Ministry of Corporate Affairs & SEBI enter into pact to tighten regulatory oversight

A formal Memorandum of Understanding (MOU) was signed between the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) for data exchange between the two regulatory organizations here today. The MoU was signed by Shri K.V.R. Murty, Joint Secretary, MCA and Smt. Madhabi Puri Buch, Whole Time Member, SEBI in the presence of senior officers from both the organisations.

The MoU comes in the wake of increasing need for surveillance in the context of Corporate Frauds affecting important sectors of the economy. As the private sector plays an increasingly vital role in economic growth, the need for a robust Corporate Governance mechanism becomes the need of the hour.

The MoU will facilitate the sharing of data and information between SEBI and MCA on an automatic and regular basis. It will enable sharing of specific information such as details of suspended companies, delisted companies, shareholding pattern from SEBI and financial statements filed with the Registrar by corporates, returns of allotment of shares, audit reports relating to corporates. The MoU will ensure that both MCA and SEBI have seamless linkage for regulatory purposes. In addition to regular exchange of data, SEBI and MCA will also exchange with each other, on request, any information available in their respective databases, for the purpose of carrying out scrutiny, inspection, investigation and prosecution.

The MoU comes into force from the date it was signed and is an ongoing initiative of MCA and SEBI, who are already collaborating through various existing mechanisms. A Data Exchange Steering Group also has been constituted for the initiative, which will meet periodically to review the data exchange status and take steps to further improve the effectiveness of the data sharing mechanism.

The MoU marks the beginning of a new era of cooperation and synergy between the two regulators.

Ban on circulation of trading tips via social media

The SEBI has issued consultation paper proposing amendments or clarifications to the investment adviser regulations. The objective of the consultation paper is to specify uniform standards across all the intermediaries/persons engaged in providing investment advisory services irrespective of whether such activity is incidental to their primary activity or not and to address the gaps or overlaps in legal or regulatory standards.

The highlights of consultative papers are as under:

• Ban on circulation of trading tips via social media platform: SEBI has proposed to curb the practice of providing trading tips (containing buy or sell recommendation on securities) to the general public through any social media platform such as SMS, Email, Telephonic call, Whatsapp, ChatOn, Wechat, Twitter, Facebook, etc.
• Restrictions on mutual fund distributors: Under the existing norms, a mutual fund distributor can sell mutual fund products and he can also provide basic advice on mutual fund products and in executing the transactions. It has been proposed that only corporate entities registered as investment advisers should offer execution or distribution services. Further, mutual fund distributors should be registered as investment advisors if they want to engage themselves in providing incidental or basic investment advisory services on mutual fund products.
• No exemption for professionals: Under the existing norms Chartered Accountants, Company Secretaries, Portfolio investors, stock brokers, etc., are exempted from registration to act as investment advisors. But now SEBI has proposed that all the persons engaged in financial planning services shall mandatorily be required to register themselves as investment advisors.
• Ban on schemes, games, and competitions: It is observed that various entities are offering schemes, competitions, games, leagues, etc., related to securities market. Such Schemes are generally based on predicting the price movement of securities and they are neither approved nor endorsed by SEBI. In order to protect the interest of the investors in the securities market and to curb such practice of offering schemes, etc., it is proposed to add new provision to restrict such activities.
• Compliance Audit: An investment adviser shall conduct yearly audit in respect of compliance with regulations from a CA or CS. Now it has been proposed that the compliance audit shall be completed within 3 months after the end of financial year and adverse observances or comments shall be brought to the notice of market regulator SEBI.
• Mode of acceptance of fee: Under the existing norms an investment advisor can accept fees in any mode including cash. Now SEBI has proposed that an investment adviser shall accept fees strictly by account by payee crossed cheque/demand draft or by NEFT/ RTGS/IMPS or any other mode allowed by RBI.
• Uniform advertisement code: Under the existing framework, there are no guidelines prescribed for issuing advertisement on mutual funds. Now SEBI has proposed uniform guidelines for issuing advertisement on mutual funds.
• Details of website: Many investment advisers are providing investment advisory services through websites without disclosing their details in a proper manner and thereby creating confusion to the investors with regard to authenticity of their registration. To clear the ambiguity, it has been proposed that all investment advisers shall display following details more prominently -
• Their name as registered with SEBI,
• Registration number, validity of registration, own logo, if any, and
• Complete address with telephone numbers on its portal /website, if any,
• Notice/display boards, advertisements, publications, know your client forms, client agreements and correspondences with the clients

Buy-back price to be disclosed even if promoter is exempt from public announcement under takeover code

A.R. DAHIYA v. Securities Exchange Board of India [2015] 63 taxmann.com 332 (Supreme Court)

SEBI: Where appellant-promotor bought back its shares from State Financial Institution, no public announcement was required as same is being protected under regulation 3 of the SEBI (SAST) Regulations, 1997, however, rate at which shares were bought back had to be disclosed.

Facts:

• In respect of an acquisition which was in excess of 15% of the total shareholding of the Target Company, the appellant neither in the public announcement nor in the letter had disclosed the fact that he and his associates had already bought back the shares of the Haryana State Industrial Development Corporation Limited (‘HSIDC’).
• The appellant had vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulations 10, 11 and 12.
• Appellant had also issued post dated cheques towards the purchase consideration for the buy-back of equity of shares held by HSIDC in the Target company which were later on dishonoured.
• The appellant contended that the amount deposited with HSIDC via post-dated cheque was not in consideration for the buy-back of shares but were deposited by way of security for the buy-back obligation. Further, the appellant contented that cheques presented had been dishonoured on presentation, the transaction did not culminate in an acquisition.

The Supreme Court rules as under:

• Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that for such transaction a public announcement would not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act.
• Thus, the transaction between the Appellant and HSIDC would have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.
• With regard to appellant’s contention on post-dated cheque, the Apex Court said the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case.
• At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. The Appellant had subsequently shirked his responsibility and had tried to slither away from honouring the agreement, which he could not be allowed to gain from, as is established by the legal maxim commodum ex injuri su non habere debet.
• Under Regulation 2 clause (1) Sub-clause (a)- ‘acquisition’ means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control over, a Target Company. This definition clarifies that an acquisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition clarifies that the actual transfer need not be contemporaneous with the intended transfer and can be in future.