatives of the Board. With a view to building the capacity of investors to undertake transactions in securities market, SEBI has been undertaking following investor awareness and education activities funded through SEBI Investor Protection and Education Fund.

i. Investor Awareness Programs/ Workshops

Towards educating investors and to spread awareness, SEBI continues it association with Investor Associations (IA) as well as exchanges, depositories and various trade bodies like AMFI etc. At the

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end of March 2012, there were 27 IAs that were recognised by SEBI. The feedback / suggestions from the IA are used as inputs for policy decisions of the Board. The total number of investor awareness workshops organised is given in Table 3.39. Educative material developed by SEBI was distributed in these workshops. The joint programs of SEBI with Exchanges, Depositories and various trade bodies like AMFI etc have speakers from all the participating organisations and educative material is distributed to all the investors free of cost. Investor grievance redressal mechanism in SEBI is a common topic in all such programs.

Table 3.39: Trends in Awareness Programs/ Workshops Conducted by SEBI

Region 2007-08 2008-09 2009-10 2010-11 2011-121 2 3 4 5 6

HO 3 4 13 25 9ERO 0 0 0 18 35NRO 1 0 3 31 72WRO 0 8 10 28 19SRO 11 14 14 47 43Total 15 26 40 149 178

ii. Regional Seminars

SEBI, in association with various Exchanges, Depositories and trade bodies started a new initiative in the form of regional seminars across the country. The objective of such seminars is to reach out to more people and concentrating primarily on tier 2 and tier 3 cities. As on March 31, 2012, 47 regional seminars have been conducted in places like Akola , Pune, Kolhapur, Nagpur, Aurangabad in Maharashtra, Guwahati in Assam, Patna in Bihar, Jamshedpur and Ranchi in Jharkhand, Khurda in Orissa, Salem , Tiruchirapalli, Chennai in Tamil Nadu, Ujjain, Jabalpur, Indore, Bhopal in Madhya Pradesh, Panaji in Goa, Shillong in Meghalaya, Kharagpur in West Bengal, Durg, Rajnandgaon, Bilaspur,

Korba and Raipur in Chattisgargh, Thrissur in Kerala, Agra, Meerut, Aligarh, Bareilly, Kanpur, Lucknow in Uttar Pradesh, Jodhpur, Jaipur in Rajasthan, Amritsar in Punjab, Mangalore, Mysore in Karnataka (Table 3.40).

Table 3.40: Regional Seminars Conducted by SEBI during 2011-12

Region 2011-12HO 20ERO 9NRO 8WRO 2SRO 6Total 45

iii. Dedicated Investor Website

SEBI has a dedicated web site (http://investor.sebi.gov.in) which contains the relevant information for investors. The website provides study material in different languages on various topics like issue of securities, investing in derivatives, CIS, dealing with brokers and sub brokers, investing in mutual funds, buyback of securities, redressal of grievances etc.

The website has been revamped to make it more user friendly and the educative material is being updated into various regional languages. SEBI Investor website have been rated four out of five by a research done by IOSCO to evaluate the regulator’s website on investor education.

iv. Educative Material for Investor Education And Awareness

SEBI is in the process of updating various materials relating to investor education and awareness across various topics in securities market. Brochures on investor grievance redressal mechanism and mutual funds have been unveiled by Shri U. K. Sinha, Chairman, SEBI in two investor awareness programs in Jaipur and Chennai respectively. These

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brochures are published in regional languages for the benefit of investors across the country.

v. SEBI OECD International Conference on Investor Education

The SEBI- OECD International Conference on Investor Education, “Towards a more inclusive and secure financial world”, was held in Goa on 3-4 February 2012, co-organised by Organisation for Economic Cooperation and Development (OECD) and SEBI.

The two day conference started with opening remarks by Mr. Prashant Saran, Whole Time Member, SEBI welcoming an international audience of almost 200 experts from 45 countries. Mr. U. K. Sinha, Chairman SEBI gave the keynote address and Mr. Richard Boucher, Deputy Secretary- General of OECD giving the inaugural address. Mr. Rajeev Kumar Agarwal, Whole Time Member, SEBI offered the vote of thanks. Mr. Pranab Mukherjee, Honourable Finance Minister, Government of India, could not attend the event as planned, but addressed the participants with a formal message which was read at the conference.

There were various sessions with experts from different countries representing Government, regulators, intermediaries, NGOs, IAs and other stakeholders of investor education. The feedback received from the participants has been that it was an extremely successful conference and the same would result in likely creation of a subgroup for investor education in the framework of INFE in 2012-13 for more focused and detailed study in future.

It was also another milestone in the co-operation between India and the OECD. It will pave the way for more structured collaboration in the future.

VII. Financial Education

Financial education of general public is the key to financial growth of any country. Financial education means “the process by which financial consumers/ investors improve their understandings of financial products, concepts and risks and, through information, instruction and/ or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well being.” (OECD definition). SEBI has taken the following programs to spread financial literacy across the country

i. School Programs

SEBI initiated financial literacy program named ‘Pocket Money’ for school students jointly with National Institute of Securities Market (NISM) in 2008-09 and positioned it as an important life skill at the school level targeting mainly 8th and 9th standard students.

Under the Pocket Money programme, financial literacy was imparted to school students. It includes orientation programmes for the school principals, training programmes for teachers followed by the teachers conducting classes to impart financial education contents covered in the pocket money programme to the students. At the end of the programme, examination is conducted for the students and certificates awarded to them. During the year 2011-12, two principals’ workshops and 12 teachers’ training workshops, benefiting a total of 41 school principals and 631 teachers were conducted. The programme could reach to 360 schools covering 50,946 students during the

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year. The schools covered include municipal schools of Mumbai, Navi Mumbai and Thane. Programme was also conducted in schools in Ahmedabad, Chennai, Jalgoan and Rajkot.

During the year, the Pocket Money

resource book was translated into Tamil, Gujarati and Hindi and now the book is available in five languages viz. English, Hindi, Marathi, Gujarati and Tamil. The progress of the programme so far is shown in Table 3.41.

Table 3.41: School Programs Conducted by SEBI during 2011-12

Year No. of Schools Covered

No. of Teachers trained

No. of Students Covered

No. of training the trainer Programs

Conducted2008-09 151 230 - 82009-10 10 161 3,876 52010-11 31 110 4,311 22011-12 360 631 50,946 12Total 552 1,132 59,133 27

ii. Through SEBI trained Resource Persons

SEBI launched a financial education drive through Resource Persons (RPs) targeting the following groups- financial education for school children, financial planning for young investors, financial education for middle income group, investment planning for executives, investment planning for home makers, investment planning for retired people, financial education for Self Help Groups.

RPs are SEBI trained teachers, a senior secondary school teacher or college teacher, having post graduate qualification in commerce, economics or finance. The person also should have a passion for spreading financial education, communication skills, ability of holding the audience attention and willing to travel across assigned area and conduct financial education programs at various locations. He/ she should not be connected to any intermediary nor promoting the interest of the intermediary.

Easy familiarity with English/Hindi and the concerned regional language is a must. The program aims at imparting understanding of financial concepts to the targeted groups.

Under the guidance of the Advisory Committee for the IPEF, the material for the aforesaid target groups were prepared and made available on SEBI investor website, http://investor.sebi.gov.in. The material has been made available in various regional languages. Efforts are on to make it available in 12 regional languages apart from Hindi and English.

These empanelled RPs would also supplement the investor education programs that are conducted through IAs recognised by SEBI, Stock Exchanges, Depositories and trade bodies like AMFI, Association of National Exchange Members etc. Currently there are 297 RPs empanelled covering 134 districts in 21 states across the country. The next round of empanelment is scheduled in 2012-13 so that more districts and states are covered with special emphasis to North Eastern region.

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Table 3.42: Trends in Financial Education Programs through Resource Persons (RPs)

Region 2010-11 2011-12

HO 68 439

ERO 0 412

NRO 0 703

WRO 106 514

SRO 2 1,014

Total 176 3,082

A total of 3,265 programs have been conducted across the country and the details of the same are made available on SEBI investor website.

iii. Through SEBI Officers as Resource Persons

As a part of SEBI’s financial literacy initiative and to further expand our activities, it was decided that SEBI officers may be allowed to conduct financial education programs and investor education campaigns across the country. Around 110 SEBI officers voluntarily empanelled themselves as RPs and have conducted 35 programs across the country.

VIII. Visit to SEBI

SEBI invites students from schools, colleges and professional institutes who are interested to learn about SEBI and its role as a regulator of securities markets. The same was started in February 2011. The details of the visits are presented in the Table 3.44.

Table 3.44: Trends in Visit to SEBI

Visit to SEBI

Year No. of Visits No. of participants

2010-11 8 287

2011-12 30 1,538

Total 38 1,825

11. Research Activities

Section 11(2)(l) of the SEBI Act enshrines SEBI to undertake research activities for effectively fulfilling its functions. The Department of Economic and Policy Analysis (DEPA) assumes its role primarily from Section 11 (2) (l) and Section 18 of SEBI Act.

During 2011-12, DEPA was restructured to form six Divisions viz., Statistics Division, Division of Publications, Regulatory Research Division, History Cell, Division of Policy

Table 3.43: Financial Education Programs through RPs - Target Group Wise

Region Target Group TotalSchool

StudentsCollege

Students / Young

Investors

Executives Home Maker

Middle Income Group

Retired People

SHG

1 2 3 4 5 6 7 8 9HO 107 264 38 23 69 5 1 507

ERO 195 123 15 9 31 4 35 412

NRO 294 350 32 7 15 3 2 703

WRO 240 300 15 28 20 4 13 620

SRO 280 539 56 35 58 8 47 1023

Total 1,116 1,576 156 102 193 24 98 3,265

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Research and Systemic Stability Unit. Division of Policy Research was further bifurcated into three subdivisions respectively dealing with issues pertaining to primary market, secondary market and mutual funds. The various works undertaken during the financial year in pursuance of the research mandate of SEBI are described below:

I Setting up of Systemic Stability unit: Systemic Stability unit (SSU) was set up in SEBI to assess systemic risks, if any, emanating from securities market and offer coordinated assistance/inputs from SEBI to FSDC in monitoring systemic risks in respect of securities market and monitoring of SIFIs under the jurisdiction of SEBI. During the year, SSU co-ordinated works relating to FSDC Sub-Committee meetings and Inter-Regulatory Technical Group of the FSDC Sub-Committee. In this regard, SSU co-ordinated with RBI and concerned Departments in SEBI in respect of circulation of agenda notes, minutes, inputs for the FSDC Sub-Committee meetings. A review of domestic equity market and inputs on crisis management framework in securities market was also prepared. SSU also collated the discussion points from SEBI for the interaction between FSDC-SC and FSLRC. SSU also provided inputs from the securities market related perspective for Financial Stability Report (FSR) published by RBI. The contributions to FSR included material on topics such as liquidity in the equity, cash and derivative segments, trends in institutional participation in the secondary market, trends in retail participation in mutual funds, liquidity of debt mutual funds, exposure of settlement guarantee funds to banks, pledging of shares and trends in currency

derivatives. Inputs were also given on the crisis management template for SEBI.

II Cross-country studies and research inputs: During 2011-12, several cross-country studies were prepared on the basis of preparation of a questionnaire, discussion with market participants, and consolidation and analysis of responses received. Some of the cross-country studies were on topics such as risk management framework in equity cash and derivatives segment and primary market process review. The research activities undertaken during the year spanned several topics viz., portfolio flows and their relation with rupee depreciation; growth, business and investment potential of the Indian capital market and impact of global financial climate on India, sovereign ratings and capital flows, trends in currency derivatives, report on mis-selling of financial products, rationalizing of STT framework in Indian securities market, financial reforms in insurance and pension sectors, issues pertaining to FCCBs, analysis on domestic broking firms, impact of transaction fee by exchanges in currency derivatives segment, study on proxy voting disclosures by mutual funds, status of wealth management industry in India, issues in HFT, analysis of STT, IIP and its impact on Indian capital market, current trends on Indian economy prospects and prospects for 2012-13. Analyses were also carried on contemporary global developments like impact of international financial developments on Asia Pacific, sovereign debt crisis in Greece; economic impact of catastrophe in Japan; preliminary assessment of Dodd-Frank Act; impact of

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Moody’s downgrade of Japan, analysis of Eurozone crisis, impact of LTRO-II on emerging markets like India, note on operation twist and analysis of India and BRIC nations’ debt exposure to USA etc.

The Department also provides inputs and represents SEBI’s views on two subgroups set up by RBI viz., Sub-Group on Inflow of Foreign Savings for the Twelfth Plan and Subgroup on Private Corporate Sector for the Working Group on Flow of Funds.

III Financial Sector Assessment Program: A joint International Monetary Fund-World Bank mission visited India during the month of June, 2011 and October, 2011 to conduct an update of the Financial Sector Assessment Program (FSAP). The FSAP mission had conducted an assessment of the Indian securities market with regard to principles and objectives of IOSCO for securities market regulations. In this regard, background materials were prepared on the basis of comments received from various Departments of SEBI and meetings were co-ordinated for FSAP Team with SEBI officials, market intermediaries and participants. The draft report was submitted to the FSAP Mission.

IV Investor Survey: During 2011-12, National Council of Applied Economic Research (NCAER) carried out an investor survey titled “How Households Save and Invest: Evidence from NCAER Household Survey” under sponsorship of SEBI. Activities undertaken in this regard include preparation of questionnaires, finalizing a chapter on “Developments in the Indian Capital Markets”, providing comments and analysis. The final report was prepared by NCAER, which was

submitted to SEBI in July 2011. SEBI organized a round table discussion on the findings of the report in August 2011 and subsequently the report was released.

V Data Repository and Publications: SEBI has also set up a Statistics Division to maintain a repository of data for entire capital/ securities market, collection of data from various sources, verifying their accuracy and continuously maintaining/ updating the data. The Phase III of DWBIS is being implemented at SEBI to integrate the research module. During 2011-12, SEBI published its Annual report of 2010-11, Handbook of Statistics on Indian securities market and bulletins for the respective months. Internal reports like weekly and monthly reports to MoF, inputs for Parliament Questions, Economic Survey of GoI and Government of Maharashtra and BIS Red book of Statistics, responses/information for the various questionnaires sent by multilateral organizations like IOSCO, SAARC–ADB etc were also provided regularly throughout the year.

VI Appointment of Consultant: SEBI is in the process of appointing a consultant to study and make appropriate recommendations in the areas of organizational structure, human resources, technological requirements, meet the emerging challenges and priorities. In this regard, Consultant Evaluation Committee (CEC) has also been formed. During the year, , various documents such as Expression of Interest (EOI), Request for Proposal (RFP), terms of reference etc. were prepared.

VII Project on History of Indian Securities Market: SEBI has initiated the project of documenting the History of the Indian

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Securities Markets. For this purpose, a depository of the old books, committee reports, Parliament debates, minutes of Board meetings of exchanges etc. was created In this endeavor, material/documents from various libraries, archives, old brokerage houses etc. were collected During 2011-12, around 594 pages of minutes of Board meetings of various stock exchanges have been uploaded on the SEBI website for information to the public.

VIII Organization of Brain Storming Programme A Brain Storming Programme involving interaction with the market participants, academicians, stock market experts including past Chairmen of SEBI, was held in Mumbai during January 6-7, 2012. The objectives

of BSP were to develop a strategic action plan for next 3 to 5 years for SEBI, to strengthen regulatory framework and to promote orderly growth of securities market.

IX Monthly Seminars: SEBI invites eminent academicians to deliver lecture/talk on the topics related to securities markets, economics and finance. During the year, topics covered were: economic implication of systemic changes in trade credit, corporate governance in India: issues and challenges and understanding India’s equity trading behavior: preliminary findings and data analysis. In addition, presentations on mutual funds and on algorithmic trading were also conducted during the year.

PART FOUR: REGULATORY CHANGES

The SEBI Board has taken various regulatory measures to protect the interests of investors in securities market, for the development of the securities market and to regulate the securities markets. Various amendments to the existing regulations were notified. The summary of regulatory changes made is as follows:

1. REGULATORY DEVELOPMENTS

I. New Regulations

i. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1992 were notified on September 23, 2011 and came into effect on October 22, 2011, by repealing the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 which laid down the regulations governing acquisition of shares and control in Indian listed companies.

Taking into consideration the dynamism of the marketplace, various regulatory and judicial rulings/ pronouncements, growing level of Mergers and Acquisition activities in India vis-a-vis evolving takeover practices across the globe, the need for a new and improvised set of Takeover Regulations was felt. Accordingly, Takeover Regulations, 2011

was formulated which has made an attempt to improvise/modify the provisions of the takeover Regulations, 1997 with a view to make the Takeover practices in India more clear, fair, equitable and transparent. Some of the significant changes made through the regulations include:

a. Initial trigger threshold increased to 25 percent from the existing 15 percent.

b. There shall be no separate provision for non-compete fees and all shareholders shall be given exit at the same price.

c. Periodic as well as transaction specific disclosures shall also include disclosures of acquisition/holding of equity linked instruments/ convertibles/ warrants.

d. The promoter shall disclose details of encumbered shares.

e. Voluntary offers have been introduced subject to certain conditions.

f. A recommendation on the offer by the independent directors of the Board of Target Company has been made mandatory.

g. Modification of the parameters for determining the open offer price.

h. Reduced timelines for various activities related to open offer process, etc.

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Box 4.1: Salient features of SEBI (Substantial Acquisitions of shares and Takeovers) Regulations, 2011

Initial TriggerAcquisition of an aggregate of 25percent or more voting rights in a target company would require the acquirer to make an open offer.

Creeping Acquisition limitAn acquirer holding 25percent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, is allowed to acquire additional shares or voting rights in the target company up to five percent of the voting rights within a financial year, without making an open offer.

Voluntary Open OfferShareholders holding shares entitling them to exercise 25 percent or more of the voting rights in the target company

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may, without breaching minimum public shareholding requirements under the listing agreement, voluntarily make an open offer for acquisition of 10percent or more to consolidate their shareholding, subject to certain conditions.

Offer SizeThe offer size for any open offer which is not a voluntary open offer, shall be for at least 26percent of total shares of the target company, as of the last day of the offer period

Compliance with Securities Contracts (Regulations) Rules 1957a. Where the acquirer(s) shareholding exceeds the maximum permissible non-public shareholding, pursuant to

the completion of open offer, the acquirer(s) shall be required to bring down the non-public shareholding to the level specified and within the time permitted under Securities Contract (Regulations) Rules, 1957.

b. If the acquirer(s) shareholding exceeds the maximum permissible non-public shareholding pursuant to an open offer, the acquirer(s) shall not be eligible to make a voluntary delisting offer under the SEBI (Delisting of Equity Shares) Regulations, 2009 unless a period of 12 months has elapsed from the date of completion of the offer period.

Offer Pricea. The minimum price shall be the highest of the negotiated price, volume-weighted average price paid by the

acquirer in the preceding fifty-two weeks, highest price paid by the acquirer during the preceding twenty-six weeks and sixty trading day volume weighted average market price (for frequently traded shares).

b. Where the shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.

c. In case of indirect acquisitions the offer price would stand increased at the rate of 10 percent per annum calculated on a pro-rata basis for the period from the date of the primary transaction being announced in the public domain until the date of actual detailed public statement in respect of the target company.

Exemption from open offer obligationsa. Acquisition pursuant to inter se transfer of shares amongst qualifying persons, acquisition pursuant to

schemes of arrangement that do not involve the target company, acquisition pursuant to scheme of corporate debt restructuring not involving change of control of the company and acquisition beyond entitlement under rights issue, increase in voting rights pursuant to buy-back of shares by the target company, are exempted from open offer obligations upon fulfilment of applicable conditions.

b. SEBI may also grant exemption from the requirement of making an open offer or grant a relaxation from strict compliance with the provisions of the open offer process, upon fulfilment of certain conditions, either based on recommendations of expert panel or on its own.

Competing offersA competing offer should be made within 15 working days of a detailed public statement by a person other than the Acquirer who has made the original detailed public statement.

Recommendation to the shareholders of the Target CompanyIn addition to the obligations of the target company as stated in SEBI (SAST) Regulations 1997, the board of the target company is required to constitute a committee of independent directors of the target company who shall provide reasoned recommendations on the open offer, which shall be published by the target company.

Disclosures of shareholding and controla. Acquisition of shares resulting into aggregate holding of five percent or more shares or voting rights of the

target company by any acquirer along with person acting in concert, is required to be disclosed to every stock exchange where the shares of the target company are listed and to the target company within two working days.

b. Any person/entity along with person acting in concert, who holds five percent or more shares/ voting rights in the target company, shall disclose every acquisition or disposal of two percent or more shares of the target

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Part Four: Regulatory Changes

ii. SEBI (Know Your Client Registration Agency) Regulations, 2011

The regulations were notified for bringing uniformity in the KYC Requirements for the securities market and setting up a mechanism wherein one or more SEBI regulated KYC Registration Agency (KRA) shall undertake KYC for all clients in the securities market. The KRA system is intended to bring about uniformity in the KYC procedure across intermediaries and centralisation of the KYC records in the securities market. Once the client has undertaken KYC with a SEBI registered intermediary, he need not undergo the same process again when he approaches another intermediary. Main features of the KRA Regulations include the following:

• KRA to be wholly owned subsidiary of any of the stock exchanges having nationwide terminals, depositories, SROs or intermediaries.

• Identification of the customer and collection of initial KYC documents shall be carried by KRA through Points of Service (PoS) which will be SEBI registered intermediaries.

• KRA would perform its role for such intermediaries that choose to rely upon

its KYC at the account opening stage.

• In case of mutual funds, the Registrar and Transfer Agent (RTA) appointed by them can also do the initial KYC for their clients.

• Registration will be granted to KRA in terms of the KRA Regulations

• Functions and obligations of the KRA and the intermediaries availing the KYC related services of the KRA have been broadly defined.

• KRA will be responsible for storing and retrieving the KYC information pertaining to all the clients and disseminating any changes in the KYC information of the clients to all the intermediaries.

II. Amendments to Existing Rules/ Regulations

i. SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2011 w.e.f April 06, 2011

The Amendment to SEBI (Stock Brokers and Sub-brokers) Regulations, 2011 facilitates introduction of self-clearing members in the currency derivatives segment of an exchange.

company, within two working days to every stock exchange where the shares of the target company are listed and to the target company.

c. For disclosures under the Takeover Regulations 2011, any convertible securities (i.e. warrants/debentures) shall also be regarded as shares.

d. Any person/entity along with person acting in concert, who holds 25 percent or more shares/voting rights in the target company, shall disclose the aggregate of his shareholdings and voting rights as of the thirty-first day of March to every stock exchange where the shares of the target company are listed and to the target company.

e. Shares taken by way of encumbrance shall be treated as an acquisition and shares given upon release of encumbrance shall be treated as a disposal for the purpose of disclosure requirements.

f. Disclosures for the encumbered shares shall be made within seven working days from the creation/invocation/release of encumbrance to every stock exchange where the shares of the target company are listed and to the target company.

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ii. SEBI (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2011 w.e.f. April 19, 2011

SEBI (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2011 were notified on April 19, 2011 whereby the existing requirements for obtaining prior approval was done away with, in case of change in status and constitution, for certain intermediaries such as stock broker and sub-broker, merchant banker, registrar to an issue and share transfer agent, underwriters, debenture trustee and credit rating agency. Instead, it is provided that the prior approval will be required only in case where there is a change in control of those intermediaries. The term ‘change in control’ shall have the meaning as assigned to it under SEBI Takeover Regulations. In case of depository participant, where there was no such provision, requirement for obtaining prior approval in case of change in control has been introduced. Vide said notification, the following regulations were amended, to give the above effect:• SEBI (Stock Brokers and Sub-brokers)

Regulations, 1992• SEBI (Merchant Bankers) Regulations,

1992• SEBI (Registrars to an Issue and Share

Transfer Agents) Regulations, 1993• SEBI (Underwriters) Regulations, 1993• SEBI (Debenture Trustees) Regulations,

1993• SEBI (Bankers to an Issue) Regulations,

1994• SEBI (Depositories and Participants)

Regulations, 1996• SEBI (Credit Rating Agencies)

Regulations, 1999

iii. SEBI (Issue of Capital and Disclo-sure Requirements) (Amendment) Regulations, 2011 w.e.f. April 29, 2011

The amendment deals with payment options in public issues and rights issues. It makes usage of the ASBA facility mandatory in the case of qualified institutional buyers and non-institutional investors.

iv. SEBI (Foreign Institutional Investors) (Amendment) Regulations, 2011 w.e.f. May 02, 2011

A new sub-section was introduced by the said amendment to provide that in cases where the GoI entered into agreements or treaties with other sovereign Governments, and where such agreements or treaties specifically recognised certain entities to be distinct and separate, the Board may recognise them as such, during the validity of such agreements or treaties.

v. SEBI (Credit Rating Agencies) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to credit rating agencies was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to credit rating agencies was amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

vi. SEBI (Registrar to an Issue and Share Transfer Agents) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate

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of registration granted to Registrar to an Issue and Share Transfer Agents (RTI & STAs) was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to RTIs & STAs were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

vii. SEBI (Underwriters) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to underwriters was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to underwriters were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

viii. SEBI (Debenture Trustees) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to debenture trustees was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to debenture trustees were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of

permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

ix. SEBI (Merchant Bankers) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to merchant bankers was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to merchant bankers were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

x. SEBI (Bankers to an Issue) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to bankers to an issue was required to be renewed after every three years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of the regulations pertaining to bankers to an issue were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

xi. SEBI (Depositories and Participants) (Amendment) Regulations, 2011 w.e.f. July 05, 2011

As per existing regulations, the certificate of registration granted to depository

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participants was required to be renewed after every five years from the date of original registration. In order to facilitate grant of certificate of permanent registration, the provisions of SEBI (Depository Participants) Regulations, 1996 were amended. The amendment regulations provided that an initial certificate of registration will be granted for a period of five years thereafter grant of certificate of permanent registration will be considered by the Board. Fee schedule has also been modified accordingly.

xii. SEBI (Registrar to an Issue and Share Transfer Agents) (Second Amendment) Regulations, 2011 w.e.f. August 16, 2011

The networth requirement for both Category I and Category II of RTI &STAs were increased to ` 50 lakh and ` 25 lakh, respectively. Further, a period of three years is granted to RTI &STAs already registered with the Board to increase its networth.

xiii. SEBI (Merchant Bankers) (Second Amendment) Regulations, 2011 w.e.f. August 16, 2011

The amendment added the requirement for merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management and in case of takeover, buyback and delisting of securities.

xiv. Amendments to SEBI (Prohibition of Insider Trading) Regulations, 2011

Amendments were carried out to include disclosure requirements from promoters. These, inter alia, included disclosure of interest or holding in listed companies, the total number of shares or voting rights held and changes in shareholding or voting rights, if there has been a change in such holdings of such promoters.

xv. SEBI (Stock Brokers and Sub-brokers) (Second Amendment) Regulations, 2011 w.e.f. August 17, 2011

The amendment regulation modifies and rationalises the documents involved in the account opening process. The various agreements entered into between brokers, sub-brokers and clients are replaced with a rights and obligations document which is to be appended to the client account opening form to be maintained in accordance with the regulations.

xvi. SEBI (Mutual Funds) (Amendment) Regulations, 2011 w.e.f. August 30, 2011

The amendment regulations provide for inter alia the following:

a) Setting up of Infrastructure Debt Funds (IDFs) in order to accelerate and enhance the flow of long-term debt in infrastructure projects for funding Government’s programme of infrastructure developments. Salient features of regulatory framework for IDF scheme are as under:

• An existing mutual fund having required number of key personnel with adequate experience in infrastructure sector may launch IDF schemes.

• Companies carrying on activities or business in infrastructure financing sector for a minimum period of five years and fulfilling the eligibility criteria under relevant provisions of SEBI (Mutual Funds) Regulations, 1996 may also apply for setting up of mutual funds exclusively for launching of IDF schemes.

• The IDF would invest 90 percent of its assets in the debt securities of infrastructure companies or special purpose vehicles (SPVs) across all infrastructure sector.

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• Minimum investment, by any investor, in an IDF scheme is ` one crore with ` 10 lakh as minimum size of the unit. The credit risk associated with the underlying securities is to be borne by the investors.

• An IDF scheme shall be launched either as close ended scheme maturing after more than five years or as an interval scheme with minimum lock-in period of five years and the units of IDFs shall be listed on stock exchange.

• An IDF shall have a minimum of five investors and no investor shall hold more than 50 percent of net assets of the scheme.

b) All the operations of mutual funds including trading desks, unit holder servicing and investment operations shall be based in India and mutual funds having operations abroad shall wind up and bring onshore within a period of one year.

c) AMCs to manage and advise only pooled assets including offshore funds, insurance funds, pension funds, provident funds etc. that are broad based. There should be one fund manager for every unique strategy followed by the mutual funds. AMCs must ensure that consolidated account statement for each calendar month is issued detailing all the transactions and holding at the end of the month including transaction charges paid to the distributor, across all schemes of all mutual funds, to all the investors.

d) Scheme-wise annual report or abridged summary thereof must be sent to investors in electronic form on their registered e-mail address and a link of the full scheme-wise annual reports to be displayed prominently on the website.

xvii. SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2011 w.e.f. September 23, 2011.

a) Rights issue of Indian Depository Receipts

In this regard the major aspects introduced include:

• To allow listed IDR issuers making rights issue to circulate an additional wrap to IDR holders along with letter of offer circulated in its home jurisdiction.

• To specify disclosures in line with reduced rights issue disclosure requirements applicable for domestic issuers.

• To allow IDR issuers, complying with the provisions of deposit agreement to make rights issue through fast track mode.

• To match timelines for rights issue of IDRs process as near to as possible with the timelines prevalent in home country of concerned IDR issuer.

b) Track record of merchant bankers introduced

As part of the disclosures (along with the due diligence certificate) to be made, price information of past issues handled by merchant bankers would also have to be enclosed. The format of this disclosure was prescribed by way of circular issued on September 27, 2011.

c) Modifications in Application form and Abridged Prospectus

Amendments were made to carry out the decisions of the Board as regards the following:

• Application form to contain only key information that is required for bidding and for easy resolution of post-issue complaints.

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• Abridged prospectus to contain relevant information in a logical order to make it more readable and investor friendly, highlighting material disclosures.

• The amendment therefore substantially deals with streamlining the extant provisions and weeding out redundant provisions as well.

d) Eligibility criteria for IPOs: It was decided that:• In case of a pure “Offer for Sale” in

which the issue proceeds go to the selling shareholders instead of the issuer company, the requirement that not more than 50 percent of the net tangible assets shall be held as ‘monetary assets’ shall not be applicable.

• The requirement of track record of distributable profits for at least three out of immediately preceding five years shall be complied with on both standalone and consolidated basis; in cases where the company did not have subsidiaries in all the immediately preceding five years but had subsidiaries for a period lesser than five years it shall have net profits on a consolidated basis in at least one or more of the years for which consolidated accounts are prepared.

xviii. SEBI (Debenture Trustees) (Second Amendment) Regulations, 2011 w.e.f. December 14, 2011.

The minimum networth requirement of debenture trustees is amended to ` two crore. A period of two years, from the date of notification of the amendment regulations, is also granted for existing debenture trustees to increase their networth.

xix. SEBI (Credit Rating Agencies) (Second Amendment) Regulations, 2011 December 27, 2011

In addition to SEBI (Credit Rating Agencies (CRA)) Regulations, 1999, the provisions in respect of obtaining credit ratings have also been dealt with under relevant regulations providing the manner of issuance of debt securities such as under SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008 and SEBI (ICDR) Regulations, 2009. The requisite number of ratings varied under different regulations whereas under SEBI (CRA) Regulations, 1999 it was required to obtain ratings at least from two different rating agencies. In order to bring clarity, the amendment regulations provide that rating shall be obtained in accordance with the relevant regulations.

xx. SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regula- tions 2012 w.e.f January 30, 2012

a) Institutional Placement Programme

The Institutional Placement Programme (IPP) has been introduced as an additional method of increasing minimum public shareholding in a listed company in terms of Rule 19A of the Securities Contracts (Regulation) Rules, 1957, by insertion of a new Chapter VIII-A. The IPP is a further public offer of eligible securities by an eligible seller (listed issuer or promoter/promoter group of the listed issuer).

Key features of the IPP include the following-

• Disclosures are in line with those under QIP route

• Companies can use this route to increase public shareholding by up to 10 percent of the capital of the company or such lesser percentage as is required to comply

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with minimum public shareholding requirement.

• No requirement of filing any draft document with SEBI for its observations.

• Reservation of minimum 25 percent is to be made for the mutual funds and insurance companies, subject to demand.

• Bids once made cannot be revised downwards or withdrawn.

• Payment at the time of bidding is compulsorily through ASBA.

• Issuer may withdraw offering in case it is not fully subscribed

b) Anchor Investors

The allotment tranche and the number of anchor investors per public issue have been modified.

c) Filing of documents

The following documents no longer require to be filed with the Board:

• Agreement between issuer and lead managers

• Statement of inter-se allocation of responsibilities among lead merchant bankers

• Syndicate agreement between syndicate members and lead managers

• Submission of placement document in the case of a QIP

d) Disclosures in respect of VCFs and FVCIs

Disclosures in respect of VCFs and FVCIs regarding their investee companies/details of their holdings in other companies wherein they have been shown as one of the promoters/ promoter group have been enhanced.

e) Preferential Issue

Relevant date in the case of preferential issue of equity shares is provided as ‘thirty days prior to the date on which meeting of shareholders is held to consider the proposed preferential issue’. To avoid interpretational issues, the amendment has provided that in case the relevant date falls on a weekend/holiday, the day preceding the weekend/holiday would be reckoned to be the relevant date, Also for purpose of uniformity, the reference to time period in terms of ‘months’ has been modified to ‘weeks’.

f) Conversion of Warrants

• Tenure of warrants have been restricted to 12 months from the date of allotment.

• Not more than one warrant can be attached to a specified security.

• Purpose of funds received from conversion of warrants should be clearly stated.

• Details of utilisation of funds so raised should be disclosed.

xxi. SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2012 w.e.f. February 07, 2012

a) Preferential Allotment

Mutual funds and insurance companies have been exempted from provisions requiring lock-in relating to pre-preferential issue holding.

b) Reservation to Holders of Convertible Debt Securities in Rights/Bonus Issues

Reservation in case of rights issue/bonus issues is now restricted to only holders of compulsorily convertible debt instruments.

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xxii. SEBI (Buyback of Securities) (Amendment) Regulations, 2012 w.e.f. February 07, 2012

Amendments were made to align the regulatory provisions with the principle of equitable treatment to all shareholders and enhancing the efficiency in the buy-back process. Accordingly, major changes effected include the following:a) The company shall announce ratio

of buyback and fix a record date for determination of entitlements.

b) The provisions pertaining to specified date are done away with.

c) Public announcement shall be published within two working days from the date of Board resolution or shareholders resolution as the case may be.

d) Acceptance shall be in proportion to the holding. Shares will be accepted based on entitlement of each shareholder and thereafter additional shares tendered over and above the entitlement shall be accepted in proportion to the shares tendered by the shareholder.

e) The timeline involved in the buy-back process is reduced.

xxiii. SEBI (Portfolio Managers) (Amendment) Regulations, 2012 w.e.f. February 10, 2012.

The key changes effected include the following:

a) Minimum investment amount per client enhanced from ` 5 lakh to ` 25 lakh.

b) Segregation of holding ensured in individual demat accounts in respect of unlisted securities.

c) Name and signature on Disclosure Document of at least two directors, instead of all the directors.

xxiv. SEBI (Mutual Funds) (Amendment)Regulations, 2012 w.e.f. February 21, 2012

Amendments were brought about for the following purposes:

a) to broaden the definition of advertisement and making SEBI (Mutual Fund) Regulations, 1996 and various circulars issued from time to time principle based as far as possible, and;

b) to require mutual funds to value its investment at fair value so as to ensure fair treatment to all investors at all points of time in all schemes and restricting the valuation of debt and money market securities through amortization basis to securities having residual maturity of upto 60 days (currently 91 days), in case these securities are not traded on a particular valuation day and such valuation is reflective of the realisable value/ fair value of the securities.

xxv. SEBI (Merchant Bankers) (Amendment) Regulations, 2012 w.e.f. March 29, 2012

Keeping in mind the dynamic market conditions and regulatory needs, it was considered appropriate that the reporting requirements for merchant bankers be stipulated through circular. Hence the format provided in the Regulations are deleted vide Amendment.

2. SIGNIFICANT COURT PRONOUNCEMENTS

I. Supreme Court

M/s. Saurashtra Kutch Stock Exchange Ltd. vs. SEBI (Civil Appeal No(s). 5498 of 2008)

M/s. Saurashtra Kutch Stock Exchange Ltd is in appeal under Section 22F of the

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Securities Contracts (Regulation) Act, 1956 (for short, ‘the 1956 Act’) against the judgment and order dated July 13, 2007 passed by the Securities Appellate Tribunal (SAT) whereby its appeal was dismissed. The said SAT appeal was filed by the appellant challenging the Order dated July 5, 2007 passed by the Whole Time Member (WTM) of SEBI, withdrawing the recognition of the appellant.

The appellant challenged the order dated July 13, 2007 passed by the Appellate Tribunal as well as the order dated July 5, 2007 passed by the WTM of SEBI by filing a Special Civil Application under Article 226 of the Constitution of India before the Gujarat High Court. Diverse grounds were raised in challenging these orders. The appellant took up the position before the High Court that the remedy of appeal against the order dated July 5, 2007 cannot be said to be appropriate redressal of the grievances of the appellant and the matter should be considered by the High Court. Inter-alia, a specific plea was raised by the appellant before the High Court that the WTM of SEBI had no jurisdiction to cancel or withdraw recognition granted to it and withdrawal of recognition under Section 5 of the 1956 Act by the WTM of SEBI was unjust, arbitrary and de hors the provisions of the statute.

The High Court dismissed the Special Civil Application vide order dated November 11, 2007 inter-alia observing that the Central Government notification dated 13th September, 1994 issued in exercise of power under Section 29A of the SCR Act of 1956, read with Section 19 of the SEBI Act, 1992 would mean that the Board may in writing delegate its power to any member of the Board and, therefore, the power exercised by the WTM of the Board under Section 11 of the SEBI Act, 1992, or even withdrawal of recognition under Section 5 of the SCR Act of 1956, cannot

be said to be unjust or arbitrary or de hors the provisions of the statute and, therefore, the contention of the appellant that no remedy of appeal is available to the petitioner cannot be accepted.”

Not satisfied with the order of the High Court, the appellant preferred Special Leave Petition which came to be dismissed by this Court on March 10, 2008. After the dismissal of the Special Leave Petition, the appellant preferred the present civil appeal under Section 22F of the 1956 Act against the order dated July 13, 2007 passed by the Appellate Tribunal.

In the instant Civil Appeal, the following question of law has been framed:-

“Whether the WTM of SEBI has no jurisdiction to cancel or withdraw recognition granted to a Stock Exchange on the principle that Delegate cannot further delegate its power, and whether the order under challenge is without jurisdiction?”

The Hon’ble Supreme Court vide the Order dated March 14, 2012 observed that it is not necessary to go into the above question as it finds that this very question was raised by the appellant before the High Court in extra-ordinary jurisdiction under Article 226 of the Constitution of India.

The Hon’ble Supreme Court dismissing the said appeal observed that the High Court, as noted above, in its order dated November 19, 2007 held that the withdrawal of recognition under Section 5 of the 1956 Act by the WTM of SEBI under Section 11 of the SEBI Act, 1992 cannot be said to be de hors the provisions of the Act and the Special Leave Petition from the above order of the High Court came to be dismissed by this Court on March 10, 2008. The same question cannot be allowed to be re-opened in the present Appeal.

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II. High Courts

A. M/s. Chanchal Jain & Ors. vs. SEBI (LPA No. 507/2009) - before the High Court of Delhi

The captioned writ petition was filed in the Delhi High Court challenging the Single Judge Order dated July 24, 2009 passed in respect of an earlier Writ Petition (C) No.10390/2009 that was filed challenging the SEBI circular SEBI/IMD/CIR No. 4/168230/09 (impugned circular) dated June 30, 2009 waiving the imposition of entry load on investors.

The Hon’ble Delhi High Court, upheld the vires of the impugned circular inter-alia on the ground that the impugned circular did not prohibit commission to be charged by distributors. Accordingly, the Hon’ble Bench was pleased to dismiss the appeal.

B. MCX- SX vs. SEBI (Writ Petition No. 213 of 2011) - before the High Court at Mumbai

SEBI, vide order dated September 23, 2011 (Impugned Order) disposed of the application dated April 7, 2010 filed by the petitioner, MCX-SX, seeking permission to deal in interest rate derivatives, equity, futures and options on equity and wholesale debt segments permitted to the BSE and the NSE. The Impugned Order, inter alia, sets out the following grounds for rejecting the aforesaid application-

• Full Compliance with the MIMPs Regulations-

• Promoters of MCX-SX as PACs

• The Applicant as Fit and Proper Person

• Buy-back Arrangements by MCX-SX in violation of the SCRA

• Concentration of Economic Interest of the Promoters.

The Bombay High Court, with respect to the first ground held that it was not possible to accept the finding that the issuance of warrants to the two promoters was a device which would result in a restoration of their holding beyond the limit prescribed by the MIMPS Regulations. A mere possibility of what may happen is hypothetical, as the Supreme Court has held, and cannot result in the invalidation of a transaction which is otherwise lawful.

On the second ground that the promoters of MCX-SX were PACs, the Court concluded that the evidence given was not sufficient to establish this ground raised by SEBI. However, the Court noted that the promoters had undertaken to bring down the joint shareholding to five percent in MCX-SX.

With respect to SEBI’s contention on buy-back arrangements entered into by MCX-SX, the Court held that there was no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such an option is exercised, the contract would be completed only by means of spot delivery or by a mode which is considered lawful.

With regard to SEBI’s contention on non-disclosure and illegality of buy-back arrangements that lead to the fit and proper criteria not being fulfilled by MCS-SX, the Court observed that the relationship of a stock exchange with SEBI must be founded on utmost good faith. Thus, the existence of the buy-back agreements was a relevant consideration in enabling SEBI to determine as to whether there was a genuine divesting of shares held by the promoters in excess of the limit. Compliance with the provisions of the MIMPS Regulations by the promoters

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of the stock exchange cannot be cloaked in secrecy qua SEBI as a regulator. However, the Court held that it would not be justifiable to reject the application merely on that ground. Further that once the buyback agreement is held not to be a forward contract, then the alleged illegality of the agreement as a ground for holding that the petitioner is not a fit and proper person necessarily ceases to exist.

With respect to the last ground raised by SEBI, the Court opined that if the requirements of the MIMPS Regulations are fulfilled, then independent of them, there would be no further norm referable to the concentration of economic interest on which the Petitioner would fail in its application.

In view of the above, the Court set aside the Impugned Order vide an Order dated March 14, 2012 with a direction that the application filed by the Petitioner on 7 April 2010 shall be reconsidered afresh in terms of the observations contained in the judgment. The Court further directed that upon remand, a fresh decision shall be arrived at after furnishing the Petitioner an opportunity of being heard within a period of one month from the date of the Order of the Bombay High Court.

C. Mr. A.K. Muthuswamy vs. SEBI (WP No 21751 of 2011) – Chennai High Court

The Writ Petition was filed by an investor Mr. A.K. Muthuswamy in M/s. Osian’s Art Fund for non-action by SEBI on a complaint submitted by him with respect to the non-redemption of his investments in the fund, which was stated to be a CIS regulated by SEBI. SEBI filed its counter-affidavit stating inter alia that necessary action pursuant to the petitioner’s complaint was taken by SEBI. The High Court dismissed the Writ Petition as premature.

D. M/s. Shilpa Stock Brokers Pvt. Ltd. & ors vs. SEBI (W.P. 2120/2011) -before Hon’ble High Court of Bombay

The order of the SEBI dated December 30, 2005 suspending the certificate of registration of the petitioner for a period of one month was challenged before the SAT which modified the order of SEBI to that of a monetary penalty of ` 1,00,000/-. SEBI preferred an appeal before the Supreme Court which vide its order dated April 21, 2009 set aside the order of the Tribunal and restored SEBI’s order dated December 30, 2005. The petitioner filed a Review petition and pending the same also filed a consent application in February 2010. However, before the case could be finalised under the consent scheme, the Review Petition was dismissed by the Supreme Court on the ground of delay as well as on merits in March 2010.

Thereafter, the petitioner filed W.P. 2120 of 2011 before the Bombay High Court praying, inter alia, to:

• Issue an appropriate writ / direction, striking the requirement of pendency of court proceedings / adjudication contained in clauses 8, 11 and 17 of the SEBI circular dated April 20, 2007 as being arbitrary and in violation of Article 14 of the Constitution of India, or

• Issue a writ of mandamus directing the respondent to read the requirement of pendency in the impugned provisions to mean and include, “pendency of enforcement proceedings post adjudication”;

While dismissing the petition, the Bombay High Court vide its order dated January 17, 2012 held as follows:-

“The Guidelines in so far as they mandate that proceedings should either be in

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contemplation or be pending before they can be resolved, are based on a valid rationale. The whole purpose of the Guidelines is to ensure that the time and effort of the regulator is devoted to cases which duly merit trial and enforcement. The Guidelines thus recognise an enabling power in SEBI to resolve certain cases which in the view of SEBI can be set at rest without compromising either an issue of principle or public interest. We have, therefore, come to the conclusion that (i) The Guidelines do not confer a vested right in any person to insist on the acceptance of a proposed settlement; (ii) In the present case, the adjudication which was initiated by SEBI had attained finality before the Supreme Court; and (iii) A proceeding which has attained finality, cannot be reopened and the attempt to enforce terms of consent would result in nullifying the effect of the order of the Supreme Court which is impermissible. In the circumstances, we do not find any merit in the Petition.”

The Court further observed as follows:-

“Clause 7 of the Guidelines states that where a criminal complaint has not yet been filed but is envisaged, the process for a consent order will be followed. According to the petitioners, the expression envisage refers to what lies within the powers of SEBI even though SEBI (as in this case) does not propose to launch criminal proceedings. Even if such a broad meaning were to be ascribed to the provisions of Regulation 7, as is contended, even so it is impossible to accept that a proceeding which is no longer pending but which has attained finality upon a judgment of the Supreme Court can be reopened merely on the ground that a criminal complaint has not yet been filed but could hypothetically still be filed. Where a criminal complaint has not yet been filed, a person who has reasonable ground to believe that criminal proceedings

may be instituted, may submit a proposal for consent. Where a civil adjudication has attained finality, the terms of consent (if agreed to by SEBI) can only be that a criminal proceeding may not be instituted.

E. Subramani Gopalkrishnan Vs. SEBI and Anr (Writ Petition No. 1899 of 2011) Talluri Srenivas Vs. SEBI and Anr (Writ Petition No. 1900 of 2011) - Before the Hon’ble Bombay High Court

The petitioners are the statutory auditors who had signed the relevant financial statements which were the basis of the Satyam scam. The grounds raised by the petitioners was that continuance of the SEBI proceedings will amount to self incrimination which is protected under Article 20 (3) of the Constitution seeking stay of the proceedings initiated against them under sections 11, 11 (4) and 11 B of SEBI Act, 1992 till the conclusion of CBI trial pending before ACMM, Hyderabad.

The petitioners relied mainly on the decision of the Supreme Court in M. Paul Antony Vs. Bharat Gold Mines Ltd (1993) 3 SCC 679.

The argument of the SEBI was that as per the settled legal position, pendency of the criminal trial is no bar to disciplinary proceedings being heard by the disciplinary authorities or regulator bodies, like SEBI. It was also submitted that as per the scheme of the SEBI Act, 1992 such proceedings should be completed expeditiously and effectively. If these proceedings were to result in debarring the petitioner from undertaking the audit of listed companies in the interest of investors, this ought to be done expeditiously so that investors do not suffer any further from the audit of the petitioner. Keeping these proceedings in abeyance, would cause continued suffering of investors and thereby defeat the statutory purpose. It was also

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submitted that SEBI cannot have control over the conclusion of criminal proceedings and, therefore, the law does not contemplate holding section 11 and 11B proceedings under the SEBI Act in abeyance till the completion of criminal trials. It was vehemently submitted that the proceedings initiated by SEBI are really in the nature of remedial or preventive measures, therefore, need not be postponed till the conclusion of criminal trials.

Upon hearing the arguments of the parties the Bombay High Court disposed of the petitions and vide orders dated February 27, 2012 keeping the questions of law open inter alia issued the following directions:

a) The SEBI shall commence the proceedings against the petitioners from the week commencing from 7th May, 2012 provided the dates do not clash with the dates fixed by the trial Court.

b) In the meanwhile, the petitioners, were prohibited from

i.) issuing any certificate with respect to compliance of obligations of listed companies and intermediaries registered with SEBI and requirements of those made under securities laws;

ii.) accessing the securities market to buy, sell or deal in the securities of Satyam (SCSL) and its associate listed companies in any manner whatsoever; and

iii.) accessing the securities market except for the purpose of disposing of the share in a company other than SCSL.

III. Securities Appellate Tribunal

A. Mr. Manmohan Shetty vs. SEBI (Appeal No. 132 of 2010, date of order: May 27, 2011)

The appellant challenged the order dated June 9, 2010 passed by the Adjudicating

Officer holding him guilty of violating the provisions of the code of conduct prescribed under the SEBI (Prohibition of Insider Trading) Regulations, 1992 & imposing a monetary penalty of Rs. 1,00,00,000 (Rupees one crore only) under section 15HB of the SEBI Act, 1992. While considering whether the violation of the code of conduct formulated by the company in terms of the Regulations amounted to a violation of the Regulations, the SAT vide its order dated May 27, 2011 upheld the order of SEBI but reduced the quantum of penalty to Rs. 25 lakh.

B. M/s. SRM Energy Ltd. vs. SEBI (Appeal No.34/2011, date of order: June 06, 2011)

The appellant company (M/s. SRM Energy Ltd.) had come out with a rights issue to raise funds for the implementation of a power project. In connection with this rights issue, the company had submitted an offer document with SEBI. SEBI, while offering observations on the said offer document, vide letter dated February 08, 2011, stated that the unsecured loans, previously advanced by the promoter group to the company, should not be adjusted against allotment of shares in lieu of their right entitlements and also against shares to be allotted to them as a result of renunciation or unsubscribed portion of the issue. The same was challenged in the appeal.

The question for consideration before Hon’ble SAT was whether the unsecured loans advanced by the promoter group to the appellant company could be adjusted against allotment of shares to them in the said rights issue.

Hon’ble SAT while examining the applicability of sections 81(1), 81(1A) and 81(3) of the Companies Act to the present case, vide order dated June 06, 2011, observed that a reading of section 81(3) makes it clear that cases which fall under this provision shall not be

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governed by section 81(1) and section 81(1A). Hon’ble SAT concluded that the methodology of adjustment of loans against allotment of shares was only a mode of payment for the shares received in the rights issue and since all the necessary disclosures in that regard had been made by the appellant in the offer document(s), only section 81(1) is applicable in the circumstances of the case. It was also held that such adjustment of unsecured loans (which were payable on demand) in the strict sense of the term is not a conversion of a loan into equity.

iv. Others Courts

A. The Udipi District Consumer Disputes Redressal Forum: Smt Sumitra D. Poojary vs. MD of M/s. Bajaj Allianz Life Insurance Co Ltd & ors. (C.C. no 66/2009)

The complainant’s deceased husband, Mr Dinesh S. Poojary, took a Unit Linked Endowment Plan of Bajaj Allianz Life Insurance Ltd. The insurance company repudiated the claim by citing the reasons that

the deceased was hospitalised and diagnosed of some critical medical ailments and was alcoholic since 9 years. SEBI was impleaded as opposite party but no relief was claimed against SEBI. The complaint was allowed against the insurance company and was dismissed against SEBI.

B. The District Consumer Forum, Guntur: Tavva Srinivasa Rao vs. M/s. Reliance Power Ltd & ors

Tavva Srinivasa Rao purchased demand draft in order to purchase shares of Reliance Power in the process of IPO and applied for the subscription of the shares that IPO. The complainant approached the forum since the shares were not allotted to him. However, it was found that no money was realized from the Demand Draft and the amount in the demand draft was refunded back to the complainant. The complaint was dismissed with the finding that the complainant is not covered under the purview of Consumer Protection Act. It was also held that SEBI is not at all proper and necessary party.

PART FIVE: ORGANISATIONAL MATTERS

1. SEBI BOARD

Shri M. S. Sahoo, Whole Time Member, relinquished the charge of Office of the Whole Time Member, SEBI on expiry of his term of appointment on July 13, 2011.

Dr. K. M. Abraham, Whole Time Member, relinquished the charge of Office of the Whole Time Member, SEBI on expiry of his term of appointment on July 20, 2011.

Shri Naved Masood, Secretary, Ministry of Corporate Affairs was nominated as one of the Members on the SEBI Board in terms of Government of India notification dated August 23, 2011 in place of Shri D. K. Mittal.

Shri T. V. Mohandas Pai, Part-Time Member, relinquished the office on expiry of his term of appointment on September 03, 2011.

Shri Rajeev Kumar Agarwal, was appointed as Whole Time Member of SEBI under clause (d) of sub-section (1) of Section 4 of the SEBI Act, 1992 by Government of India vide notification dated November 3, 2011. Shri Agarwal assumed charge as Whole Time Member on the same day.

During the year 2011-12, SEBI Board met on six occasions (Table 5.1).

Table 5.1: Board Meetings during 2011-12Number of Meetings

held

Number of Meetings a� ended

1 2 3(i) Chairman Shri U. K. Sinha 6 6(ii) Whole Time Member Shri Prashant Saran 6 6 Shri Rajeev K. Agarwal 4* 4(iii) Members Dr. Thomas Mathew 6 4 Shri V. K. Jairath 6 6 Shri Anand Sinha 6 5 Shri Naved Masood 4* 3

* Number of meetings held after assuming the charge.Note:Shri D. K. Mittal attended one out of two meetings held during the year, prior to his demitting the Office of the Part-Time Member. Shri T. V. Mohandas Pai attended two meetings held during the year, prior to his demitting the Office of the Part-Time Member. Shri M. S. Sahoo attended one meeting held during the year, prior to his demitting the Office of the Whole-Time Member. Shri K. M. Abraham did not attend any meeting held during the year, prior to his demitting the Office of the Whole-Time Member.

2. AUDIT COMMITTEE

In pursuit of high standards of governance and transparency, the SEBI Board, in its 127th meeting held on September 22, 2009, constituted an Audit Committee to exercise oversight of SEBI’s financial reporting process and disclosure of its financial information.

The Committee comprises three members nominated by the Board. The tenure of the members of the Committee is two years. The Committee is presently chaired by Shri V.K. Jairath. Dr. Thomas Mathew (Jt. Secretary, Ministry of Finance) and Shri Prashant Saran (Whole Time Member, SEBI) are the other two members. Shri V.K. Jairath and Shri Prashant Saran were nominated to the Committee as Chairman and Member respectively, by the Board in its meeting held on November 24, 2011, in place of Shri T.V. Mohandas Pai and Shri M.S. Sahoo, who ceased to be the members of the SEBI Board. During 2011-12, the Committee held four meetings.

The Committee carried out the following responsibilities:

a. Reviewed the internal audit reports with the management and the internal auditors

b. Reviewed the action taken by the management to rectify deficiencies and implement suggestions as pointed out by the internal auditors

c. Approved the Internal Audit Plan for the financial year 2012-13

d. Reviewed the investment policy of SEBI

e. Reviewed and discussed the Quarterly statement of accounts of SEBI for the quarters ended June, September and December 2011.

Pursuant to the suggestions made by the Committee, SEBI implemented quarterly

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closing of accounts and e-payment to suppliers, contractors etc. The Committee effectively coordinated with the management and the internal auditors and helped in bringing the improvement of the internal control systems.

The Committee reviewed and discussed the annual statement of accounts of SEBI for the year 2011-12 with the management of SEBI and internal auditors. Relying on the review and discussions conducted with the management and internal auditors, the Audit Committee believes that SEBI’s annual statement of accounts is fairly presented in conformity with the Generally Accepted Accounting Principles (GAAPs) in all material aspects. The Committee also reviewed the internal control systems put in place and expressed its satisfaction with the same. The Committee fulfilled its responsibilities during the year in compliance with its charter.

3. ORGANISATIONAL RESTRUCTURING

During the year 2011-12, SEBI decided to explore the scope of strengthening its regional offices, decentralisation of work to regional offices and opening of offices at new places. This exercise was carried out keeping the following factors in mind:

a. There was a need for investors to get the services of SEBI at their doorsteps to promote a balanced, pan India securities market.

b. Physical proximity of SEBI office to investors and intermediaries would promote deepening and broadening of securities market.

Accordingly, it was felt that:

a. There is a need to strengthen the regional offices by delegating the additional activities/works to them, and

b. There is a need to open local offices in various state capitals to service the investors in the locality.

Keeping in view the above factors and need, SEBI has decided to open local offices at Bangalore, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Indore, Jaipur, Kochi, Lucknow and Patna.

During 2011-12, SEBI felt the need to revisit its organisational capabilities to ensure that these are relevant in the dynamic market environment. Accordingly, it was decided to engage an independent reputed consultant to study and make appropriate recommendations in the areas of a) Organisational Structure, b) Human Resources, c) Re-prioritise areas of focus, d) Technological Requirements, e) Sharing of regulation and oversight with Self Regulatory Organisations, and f) Co-operation with external agencies to meet the emerging challenges and priorities. The process for selection of consultant has begun.

4. HUMAN RESOURCES

Human Resources Development Division continued to play an important role with prime focus on implementation of policies on capacity building, training, promotions, placement and transfers.

I. Staff Strength, Recruitment, Deputation

As on March 31, 2012, SEBI had a total of 639 employees in various grades – 527 were officers and 112 comprised of secretaries and other staff. Three officers are on deputation to Competition Commission of India (CCI) and one officer was deputed to FSDC. SEBI undertook All India Recruitment Exercise and has recruited 76 officers at grade A in an effort to augment its staff strength in various areas. The provisions of percentage of reservation,

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Part Five: Organisational Ma� ers

relaxation and concession to candidates of SCs, STs, OBCs and PWDs have been implemented in direct recruitment as prescribed by Govt. of India from time to time.

II. Training and Development

In order to enhance the knowledge base as well as “soft skills” including motivation, communication etc., staff members across all grades were deputed to various behavioural and functional training programmes at both domestic and international level. The details are as under:

i. Domestic Training:

a. Executive Training Program for Senior officials

Twenty three Senior Officers (Chief General Managers and Executive Directors) attended the Executive training program on “Leading into the Future” at Indian School of Business (ISB) Campus, Hyderabad.

b. Judicial training programme for officers

26 officers (Divisional Chiefs) attended the training program on “Professional Advancement Course for Quasi Judicial Officers of SEBI” at Andhra Pradesh Judicial Academy, Hyderabad.

c. Structured products and Derivatives:

Eighty five officers were imparted training in collaboration with National Institute of Securities Markets (NISM) in structured products and derivatives with objective to impart knowledge and skills in new derivative products and structured products.

d. Other Programmes Officers/Accounts Assistants were also

deputed to attend various training programmes on reservation in service, Right to Information (RTI) Act, information technology, disciplinary matter, contract labour, etc with the objective of enhancing specific skills.

Training / attachment programs were conducted for trainee officers of Indian Foreign Service, Indian Accounts and Audit Service, Indian Revenue Service, Indian Railway Account Service, etc. by SEBI.

ii. Foreign Training:

One hundred and sixty two officers were deputed to attend various training programmes and seminars/ conferences conducted by regulators and other agencies outside India.

A. Internship

SEBI, as an integral part of its policy, offered short duration projects/ internships to students of reputed management schools and law schools. In each financial year, 20 students (12 General Stream and eight Legal Stream) from premier management schools and law schools are offered four to eight weeks internship in Mumbai.

III. Strengthening of Regional Offices

Chief General Managers/ Legal Advisers have been posted to take charge of Regional offices at Northern Regional Office (NRO), Southern Regional Office (SRO), and Eastern Regional Office (ERO). Presently, the ERO has 19 officers, SRO has 21 officers, NRO has 36 officers and WRO has 10 officers.

IV. Promotions

During the year 2011-12, the following promotions took place covering various grades in SEBI against the existing vacancies:

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Table 5.2 Promotion of SEBI Officials

From To No. of Persons

promoted

1 2 3

Chief General Manager

Executive Director

1

General Manager Chief General Manager

3

Further, during the year, nine Officers in Grade C and two officers in Grade D who had completed seven years of service in their existing grade were granted personal promotion to the next higher grade. Secretarial staff, Liaison Assistant who have completed 12 years of service in Grade A were upgraded to the next higher grade.

V. Enhancement of Staff Pay, Allowances and Benefits

During the financial year benefits/ entitlements like household help/ cleaning at residence, briefcase, book grant scheme, vehicle maintenance, conveyance, and furniture allowance have been revised and the air conditioner facility at residence has been extended to Grade E and F.

VI. Scheme for Recognising and Rewarding Academic Excellence of Children of Employees

During the financial year, ten children of employees were rewarded for academic excellence in 10th /12th Standards.

VII. Disciplinary Matters

During 2010-11, no staff member was placed under suspension in terms of Regulation 74 (1) and 86 (1) (b) of the SEBI (Employees’ Service) Regulations, 2001.

5. NATIONAL INSTITUTE OF SECURITIES MARKETS (NISM)

I. Certification of Associated Persons in Securities Markets

As a part of its periodic examination review, NISM launched revised exams for two certification examinations in the financial year 2011-12. These are:

a. NISM-Series-I: Currency Derivatives Certification Examination, and

b. NISM-Series-VI: Depository Operations Certification Examination

NISM has completed the development of the following certification examinations and will launch the examination after receiving required approvals:

a. Certification Examination for Compliance (Non-Fund), and

b. Certification Examination for Equity Derivatives

NISM is currently developing various certification examinations for market intermediaries, which are in different stages of development. These include:

a. Certification Examination for Sales function across market intermediaries

b. Certification Examination for Mutual Fund Advisers

c. Certification Examination for Sales function in the Equities segment

d. Certification Examination for Compliance for Issuers

e. Certification Examination for Merchant Banking

Currently NISM Series VA: Mutual Fund Distributors Certification Examination is also being conducted in Hindi and Gujarati

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Languages. The Hindi and Gujarati version of the NISM Series VII: Securities Operations and Risk Management Certification Examination workbook have been made available to candidates.

NISM developed seven types of mandatory certification examinations for various segments in the capital market during the year. In all 29,664 candidates passed the examination out of 75,078 candidates appeared for these examinations. NISM also conducts Certified Personal Financial Advisor Examination (Non-Mandatory Certification Examination) which is cleared by 327 candidates out of 639 candidates appeared for the examination.

II. Development and Administration of Continuing Professional Education (CPE)

Further to SEBI’s discussion paper on CPE and SEBI’s guidance on CPE requirements to be implemented by NISM. NISM announced the CPE requirements for associated persons vide communiqué dated December 21, 2011.

As per the detailed CPE requirements, associated persons may get their certificates revalidated by successfully completing a related two days CPE Program or passing the relevant NISM certification examination during 12 months preceding the date of expiry of the certificate. NISM initiated the accreditation of various CPE Providers for the delivery of NISM CPE programs. In addition to the accredited CPE Providers, NISM may also provide classroom delivery of CPE Program specific to each certification examination. During the year 2011-12, NISM has conducted 196 CPE programs for mutual fund distributors where 7,909 candidates participated.

III. Financial Literacy and Investor Education

i. Pocket Money: Financial Literacy for School Students

Under the Pocket Money programme, financial literacy was imparted to school students. NISM’s strategies in this regard are conducting orientation programmes for the school principals, organising teachers training programmes, and the teachers conducting classes to impart necessary understanding about the contents covered in the pocket money programme to enable the students to appear for the examination. Examinations are conducted for the students and certificates awarded to them.

During 2011-12, School for Investor Education and Financial Literacy has conducted two Principals’ Workshops and 12 Teachers Training Workshops, benefitting a total of 41 School Principals and 631 Teachers. The programme was implemented in various schools, the students were enrolled, and examination conducted on financial literacy. The programme could reach to 360 schools covering 50,946 students during the year.

During the year, pocket money programme was penetrated deeply to municipal schools of Mumbai, Navi Mumbai and Thane. Programmes were also conducted in Ahmedabad, Chennai, Jalgoan and Rajkot. During the year, the pocket money resource book was translated into Tamil, Gujarati and Hindi and now the book is available in five languages viz. English, Hindi, Marathi, Gujarati and Tamil.

ii. SEBI Financial Education Resource Person Program

NISM has been providing capacity building support to SEBI for implementing the Financial Education Resource Person

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Program in the country. NISM’s role is to identify, empanel and train the resource persons in the four regions viz. West, East, North and South. During the year 2011-12, NISM could assist SEBI in identifying 167 Resource Persons spread across all the four regions.

iii. Other Capacity Building Initiatives

During the period, the SIEFL has organized a workshop for SEBI Helpline and Score Staff to keep them abreast of the developments in capital market. A five days training program was organized at NISM premises during December 19-23, 2011. Thirty candidates participated in the program.

A Consensus Building Workshop on Financial Literacy in School Curriculum was conducted by NISM in New Delhi on August 16, 2011. Representatives from SEBI, RBI, IRDA, PFRDA, NISM, BSE, NSE, and CBSE attended the program. Shri Prashant Saran, Whole Time Member, SEBI, Shri Ramesh Krishnamurthi, Director-Capital Markets, Ministry of Finance, and Prof. G. Sethu, Officer on Special Duty (OSD), NISM, attended the programme and guided the proceedings. NISM could sensitize the participants the need for introducing financial literacy in school curriculum. As a follow up of the workshop, Central Board of Secondary Education (CBSE) has constituted a committee to look into the aspect of introducing financial literacy in CBSE syllabus. NISM has also conducted a Brainstorming Session on ‘Financial Literacy Topics for School Curriculum’ on March 30, 2012 at NISM Bhavan, Vashi wherein NISM and SEBI representatives participated and deliberated on the topic. The session could bring out broad topics to be included in the syllabus of financial literacy in School curriculum.

IV. Securities Market Education

During 2011-12, School for Securities Education (SSE) carried out a number of activities and initiatives in line with its vision to “lead, catalyze and deliver educational initiatives to enhance the quality of interactions in the securities markets”. The activities and initiatives are presented in the following steps.

NISM entered into a MoU on June 9, 2011, with ICICI Bank for a dedicated batch of 21 students, offering the one-year fulltime Post Graduate Certificate in Securities Markets (PGCSM). These students will be posted in the Risk and Treasury Department of ICICI Bank on successful completion in Term III. NISM successfully conducted classes for the third batch of the Certificate in Financial Engineering and Risk Management (CFERM). Of the 34 students admitted into the Basic Module, 22 students made it to the Advanced Module, which is in progress.

NISM proposes to launch a One-Year programme namely, Certificate in Securities Law (CSL). It will be a part-time, evening programme for working executives. Classes will be held on weekdays (Tuesdays through Fridays) from 6.30 pm to 8.30 pm at Nariman Point, Mumbai. NISM has received recognition as a Research Centre for Ph.D. studies, from the Symbiosis International University, Pune. The faculty of NISM will provide course-work and guidance to Ph.D. candidates. This will enrich the research environment at NISM.

V. Executive Education Program

NISM successfully conducted the following programmes:

• SEBI Induction - I from June 15 - July 8, 2011 for the newly recruited officers (batch 2011) at the Centre for Excellence

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in Telecom Technology and Management (CETTM), MTNL, Powai, Mumbai.

• A comprehensive training programme in securities markets for 28 SEBI officials in Grade A and B. The programme offered a holistic view of securities markets through classroom sessions, field visits to stock exchanges, depositories and simulation and trading session at ITM, Vashi, Mumbai.

• The Asian Development Bank (ADB) in collaboration with SEBI organized a Regional Seminar on Investigation and enforcement under APEC financial regulators training initiative (FRTI). The seminar was held from 6th to 10th February, 2012 at Hotel Trident, Mumbai.

• One-day training program on Structured Products for twenty SEBI officers (Managers and AGM) was held on 17th

February, 2012 at NISM premises at Vashi.

• NISM conducted two-day workshop on “Basics of Derivatives “for SEBI officers (Managers and AGM). The total participants across two batches were 52.

• Leadership Program for Executive Directors and Chief General managers of SEBI and NISM organized a learning intervention by Prof Anton Musgrave on “Leading into the Future” for the Top Management at the SEBI in association with Indian School of Business (ISB). This two day intervention was delivered at ISB campus on the 12th and 13th of March 2012.

VI. Project with World Bank Technical Assistance

During the year 2011-12, NISM has completed following three assignments under

the World Bank Technical Assistance:

• Assistance to National Institute of Securities Markets in the areas of certification.

• The assignment undertaken with Financial Industry Regulatory Authority (FINRA), US was completed during the year with the visit of US Team to India during May, 2011.

• Securities Market Simulator for Training.

VII. Initiatives on Information and Communication Technology Matters

i. Network for Securities Market Data (NSMD)

A project to develop high quality information and communication technology infrastructure was completed to provide access to process securities market data to designated stakeholders. The following were the major milestones of the project:

• Procurement of two IBM Servers (One for securities market data access (SMDA) system and the other for securities market data analysis)

• Hosting of SMDA System on the server

• Relocation of SMDA System Server to external data centre

• Procurement and installation of market data analysis tools (i.e. SAS, WinRats, Proline etc,)

ii. Online Registration, Enrolment and Testing System (ORETS)

A sophisticated application software for online registration, enrolment and Testing was developed and implemented. This software is being used since September 2011 to conduct all mandatory certification

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examinations online for various types of intermediaries in the securities market.

iii. Online Testing Centers

Two test centers were setup – One in NISM Bhavan/Vashi and another at Nariman Point, Mumbai. The project involved procurement and installation of computers, network equipment, sophisticated Audio-visual equipment and electronic monitoring systems.

iv. Automation of Internal Processes

An application has been developed in-house and implemented for employees to register online and track the status of various requests for service from the ICT Department.

v. Networking of NISM Nivas

A robust data network with sophisticated firewall has been setup at NISM Nivas to manage bandwidth and to monitor the content accessed by students on the internet. Also necessary connectivity was setup to monitor the data traffic on the NISM Nivas network from NISM Bhavan.

6. VIGILANCE CELL

Vigilance Awareness Week for the year 2011 was observed from October 31 – November 05, 2011. The observance of the week commenced with the pledge administered by Whole Time Member to the Executive Directors and Division Chiefs, who in turn, administered the pledge to their staff. The Regional Manager located at the four regional offices – NRO, ERO, SRO and WRO administered the pledge to their staff. A banner on ‘Vigilance Awareness Week’ was prominently displayed outside the office premises at Mumbai and all four regional offices during the above-mentioned week. CBI organized a Conference of all Chief Vigilance

Officers of Government of India undertakings in Mumbai with the co-operation of SEBI in its premises in BKC, Mumbai on February 21, 2012.

7. PROMOTION OF OFFICIAL LANGUAGE

In order to ensure the compliance of official language policy of the Government of India on implementation of official language Hindi in the offices of SEBI, various efforts were made during the year 2011-12.

I. Bilingualization

During the year, various documents, viz. all notifications, registration certificates granted to various market participants, intermediaries, etc., were issued in both the languages, i.e. Hindi and English. All the papers were submitted before various Parliamentary Committees in diglot form. Further, the reports like Annual Report, Audit Report were also issued in Hindi and English. In addition, initiatives were also taken to provide all the standard formats in diglot form.

II. Correspondence in Hindi

Every year, numerous letters are sent by the Board to the investors / intermediaries in Hindi / in diglot form. During the year, all the letters received in Hindi were replied in Hindi.

III. Training

During the year, as per the requirements, Hindi training programmes were also conducted for newly recruited officers.

IV. Rajbhasha Competitions and Functions

To encourage the staff members for the usage of Hindi in day-to-day official work, various Hindi competitions were organised during the year, namely, Kavita Lekhan

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Partiyogita, Hindi Prachar-Vaakya Lekhan Partiyogita, Hindi Vaktritva Partiyogita, Ashubhashan Partiyogita, Vaad-Vivaad Partiyogita, Bolati Tasveer Partiyogita, Prashnottari Partiyogita, Hindi Karyalayeen Kaamkaaj Partiyogita, Hindi Tankan Partiyogita and Varg Paheli Partiyogita. Staff members took part in these competitions with zeal. During the year, Rajbhasha Samaroh was also organised to honour the winners of various competitions.

V. Aaj Ka Shabd

To make the staff members conversant with Hindi vocabulary, one new Hindi word daily displayed through SEBI Portal.

VI. Hindi Noting and Hindi Quotes

A practice to display one phrase, generally used in Hindi Noting, and one Hindi Quote daily through SEBI portal for staff members of SEBI has been initiated during the year. This practice has been adopted on the lines of displaying a Hindi word daily through SEBI portal.

VII. Rajbhasha Meetings and Seminars

In order to ensure compliance and implementation of the official language policy of the Government of India in the offices of the Board, meetings of the Official Language Implementation Committee were conducted. Accordingly, during the year 2011-12, various crucial decisions were taken with regard to the usage of Hindi in day-to-day official work, and follow-up actions were taken to ensure the implementation of these decisions. In addition, officials of the Board also took part in the Rajbhasha Seminars / Meetings organised by other institutions.

VIII. Information Technology and Hindi

All the computers available in SEBI offices have the facility to work in Hindi.

Besides, efforts are in progress to provide advanced multi-lingual software having Unicode facility. Furthermore, during the year under review, efforts are also in progress to make the entire internal portal bilingual in coordination with the Information Technology Department.

IX. Investor Website and SCORES (SEBI Complaints Redress System)

Necessary steps have been taken towards making the investor website available in Hindi, and initiatives have also been taken to ensure bilingualisation of SCORES, so as to make available the investor website and the SCORES for investors in their language.

X. Investor Awareness

During the year, Hindi Brochures were also published for investor awareness. Further, during the year, initiatives were also taken to display the informative material, through LCD, in diglot form for awareness of investors visiting SEBI Bhavan.

XI. Regional Offices

Efforts are being made in the regional offices also towards compliance of the official language policy of the Government of India, which includes meetings of the Official Language Implementation Committee, bilingualization, reply in Hindi to the letters received in Hindi, correspondence in Hindi, Hindi competitions, etc. Thus, during the year, besides compliance of the official language policy in the regional offices, all possible efforts were continued to be made towards the use of Hindi in day to day official work.

8. INFORMATION TECHNOLOGY

The major Information Technology (IT) initiatives during 2011-12 include strengthening of IT Security, implementation of new webmail system, implementation of

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secured system to access SEBI applications, implementation of Information Rights Management (IRM) and Data Leakage Protection (DLP) systems as part of Document Management System (DMS).

I. Strengthening of IT security

The existing organisational IT security has been reviewed extensively and the following steps were taken to strengthen the IT security in order to minimise risks arising out of people, process and technology:

• Enterprise network architecture was redesigned to minimise the IT security risks.

• Implementation of latest Intrusion Detection and Prevention System (IPS) to check cyber frauds and hacking.

• Implementation of Organizational Information Security Policy Document covering people, process and technology.

II. New Webmail

A new webmail system with additional security features was implemented at SEBI.

The main features of the new web mail system include:• High availability through global and

local load balancing• Easy to use interface• Enable users to receive and send e-mails

through their mobile handsets• Instant messaging facility• Disaster recovery functionalities• Audio/video/web conferencing facility

III. Implementation of secured system to access SEBI applications

To further secure the SEBI IT resources, it was decided that all the applications accessible

through the internet will henceforth be accessed only with multifactor authentication. The upgrade of all applications to enable multifactor authentication is in progress.

IV. Implementation of Information Rights Management (IRM) and Data Leakage Protection (DLP) systems

To secure the sensitive digitized documents / information while in store or during transmission, an Information Rights Management (IRM) with multiple levels of security and Data Leakage Protection (DLP) system was implemented.

9. INTERNATIONALCO-OPERATION

SEBI has been playing an increasingly important role and contributing significantly to the setting of international standards and their implementation towards promoting fairness, transparency and efficiency of securities markets globally. SEBI is member of key international standard setting bodies, making effective contribution to their work program and holds leadership position in several committees of international bodies facilitating stronger representation of the views of emerging market jurisdictions on a global platform.

SEBI is an active and a leading member of the IOSCO, which is globally recognised as the international standard setter for securities markets. SEBI is a member of the Financial Stability Board (FSB), which has been mandated by the G20 to promote implementation of financial sector regulatory reforms in the world. SEBI has recently been selected as a new member of the Joint Forum (JF), as part of the expansion process of the JF, meant to effectively address global regulatory policy issues common to the banking, insurance and securities sectors.

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SEBI actively engages in co-operation on investigation / enforcement/ supervisory matters with other overseas regulators under the aegis of the IOSCO Multilateral Memorandum of Understanding /bilateral MoU framework, provides inputs to the GoI on international issues/ treaties, supports technical assistance to developing countries and hosts/organises visits of foreign delegates and international seminars/ training programs.

I. Association With IOSCO

SEBI is a member of the Technical Committee (TC), the main standard setting body of the IOSCO and of the IOSCO Executive Committee (EC), the main governing body of the IOSCO. SEBI is also a member of IOSCO Emerging Markets Advisory Board (EMCAB), which is the executive body of the Emerging Markets Committee (EMC) of IOSCO. SEBI has nominated its senior executives on various Standing Committees of the Technical Committee of IOSCO. SEBI’s nominees contribute actively in the standard setting work/other work streams of these Standing Committees.

SEBI is co-chair of the IOSCO EMC Task Force on “Developing Corporate Bond Markets in the EMs”. The Task Force published its report on November 15, 2011. The EMC Report reviews the current state of development of corporate bond markets in emerging markets, discusses issues and challenges and provides emerging markets with guidance and direction in regulating and developing their corporate bond markets. It addresses the varying needs of corporate bond markets in emerging markets, which are at different stages of development, and identifies a comprehensive set of novel recommendations encompassing both regulatory and developmental issues.

SEBI is also one of the three co-chairs of the IOSCO Task Force on Derivatives Regulation. The purpose of the Task Force is to co-ordinate securities and futures regulators’ efforts to work together in the development of supervisory and oversight structures related to over-the-counter (OTC) derivatives markets. During the year, the Task Force produced the following reports: (1) a report on data reporting (2) a report on further analysis of multi- or single- dealer platforms (3) a report on requirements for mandatory clearing and (4) a report on oversight of derivatives dealers.

As Vice-Chair of the IOSCO Implementation Task Force (ITF), SEBI has played a leadership role in the work of review of IOSCO Objectives and Principles of securities regulation which is recognised by the FSB as one of the 12 standards and codes for sound financial regulation in the word. During the year (September 2011), the ITF completed the work of review by publishing the revised IOSCO Methodology for assessment of Implementation of IOSCO principles of securities regulation.

In February 2012, the combined meeting of IOSCO TC, EC and EMC-AB elected SEBI as Vice Chair of the newly established IOSCO Assessment Committee (AC). As part of the new IOSCO strategic direction, the AC has been set up with mandate of taking forward the Assessment Program of implementation of IOSCO Principles and Standards. This is in accordance with IOSCO’s first strategic goal to maintain and improve the international regulatory framework for securities markets via setting of international standards and their systematic implementation across the IOSCO member jurisdictions. The work of AC assumes further significance in the context of the G20 endorsed FSB co-ordination

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Framework for Implementation Monitoring whose work will build upon the monitoring activities conducted by the standard setting bodies to the extent possible.

II. Chair of the Asia-Pacific Regional Committee

In the 36th IOSCO Annual Conference in Cape town, South Africa in April 2011, Shri U. K. Sinha, Chairman SEBI was elected Chair of the IOSCO Asia-Pacific Regional Committee (APRC) for the period till May 2012.

The APRC is one of the four Regional Committees of IOSCO which focus on regional issues relating to securities regulation. The APRC comprises 25 members representing securities regulators from the Asia-Pacific jurisdictions and met twice during the year. As APRC Chair, SEBI played a leading role in adding value to the issues, initiatives and common agenda concerning APRC jurisdictions and in articulating the concerns of the APRC jurisdictions in the IOSCO policy making and implementation framework; in the context of developing fair, efficient and transparent markets in this region. SEBI also continues its effort in developing capacity building and training program in the region.

The last meeting of APRC held in December 2011 (in Kuala Lumpur) included very useful discussions on current global developments in financial sector and its impact on APRC jurisdiction, country presentations on contemporary regulatory topics of common concern and panel discussions on market development issues for the region with impressive participation of market participants from the Asia Pacific region.

With the changing committee structure in IOSCO, the Regional Committees of IOSCO

are expected to play an increasingly important role in the standard setting work of IOSCO. The presence of SEBI in the APRC will further enhance the quality of engagement of SEBI with IOSCO.

III. Association with G20 / FSB

The Financial Stability Board (FSB) is an international body established to address financial system vulnerabilities and to drive the development and implementation of strong regulatory, supervisory and other policies in the interest of financial stability. One of the main mandates of the FSB is to implement G20 Policy announcements on financial regulation.

SEBI is a member of the Plenary and Regional Committee Group- RCG (Asia) of the FSB. During the year, FSB Plenary met three times and the FSB RCG Asia met once. SEBI provides comments to the MoF on various FSB issues since the MoF is the principal country member to the FSB from India. Since the onset of the global financial crisis, the G20 has established core elements of a new global financial regulatory framework that will make the financial system more resilient and better able to serve the needs of the real economy. National authorities and international bodies, with the FSB as a central locus of co-ordination, have further advanced this financial reform programme, based on clear principles and timetables for implementation. As member of FSB, SEBI is committed to implement international financial standards.

IV. Joint Forum

The Joint Forum is a cooperative cross-sector group which was established in 1996 by its three parent bodies, the Basel Committee on Banking Supervision (BCBS), the IOSCO and the International Association

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of Insurance Supervisors (IAIS), to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.

In February 2012, SEBI was selected as a new member of the Joint Forum (JF) following the decision of the Joint Forum Co-ordination Group comprising the three parent bodies - BCBS, IOSCO and the IAIS. The JF currently comprises 27 representatives from authorities in banking, insurance and securities sectors which are drawn from 12 jurisdictions. The JF had recently decided to expand its membership to enhance wider representation and asked each parent committees to nominate one member as first ranked candidate followed by two members as alternates. SEBI was nominated by the IOSCO as the first ranked jurisdiction for membership of the JF.

V. Hosting of International Seminar

SEBI hosted the Asia-Pacific Economic Co-operation (APEC) Financial Regulators Training Initiative (FRTI) Seminar on investigation and enforcement in collaboration with the NISM during 6th to the 10th of February 2012, in Mumbai.

The seminar was attended by 40 delegates from 21 jurisdictions. The program focused on identifying best practices, tools, and techniques for carrying out investigation and enforcement proceedings, and for obtaining evidence necessary to successfully prosecute a violation of securities laws. Case studies were also used to demonstrate the best practices for successfully investigating and prosecuting the most common securities law violations.

VI. MMoU and MoU Requests

• IOSCO MMoU requests

Since April 2003, SEBI has been a signatory of the IOSCO Multilateral Memorandum of Understanding (MMoU) which is an international benchmark for enforcement related cooperation and exchange of information among securities regulators. During the year, SEBI received 37 requests from the overseas securities regulators seeking SEBI’s assistance and SEBI made six such requests to other overseas regulators under the aegis of the IOSCO-MMoU. SEBI executed / took steps for the

Box 5.1: Implementing Global StandardsAs part of its commitment to develop and implement global standards and principles in order to promote fi nancial stability, SEBI has been actively working towards aligning its Regulations and Policies to the relevant G20/FSB recommendations. SEBI has also been giving its response to the Implementation Monitoring Network (IMN) template under the Coordination Framework for Implementation Monitoring (CFIM) of the FSB. The template is designed to refl ect the completion of the specifi c action points and planned next steps in future; with a view to assess the national authorities’ progress in implementing the G20/FSB recommendations on fi nancial regulatory reform. The broad areas in securities market, to which these recommendations inter alia relate to, include shadow banking (including money market funds), global reforms in the supervision of credit rating agencies, regulatory framework for alternative investment funds including hedge funds and securitized and structured products, mechanisms for sharing of information among domestic authorities and international counterparts and regulatory framework to deal with identifi cation of emerging risks and to address them eff ectively. During the year, SEBI has made signifi cant progress in many of these regulatory areas as detailed elsewhere in the report.

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execution of requests so received, subject to the provisions of the MMoU.

• Bilateral MoUs / Agreements

SEBI has till date signed 18 bilateral MoUs/Technical Collaboration Agreement and one Letter of Intent with various overseas jurisdictions for mutual assistance and information sharing, thus strengthening cross-border co-operation in matters of securities laws. With the increasing internationalisation and interdependence of securities markets and the need for closer co-operation between regulatory authorities, the MoUs facilitate mutual assistance, the strengthening of cross-border co-operation and contribute towards efficient performance of the supervisory functions, and effective enforcement of the laws and regulations governing the markets. During the year, SEBI made three requests for information and received one request for information from overseas regulators under the aegis of bilateral MoUs.

VII. Contribution to Various International Treaties

During the year, SEBI continues to give its comments to the GoI on various international treaties under consideration by the GoI for areas related to the securities markets.

VIII. Participation in International Programs

SEBI officials have been invited to participate as Speakers / Panelists at many important international seminars and conferences. During the year, SEBI also nominated officials for overseas training programs/ conferences/ seminars held by international bodies such as IOSCO, IMF, OECD, ADB, APG and financial market

regulation programs. The purpose of these programs is to share expertise of SEBI officials and to provide training as well as exposure to best practices in international financial market regulation.

IX. Visits by Foreign Delegates / Dignitaries

During the year, SEBI hosted a number of dignitaries / delegations from various overseas regulators/ agencies in order to promote mutual co-operation and better understanding of the Indian markets and for establishing inter-regulatory dialogue between the respective authorities. The authorities/agencies from which delegations visited SEBI include the SEC - Pakistan, MAS-Singapore, Tanzania, SEC-Nigeria, African Union, FSS-Korea, SIX Swiss Exchange Ltd.- Switzerland, European Union, SEC- Sri Lanka, SEBON- Nepal, CFFEX-China and USIBC, among others.

X. Study Tours for Overseas Regulators

SEBI conducted seven study tours on requests made by various overseas regulators. SEBI also conducted two study tours during the year, on request made by BSE for delegations representing various overseas jurisdictions attending an International program on Securities Markets Operation at the BSE. The increasing requests for conducting of study tours from overseas regulators signifies India’s growing importance amongst emerging markets for its robust regulatory framework and market practices.

10. PARLIAMENT QUESTIONS

The Parliament Questions Cell acts as the nodal and interface point for all Parliament Questions, assurances to Parliament Questions, VIP references and other

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Parliament related work. During 2011-12, SEBI furnished material for reply to 139 Parliament Questions and 94 points/queries raised by Parliamentary Committees, as under:

Table 5.3: Parliament Queries received/ raised

12011-12 2010-11

2 3

No. of Parliament Questions received

139 240

No. of points/ queries raised by Parliamentary Commi� ees

94 88

Table 5.5: Details on appearance of SEBI representatives before various Committees

Sr. No. Commi� ee Month

1 2 3

Standing Commi� ee on Finance - Overall Performance of SEBI with particular emphasis on recent measures taken and proposed to strengthen the regulatory mechanism

July, 2011

Commi� ee on Subordinate Legislation, Rajya Sabha (Issue of Capital and Disclosure Requirements) Regulations, 2009

September, 2011

Table 5.6: Queries/ points raised by various Committees and replied by SEBI during 2011-12

Sr. No. Commi� ee Queries/ Points raised

1 2 3

1 List of points during the meeting of Standing Commi� ee on Finance - Overall Performance of SEBI with particular emphasis on recent measures taken and proposed to strengthen the regulatory mechanism – July 2011

77

2 List of points in connection with the visit of the Commi� ee on Subordinate Legislation, Rajya Sabha – The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 – September, 2011

14

3 Standing Commi� ee on Finance on Selection of Subjects for examination during the year 2011 – 12 -Background Note on Performance of SEBI Mechanism for protection of Investors Rights and Interests in the Capital Market (October, 2011)

1

4 Query raised by Standing Commi� ee on Finance on Participatory Note 1

5 Standing Commi� ee on Finance – Background note on Examination of the Prevention of Money Laundering (Amendment) Bill, 2011

1

Table 5.4: Session-wise Parliament Queries received and replied by SEBI during 2011-12

Parliament Session No. of Questions received

Admi� ed Questions

1 2 3Monsoon Session(August – September 2011)

70 35

Winter Session(November – December 2011)

41 26

Budget Session (March, 2012) 28 18Total 139 79

SEBI’s endeavour has been to furnish reply to Parliament Questions, VIP references and other queries in a time bound manner.

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11. RIGHT TO INFORMATION ACT-2005

SEBI has been implementing the Right to Information Act, 2005 (RTI Act) in its true spirit since its enactment in the year 2005. As per the provisions of the RTI Act, SEBI has designated a Central Public Information Officer (CPIO) at its Head Office in Mumbai. Dr. Anil Kumar Sharma is the present CPIO of the SEBI. In order to process the RTI application in efficient manner and keeping the convenience of the information seeker, SEBI has also appointed four Central Assistant Public Information Officer (CAPIO) at its Regional Offices located at Delhi, Chennai, Kolkata and Ahmedabad. The role of CAPIO is to receive the application for information or appeals under the provisions of the RTI Act and forward them to CPIO. SEBI has also designated an Official as the Appellate Authority (AA) where appeal can be made against the Order of the CPIO. Shri Prashant Saran, Whole Time Member, SEBI has been the Appellate Authority during 2011-12. As per the direction of the Central Information Commission (CIC), SEBI has also designated the Transparency Officer and Shri P. K. Nagpal, Executive Director; SEBI is the present Transparency Officer.

Section 4 of the RTI Act casts obligation on every Public Authority to make certain proactive disclosure. SEBI has been proactively making such disclosure and fulfilling its obligation under the SEBI Act as well as RTI Act.

Since its formation, SEBI always believes in adequate disclosure of the information in the interest of securities market and the investor. The focus of the disclosure is transparency, better understanding of the functioning of the regulators and SEBI registered intermediaries and other market participants. SEBI has been proactively disclosing lots of information

about various aspects of securities market including various activities and policy of the SEBI on its website i.e. www.sebi.gov.in. SEBI has provided SEBI Act, 1992 and other Acts as well as various rules, regulations, circulars and guidelines issued there-under on its website under the head “Legal Framework.” Further, all the orders passed by SEBI, orders of SAT as well as orders of SEBI Appellate Authority is available on the SEBI website.

SEBI has also been taking various steps for ensuring the transparency in the functioning of the exchanges and other market participants. Accordingly, SEBI regulated entities are also disclosing relevant information on their websites.

Since most of the time RTI applications received by SEBI are in the nature of complaint, the office of CPIO voluntary provides guidance to the information seeker. SEBI endeavors for proper and timely redressal of investor complaints. In this regard, SEBI has taken various measures recently. SEBI has separate designated website for the investor viz. http://investor.sebi.gov.in. SEBI has also launched SCORES, a web-based, centralized grievance redress system for the investors of the securities market. One can make complaint / grievances in electronic mode with facility for online updation of ATRs. SEBI has started providing status of the complaint to the investors on Toll Free No. 1800227575.

The number of RTI applications received by SEBI since 2005 is showing upward trend. During 2011-12, SEBI has received 1,157 applications whereas the number of applications received during 2010-11 was 965. SEBI has provided the disclosable information within the stipulated time and there is not even a single case of delay. Further, information sought, many times, is voluminous and

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contain large number of issues pertaining to various departments of SEBI in a single application. Wherever felt appropriate, SEBI has provided additional information / guidance voluntarily to the information seeker about the securities market.

Table 5.7: RTI applications and First Appeal to SEBI Appellate Authority

Particulars 2010-11 2011-12No. of applications received 965 1,157Total no. of issues raised in applications

4,093 4,468

No. of appeals received by the Appellate Authority in SEBI

308 294

No. of orders passed by the Appellate Authority in SEBI

291 304

No. of appeals rejected / dismissed by the Appellate Authority

212 227

No. of appeals partially allowed

79 76

Table 5.8: Appeal before Central Information Commission

Particulars 2 0 1 0 -11

2011-12

No. of appeals received by CIC 34* 24 *No. of appeals rejected / dismissed by CIC

20 7

No. of appeals remanded back to SEBI Appellate Authority by CIC

1 4

No. of appeals with directions to furnish part of information passed by CIC

7 8

*on the basis of appeal memo/hearing notice received from CIC/Appellant.

The office of CPIO has also conducted in house comprehensive training programme on RTI Act for the officers of the Board. A total of 318 officers of SEBI attended the said training programme. The training was imparted by the officials of the office of CPIO.

During the year, the Board took various initiatives to maintain transparency in its functions, including disclosure of the information on a regular basis. The Board has also taken various initiatives/measures for investor education and protection of the interest of investors of the securities market. These initiatives/measures also helped in achievement of the objectives of the RTI Act.

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Chronology of Major Policy Initiatives By SEBI

Contd.

Date Announcements

April 7, 2011 In view of streamlining the provisions in the depositories, SEBI decided that the limitation period for filing an arbitration reference would be governed by the law of limitation, i.e., The Limitation Act, 1963.

April 29, 2011 The methodology of calculating the Annual Issuers Charges was modified to be based on the average no. of folios during the previous financial year instead of the total number of folios as on 31st March of the previous financial year.

April 29, 2011 Syndicate/sub-syndicate members allowed to procure ASBA forms from investors, starting initially from 12 bidding centers with maximum number of application in public issues.Non-retail investors i.e. Qualified Institutional Buyers and Non-Institutional Investors, mandated to apply in public/ rights issue only through ASBA facility.

May 13, 2011 SEBI permitted a new category of trading member, namely, self clearing member in the currency derivatives segment having minimum networth of ` 5 crore.

May 16,2011 Investors eligible for discount in public issues permitted to make payment, net of discount, if any, at the time of bidding.

May 19, 2011 SEBI advised mutual funds/AMCs to invariably provide an option to the investors to mention demat account details in the subscription form, in case they desire to hold units in demat form. In addition, mutual funds /AMCs are advised to obtain ISIN for each scheme and quote the respective ISIN along with the name of the scheme in Account Statements issued to the investors.

June 2, 2011 SEBI permitted stock exchanges to introduce Liquidity Enhancement Scheme(s) (LES) to enhance liquidity of illiquid securities in their equity derivatives segments. The LES can be discontinued at any time with an advance notice of 15 days.

June 3, 2011 The framework for redemption of Indian Depository Receipts (IDRs) into underlying equity shares laid down.SEBI has commenced processing of investor grievances against the intermediaries in a centralized web-based complaints redressal system, ‘SCORES’ at http://scores.gov.in/Admin

June 15, 2011 The rating symbols and definitions of CRAs was standardised.

June 16, 2011 Stock exchanges directed to ensure that the amount realized from the assets of the defaulter member is returned to the defaulter member (and not credited to the IPF/CPF) after satisfying the claims of the stock exchange and SEBI.

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Date Announcements

June 16, 2011 SEBI notified that the listed companies seeking change of name should either have at least 50 percent of its total revenue in the preceding one year period accounted for by the new activity suggested by the new name or the amount invested in the new activity/project should be at least 50 percent of the assets of the company.

June 17, 2011 SEBI mandated that the securities of companies shall be traded in the normal segment of the exchange if and only if, the company has achieved 100 percent of promoter’s and promoter group’s shareholding in dematerialized form, else, the trading in securities of such companies shall take place in trade for trade segment.

June 30, 2011 In a review to the extant guidelines on IBT and STWT, SEBI stated that broker shall ‘inter-alia’ capture the IP address for all IBT/STWT orders, implement secure end-to-end encryption for all data transmission between the client and the broker through a Secure Standardized Protocol, and implement two-factor authentication for login session for all orders emanating using IP.

July 5, 2011 SEBI permitted modifications of client code of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing/modifying the related order.

August 1, 2011 For close-ended debt oriented schemes, mutual funds/AMCs were advised to make additional disclosures with respect to intended allocation for instruments such as CPs, CDs, NCDs, securitized debt, etc with floors and ceilings within a range of 5 percent against each sub-asset class/credit rating without indicating the portfolio or yield, directly, credit evaluation policy for investments in debt securities and list of sectors where the scheme/s would not be investing.

August 2, 2011 To safeguard investors against unauthorized trading, SEBI mandated that the stock exchanges shall send details of the transactions in cash and derivative to the investors, by the end of trading day, through SMS and e-mail alerts.

August 9, 2011 Guidelines were issued for Qualified Foreign Investors (QFIs) who meet KYC requirement. QFIs were allowed to invest in equity and debt schemes of mutual funds through direct route (holding mutual fund units in demat account through a SEBI registered depository participant and indirect route (holding mutual fund units via Unit Confirmation Receipt.

August 11, 2011 Stringent penalty structure prescribed for members for short-collection/non-collection of margins from clients in the derivatives segment.

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Date Announcements

August 22, 2011 The trading account opening process simplified by which all client-broker agreements have been replaced with the ‘Rights and Obligations’ documents, which shall be mandatory and binding on all parties.

August 22, 2011 Guidelines issued on various aspects related to mutual funds/AMCs, as below:• Introduction of transaction charge of `100 (for existing investors)

and ̀ 150 (first time investor) per subscription of ̀ 10,000 to be paid to the distributors.

• Mutual funds / AMCs shall disclose on their respective websites the total commission and expenses paid to distributors who satisfy the conditions laid by SEBI with respect to non-institutional investors.

• AMCs to undertake a due diligence process on select ‘large’ distributors through an assessment of factors like business model, record of regulatory fines and penalties and customer compensations to ensure that certain processes like customer risk evaluation and mutual fund scheme appropriateness evaluation are delinked from sales and relationship management.

• It was mandated that where scheme has been in existence for less than one year, past performance shall not be provided except for money market schemes and cash schemes and liquid schemes.

• Mutual funds are required to disclose AUM with bifurcation of the AUM into debt/equity/ balanced etc, and percentage of AUM by geography on their respective websites and to AMFI and AMFI shall disclose industry wide figures on its website.

September 8, 2011 Regulatory guidelines issued for ‘Infrastructure Debt Fund Schemes’ according to which an “Infrastructure debt fund scheme” would mean a mutual fund scheme that invests minimum 90 percent of scheme assets in the notified infrastructure debt securities.

September 23,2011 • Issuers mandated to comply with eligibility criteria regarding profitability track record both, on stand-alone as well as consolidated basis.

• Merchant bankers mandated to disclose price information of past issues handled by them in application form/prospectus

• Contents of Bid-cum-Application Form & Abridged Prospectus reviewed and made user-friendly.

• Framework for ‘rights issue’ of IDRs laid down.September 27, 2011 SEBI (Merchant Bankers) Regulations, 1992 were amended, requiring

merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management, and in case of takeover, buyback and delisting of securities.

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Contd.

Date Announcements

September 28, 2011 SEBI put in place framework for issue of Structured Products.

September 30, 2011 The allocation procedure for FII debt limits was changed to the open bidding process wherein bifurcation in terms of lock in period and manner of allocation the long term infrastructure limits of USD 22 billion was advised.

October 5, 2011 Following amendments were carried out to the Equity Listing Agreement, Model Listing Agreement for IDRs and Model SME Equity Listing Agreement:• Disclosure of Quarterly Financial Results• The submission of unaudited financial results shall be accompanied

by the limited review report of the auditors.• As a green initiative, it has been decided to supply soft copies of

full annual reports to all those shareholders who have registered their email addresses for the purpose and hard copy of abridged annual reports to others.

• Listed entities were mandated to disclose voting results/patterns on their websites and to the exchanges within 48 hours from the conclusion of the concerned shareholders’ meeting.

October 5, 2011 The KYC requirements for investors standardized while opening accounts with all the registered intermediaries in securities markets.

October 24, 2011 The format of reporting of shareholding pattern of the recognised stock exchanges under SEBI (MIMPS) Regulations, 2006 standardized.

October 25, 2011 SEBI mandated the stock brokers to carry out ‘in-person’ verification of their clients by their staff while registering them and also ensure that this function is not outsourced.

November 11, 2011 Guidelines were issued to enable participation of mutual funds in repo of corporate debt securities with primary conditions that participation be only in AAA rated corporate debt securities, tenor of the transaction shall not exceed six months and that gross exposure shall not be more than 10 percent of assets of the concerned scheme.

November 29, 2011 The existing frame work of system audit has been reviewed encompassing the system audit processes, auditor selection norms, terms of reference and auditor report guidelines.

December 2, 2011 The KYC Registration Agency (KRA) Regulations were notified. The Regulations cover the registration of KRAs, functions and responsibilities of the KRAs and intermediaries, code of conduct, data security, etc.

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Contd.

Date AnnouncementsDecember 15, 2011 In order to address the concerns arising from the outsourcing of activities,

SEBI has framed principles for outsourcing to be implemented by the intermediaries.

December 19, 2011 A revised reporting format along with the directives was prescribed by SEBI to debenture trustees that envisage increasing the accountability of their boards in respect of review of regulatory compliance on half-yearly basis and corrective measures initiated to avoid deficiencies in future.

December 23, 2011 Guidelines in Pursuance of the SEBI KYC Registration Agency Regulations, 2011 and for in-person verification were issued for registered intermediaries and KRAs along with the applicability criteria.

December 30, 2011 SEBI permitted stock exchanges to introduce cash settled futures on 2-year and 5-year notional coupon bearing GoI security on currency derivatives segment of stock exchanges.

January 3, 2012 The re-investment mechanism was discontinued for all new allocations of debt limits to FIIs/sub-accounts, and the limits shall come back to the pool once the investment is sold/ redeemed. These limits shall again be allocated in subsequent bidding processes.

January 13, 2012 QFIs who meet prescribed KYC requirements permitted to invest in equity shares listed on the recognized stock exchanges and in equity shares offered to public in India, provided they hold equity shares in a demat account opened with a SEBI registered qualified Depository Participant.

January 20, 2012 • In order to facilitate early redressal of investor grievances, SEBI has mandated that stock exchanges having nationwide terminals, functional stock exchanges having trading volumes, stock exchanges entering into MoU with other exchanges and stock exchanges intending to recommence trading operations, shall constitute Investor Grievance Redressal Committees at every investor service centre.

• SEBI has decided to do away with the representation of trading members on arbitration committee/panel of all stock exchanges, in opposition to the previous mandate of not more than twenty percent of the members of the arbitration committee shall be trading members.

• SEBI has extended the call auction mechanism to IPOs on the first day of trading and to re-listed scrips on the day of recommencement of trading.

• In light of high volatility and price movement observed on first day of trading and recommencement of trading in case of IPOs and re-listed scrips, SEBI has put in place a framework of trade controls in normal trading session.

181


Date Announcements

February 1, 2012 In order to facilitate promoters to dilute/offload their holding in listed companies in a transparent manner with wider participation, SEBI has permitted the offer for sale of shares by promoters of such companies through a separate window provided by the stock exchanges.

February 15, 2012 With a view to increase investor confidence in the securities market, SEBI, after examining the data on complaints and arbitrations filed, advised NSE and BSE to step up investor grievance redressal mechanism by opening investor service centres at Ahmedabad and Hyderabad by March 31, 2012 and at Kanpur and Indore by September 30, 2012.

February 21, 2012 SEBI has notified the standardised lot sizes for SMEs in case of initial public offer and secondary market trading on SME exchange/platform.

February 28, 2012 SEBI (Mutual Funds) Regulations, 1996 amended as follows :• The valuation of money market and debt securities shall be in terms

of the Eighth schedule. In order to further enhance transparency, the AMCs shall disclose all details of debt and money market securities transacted (including inter scheme transfers) in its schemes portfolio on AMCs’ website.

• “Advertisement” of mutual funds or its Schemes shall include all forms of communication issued by or on behalf of the AMC/mutual fund that may influence investment decisions of any investor/prospective investors

• mutual funds shall not undertake any business activities other than in the nature of management and advisory services provided to pooled assets.

March 1, 2012 SEBI has mandated that Credit Rating Agencies shall follow the applicable requirements pertaining to rating process and methodology and its records/transparency and disclosures, avoidance of conflict of interest, code of conduct, as specified in the SEBI Regulations and circulars issued by SEBI from time to time.

March 30, 2012 Based on the recommendations of TAC and SMAC, SEBI has put in place broad guidelines for Algorithmic Trading in the securities market.

Sebi Report

Documents

Transcript of Sebi Report