Guide to Securities & Exchange Board of India (SEBI) Act, 1992

Table of Contents

1. Relevant provisions

1.1 Objectives of constituting SEBI

2. Establishment, Powers & Functions of The SEBI

2.1 Establishment & incorporation of the SEBI [Section 3]

2.2 Composition of the SEBI [Section 4(1)]

2.3 Management of the SEBI [Section 4(2)]

2.4 Powers of Chairman of SEBI [Section 4(3)]

2.5 Appointment of Chairman & Members [Section 4(4)]

2.6 Who can be member of SEBI [Section 4(5)]

2.7 Duties of SEBI [Section 11(1)]

2.8 Functions of SEBI [Section 11(2)]

2.9 Inspection of listed companies by SEBI [Section 11(2A)]

2.10 Powers of the SEBI [Section 11(3)]

2.11 Power of SEBI where an inquiry or investigation is ordered [Section 11(4)]

2.12 Power of SEBI to levy penalty [Section 11(4A)]

2.13 Utilization of Amount disgorged [Section 11(5)]

2.14 SEBI to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities [Section 11A]

2.15 Power to issue directions and levy penalty [Section 11B]

2.16 Investigation [Section 11C]

2.17 Cease and desist proceedings [Section 11D]

3. Registrations of Intermediaries

3.1 Registration of stock brokers, sub-brokers, share transfer agents, etc. [Section 12]

4. Prohibition of Manipulative Devices, Deceptive Devices & Insider Trading

4.1 Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control [Section 12A]

5. Penalties & Adjudication

5.1 Penalty for failure to furnish information, return etc. [Section 15A]

5.2 Penalty for failure enter into agreement with clients [Section 15B]

5.3 Penalty for failure to redress investors grievances [Section 15C]

5.4 Penalty for certain defaults in case of mutual funds [Section 15D]

5.5 Penalty for failure to observe rules and regulations by AMC [Section 15E]

5.6 Penalty for default in case of AIF, IIT & REIT [Section 15EA]

5.7 Penalty for default in case of stock brokers [Section 15F]

5.8 Penalty for Investment Adviser and Research Analyst [Section 15EB]

5.9 Penalty for insider trading [Section 15G]

5.10 Penalty for non-disclosure of acquisition of shares and takeovers [Section 15H]

1. Relevant provisions

Securities & Exchange Board of India Act, 1992

Section 3	Establishment & incorporation of the SEBI
Section 4(1)	Composition of the SEBI
Section 4(2)	Management of the SEBI
Section 4(3)	Powers of Chairman of the SEBI
Section 4(4)	Appointment of Chairman & Members of the SEBI
Section 4(5)	Who can be member of SEBI
Section 11(1)	Duties of SEBI
Section 11(2)	Functions of SEBI
Section 11(2A)	Inspection of listed companies by SEBI
Section 11(3)	Powers of the SEBI
Section 11(4)	Power of SEBI where an inquiry or investigation is ordered
Section 11(4A)	Power of SEBI to levy penalty
Section 11(5)	Utilization of Amount disgorged
Section 11A	SEBI to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities
Section 11B	Power to issue directions and levy penalty
Section 11C	Investigation
Section 11D	Cease and desist proceedings
Section 12	Registration of stock brokers, sub-brokers, share transfer agents, etc.
Section 12A	Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control
Section 15A	Penalty for failure to furnish information, return etc.
Section 15B	Penalty for failure enter into agreement with clients
Section 15C	Penalty for failure to redress investors grievances
Section 15D	Penalty for certain defaults in case of mutual funds
Section 15E	Penalty for failure to observe rules and regulations by Asset Management Company (AMC)
Section 15EA	Penalty for default in case of Alternative Investment Funds (AIF), Infrastructure Investment Trusts (IIT) and Real Estate Investment Trusts (REIT)
Section 15F	Penalty for default in case of stock brokers
Section 15EB	Penalty for Investment Adviser and Research Analyst
Section 15G	Penalty for insider trading
Section 15H	Penalty for non-disclosure of acquisition of shares and takeovers
Section 15HA	Penalty for fraudulent and Unfair Trade Practices (UTP)
Section 15HB	Residual Penalty
Section 15JA	Crediting sums realized by way of penalties
Section 15-I	Power to adjudicate
Section 15J	Factors to be taken into account by Adjudicating Officer
Section 15JB	Settlement of administrative and civil proceedings
Section 15K	Establishment of Securities Appellate Tribunal (SAT)
Section 15L	Composition of SAT
Section 15M	Qualification for appointment as Presiding Officer or Member of SAT
Section 15MB	Appointment of Presiding Officer and Judicial Members of SAT
Section 15MC	Validity of appointment of Presiding Officer & Members of SAT
Section 15N	Tenure of office of Presiding Officer and other Members of SAT
Section 15R	Orders constituting SAT to be final and not to invalidate its proceedings
Section 15T	Appeal to the SAT
Section 15U	Procedure and powers of the SAT
Section 15V	Right to legal representation
Section 15W	Limitation
Section 15X	Presiding Officer, Members and staff of SAT to be public servants
Section 15Y	Civil Court not to have jurisdiction
Section 15Z	Appeal to Supreme Court
Section 16	Power of Central Government to issue directions
Section 17	Power of Central Government to supersede the SEBI
Section 18	Returns and reports
Section 19	Delegation of powers
Section 20	Appeals to Central Government
Section 20A	Bar of jurisdiction
Section 22	Members, officers and employees of the Board to be public servants
Section 24(1)	Offences
Section 24(2)	Penalty for failure to pay penalty imposed by the Adjudicating Officer
Section 24A	Composition of certain offences
Section 24B	Power to grant immunity
Section 26	Cognizance of offences by Courts
Section 26A	Establishment of Special Courts
Section 26B	Offences triable by Special Courts
Section 26C	Appeal and revision
Section 26D	Application of Code to proceedings before Special Court
Section 27	Offences by companies
Section 28A	Recovery of amounts
Section 28B	Continuance of proceedings

1.1 Objectives of constituting SEBI

Objectives of the SEBI Act, 1992 are as follows:

• • To protect the interests of investors in securities.
  • To promote the development of securities market.
  • To regulate the securities market.
  • To promote the fair dealing by the issuer of securities.
  • To ensure issuer of securities can raise funds at relative low cost.
  • To regulate and develop a code of conduct and fair practices by various intermediaries.
  • To monitor activities of stock exchanges & market intermediary.

2. Establishment, Powers & Functions of The SEBI

2.1 Establishment & incorporation of the SEBI [Section 3]

• • SEBI shall be a body corporate, having perpetual succession and a common seal, with power to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.
  • Head office of the SEBI shall be at Mumbai.
  • SEBI may establish offices at other places in India.

2.2 Composition of the SEBI [Section 4(1)]

SEBI shall consist of the following members:

(a) A Chairman.

(b) Two members from amongst the officials of the Ministry of the Central Government dealing with Finance and administration of the Companies Act, 2013.

(c) One member from amongst the officials of the RBI.

(d) Five other members of whom at least 3 shall be the whole-time members to be appointed by the central Government.

Thus, SEBI Board consists of total 9 members.

2.3 Management of the SEBI [Section 4(2)]

• • General superintendence, direction and management of the affairs of the SEBI shall vest in a Board of members.
  • Board of members may exercise all powers and do all acts and things which may be exercised or done by the SEBI.

2.4 Powers of Chairman of SEBI [Section 4(3)]

• • Chairman shall also have powers of general superintendence and direction of the affairs of the SEBI.
  • He may exercise all powers and do all acts and things which may be exercised or done by the SEBI.

2.5 Appointment of Chairman & Members [Section 4(4)]

• • Chairman and members referred to in Section 4(1)(a) & (d) shall be appointed by the Central Government.
  • Members referred to in Section 4(1)(b) & (c) shall be nominated by both Central Government and RBI.

2.6 Who can be member of SEBI [Section 4(5)]

Following persons can be appointed as the Chairman and other members of the SEBI:

• • A person having ability, integrity and standing who have shown capacity in dealing with problems relating to securities market.
  • A person having special knowledge or experience of law, finance, economics, accountancy, administration.
  • A person having special knowledge or experience in any discipline which in the opinion of the Central Government shall be useful to the SEBI.

2.7 Duties of SEBI [Section 11(1)]

It shall be the duty of the SEBI:

• • To protect the interests of investors in securities.
  • To promote the development of the securities market.
  • To regulate the securities market.

In order to discharge above duties, SEBI may take such measures as it thinks fit.

2.8 Functions of SEBI [Section 11(2)]

Functions of SEBI are as follows:

• • Regulating the business in stock exchanges and any other securities markets.
  • Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner.
  • Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries.
  • Registering and regulating the working of VCF and CIS, including MFs.
  • Promoting and regulating self-regulatory organisations.
  • Prohibiting fraudulent and unfair trade practices relating to securities markets.
  • Promoting investors education and training of intermediaries of securities markets.
  • Prohibiting insider trading in securities.
  • Regulating substantial acquisition of shares and take-over of companies.
  • Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market intermediaries and self-regulatory organisations in the securities market.
  • Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the SEBI.
  • Performing functions and exercising powers under the provisions of the SCR Act, 1956 delegated by the Central Government.
  • Levying fees or other charges.
  • Conducting research.
  • Calling from or furnishing to any such agencies, as may be specified by the SEBI, such information as may be considered necessary by it for the efficient discharge of its functions.
  • Calling from or furnishing to any such agencies, as may be specified by the SEBI, such information as may be considered necessary by it for the efficient discharge of its functions.
  • Performing such other functions as may be prescribed.

2.9 Inspection of listed companies by SEBI [Section 11(2A)]

• • SEBI may take measures to undertake inspection of any book, register, or other document or record of:

–  Any listed public company.

–  A public company which is in process of listing its securities in recognised stock exchange.

• • Such inspection can be made by the SEBI if it has reasonable grounds to believe that company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.

Dive Deeper:
Overview of SEBI’s Prohibition of Insider Trading Regulations (PIT Regulations)
SEBI’s New Guidelines on Grant of Rewards to Informants
ESOPs – The Legal Procedures & Implementation under the Companies Act & SEBI

2.10 Powers of the SEBI [Section 11(3)]

SEBI shall have the same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters:

– Discovery and production of books of account and other documents, at such place and such time as may be specified by SEBI.

– Summoning and enforcing the attendance of persons and examining them on oath.

– Inspection of any books, registers and other documents of stock brokers, sub-brokers, share transfer agents, at any place.

– Inspection of any book, or register, or other document or record of any listed public company or a public company which intends to get its securities listed on any recognized stock exchange.

– Issuing commissions for the examination of witnesses or documents.

2.11 Power of SEBI where an inquiry or investigation is ordered [Section 11(4)]

SEBI can pass following orders, either during or after investigation or inquiry:

(a) Suspend the trading of any security in a recognised stock exchange.

(b) Restrain persons from accessing the securities market.

(c) Prohibit any person associated with securities market to buy, sell or deal in securities.

(d) Suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position.

(e) Impound and retain the proceeds or securities in any transaction which is under investigation.

(f) Attach bank accounts or other property of any intermediary or any person associated with the securities market involved in violation of provisions of the Act, or the rules/regulations made thereunder.  Such attachment can be made for a period not exceeding 90 days.

However, within 90 days of the said attachment, the SEBI shall obtain confirmation from the Special Court and on such confirmation, such attachment shall continue during the pendency of the proceedings.

On conclusion of proceedings, the provisions of  ‘recovery of amounts’  will be applicable.

It is to be noted that only property, bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of the SEBI Act, 1992 or the rules or the regulations made there under shall be allowed to be attached.

(g) Attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of the Act, or the rules or the regulations made thereunder. However, only bank account or accounts which are involved in violation shall be allowed to be attached.

(h) Direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation.

The powers referred in clause (d), (e) or (f) can be exercised in respect of listed public company or a public company which intends to get its securities listed on any recognized stock exchange where if the SEBI has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market

Conditions for passing orders: SEBI shall give an opportunity of hearing to such intermediaries or persons concerned either before or after passing such orders.

2.12 Power of SEBI to levy penalty [Section 11(4A)]

SEBI may levy penalty after holding an inquiry in the prescribed manner.

2.13 Utilization of Amount disgorged [Section 11(5)]

Amount disgorged shall be credited to the Investor Protection & Education Fund and such amount shall be utilized by the SEBI in accordance with the regulations made under the Act.

Disgorgement Meaning: Disgorgement is the legally mandated repayment of ill-gotten gains imposed on wrongdoers by the Courts. Funds that were received through illegal or unethical business transactions are disgorged, or paid back, often with interest.

In other words, disgorgement is the act of giving up profits illegally obtained on demand or by legal compulsion.

2.14 SEBI to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities [Section 11A]

For the protection of investors the SEBI may specify by regulations –

• • Matters relating to issue of capital, transfer of securities and other incidental matters.
  • Manner in which such matters shall be disclosed by the companies.

SEBI may by issuing general or special orders –

• • Prohibit any company from issuing prospectus, any offer document, or
    advertisement soliciting money from the public for the issue of securities.
  • Specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued.

SEBI may also specify the requirements for listing and transfer of securities and other incidental matters incidental.

2.15 Power to issue directions and levy penalty [Section 11B]

SEBI is empowered to issue directions for the following reasons:

• • In the interest of investors.
  • Orderly development of securities market.
  • To prevent the affairs of any intermediary or stock brokers, sub-brokers, share transfer agents being conducted in a manner detrimental to the interests of investors or securities market.
  • To secure the proper management of any such intermediary or person.

Such directions can be issued to:

(a) Any stock brokers, sub-brokers, share transfer agents or person associated with the securities market.

(b) Any company in respect of matters relating to issue of capital, transfer of securities and other incidental matter appropriate in the interests of investors in securities and the securities market.

Explanation: Power to issue directions shall include and always be deemed to have been included the power:

• • To direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the Act or regulations made there under,
  • To disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

Example: Zerodha Ltd., a registered stock broker is involved in some activities which are detrimental to the interest of the general investors according to complaint made by group of investors. The SEBI wants to issue some directions to Zerodha Ltd.

Referring to the provisions of the SEBI Act, 1992, discuss whether the SEBI has power to issue such directions. Can such directions be given to an individual who made some profit in any transaction in contravention of any provision of the SEBI Act, 1992?

Section 11B of the SEBI Act, 1992 provides that SEBI is empowered to issue direction to prevent the affairs of any intermediary or stock brokers being conducted in a manner detrimental to the interests of investors or securities market. SEBI can also issue directions to an individual who had made some profit in any transaction in contravention of any provision of the SEBI Act, 1992. Power to issue direction includes power to disgorge an amount equivalent to the wrongful gain made or loss averted by any contravention.

Yes, such directions can be given by the SEBI to any person who made profit by indulging in any transaction or activity in contravention of the provisions of the SEBI Act, 1992.

2.16 Investigation [Section 11C]

Grounds for investigation: In following cases, SEBI may appoint any person (Investigating Authority) to investigate the affairs of intermediary or persons associated with the securities market, if the SEBI has reasonable ground to believe that:

(a) Transactions in securities are being dealt with in a manner detrimental to the investors or the securities market.

(b) Any intermediary or any person associated with the securities market has violated any of the provisions of the Act or Rules or Regulations made or directions issued by the SEBI.

Duty of officers to produce document and records: It shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary or every person associated with the securities market to preserve and to produce to the
Investigating Authority, all the books, registers, other documents and record relating to the company or relating to the intermediary.

Duty to furnish information: The Investigating Authority may require any intermediary or person associated with securities market to furnish information which is relevant or necessary for the purposes of its investigation.

Power of Investigating Authority to take custody of records: The Investigating Authority may keep in its custody any books, registers, other documents and record for 6 months and thereafter shall return the same. However, the Investigating Authority may call again the documents and records if they are needed.

The Investigating Authority shall give certified copies of books & documents if needed by the person producing the same.

Power of Investigating Authority to examine on oath: The Investigating Authority may examine on oath any manager, managing director, officer and other employee of any intermediary or any person associated with securities market and for that purpose may require any of those persons to appear before it personally.

Penalty: If any person contravenes the provisions relating to oath or fails to appear personally, he shall be punishable –

• • With imprisonment for a term which may extend to 1 year or
  • With fine which may extend to ` 1 Crore or
  • With both.

Additional fine can be imposed which may extend to ` 5 lakh for every day after the first during which the failure or refusal continues.

Power to take notes on examination: Notes of any examination shall be taken down in writing and shall be read over to and signed by the person examined. The notes may used as evidence against such person in the legal proceedings.

Search & Seizure:

• • If Investigating Authority has reasonable ground to believe that the records
    destroyed, mutilated, altered, falsified or secreted, he can make application to the Judicial Magistrate of the first class for order of seizure of records.
  • The Investigating Authority may requisition the services of any police officer to assist him for seizure of records.
  • The Magistrate may authorise the Investigating Authority to enter premises, search and seize records. However, records of listed company or company intending to be listed can be seized only if it is indulging insider trading or market manipulation.
  • The Investigating Authority shall keep the records till investigation and then return after placing identification marks.
  • Search will be carried out as per provisions of the Code of Criminal Procedure, 1973 relating to searches and seizures.

2.17 Cease and desist proceedings [Section 11D]

• • After making inquiry, SEBI can issue cease and desist order to any person who has violated or is likely to violate any provisions of the Act or any rules or regulations.
  • In case of listed public company or a public company which intends to get its securities listed on any recognised stock exchange, such order can be passed only if such company has indulged in insider trading or market manipulation.

Note: ‘Cease and desist’ denotes a legally enforceable order from a Court/Tribunal directing someone to stop engaging in a particular activity.

Example: David is a Managing Director of Dynamic Ltd., a listed entity. David shared with her wife the information of unpublished adverse financial results of Quarter-4. Taking a call of this information she sold her holdings in Dynamic Ltd. at a handsome price. The market prices of Dynamic Ltd. steeply fell after Quarter-4 results were published. Some investors made a complaint to SEBI alleging that David and Dynamic Ltd. are indulged in insider trading with a request to issue cease and desist order for protection of investors interest. Explain powers of the SEBI to pass cease and desist order.

According to Section 11D of the SEBI Act, 1992, after making inquiry, SEBI can issue cease and desist order to any person who has violated or is likely to violate any provisions of the Act or any rules or regulations. In case of listed public company or a public company which intends to get its securities listed on any recognised stock exchange, such order can be passed only if such company has indulged in insider trading or market manipulation.

In the present case, after causing inquiry, if SEBI has reasonable grounds to believe that Dynamic Ltd. and its Managing Director, David has indulged in insider trading or market manipulation, it may pass an order requiring such person to cease and desist from committing or causing such violation.

3. Registrations of Intermediaries

3.1 Registration of stock brokers, sub-brokers, share transfer agents, etc. [Section 12]

Following intermediaries are required to obtain a registration certificate from the SEBI to buy, sell or deal in securities:

• • Stock broker
  • Share transfer agent
  • Banker to an issue
  • Trustee of trust deed
  • Registrar to an issue
  • Merchant banker
  • Underwriter
  • Portfolio manager
  • Investment adviser
  • Other intermediary associated with securities market.

Application: Every application for registration shall be made in prescribed manner along with prescribed fees as per relevant applicable regulations.

Suspension or cancellation of registration: SEBI may suspend or cancel a certificate of registration after giving a reasonable opportunity of being heard to a concerned
person.

4. Prohibition of Manipulative Devices, Deceptive Devices & Insider Trading

4.1 Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control [Section 12A]

No person shall directly or indirectly –

• • Use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder.
  • Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange.
  • Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of the Act or the rules or the regulations made thereunder.
  • Engage in insider trading.
  • Deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of the Act or the rules or the regulations made thereunder.
  • Acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under the Act.

5. Penalties & Adjudication

5.1 Penalty for failure to furnish information, return etc. [Section 15A]

A person shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if he fails –

(a) To furnish any document, return or report to the SEBI.

(b) To file return or furnish information, books or other documents within specified time.

(c) To maintain books of account or records.

Example: Blue Star Custodian Ltd., an intermediary registered with SEBI failed to furnish information which was called by the SEBI. As per order passed by the SEBI the company has to furnish information on or before 30th September, 2021. The company defaulted and not submitted the information to SEBI within prescribed time. Finally the company furnished information to the SEBI on 1st February, 2022. What is the minimum and maximum fine that can be imposed by the SEBI on Blue Star Custodian Ltd. under the provisions of the SEBI Act, 1992?

As per Section 15A of the SEBI Act, 1992, a person shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if he fails furnish information within specified time. Thus, penalty that can be imposed on the company is as follows:

Minimum Penalty: ` 1 lakh

Maximum Penalty: Lower of the following –

• • ` 1 lakh for each day (123 days × 1 lakh) = ` 1.23 Crore
  • Amount specified = ` 1 Crore

Thus, maximum penalty that can be imposed by the SEBI will be ` 1 Crore.

5.2 Penalty for failure enter into agreement with clients [Section 15B]

If any registered intermediary fails to enter into an agreement with his client, it shall be liable to a penalty which shall not be less than INR 1 lakh but which may extend to INR 1 lakh for each day during which such failure continues subject to a maximum of INR 1 Crore.

5.3 Penalty for failure to redress investors grievances [Section 15C]

If any listed company or registered intermediary fails to redress grievances of investors within the time specified by the SEBI, such company or intermedi

5.4 Penalty for certain defaults in case of mutual funds [Section 15D]

A Mutual Fund and Collective Investment Schemes shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if it fails –

(a) To obtain a certificate of registration from the SEBI for sponsoring or carrying on any collective investment scheme.

(b) To comply with the terms and conditions of certificate of registration.

(c) To make an application for listing of its schemes as provided for in the regulations governing such listing.

(d) To despatch unit certificates of any scheme in the manner provided in the regulation governing such despatch.

(e) To refund the application monies paid by the investors within the period specified in the regulations.

(f) To invest money collected by collective investment schemes in the manner or within the period specified in the regulations.

5.5 Penalty for failure to observe rules and regulations by AMC [Section 15E]

Where any Asset Management Company (AMC) of a mutual fund fails to comply with any of the regulations providing for restrictions on the activities of the AMCs, such AMC shall be liable to a penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day during which such failure continues subject to a maximum of ` 1 Crore.

5.6 Penalty for default in case of AIF, IIT & REIT [Section 15EA]

Alternative Investment Funds (AIF), Infrastructure Investment Trusts (IIT) and Real Estate Investment Trusts (REIT) shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of  ` 1 Crore or 3 times the amount of gains made, whichever is higher, if it fails –

(a) To comply with the regulations made by the SEBI.

(b) to comply with the directions issued by the SEBI.

5.7 Penalty for default in case of stock brokers [Section 15F]

A registered stock broker shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore, if it fails –

(a) To issue contract notes in the form and manner specified by the stock exchange;

(b) To deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations;

(c) Charges an amount of brokerage which is in excess of the brokerage specified in the regulations.

Example: An investor has complained to SEBI that he has not received the payment due to him from the stock-broker registered with Calcutta Stock Exchange Association Ltd. The complainant has requested SEBI to take appropriate action against the stock-broker.

You are required to state with reference to the provisions of SEBI Act, 1992 the answer to the following:

(i) What action SEBI can take against the stock-broker on the complaint as stated above?

(ii) What is the procedure to be adopted and what are the factors that will be taken into account while taking such action?

As per Section 15F of the SEBI Act, 1992, a registered stock broker shall be liable to penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day subject to a maximum of ` 1 Crore or 3 times the amount of gains made, whichever is higher.

For the purpose of adjudging any default, SEBI shall appoint any of its officers not below the rank of Division Chief to be an Adjudicating Officer for holding the enquiry in the prescribed manner after giving the person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

Section 15J enumerates following factors that shall have to be taken into account by the adjudicating officer while adjudging the quantum of penalty.

(a) Amount of disproportionate gain or unfair advantage (if quantifiable) made as a result of the default.

(b) Amount of loss to an investor or group of investors as a result of the default.

(c) Repetitive nature of the default.

5.8 Penalty for Investment Adviser and Research Analyst [Section 15EB]

Where an investment adviser or a research analyst fails to comply with the regulations made by the Board or directions issued by the Board, such investment adviser or research analyst shall be to a penalty which shall not be less than ` 1 lakh but which may extend to ` 1 lakh for each day during which such failure continues subject to a maximum of  ` 1 Crore.

5.9 Penalty for insider trading [Section 15G]

For the following defaults, an insider shall be liable to penalty which shall not be less than ` 10 lakh but which may extend to ` 25 Crore or 3 times of profits out of insider trading, whichever is higher:

(a) Where he deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information or

(b) Where he communicates any unpublished price-sensitive information to any person except as required in the ordinary course of business or under any law; or

(c) Where he counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information.

5.10 Penalty for non-disclosure of acquisition of shares and takeovers [Section 15H]

For the following defaults, a person shall be liable to penalty which shall not be less than ` 10 lakh but which may extend to ` 25 Crore or 3 times of profits made out of insider trading, whichever is higher:

(i) Failure to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or

(ii) Failure to make a public announcement to acquire shares at a minimum price; or

(iii) Failure to make a public offer by sending letter of offer to the shareholders of the concerned company; or

(iv) Failure to make payment of consideration to the shareholders who sold their shares pursuant to letter of offer.