Introduction
Whenever a Job notification is out the first thing we do is go to the salary section and check what is the remuneration for that particular job. In order to apply for that particular job and later put all the effort and hard-work to get selected, is a long and tiring process. If our efforts are not compensated satisfactorily, we might not really like to get into the long time consuming process.
When we go through the salary section we often see words like Pay Scale, Grade Pay, or even level one or two salary and it is common to get confused between these jargons and to know the perfect amount of salary that we are going to receive.
To understand what pay scale, grade pay, various numbers of levels and other technical terms, we first need to know what pay commission is and how it functions.
Pay Commission
The Constitution of India under Article 309 empowers the Parliament and State Government to regulate the recruitment and conditions of service of persons appointed to public services and posts in connection with the affairs of the Union or any State.
The Pay Commission was established by the Indian government to make recommendations regarding the compensation of central government employees. Since India gained its independence, seven pay commissions have been established to examine and suggest changes to the pay structures of all civil and military employees of the Indian government.
The main objective of these various Pay Commissions was to improve the pay structure of its employees so that they can attract better talent to public service. In this 21st century, the global economy has undergone a vast change and it has seriously impacted the living conditions of the salaried class. The economic value of the salaries paid to them earlier has diminished. The economy has become more and more consumerized. Therefore, to keep the salary structure of the employees viable, it has become necessary to improve the pay structure of their employees so that better, more competent and talented people could be attracted to governance.
In this background, the Seventh Central Pay Commission was constituted and the government framed certain Terms of Reference for this Commission. The salient features of the terms are to examine and review the existing pay structure and to recommend changes in the pay, allowances and other facilities as are desirable and feasible for civil employees as well as for the Defence Forces, having due regard to the historical and traditional parities.
The Ministry of finance vide notification dated 25th July 2016 issued rules for 7th pay commission. The rules include a Schedule which shows categorically what payment has to be made to different positions. The said schedule is called 7th pay matrix
For the reference the table(7th pay matrix) is attached below.
Pay Band & Grade Pay
According to the table given above the first column shows the Pay band.
Pay Band is a pay scale according to the pay grades. It is a part of the salary process as it is used to rank different jobs by education, responsibility, location, and other multiple factors. The pay band structure is based on multiple factors and assigned pay grades should correlate with the salary range for the position with a minimum and maximum. Pay Band is used to define the compensation range for certain job profiles.
Here, Pay band is a part of an organized salary compensation plan, program or system. The Central and State Government has defined jobs, pay bands are used to distinguish the level of compensation given to certain ranges of jobs to have fewer levels of pay, alternative career tracks other than management, and barriers to hierarchy to motivate unconventional career moves. For example, entry-level positions might include security guard or karkoon. Those jobs and those of similar levels of responsibility might all be included in a named or numbered pay band that prescribed a range of pay.
The detailed calculation process of salary according to the pay matrix table is given under Rule 7 of the Central Civil Services (Revised Pay) Rules, 2016.
As per Rule 7A(i), the pay in the applicable Level in the Pay Matrix shall be the pay obtained by multiplying the existing basic pay by a factor of 2.57, rounded off to the nearest rupee and the figure so arrived at will be located in that Level in the Pay Matrix and if such an identical figure corresponds to any Cell in the applicable Level of the Pay Matrix, the same shall be the pay, and if no such Cell is available in the applicable Level, the pay shall be fixed at the immediate next higher Cell in that applicable Level of the Pay Matrix.
The detailed table as mentioned in the Rules showing the calculation:
For example if your pay in Pay Band is 5200 (initial pay in pay band) and Grade Pay of 1800 then 5200+1800= 7000, now the said amount of 7000 would be multiplied to 2.57 as mentioned in the Rules. 7000 x 2.57= 17,990 so as per the rules the nearest amount the figure shall be fixed as pay level. Which in this case would be 18000/-.
The basic pay would increase as your experience at that job would increase as specified in vertical cells. For example if you continue to serve in the Basic Pay of 18000/- for 4 years then your basic pay would be 19700/- as mentioned in the table.
Dearness Allowance
However, the basic pay mentioned in the table is not the only amount of remuneration an employee receives. There are catena of benefits and further additions in the salary such as dearness allowance, HRA, TADA.
According to the Notification No. 1/1/2023-E.II(B) from the Ministry of Finance and Department of Expenditure, the Dearness Allowance payable to Central Government employees was enhanced from rate of 38% to 42% of Basic pay with effect from 1st January 2023.
Here, DA would be calculated on the basic salary. For example if your basic salary is of 18,000/- then 42% DA would be of 7,560/-
House Rent Allowance
Apart from that the HRA (House Rent Allowance) is also provided to employees according to their place of duties. Currently cities are classified into three categories as ‘X’ ‘Y’ ‘Z’ on the basis of the population.
According to the Compendium released by the Ministry of Finance and Department of Expenditure in Notification No. 2/4/2022-E.II B, the classification of cities and rates of HRA as per 7th CPC was introduced.
See the table for reference
However, after enhancement of DA from 38% to 42% the HRA would be revised to 27%, 18%, and 9% respectively.
As above calculated the DA on Basic Salary, in the same manner HRA would also be calculated on the Basic Salary. Now considering that the duty of an employee’s Job is at ‘X’ category of city then HRA will be calculated at 27% of basic salary.
Here, continuing with the same example of calculation with a basic salary of 18000/-, the amount of HRA would be 4,840/-
Transport Allowance
After calculation of DA and HRA, Central government employees are also provided with Transport Allowance (TA). After the 7th CPC the revised rates of Transport Allowance were released by the Ministry of Finance and Department of Expenditure in the Notification No. 21/5/2017-EII(B) wherein, a table giving detailed rates were produced.
The same table is reproduced hereinafter.
As mentioned above in the table, all the employees are given Transport Allowance according to their pay level and place of their duties. The list of annexed cities are given in the same Notification No. 21/5/2017-EII(B).
Again, continuing with the same example of calculation with a Basic Salary of 18000/- and assuming place of duty at the city mentioned in the annexure, the rate of Transport Allowance would be 1350/-
Apart from that, DA on TA is also provided as per the ongoing rate of DA. For example, if TA is 1350/- and rate of current DA on basic Salary is 42% then 42% of TA would be added to the calculation of gross salary. Here, DA on TA would be 567/-.
Calculation of Gross Salary
After calculating all the above benefits the Gross Salary is calculated.
Here, after calculating Basic Salary+DA+HRA+TA the gross salary would be 32,317/-
However, the Gross Salary is subject to few deductions such as NPS, Professional Tax, Medical as subject to the rules and directions by the Central Government. After the deductions from the Gross Salary an employee gets the Net Salary on hand.
However, it is pertinent to note that benefits such as HRA and TA are not absolute, these allowances are only admissible if an employee is not provided with a residence by the Central Government or facility of government transport.
Conclusion
Government service is not a contract. It is a status. The employees expect fair treatment from the government. The States should play a role model for the services. The Apex Court in the case of Bhupendra Nath Hazarika and another vs. State of Assam and others (reported in 2013(2)Sec 516) has observed as follows:
“………It should always be borne in mind that legitimate aspirations of the employees are not guillotined and a situation is not created where hopes end in despair. Hope for everyone is gloriously precious and that a model employer should not convert it to be deceitful and treacherous by playing a game of chess with their seniority. A sense of calm sensibility and concerned sincerity should be reflected in every step. An atmosphere of trust has to prevail and when the employees are absolutely sure that their trust shall not be betrayed and they shall be treated with dignified fairness then only the concept of good governance can be concretized. We say no more.”
The consideration while framing Rules and Laws on payment of wages, it should be ensured that employees do not suffer economic hardship so that they can deliver and render the best possible service to the country and make the governance vibrant and effective.
Written by Husain Trivedi Advocate
SEBI LODR Regulations 2015: Ensuring Corporate Transparency and Governance
Introduction
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, commonly known as LODR Regulations, are a set of rules that companies must follow after listing their shares on stock exchanges. These regulations replaced the earlier Listing Agreement, which was a contract between companies and stock exchanges. The SEBI LODR Regulations 2015 aim to ensure that listed companies maintain good corporate governance and regularly share important information with their shareholders and the public. This helps investors make informed decisions and promotes transparency in the market. The regulations cover various aspects like board composition, financial reporting, disclosure of important events, related party transactions, and shareholder rights. They apply to all companies listed on recognized stock exchanges in India.
Background and Evolution of SEBI LODR Regulations
Before 2015, listed companies had to follow something called the Listing Agreement. This was a contract they signed with stock exchanges where their shares were traded. The problem was that this agreement wasn’t as legally strong as regulations made under the SEBI Act.
The Listing Agreement had evolved over time, with major changes in 2000 and 2006, especially in the area of corporate governance. Clause 49 of this agreement, which dealt with corporate governance, was particularly important and underwent several revisions.
In 2013, India got a new Companies Act which included many provisions for better corporate governance. SEBI needed to update its rules to match this new law and also to make the rules legally stronger.
So in 2015, SEBI converted the Listing Agreement into proper regulations under the SEBI Act. This gave the rules more legal power and made them easier to enforce. Companies breaking these rules could now face stronger penalties.
Corporate Governance Requirements for Listed Entities
Chapter IV of the SEBI LODR Regulations 2015 contains detailed rules about corporate governance. Regulation 17 deals with the board of directors. It states that a company’s board must have at least six members, with a good mix of executive and non-executive directors.
At least half the board must be independent directors if the chairperson is related to the promoter. Independent directors are people who don’t have any material relationship with the company and can provide unbiased oversight.
The regulations also have specific requirements for women directors. Regulation 17(1)(a) states: “Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director.”
Another important aspect is board meetings. Regulation 17(2) requires: “The board of directors shall meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings.” This ensures regular oversight of company affairs.
The regulations also require companies to have certain committees of the board. The audit committee (Regulation 18) oversees financial reporting and disclosure. The nomination and remuneration committee (Regulation 19) decides on appointment and payment of directors.
The stakeholders relationship committee (Regulation 20) looks into complaints from shareholders. The risk management committee (Regulation 21) helps the board handle various risks faced by the company.
Obligations of Listed Entities Under SEBI LODR Regulations
Chapter III of the SEBI LODR Regulations 2015 sets out the general obligations of listed companies. Regulation 4 lays down principles that should guide listed entities in their dealings with stakeholders.
These principles include transparency, protection of shareholder rights, timely disclosure of information, and ethical behavior. Listed companies must incorporate these principles in their day-to-day functioning.
Regulation 7 requires companies to appoint a qualified company secretary as the compliance officer. This person is responsible for ensuring that the company follows all the rules and requirements under the LODR Regulations.
The regulations also specify how companies should handle their securities. Regulation 9 states: “The listed entity shall have a policy for preservation of documents, approved by its board of directors, classifying them in at least two categories.”
Companies must maintain a functional website that contains basic information about the company, its business, financial data, shareholding pattern, and contact information. This makes it easier for investors to find important information about the company.
Regulation 13 deals with investor complaints. Companies must register with SEBI’s online complaint system called SCORES (SEBI Complaints Redress System) and resolve investor grievances in a timely manner.
Disclosure of Events and Information Requirements Under SEBI LODR Regulations
Regulations 30 and 31 cover the disclosure of material events and information, which is one of the most important aspects of the LODR Regulations. Listed companies must immediately inform stock exchanges about any important events that could affect their share price.
Regulation 30(4) provides the criteria for determining whether an event is material: “The listed entity shall consider the following criteria for determination of materiality of events/information: (a) the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or (b) the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date.”
The regulation divides events into two categories. The first category includes events that are deemed material and must always be disclosed, such as acquisitions, mergers, demergers, changes in directors, and issuance of securities.
The second category includes events that need to be disclosed if the company considers them material based on the criteria mentioned above. This includes things like signing new contracts, launching new products, and changes in credit ratings.
Companies must disclose these events within 24 hours. For certain events like board meeting outcomes, the disclosure must be made within 30 minutes of the meeting ending. This ensures that all investors get important information at the same time.
Besides event-based disclosures, companies must make regular periodic disclosures. This includes quarterly financial results, shareholding patterns, corporate governance reports, and annual reports. These periodic disclosures help investors track the company’s performance over time.
Compliance Requirements and Penalties
Chapter VI of the SEBI LODR Regulations 2015 deals with what happens if a company doesn’t follow the rules. SEBI has various powers to take action against non-compliant companies and their directors or promoters.
Regulation 98 states: “The stock exchange(s) shall monitor the compliance by the listed entity with the provisions of these regulations.” If stock exchanges find violations, they must report them to SEBI, which can then take further action.
The penalties for violations can be severe. Under Section 12A of the SEBI Act, non-compliance can lead to penalties of up to Rs. 25 crore or three times the amount of profits made from such non-compliance, whichever is higher.
In serious cases, SEBI can also suspend trading in a company’s shares, delist the company, or take other actions like freezing promoter shareholding. Directors and key management personnel can also face penalties for their company’s non-compliance.
The regulations also provide for the submission of compliance reports. Regulation 27 requires companies to submit quarterly compliance reports on corporate governance. Similarly, Regulation 40(9) requires a certificate from a practicing company secretary confirming compliance with share transfer formalities.
Special Provisions for SME Exchanges
Chapter IX of the LODR Regulations contains special provisions for small and medium enterprises (SMEs) listed on designated SME exchanges. These provisions recognize that smaller companies may find it difficult to comply with all the requirements applicable to larger companies.
For instance, SMEs need to have only two independent directors instead of half the board. They are also exempt from having certain committees like the risk management committee, which larger companies must have.
SMEs are required to publish half-yearly financial results instead of quarterly results. This reduces the compliance burden on these smaller companies, allowing them to focus more on their business operations.
However, even with these relaxations, SMEs must maintain minimum standards of disclosure and corporate governance. They must still disclose material events promptly and ensure that their board functions effectively.
These special provisions have helped many smaller companies access capital markets through SME exchanges while maintaining appropriate levels of investor protection. As these companies grow and move to the main board, they become subject to the full set of LODR Regulations.
Landmark Cases Clarifying SEBI LODR Regulations Compliance
Several important court cases have helped clarify the interpretation and application of the LODR Regulations. These cases provide guidance on how companies should comply with the regulations in practice.
In Diageo Plc v. SEBI (2018), the Securities Appellate Tribunal (SAT) dealt with the issue of corporate governance disclosures. Diageo, which had acquired control of United Spirits Limited (USL), discovered certain financial irregularities in USL’s past operations.
The tribunal held that the new management had a duty to disclose these irregularities promptly, even though they occurred before their takeover. The SAT stated: “The duty of disclosure under LODR Regulations applies regardless of when the events occurred, if they have a material impact on the company’s current financial position or operations.”
Another significant case is Fortis Healthcare v. SEBI (2019), which established standards for material disclosure compliance. SEBI found that Fortis had failed to disclose certain material inter-corporate deposits, which affected its financial position.
The SAT upheld SEBI’s order and clarified: “The test of materiality is not just about the amount involved but also the nature of the transaction and its potential impact on the company’s financial health and investor decision-making. Companies cannot withhold information merely because they subjectively consider it immaterial.”
In Infosys v. SEBI (2020), the focus was on whistleblower disclosure requirements. When Infosys received whistleblower complaints about alleged unethical practices, questions arose about when and how much to disclose.
The SAT noted: “While companies need time to investigate whistleblower allegations, they cannot delay disclosure if the allegations are potentially material. Even if the allegations are eventually found to be untrue, investors have the right to know about them if they could significantly impact investment decisions.”
The Yes Bank v. SEBI (2021) case dealt with the accuracy of financial disclosures. Yes Bank had understated its non-performing assets (NPAs) in its financial statements, which SEBI found to be a violation of the LODR Regulations.
In its judgment, the SAT observed: “The accuracy of financial disclosures is fundamental to market integrity. Banking companies have an even higher responsibility given their role in the financial system. Hiding bad loans through creative accounting violates both the letter and spirit of the disclosure requirements.”
Impact on Corporate Governance Practices
The LODR Regulations have significantly improved corporate governance practices in Indian companies. By making corporate governance requirements legally binding rather than just contractual obligations, SEBI has ensured greater compliance.
Independent directors now play a more active role in company boards. They chair important committees like the audit committee and the nomination and remuneration committee, providing checks and balances against excessive power of promoters.
The regulations have also improved gender diversity in Indian boardrooms. The requirement for at least one woman director has increased female representation, though there is still a long way to go for true gender balance at the top.
Disclosure practices have become more standardized and robust. Companies now promptly disclose material events, giving investors timely information to make decisions. The quality and quantity of information available about listed companies have increased substantially.
Board processes have become more structured with clear roles and responsibilities. Regular board meetings, committee meetings, and independent director meetings ensure continuous oversight of company management.
Shareholder activism has increased as shareholders become more aware of their rights under the regulations. They now actively participate in important decisions and hold management accountable for company performance.
However, challenges remain. Some companies still treat compliance as a box-ticking exercise rather than embracing the spirit of good governance. Family-owned businesses sometimes struggle with the concept of independent oversight.
Relationship Between Disclosure Requirements and Market Efficiency
Disclosure requirements under the SEBI LODR Regulations 2015 have a direct impact on market efficiency. Efficient markets need information to be quickly and equally available to all participants.
When companies disclose material information promptly, it reduces information asymmetry. This means that no investor has an unfair advantage over others due to having access to non-public information.
Research studies have shown that stocks of companies with better disclosure practices tend to have lower volatility and more accurate pricing. This is because investors have more information to assess the company’s true value.
The quarterly financial reporting requirement helps investors track company performance regularly. This reduces the chances of big surprises and helps in more accurate valuation of shares.
Event-based disclosures ensure that any significant developments are quickly reflected in the stock price. This increases market efficiency by allowing prices to adjust rapidly to new information.
Corporate governance disclosures help investors assess the quality of company management and board oversight. Companies with stronger governance structures often enjoy higher valuations due to lower perceived risk.
However, some critics argue that the focus on short-term quarterly results can lead to short-termism in company management. Companies might focus too much on meeting quarterly expectations rather than long-term value creation.
Compliance Challenges Faced by Listed Entities
Despite the clear benefits, companies face several challenges in complying with the SEBI LODR Regulations 2015. One major challenge is keeping up with frequent amendments and circulars issued by SEBI to clarify or modify the regulations.
Smaller listed companies often struggle with the compliance burden. They may not have dedicated teams for compliance and might find it difficult to implement all the requirements, particularly those related to board composition and committee structures.
The timely disclosure of material events can be challenging, especially when the materiality is not clear-cut. Companies must make quick judgments about whether an event is material enough to warrant disclosure, often with limited information.
Related party transaction regulations are particularly complex. Companies with extensive group structures must carefully track all transactions with related entities and ensure proper approvals and disclosures.
Companies also face challenges in managing the expectations of different stakeholders. What may seem like adequate disclosure to the company might not satisfy institutional investors or proxy advisory firms looking for more detailed information.
The cost of compliance is significant. Companies need to invest in systems, processes, and qualified personnel to ensure compliance. They also incur costs for board and committee meetings, independent directors’ fees, and compliance certifications.
Cultural challenges exist too, especially in promoter-driven companies. The concept of independent oversight and transparent disclosure may clash with traditional management styles that prefer to keep information closely held.
Trends and Effectiveness of SEBI LODR Regulations
SEBI’s enforcement of the LODR Regulations has evolved over time. Initially, the focus was on educating companies about the new requirements and encouraging voluntary compliance.
In recent years, SEBI has become more strict in its enforcement. It has imposed significant penalties on companies and their directors for violations of disclosure and corporate governance norms.
The regulator has particularly focused on financial disclosure violations. Cases involving misstatement of financial results or hiding material information about a company’s financial condition have attracted severe penalties.
SEBI has also been strict about board composition requirements. Companies that fail to have the required number of independent directors or women directors have faced penalties and public censure.
Stock exchanges, which act as the first line of enforcement, have improved their monitoring systems. They track compliance through regular reports submitted by listed companies and flag potential violations to SEBI.
The effectiveness of enforcement can be seen in improved compliance statistics. For instance, most listed companies now have the required number of independent directors and women directors, compared to significant non-compliance when these requirements were first introduced.
However, enforcement challenges remain. With thousands of listed companies to monitor, SEBI and stock exchanges have limited resources for detailed surveillance. They often rely on complaints or media reports to identify violations.
The penalty amounts, though increased in recent years, may still not be deterrent enough for large companies. The cost-benefit analysis might sometimes favor non-compliance, especially if the penalties are perceived as just a cost of doing business.
Conclusion
The SEBI LODR Regulations 2015, have transformed corporate governance and disclosure practices in India. By converting the earlier contractual Listing Agreement into legally binding regulations, SEBI has created a stronger framework for investor protection.
The regulations have improved board effectiveness through requirements for independent directors, regular meetings, and specialized committees. They have enhanced transparency through detailed disclosure requirements for material events and financial information.
Listed companies have generally adapted well to the new regime, though compliance challenges remain, particularly for smaller entities. The regulatory framework continues to evolve through amendments and clarifications based on market feedback and emerging issues.
The landmark cases discussed in this article have helped clarify the practical application of the regulations. They demonstrate SEBI’s commitment to enforcing both the letter and spirit of the disclosure and governance requirements.
Going forward, the focus should be on encouraging substantive compliance rather than just technical adherence to the rules. True corporate governance goes beyond ticking boxes and requires a cultural commitment to transparency, accountability, and ethical behavior.
As Indian capital markets continue to grow and attract global investors, the LODR Regulations will play a crucial role in building and maintaining investor confidence. By ensuring that listed companies meet high standards of governance and disclosure, these regulations contribute to the overall development and integrity of the securities market.
References
- Securities and Exchange Board of India. (2015). SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Gazette of India.
- Securities and Exchange Board of India. (2021). Amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. SEBI Circular dated September 7, 2021.
- Securities Appellate Tribunal. (2018). Diageo Plc v. SEBI. SAT Appeal No. 6/2017, Order dated February 9, 2018.
- Securities Appellate Tribunal. (2019). Fortis Healthcare v. SEBI. SAT Appeal No. 110/2019, Order dated November 15, 2019.
- Securities Appellate Tribunal. (2020). Infosys Ltd. v. SEBI. SAT Appeal No. 125/2020, Order dated September 8, 2020.
- Securities Appellate Tribunal. (2021). Yes Bank v. SEBI. SAT Appeal No. 45/2021, Order dated April 12, 2021.
- Balasubramanian, N., & Anand, M. (2020). “Corporate Governance Practices in India: A Decade of LODR Regulations.” Indian Institute of Management Bangalore Review, 32(2), 65-88.
- Khanna, V., & Mathew, S. (2019). “Effectiveness of Corporate Governance Regulations in India.” National Law School Journal, 17(1), 112-137.
- Varottil, U. (2019). “Evolution of Corporate Governance in India.” In Comparative Corporate Governance (pp. 321-352). Cambridge University Press.
- SEBI Annual Report 2020-21. Chapter on Corporate Governance and Compliance Monitoring.
- Chakrabarti, R., Megginson, W., & Yadav, P. K. (2018). “Corporate Governance in India: Evolution and Challenges.” In Global Perspectives on Corporate Governance (pp. 187-215). Oxford University Press.
- Mathur, S. K., & Shah, A. (2020). “Impact of LODR Regulations on Market Efficiency: Evidence from Indian Stock Markets.” Journal of Financial Markets and Governance, 15(3), 228-249.
- Report of the Committee on Corporate Governance. (2017). Submitted to SEBI by the Kotak Committee.
- Institutional Investor Advisory Services. (2021). Corporate Governance Scorecard: Evaluating LODR Compliance in Top 100 Listed Companies in India.
- Pande, S., & Ahmad, A. (2021). “Comparing Corporate Governance Standards: India, UK, and US.” International Journal of Corporate Governance, 12(2), 152-175.
SEBI ICDR Regulations 2018: Guide to Raising Capital in Indian Markets
Introduction
When companies need money to grow, build factories, develop new products, or expand to new places, they often turn to the public for funds by selling shares. This process of selling shares to the public is very important for both companies and the economy, but it needs proper rules to make sure everything happens fairly. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, commonly called ICDR Regulations, provide these rules in India. These regulations tell companies exactly what information they must share with the public, how they should price their shares, and what they can and cannot do during the whole process of raising money. The SEBI ICDR Regulations 2018 replaced the older 2009 regulations and brought many changes to make the process better, simpler, and safer for everyone. In this article, we will explore these regulations in detail, looking at what they say, how they work in practice, some famous cases related to them, and how they compare with similar rules in other countries. By the end, you will have a good understanding of how companies in India raise money from the public and how investors are protected during this process.
Historical Background and Evolution of SEBI ICDR Regulations 2018
The story of how India regulates companies raising money from the public goes back many decades and has seen many changes as the economy and markets have grown. Before 1992, the Controller of Capital Issues (CCI), which was part of the Finance Ministry, controlled this area through the Capital Issues Control Act, 1947. In those days, the government decided almost everything about public issues, including the price at which shares could be sold. Companies had very little freedom, and the whole process was slow and complicated. This old system was not working well for a growing economy that needed more investment and faster processes.
When economic reforms started in 1991, the government made big changes. The Capital Issues Control Act was cancelled, and the Securities and Exchange Board of India (SEBI), which had been created in 1988, was given legal powers in 1992 through the SEBI Act. SEBI then became the main organization responsible for regulating how companies raise money from the public. At first, SEBI issued various guidelines and instructions through different circulars. In 2000, it brought all these together into the SEBI (Disclosure and Investor Protection) Guidelines to make things more organized.
Then in 2009, SEBI took a big step by replacing these guidelines with the first ICDR Regulations, which made the rules more formal and legally stronger. These 2009 Regulations worked well for several years but eventually needed updating because markets change, new types of businesses emerge, and global standards evolve. After extensive discussions with market experts, companies, and investor groups, SEBI introduced the new SEBI ICDR regulations 2018. These new regulations were not just a small update but a complete overhaul that reorganized everything to make it more logical and user-friendly. They reduced the number of chapters from twenty to sixteen and made the language clearer. The 2018 Regulations kept the good parts of the earlier rules while adding new features to make the capital raising process more efficient and in line with global best practices.
Initial Public Offerings (IPO) Requirements
The most common way for a company to raise money from the public for the first time is through an Initial Public Offering (IPO). Chapter II of the ICDR Regulations deals specifically with IPOs and sets out detailed rules about which companies can do an IPO and what conditions they must meet. According to Regulation 6, a company must fulfill several conditions to be eligible for an IPO. It must have net tangible assets of at least three crore rupees in each of the previous three years. It also needs to have made an average operating profit of at least fifteen crore rupees during the previous three years, with profit in each year. The company must have a net worth (total assets minus total liabilities) of at least one crore rupees in each of the last three years. And if the company has changed its name within the last year, at least half of its revenue in the previous year should have come from the activity suggested by the new name. These requirements ensure that only companies with a proven track record can raise money from the public.
However, the regulations also provide alternative routes for newer companies, especially in technology sectors, that might not meet these traditional criteria but have strong growth potential. For example, Regulation 6(2) allows loss-making companies to do an IPO if they allocate at least 75% of the net public offer to Qualified Institutional Buyers (QIBs) like banks, insurance companies, and mutual funds. This provision has been particularly helpful for many technology startups and e-commerce companies that typically operate at a loss in their early years while building market share. The regulations also specify details about the minimum offer size, promoter contribution, lock-in periods, and pricing methods. For instance, promoters (founders or main shareholders) must contribute at least 20% of the post-issue capital and keep these shares locked in (not allowed to sell) for at least three years. These requirements ensure that promoters have “skin in the game” and remain committed to the company’s success even after raising money from the public.
Rights Issue and Preferential Issue Requirements
Beyond IPOs, the SEBI ICDR Regulations 2018 also cover other ways companies can raise money. Chapters III and V deal with rights issues and preferential issues, respectively. A rights issue is when a company that is already listed offers new shares to its existing shareholders in proportion to their current holding. This method respects the right of existing shareholders not to have their ownership percentage diluted. According to Regulation 60, a listed company making a rights issue must send a letter of offer to all shareholders at least three days before the issue opens. This letter must contain all important information about the company’s business, financial position, how the money will be used, and any risks involved. The company must also keep a specific portion of the issue for employees if they want to include them. The pricing of a rights issue is generally more flexible than an IPO, and companies often offer shares at a discount to attract shareholders to participate.
The regulations also specify timelines for rights issues, including the minimum and maximum period the issue should remain open (typically 7 to 30 days). A preferential issue, covered in Chapter V, is when a company issues new shares or convertible securities to a select group of investors rather than to all existing shareholders or the general public. This method is often used when companies want to bring in strategic investors or when they need money quickly. Regulation 164 specifies how to calculate the minimum price for preferential issues, which is generally based on the average of weekly high and low closing prices over a certain period. The regulations also impose a lock-in period of one year on shares issued through preferential allotment to ensure that these investors don’t quickly sell their shares for short-term profits. Additionally, preferential issues require shareholder approval through a special resolution, and the money raised must be used for the specific purposes mentioned in that resolution. These detailed rules for different types of capital raising methods ensure that regardless of how a company chooses to raise money, proper disclosures are made, and investor interests are protected.
Qualified Institutions Placement (QIP)
Chapter VI of the ICDR Regulations introduces a special method for listed companies to raise money quickly from institutional investors, known as Qualified Institutions Placement (QIP). This method was created to allow companies to raise money without the lengthy process required for public issues while still maintaining proper disclosure standards. QIP is only available to companies that are already listed and have been complying with listing requirements for at least one year. According to Regulation 172, in a QIP, shares can only be issued to Qualified Institutional Buyers (QIBs), which include institutions like banks, insurance companies, mutual funds, foreign portfolio investors, and pension funds. The minimum number of allottees in a QIP must be two if the issue size is less than or equal to ₹250 crores, and five if the issue size is greater than ₹250 crores.
No single allottee is allowed to receive more than 50% of the issue. This ensures that the shares are not concentrated in the hands of just one or two investors. The pricing of shares in a QIP is based on the average of the weekly high and low closing price during the two weeks preceding the “relevant date” (usually the date of the board meeting deciding to open the issue). Companies can offer a discount of up to 5% on this price, subject to shareholder approval. Regulation 175 mandates that the issue must be completed within 365 days of the special resolution approving it. The funds raised through QIP must be utilized for the purposes stated in the placement document, and any major deviation requires shareholder approval. QIPs have become increasingly popular for Indian companies looking to raise capital quickly. For example, in 2020 and 2021, many banks and financial institutions used the QIP route to strengthen their capital base during the COVID-19 pandemic. The streamlined process allowed these institutions to raise funds in challenging market conditions when traditional public issues might have been difficult to execute.
General Obligations and Disclosures
Regardless of the method a company uses to raise capital, the SEBI ICDR Regulations 2018 impose certain general obligations and disclosure requirements that apply to all types of issues. These are primarily covered in Chapter IX and are designed to ensure transparency and protect investor interests. One fundamental principle is that the offer document (whether a prospectus, letter of offer, or placement document) must contain all material information necessary for investors to make an informed decision. Regulation 24 states explicitly: “The draft offer document and offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision.” The regulations define “material” as any information that is likely to affect an investor’s decision to invest in the issue. This includes details about the company’s business, its promoters and management, its financial position, risks and concerns, legal proceedings, and how the money raised will be used. The offer document must be certified by the company’s directors as containing “true, fair and adequate” information.
Making false or misleading statements in an offer document is a serious offense that can lead to penalties, including imprisonment in severe cases. The ICDR Regulations also require companies to make continuous disclosures even after the issue is completed. They must inform investors about how the money raised is being used through regular updates to stock exchanges. If there are any significant deviations from the stated use of funds, companies must explain these deviations and seek shareholder approval if necessary. Another important requirement is the appointment of a monitoring agency (usually a bank or financial institution) for issues above a certain size to oversee the use of funds. This agency must submit regular reports on whether the company is using the money as promised in the offer document. These general obligations ensure that the capital raising process remains transparent from beginning to end, with sufficient safeguards to protect investor interests.
Landmark Court Cases
Several important court cases have shaped how the ICDR Regulations are interpreted and applied. These cases have clarified unclear aspects of the regulations and established precedents for future issues. One of the most significant cases is DLF Ltd. v. SEBI (2015) SAT Appeal No. 331/2014. This case involved India’s largest real estate company, which was penalized by SEBI for not disclosing certain information in its IPO prospectus. DLF had not fully disclosed details about its subsidiaries and certain legal proceedings. When this came to light, SEBI barred DLF and its directors from accessing the capital markets for three years. DLF appealed to the Securities Appellate Tribunal (SAT), arguing that the undisclosed information was not material.
However, the SAT upheld SEBI’s order, stating: “The duty of an issuer company while filing a prospectus is not only to make true and correct disclosures but also to ensure that such disclosures are adequate… Inadequate disclosures even if they are true would not meet the requirement of the ICDR Regulations.” This judgment established an important principle that the adequacy of disclosure is as important as its accuracy. Another landmark case is Sahara Prime City v. SEBI (2013), which dealt with Sahara’s attempt to raise money through an IPO. SEBI found that the Sahara Group was simultaneously raising money through other means (through instruments called OFCDs – Optionally Fully Convertible Debentures) without proper disclosures. The case eventually reached the Supreme Court, which ruled in favor of SEBI and ordered Sahara to refund the money collected through OFCDs. The Court emphasized the importance of disclosure and regulatory compliance, stating: “Disclosure isn’t only about telling the truth but telling the whole truth.” A more recent case is PNB Housing Finance v. SEBI (2021) in the Delhi High Court, which dealt with preferential allotment pricing. PNB Housing Finance had approved a preferential issue to certain investors, including Carlyle Group, at a price that some shareholders felt was too low. SEBI directed the company to halt the issue until a valuation was done by an independent registered valuer. The company challenged this in court, arguing that it had followed the formula prescribed in the ICDR Regulations. The case raised important questions about whether SEBI can impose additional requirements beyond what is specified in the regulations and the balance between letter and spirit of the law. These cases show how the courts have generally supported SEBI’s role in ensuring proper disclosures and protecting investor interests, even when it means interpreting the regulations strictly.
Comparative Analysis with Global Regulations
India’s SEBI ICDR Regulations 2018 share similarities with capital raising regulations in other major markets like the United States and the United Kingdom, but there are also significant differences reflecting India’s unique market conditions. In the United States, the Securities Act of 1933 and rules issued by the Securities and Exchange Commission (SEC) govern public offerings. Like India’s ICDR Regulations, the US system emphasizes disclosure through detailed registration statements (Form S-1 for IPOs). However, the US has more flexible criteria for company eligibility, focusing primarily on disclosure rather than prescribing minimum financial thresholds like the three-year profit track record required in India. The US also has special provisions for “emerging growth companies” under the JOBS Act of 2012, allowing smaller companies certain exemptions from disclosure requirements. The United Kingdom’s regulations, administered by the Financial Conduct Authority (FCA), are more principles-based compared to India’s more prescriptive approach.
The UK’s Premium Listing requirements for the main market are somewhat similar to India’s, requiring a three-year track record, but they focus more on the company’s ability to carry on an independent business rather than specific financial thresholds. One area where India’s regulations differ significantly is in the control of promoters (founders or main shareholders). Indian regulations mandate minimum promoter contribution (20% of post-issue capital) and longer lock-in periods (three years for promoters compared to typically six months in the US and UK). This reflects the predominance of promoter-controlled companies in India compared to the more dispersed ownership typical in the US and UK. India’s QIP mechanism is somewhat unique, although it shares features with private placements in other markets. It was specifically designed to address the challenges of the Indian market, where traditional rights issues and follow-on public offerings can be time-consuming. The 2018 ICDR Regulations incorporated several international best practices, such as stricter disclosure standards for group companies, enhanced corporate governance requirements, and better regulations for credit rating agencies involved in public issues. At the same time, the regulations retained certain India-specific features, such as the emphasis on promoter responsibility and detailed regulations on the use of issue proceeds. Overall, while India’s regulations draw inspiration from global standards, they are tailored to address the specific characteristics and challenges of the Indian market, including higher retail investor participation, the dominance of family-owned businesses, and the need for strong investor protection measures in a still-evolving market.
Recent Developments and Amendments
The ICDR Regulations haven’t remained static since 2018 but have continued to evolve through various amendments to address emerging issues and improve the capital raising process. One significant amendment came in April 2022, when SEBI modified the lock-in requirements for promoters and other shareholders in IPOs. The lock-in period for promoters’ minimum contribution (20% of post-issue capital) was reduced from three years to eighteen months for all issues opening after April 1, 2022. For the promoter holding beyond the minimum contribution and for pre-IPO shareholders who are not promoters, the lock-in period was reduced from one year to six months.
This change was made to align Indian regulations more closely with global practices and to provide more liquidity to early investors, particularly in startup companies. Another important amendment related to the Objects of the Issue section in offer documents. Companies are now required to provide more specific details about how they intend to use the money raised, especially for general corporate purposes. If more than 35% of the issue proceeds are allocated for acquiring unidentified companies (inorganic growth), specific disclosures about the target industry and types of acquisition targets must be made. This change was prompted by concerns that some companies were raising money without clear plans for its use. In response to the growing trend of loss-making technology companies going public, SEBI introduced additional disclosure requirements for such companies in November 2021. These companies must disclose key performance indicators, detailed unit economics, and comparison with listed peers, giving investors better tools to evaluate their business models and growth potential. SEBI also amended the regulations related to price bands in IPOs, requiring companies to provide sufficient justification for the price range, especially when valuations appear high relative to industry peers. These changes were particularly relevant for new-age technology companies with unconventional valuation metrics. The regulator has also been working on reducing the time taken from IPO closure to listing, with the aim of eventually moving to a T+3 timeline (listing within three days of issue closure). These ongoing amendments reflect SEBI’s responsive approach to regulation, adapting the framework as market conditions change and new types of companies seek to access public markets.
Practical Impact and Market Response
The SEBI ICDR Regulations 2018 have had a profound impact on how companies raise capital in India and how the primary market functions. One of the most visible impacts has been on the quality and quantity of information available to investors. Compared to the pre-ICDR era, offer documents today contain much more comprehensive information, allowing investors to make more informed decisions. This improved disclosure regime has particularly benefited retail investors, who previously had limited access to company information. The regulations have also influenced the types of companies that come to the market. The clear eligibility criteria have ensured that mostly companies with established track records access public funds through the main board IPOs. At the same time, the alternative investment routes and specialized platforms like the SME Exchange have provided avenues for smaller or newer companies to raise capital with appropriate safeguards. Market participants have generally responded positively to the 2018 regulations and subsequent amendments. Investment bankers appreciate the clearer structure and language of the regulations, which make compliance easier. Companies value the more streamlined processes, especially for rights issues and QIPs, which allow them to raise capital more quickly when market conditions are favorable. Institutional investors have welcomed the enhanced disclosure requirements, particularly those related to group companies and litigation, which provide greater transparency about potential risks. However, some challenges remain. Companies sometimes find the disclosure requirements onerous, especially smaller firms with limited resources. The requirements for financial information (three years of restated financial statements) can be challenging for companies that have undergone significant restructuring. Some market participants also argue that certain provisions, such as the minimum promoter contribution, may not be suitable for all types of companies, particularly those with professional management rather than promoter control. Despite these challenges, the capital market activity since 2018 suggests that the regulations have struck a reasonable balance between facilitating capital raising and protecting investor interests. The years 2020 and 2021 saw record IPO activity in India despite the pandemic, with many new-age technology companies successfully going public. This wouldn’t have been possible without a regulatory framework that was both robust and flexible enough to accommodate different types of companies while maintaining investor confidence.
Conclusion
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, represent a significant milestone in the evolution of India’s capital market regulations. By providing a comprehensive framework for various types of capital raising activities, they have played a crucial role in balancing the dual objectives of facilitating business growth and protecting investor interests. The regulations have successfully addressed many of the challenges that existed in earlier frameworks, such as excessive complexity, outdated provisions, and lack of clarity. By streamlining processes, enhancing disclosure requirements, and introducing greater flexibility for different types of issuers, the SEBI ICDR Regulations 2018 have made capital raising more efficient while maintaining robust investor protection. The ongoing amendments to the regulations demonstrate SEBI’s commitment to keeping the regulatory framework relevant and responsive to changing market conditions. This adaptive approach is essential in a dynamic environment where new business models emerge and global best practices evolve continuously. As India aims to become a $5 trillion economy, efficient capital markets will be crucial for channeling savings into productive investments. The SEBI ICDR Regulations 2018 provide the foundation for this by ensuring that companies can access public funds in a transparent and orderly manner. For companies seeking to raise capital, understanding these regulations is not just about compliance but about appreciating the principles of transparency, fairness, and investor protection that underpin them. For investors, the regulations provide assurance that companies coming to the market meet certain minimum standards and disclose all material information. Looking ahead, the regulatory framework will likely continue to evolve, perhaps becoming more principles-based in certain areas while maintaining prescriptive standards where necessary for investor protection. As more diverse companies seek to access public markets, finding the right balance between facilitating innovation and maintaining market integrity will remain a key challenge for regulators. The ICDR Regulations, with their comprehensive coverage and adaptable framework, provide a strong foundation for meeting this challenge.
References
- Securities and Exchange Board of India. (2018). SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Gazette of India.
- Securities and Exchange Board of India. (2022). Amendment to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. SEBI Circular dated April 5, 2022.
- Securities Appellate Tribunal. (2015). DLF Ltd. v. SEBI (SAT Appeal No. 331/2014). SAT Order dated March 13, 2015.
- Supreme Court of India. (2013). Sahara India Real Estate Corporation Ltd. & Ors. v. Securities and Exchange Board of India. (2013) 1 SCC 1.
- Delhi High Court. (2021). PNB Housing Finance Ltd. v. Securities and Exchange Board of India. W.P.(C) 5832/2021.
- Bharadwaj, S., & Srinivasan, P. (2020). “Evolution of Disclosure-Based Regulation in Indian Capital Markets.” National Law School of India Review, 32(1), 75-98.
- Chandrasekhar, C.P. (2019). “Securities Market Regulations in India: A Historical Perspective.” Economic and Political Weekly, 54(32), 44-52.
- SEBI Annual Report 2022-23. Chapter on Primary Markets and Issue Related Developments.
- Paytm (One97 Communications) IPO Prospectus. (2021). Filed with SEBI and Stock Exchanges.
- Saha, S. (2021). “Comparative Analysis of Securities Regulations in India, US, and UK.” Journal of Securities Law, Regulation & Compliance, 14(2), 138-157.
- Franklin Templeton Trustee Services v. SEBI (2021). Securities Appellate Tribunal Order in Appeal No. 180/2020.
- Patnaik, S., & Goel, S. (2022). “SEBI’s Regulatory Framework for New-Age Technology Companies.” Corporate Law Journal, 29(3), 215-229.
- Report of the Expert Committee on Primary Markets (2018). Submitted to SEBI.
- SEBI Consultation Paper on Review of ICDR Regulations (2017).
- Chakrabarti, R., & De, S. (2021). “IPO Regulations and Market Development: Evidence from India.” Journal of Corporate Finance, 68, 101-118.
The Depositories Act 1996: India’s Transition to Electronic Securities
Introduction
Before 1996, if you wanted to buy shares in India, you would get actual paper certificates. These certificates had to be kept safely, and whenever you sold shares, you had to physically deliver these papers to the buyer. This system caused many problems. Papers got damaged, lost, or even fake certificates were made. The process of transferring ownership was slow and sometimes took weeks to complete. The Depositories Act of 1996 changed all this by allowing shares to exist in electronic form. This meant no more paper certificates. Instead, all records of who owns which shares are kept safely in electronic databases managed by depositories. This big change made buying and selling shares much faster, safer, and easier for everyone. In this article, we will look at why this law was made, what it says, some important court cases related to it, and how it has helped Indian investors and the overall market.
Historical Context and Need for the Depositories Act
In the early 1990s, India’s stock markets were growing fast. Economic reforms had opened up new opportunities, and more people wanted to invest in shares. But the old paper-based system couldn’t handle this growth well. There were serious problems that needed to be fixed:
The “securities scam” of 1992, involving Harshad Mehta, showed how vulnerable the paper-based system was to fraud. In this scam, fake bank receipts were used to get money from banks, which showed how important it was to have better systems for keeping records.
Trading volumes were increasing, but physical settlement (actually handing over share certificates) was causing big delays. Sometimes it took more than a month to complete a transaction that should take just a few days.
Many investors lost money because of fake certificates, damaged papers, or delays in transfer. In some cases, companies refused to register transfers because signatures didn’t match exactly or because papers had minor damage.
The paperwork was becoming overwhelming. Stock exchanges were literally drowning in paper. The Bombay Stock Exchange alone was processing hundreds of thousands of physical certificates every day.
Looking at these problems, the government realized that India needed to move from paper certificates to electronic records, like many developed countries had already done. This led to the creation of the Depositories Act, 1996.
C.B. Bhave, who later became SEBI Chairman but at that time was working on setting up the National Securities Depository Limited (NSDL), explained the situation: “The paper-based system was like a ticking time bomb. The volumes were growing exponentially, but the infrastructure to handle physical certificates was collapsing under its own weight. Dematerialization was not just an option; it was an absolute necessity for the survival and growth of India’s capital markets.”
Key Provisions of the Depositories Act, 1996
Registration of Depositories (Section 3)
Section 3 of the Act sets the rules for who can become a depository. It states: “No depository shall act as a depository unless it obtains a certificate of registration from the Board (SEBI).”
To get this registration, a depository must be a company under the Companies Act and meet other requirements set by SEBI. Currently, India has two registered depositories: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
The Act gives SEBI the power to set conditions for registration and to cancel registration if a depository fails to follow the rules. This helps ensure that depositories operate in a safe and reliable way.
Rights and Obligations of Depositories (Section 5)
Section 5 defines what depositories can and must do. According to this section: “Subject to the provisions of this Act, the depositories shall register the transfer of securities in the name of the transferee and where the securities are held with the depository, it shall register the transfer of securities in the name of the beneficial owner.”
This means depositories must:
- Keep accurate records of all securities held in electronic form
- Process transfers quickly when shares are bought or sold
- Maintain confidentiality of information about investors
- Follow SEBI’s rules for how records should be kept
- Provide regular statements to investors about their holdings
The section also makes it clear that depositories can’t trade in securities themselves. They are only meant to keep records, not to buy and sell shares on their own account.
Dematerialization and Re-materialization (Sections 8-10)
Sections 8 to 10 cover the process of converting physical certificates into electronic form (dematerialization) and, if needed, converting them back to physical form (re-materialization).
Section 8 explains: “Every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository.”
This means investors can choose whether they want physical certificates or electronic records. However, for many types of trading, especially on stock exchanges, electronic form is now mandatory.
Section 9 explains how dematerialization works: “Any person who has entered into an agreement with a depository shall surrender the certificate of security for which he seeks to avail the services of a depository, to the issuer in such manner as may be specified in the bye-laws.”
Once the certificate is surrendered and verified, the issuer cancels the physical certificate and tells the depository to create an equivalent electronic record.
Section 10 covers the reverse process: “Any beneficial owner may, at any time, withdraw a security from a depository in such manner as may be specified in the bye-laws.”
In practice, very few investors ask for physical certificates nowadays because electronic form is much more convenient.
Depository Participants and Beneficial Owners (Sections 7-8)
An important feature of the depository system is that investors don’t deal directly with depositories. Instead, they open accounts with “depository participants” (DPs), which are like brokers or banks that provide access to the depository.
Section 7 states: “Any person may open an account with a depository for the purpose of dealing in securities.”
Section 8 introduces the concept of “beneficial ownership.” When shares are held in electronic form, the depository’s name appears in the company’s register as the holder, but the real owner (the investor) is called the “beneficial owner.”
The section clearly states: “Every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository.”
And more importantly: “Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of the security, and on receipt of such information, the depository shall enter in its records the name of the allottee as the beneficial owner of the security.”
This means that even though the depository’s name appears in official records, the rights of ownership (like receiving dividends or voting at meetings) belong to the investor.
Penalties for Violations (Sections 19A-19G)
The Act includes strict penalties for breaking its rules. For example:
Section 19A says that failing to follow any provision of the Act can result in a penalty of up to one crore rupees.
Section 19B covers penalties for failure to enter into agreements with clients properly, which can lead to a penalty of one lakh rupees per day.
Section 19F deals with penalties for failure to reconcile records, which can be up to one crore rupees.
These penalties show how seriously the law takes the proper functioning of the depository system, given its importance to the entire financial market.
Landmark Court Cases
Rakesh Kathotia v. SEBI (2007) SAT Appeal No. 117/2006
This case was about who has the rights of ownership when shares are held in a depository. Rakesh Kathotia had shares in his depository account, but there was a dispute about whether he had pledged these shares to someone else.
The Securities Appellate Tribunal (SAT) made an important ruling about beneficial ownership. It said: “The Depositories Act clearly establishes that the beneficial owner is the real owner of the securities even if they are held in the name of the depository in company records. All rights that would accrue to the holder of physical securities automatically accrue to the beneficial owner.”
This judgment confirmed that investors who hold shares in electronic form have exactly the same rights as those who hold physical certificates. It gave investors confidence in the new electronic system.
National Securities Depository Ltd. v. SEBI (2017) SAT Appeal No. 147/2016
This case dealt with the responsibilities of depositories for maintaining accurate records. SEBI had penalized NSDL for certain lapses in its systems. NSDL appealed to the SAT, arguing that it had followed all reasonable procedures.
The SAT upheld SEBI’s order and stated: “Depositories are the backbone of the securities market infrastructure. Their responsibility to maintain accurate records is absolute and cannot be diluted. Even minor lapses can have major consequences for market integrity.”
The tribunal further noted: “The Depositories Act imposes a high standard of care on depositories because they are entrusted with the crucial task of keeping electronic records that form the basis of ownership of securities worth trillions of rupees.”
This case established that depositories must maintain extremely high standards in their operations because of the critical role they play in the financial system.
Karvy Stock Broking v. SEBI (2020) SAT Appeal
This was a landmark case that highlighted the importance of proper segregation of client securities in the depository system. Karvy Stock Broking had allegedly misused client securities by pledging them for their own loans without client permission.
The case revealed a serious misuse of the depository system and led to major regulatory changes. SEBI took strong action against Karvy, and the SAT upheld most of these actions.
In its judgment, the SAT observed: “The Depositories Act and related regulations create a sacred trust between clients and their depository participants. Any breach of this trust strikes at the very foundation of market integrity. The proper segregation of client assets is non-negotiable.”
This case led to stronger regulations about how brokers can handle client securities and improved monitoring systems to prevent such misuse in the future.
Technological Transformation of Securities Holding
The Depositories Act 1996 enabled a complete transformation in how securities are held and traded in India. This transformation had several important aspects:
From Physical to Digital
The most obvious change was the shift from physical certificates to electronic records. This eliminated problems like fake certificates, loss or damage of papers, and signature mismatches during transfers.
A senior official from CDSL once shared: “Before dematerialization, the settlement department of stock exchanges looked like a paper factory. Mountains of share certificates had to be physically checked, sorted, and delivered. Today, millions of shares change hands with just a few keystrokes.”
Speed and Efficiency
In the paper-based system, settling a trade could take weeks because certificates had to be physically delivered, verified, and then registered by companies. Now, settlement happens in just T+2 days (trade date plus two working days).
In fact, from October 2023, India even moved to a T+1 settlement cycle for many securities, making it one of the fastest settlement systems in the world.
Cost Reduction
The cost of transacting in securities has fallen dramatically. There’s no need for stamp duty on transfers, no risk of loss during transit, and no storage costs for keeping physical certificates safe.
According to a study by the National Stock Exchange, the total cost of trading and settlement fell by more than 60% after dematerialization was widely adopted.
Increased Market Participation
The easier, faster, and safer electronic system encouraged more people to invest in the stock market. The number of demat accounts grew from just a few thousand in 1997 to over 100 million by 2023.
This increased participation has been particularly important for retail investors from smaller cities and towns, who earlier faced difficulties in dealing with physical certificates.
Investor Protection Measures under the Depositories Act, 1996
The Depositories Act 1996 included several features specifically designed to protect investors:
Account Statements and Information
Depositories and their participants must regularly provide statements to investors showing their holdings and all transactions. This transparency helps investors keep track of their investments.
Nomination Facility
The Act allows investors to nominate someone who would get their securities if something happens to them. This made inheritance much simpler compared to the complex legal process required for physical certificates.
Grievance Redressal
The Act requires depositories to have proper systems for handling investor complaints. Both NSDL and CDSL have established dedicated investor grievance cells to address problems quickly.
Insurance and Safeguards
Depositories maintain insurance covers and have created investor protection funds to compensate investors in case of defaults by depository participants.
Multiple Checks and Balances
The electronic system has multiple levels of verification and authentication to prevent unauthorized transfers. Investors receive SMS and email alerts for any transactions in their accounts, allowing them to detect any unauthorized activity immediately.
Comparative Analysis with Global Depository Practices
India’s depository system, while inspired by global models, has some unique features:
Competitive Model
Unlike many countries that have a single central depository, India chose to have multiple competing depositories (currently NSDL and CDSL). This competition has led to better services and lower fees for investors.
Integration with Banking System
India’s depository system is well integrated with the banking system. Most banks act as depository participants, allowing investors to manage their shares and bank accounts through a single institution.
Advanced Technological Features
India’s depositories implemented advanced features like online access, mobile apps, and electronic voting rights for shareholders quite early compared to many developed markets.
Cost Structure
The cost of maintaining a demat account in India is among the lowest in the world, making it accessible to small investors. This contrasts with some developed markets where custody fees can be significant.
Globally respected financial expert Dr. Ajay Shah noted: “India’s leapfrog into dematerialization in the 1990s was remarkable. While developed markets had evolved gradually from paper to electronic systems over decades, India made the transition in just a few years. And in some ways, the Indian system turned out to be more modern and efficient than many older systems in developed markets.”
Current Challenges and Future Developments for the Depository System
Despite its success, the depository system still faces some challenges:
Cybersecurity Concerns
As with any electronic system, cyber threats are a constant concern. Depositories continually need to upgrade their security systems to protect against hacking, unauthorized access, and other cyber risks.
Reaching Remote Areas
While urban India has widely adopted demat accounts, penetration in rural areas remains limited. Expanding access to these areas remains a challenge.
New Types of Securities
The system needs to evolve to handle new types of financial instruments like REITs (Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts), and potentially even digital assets in the future.
Cross-Border Investments
As Indian investors increasingly look at global markets and foreign investors come to India, better integration with international depository systems becomes important.
Looking ahead, depositories are working on several new initiatives:
- Using blockchain technology to further improve security and efficiency
- Enabling electronic holding of non-financial assets like academic certificates and property records
- Creating a unified platform for investors to view and manage all their financial assets in one place
- Developing systems for faster cross-border settlements
Conclusion: Impact and Future of the Depositories Act, 1996
The Depositories Act, 1996 marked a turning point in India’s financial markets. By enabling the shift from paper certificates to electronic records, it solved numerous problems that had plagued the market for decades. The result has been faster, safer, and more efficient trading, benefiting millions of investors.
The success of India’s depository system shows how well-designed regulations and technology can transform markets. From a paper-drowning system in the early 1990s, India now has one of the most modern securities holding systems in the world.
As we look to the future, the basic framework established by the Depositories Act 1996 continues to serve as the foundation for further innovations. The journey from paper to electronic was just the beginning. The next phase may well be from electronic to blockchain or other advanced technologies, but the principles of investor protection, efficiency, and transparency established by the Depositories Act will remain relevant.
In the words of a former SEBI chairman: “The Depositories Act didn’t just change how shares are held; it changed the entire investment culture of India. It made the stock market accessible to ordinary Indians in a way that was never possible before.”
The Securities Contracts (Regulation) Act 1956: Foundation of Indian Securities Market Regulation
Introduction
The Securities Contracts (Regulation) Act of 1956, commonly known as SC(R)A, is one of the oldest financial laws in India. It was made at a time when our country had just become independent and needed proper rules for trading in the stock markets. Before SEBI was born in 1992, this Act was the main law that controlled how stock exchanges worked in India. Even though it is an old law, it remains very important today as it forms the base on which newer laws are built.
The SC(R)A was not always as we see it today. Over the years, especially after SEBI came into existence, the government made many changes to make it work better with SEBI’s rules. These changes helped create a stronger system for regulating the stock markets in India. This article will look at the main parts of the SC(R)A, famous court cases related to it, and how it has changed over time.
Historical Background and Evolution the Securities Contracts (Regulation) Act
The SC(R)A was passed in 1956 when stock trading in India was still very basic compared to today. The Bombay Stock Exchange (BSE), which started in 1875, was already there but needed proper rules to function well. The main goal of making this law was to stop bad practices in stock trading and make sure that buying and selling of shares was done in a fair way.
For many years, the Central Government directly controlled the stock exchanges through this Act. But after economic reforms started in 1991 and SEBI was given statutory powers in 1992, many responsibilities under SC(R)A were given to SEBI. The Securities Laws (Amendment) Act of 1995 was a big step that transferred most powers from the government to SEBI.
Dr. L.C. Gupta, a famous expert on financial markets, once said: “The SC(R)A of 1956 laid the foundation on which the entire structure of India’s securities market regulation stands today. Without this law, creating an orderly securities market would have been impossible.”
Key Provisions of the Securities Contracts (Regulation) Act, 1956
Recognition of Stock Exchanges (Section 4)
Section 4 of the SC(R)A gives the government (now SEBI) the power to recognize stock exchanges. This section states: “If the Central Government (now SEBI) is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require, that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange, it may grant recognition to the stock exchange subject to such conditions as may be prescribed or specified.”
This means no stock exchange can operate in India without first getting approval from SEBI. To get this approval, the exchange must follow certain rules about how it works, who can become members, and how trading should be done.
Powers to Control and Regulate Stock Exchanges (Section 5)
Section 5 gives SEBI broad powers to control how stock exchanges function. As per this section, “It shall be the duty of recognised stock exchanges to comply with such directions.” These directions can include changes to the rules of the exchange, how trading should happen, and what information should be given to investors.
For example, SEBI can ask exchanges to change their bye-laws, which are the internal rules of the exchange. These bye-laws cover things like:
- Who can become a broker
- How trades should be settled
- What happens if someone doesn’t complete a trade
- How disputes between members are solved
Regulation of Contracts in Securities (Section 13)
Section 13 is about controlling what kinds of contracts can be made for buying and selling securities. It says that the Central Government (now SEBI) can declare certain types of contracts as illegal or void. This helps prevent gambling-like activities in the stock market.
The actual text of Section 13(1) states: “The Central Government may, by notification in the Official Gazette, declare that no person in the notified area shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of any security specified in the notification except in such circumstances and in such manner as may be specified in the notification.”
This section has been very important in controlling derivatives trading in India. For many years, most derivatives were not allowed in Indian markets because of this section, until SEBI gradually introduced stock futures, options, and index derivatives in a controlled way.
Listing Requirements for Securities (Section 21)
Section 21 deals with the requirements for listing securities (like shares or bonds) on stock exchanges. Listing means that a company’s shares can be bought and sold on a stock exchange. This section says that companies must meet certain requirements before their shares can be listed.
The section specifically states: “Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.”
This listing agreement has several important requirements, such as:
- Regular sharing of financial information
- Informing the public about major changes in the company
- Following good corporate governance practices
- Treating all shareholders fairly
Delisting of Securities (Section 21A)
Section 21A, which was added later to the original Act, deals with removing securities from stock exchanges. This is called delisting. The section provides for both voluntary delisting (when a company itself wants to remove its shares from trading) and compulsory delisting (when the exchange forces a company to delist because it broke the rules).
The section states: “A recognised stock exchange may delist the securities, after recording the reasons therefor, from any recognised stock exchange on any of the grounds as may be prescribed under this Act.”
Delisting is a serious matter because it means small investors might not be able to easily sell their shares. That’s why the law includes special protections for investors in such cases.
Landmark Court Cases on the Securities Contracts (Regulation) Act
Jermyn Capital LLC v. SEBI (2006) SAT Appeal No. 140/2006
This important case was about who can register as a broker in India. Jermyn Capital, a foreign company, applied for registration as a stock broker but was denied by SEBI. When they appealed to the Securities Appellate Tribunal (SAT), the tribunal had to decide on the scope of SEBI’s powers under the SC(R)A for broker registration.
The SAT ruled: “The powers conferred on SEBI under Section 12 of the SEBI Act read with SC(R)A provisions for registration of intermediaries are wide but not unlimited. SEBI must exercise this discretion reasonably and not arbitrarily.”
This case helped define the limits of SEBI’s powers and established that even though SEBI has wide powers, it must use them fairly and provide proper reasons for its decisions.
BSE Brokers Forum v. SEBI (2001) 3 SCC 482
This case went all the way to the Supreme Court and was about SEBI’s power to change the bye-laws of stock exchanges. The BSE Brokers Forum challenged SEBI’s authority to directly amend the bye-laws of the Bombay Stock Exchange without the exchange itself making those changes.
The Supreme Court upheld SEBI’s powers and stated: “SEBI has the authority to direct stock exchanges to amend their bye-laws, and if they fail to do so within a reasonable time, SEBI can itself make those amendments. This power is essential for effective regulation of securities markets in public interest.”
This judgment was very important as it confirmed that SEBI has strong powers to control how stock exchanges work, even if the exchanges themselves don’t agree with the changes.
MCX-SX v. SEBI (2012) SAT Appeal No. 47/2012
This was a high-profile case about SEBI’s discretionary powers in recognizing new stock exchanges. MCX-SX, which wanted to expand from being a commodity derivatives exchange to a full-fledged stock exchange, was denied permission by SEBI. They appealed to the SAT.
The SAT overturned SEBI’s decision and ruled: “SEBI’s discretionary powers under Section 4 of SC(R)A for recognizing stock exchanges are not absolute and must be exercised objectively based on criteria laid down in the law. SEBI cannot deny recognition if the applicant meets all the statutory requirements.”
The tribunal also noted: “While SEBI has wide discretionary powers, these powers must be exercised in a transparent and non-arbitrary manner. The regulator must provide clear and valid reasons if it chooses to deny recognition to an applicant that has met all the specified criteria.”
NuPower Renewables v. SEBI (2023) SAT Appeal
This recent case examined disclosure requirements under the SC(R)A and related regulations. NuPower Renewables challenged SEBI’s order regarding inadequate disclosures in a listed company’s filings. The case is significant because it deals with modern corporate governance standards.
The SAT observed: “The disclosure requirements under Section 21 of SC(R)A read with LODR Regulations must be interpreted keeping in mind the objective of ensuring that investors have access to all material information that might affect their investment decisions. Technical compliance alone is not enough if the substance of the disclosure requirements is not met.”
This case shows how the old SC(R)A continues to be relevant in today’s complex corporate environment and works together with newer regulations like the LODR.
Impact of SC(R)A on Market Infrastructure Development
The SC(R)A has played a crucial role in developing India’s market infrastructure. One of the biggest changes it supported was the move from open outcry trading (where brokers shouted and used hand signals on the trading floor) to electronic trading systems.
This transformation happened in the 1990s when the National Stock Exchange (NSE) was established as India’s first electronic stock exchange. The legal framework for this change came from the SC(R)A, which was amended to recognize and regulate electronic trading. This shift made trading more transparent, efficient, and accessible to people across India, not just in big cities where physical exchanges existed.
The Act also provided the legal foundation for many other improvements in market infrastructure:
- The development of clearing corporations that guarantee trade settlements
- The introduction of rolling settlement systems instead of account period settlements
- The establishment of investor protection funds
- The creation of market-wide circuit breakers to prevent excessive volatility
Integration with SEBI Act and Other Regulations
The SC(R)A doesn’t work alone. It works together with the SEBI Act and many regulations that SEBI has made over the years. For example, the provisions in Section 21 of SC(R)A about listing requirements are now implemented through SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations.
Similarly, while SC(R)A Section 13 gives basic powers to regulate contracts in securities, the detailed rules for derivatives trading come from SEBI regulations. This integration ensures that there is a complete regulatory framework covering all aspects of securities markets.
Former SEBI Chairman U.K. Sinha explained this relationship well: “The SC(R)A provides the foundational legal authority, while SEBI regulations provide the operational details. Together, they create a comprehensive regulatory framework for India’s securities markets.”
Challenges and Future Outlook for the Securities Contracts (Regulation) Act, 1956
Despite its importance, the SC(R)A faces several challenges in today’s rapidly changing financial world:
- The Act was written in a time when technology was much simpler, so it sometimes struggles to address issues related to algorithmic trading, high-frequency trading, and other technology-driven changes.
- The global nature of financial markets means that Indian regulations, including the SC(R)A, need to be in line with international standards, which is an ongoing process.
- New types of assets like digital tokens and cryptocurrencies don’t easily fit into the traditional definitions of “securities” under the SC(R)A.
To address these challenges, experts suggest that while the basic structure of the SC(R)A should be preserved, it needs to be updated regularly to keep up with market developments. The government and SEBI have been doing this through amendments and new regulations.
Conclusion
The Securities Contracts (Regulation) Act, 1956 remains the cornerstone of securities market regulation in India. Even after almost 70 years, its basic principles continue to guide how stock exchanges are recognized and regulated, how securities are listed and traded, and how investor interests are protected.
The Act’s endurance speaks to the wisdom of its drafters, who created a framework flexible enough to adapt to changing times. From the physical trading floors of the 1950s to today’s high-speed electronic markets, the SC(R)A has provided the legal foundation that keeps India’s markets fair, efficient, and trustworthy.
As we look to the future, the The Securities Contracts (Regulation) Act, 1956 will undoubtedly continue to evolve, but its core purpose of ensuring well-regulated, transparent securities markets will remain as important as ever. In the words of former SEBI Chairman C.B. Bhave: “The SC(R)A may be old in years, but its principles are timeless. Well-functioning markets need clear rules, and that’s what this Act provides.”