FRF NOTES

Financial regulation: laws and rules that govern what financial institutions such as banks, brokers and investment companies can do. These rules are generally promulgated by government regulators or international groups to protect investors, maintain orderly markets and promote financial stability. The range of regulatory activities can include setting minimum standards for capital and conduct, making regular inspections, and investigating and prosecuting misconduct.

ExamplesThe US Securities and Exchange Commission (SEC) was created in 1934 and now enforces American securities laws including the 1933 act that sets standards for securities, the 1940 Investment Companies Act.  Finra is the US industry body that inspects and regulates broker-dealers under the oversight of the SEC. BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) is the German financial regulator that supervises about 4,000 banks, insurance firms and other financial services companies.  Indian financial sector is diversified and expanding rapidly. It comprises commercial banks, insurance companies, non-banking financial companies, cooperatives, pension’s funds, mutual funds and other smaller financial entities. Different regulatory authorities carry out the regulation and supervision of the financial system in India. The Reserve Bank of India (RBI) regulates and supervises the major part of the financial system. The supervisory role of the RBI covers commercial banks, urban cooperative banks (UCBs), some financial institutions, and non-banking finance companies (NBFCs). Some of the financial institutions, in turn, regulate or supervise other institutions in the financial sector, for instance, Regional Rural Banks and the Co-operative banks are supervised by National Bank for Agriculture and Rural Development (NABARD); and housing finance companies by National Housing Bank (NHB).

India has a legacy financial regulatory architecture. At present, financial regulation in India is oriented towards product regulation, i.e. each product is separately regulated. For example, fixed deposits and other banking products are regulated by the Reserve Bank of India (RBI), small savings products by the Government of India (GOI), mutual funds and equity markets by the Securities and Exchange Board of India (SEBI), insurance by the Insurance Regulatory Development Authority of India (IRDA) and the New Pension Scheme (NPS) by the Pension Fund Regulatory and Development Authority (PFRDA). All these regulators have a key mandate to protect the interests of customers - these may be investors, policyholders or pension fund subscribers, depending on the product. Each regulator has their own rules on registration, code of conduct, commissions, and fees to monitor the product providers and distributors.

A) Meaning: 1) Regulation : The word "Regulation" means to regulate, to direct, or to move in a desired direction.

2) Regulatory Framework : Regulatory framework is a system of regulations and the means used to enforce them.

3) Financial Regulation:

Financial regulation is laws and rules that govern what financial institutions such as banks, brokers and investment companies can do.

B) Definitions of Regulation: Baldwin :

“Regulation refers to the promulgation of an authoritative set of rules, accompanied by some mechanism, typically a public agency for monitoring and promoting compliance with these rules "

• Price Stability

• To Ensure Financial Activities Appropriateness

• Protection of the Small Investors

• Misconduct :

• Preventing Market Misconduct

• Safety and Soundness

• Competitiveness

• Fairness of Customer Treatment

• Disclosure and Reporting

• Avoidance of Conflicts and Abuses’

• Allocative Preferences

• Monetary Management

• Goals of Regulation:

Regulatory objectives

Price Stability

To Ensure Financial Activities Appropriateness

Protection of the Small Investors

Preventing Market Misconduct:

Safety and Soundness

Competitiveness

Fairness of Customer Treatment

Disclosure and Reporting

Institutional Regulations: An institutional regulation is also known as structural regulations, are those that stem from a host of regulatory institutions set up in a financial market by the government.

Prudential Regulations: Regulations relating to the internal management of financial institutions and other financial service organizations regarding capital adequacy, liquidity and solvency may be called as ‘prudential Regulations.

Investor Regulations: Regulations that are designed to protect the interests of the small and individual investors are called investor regulations.

Legislative Regulations: These regulations are contained in the legislative measures brought out by the government from time to time keeping in mind the need for all-round development of the financial services industry. Some of the important regulations include the Banking Regulation Act, Securities Contracts (Regulation) Act etc.

Self Regulations: In addition to the regulations ordained by the regulatory, institutions, legislations etc there are self-imposed regulations.

The recent financial crisis and ongoing sovereign debt crisis has highlighted the growing importance of the stability of the financial sector and the need for policy makers to consider the systemic impact that failures in the financial sector can have on the overall well being of the economy.

1) Economic Growth 2) Promoting Savings and Investments 3) Efficient Financial Services

4) Investor Protection 5) Facilitates Growth of a Strong Financial Network 6) Maximises the Influence of Regulatory Policy 7) Integrated Approach to Deployment of Regulatory Institutions

Effects of good Regulations

1.Better Market Outcomes 2.Profound Economic and Social Transformations 3. Regulation has Shifted in Focus 4. It Makes Banks and Financial Firms Independent 5.Ensures a Coordinated Approach 6.Encourages New Funding Models 7. Explicitly Trades-off Systemic Safety and Economic Growth 8.Provides Clarity in the Reform Process 9.Provide Framework for Managing the Authority’s 10.Safety and Soundness

Regulatory Structure

1) Ministry of Finance 2) Reserve Bank of India 3) Securities and Exchange Board of India :

4) Insurance Regulatory and Development Authority (IRDA) 5) Pension Fund Regulatory and Development Authority (PFRDA) : Established 23rd August, 2003.

Meaning of Financial Inclusion:

• Financial inclusion is delivery of banking services at an affordable cost to the vast sections of underprivileged and low-income groups. By financial inclusion we mean the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded. It is important to recognize that in the policy framework for development of the formal financial system in India, the need for financial inclusion and covering more and more of the excluded population by the formal financial system has always been consciously emphasized.

B) Trade-off between Financial Regulation and Financial Inclusion :

1) Financial Regulation is needed for Financial Inclusion

2) Investors and lenders are comfortable with providing more funds only if such entities are regulated

3) Only Sound and Strong Institutions can deliver Financial Inclusion

4) Regulatory Tool are uses to promote Financial Inclusion

Financial Regulation : As Challenge in Achieving Greater Financial Inclusion:

One significant area, where we found that regulation could be a challenge in achieving greater financial inclusion is in regard to Know Your Customer (KYC) norms.

The operation of the financial system exerts a powerful effect on national rates of Economic growth.

1) Efficient Economic Function

2) Promote Long-Term Economic Growth

3) Promoting Capital Formation

4) Financial Regulation take care of Users’ Welfare

5) Custodian of Appropriate Incentive Structure

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.

A) Causes : The Global Financial Crisis of 2008-2012 is widely considered to be second in severity to only the Great Depression of the 1930s .

1) The Subprime Mortgage Crisis U.S.example

2) Reckless Speculation

3) Epidemic As the higher interest rates from the ARMs began to set in, many borrowers started to default.

4) Fiscal Stimulus

5) Systemic Causes

B) Effects of the Recent Global Financial Crisis

1.Initially Indian Financial Sector Remained Impervious to the effects of Sub-Prime Crisis

2) Negative Impact on some of the Financial Sub-Sectors

3) Sharp Collapse in Trade Finance

4) India Experienced a Sell-Off in Domestic Equity Markets

5) Commercial Paper and Certificates of Deposit Markets became Illiquid

6) Sharp Drop in the Flow of Credit to the Indian Corporate Sector

7) Adverse Impact on NBFCs

C) Responses of Indian Regulators:

Indian policymakers adopted a proactive stance while dealing with the aftermath of the crisis.

1) CRR was lowered from 9% to 4.5%.

2) RBI Cut Back Various Policy Rates to Encourage Credit Expansion

3) Liquid Adjustment Facility (LAF) and Refinance Facility was Reintroduced

4) Large Amount of Market Stabilization Scheme (MSS) Issued

5) Central Bank also provided Foreign Exchange Swap Facility

6) Non-Resident Indian Deposits Interest Rates were Progressively Raised

In addition, to attract foreign capital, interest rates on non-resident Indian deposits were progressively raised by 100 to 175 basis points.

7) NBFCS were Permitted to issue Perpetual Debt Instruments

• To alleviate some of the pressure on the NBFCs, they were permitted to issue perpetual debt instruments qualifying for regulatory capital. In addition, NBFCs’ deadline to raise their CRAR from 12% to 15% was postponed by one year.

• There are other government bodies which perform quasi-regulatory functions, including National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB). NABARD supervises regional rural banks as well as state and district cooperative banks. NHB regulates housing finance companies, and SIDBI regulates the state finance corporations.

A) National Bank for Agriculture and Rural Development (NABARD):

Objectives of NABARD:

NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of agriculture, small scale industries, cottage and village

1) To Provide all Types of Production and Investment Credit

2) Development Objective

3) Refinancing Institution for Institutional Credit

4) To provide Direct Lending

5) Maintain a Close Link with Reserve Bank

The Salient Features of NABARD:

i) Capital Fund: Rs. 100 crores

ii) Loan Operations not exceeding 18 months for agricultural operations

iii) Co-ordination

iv) Research

v) Monitoring and Evaluation

vi) Inspection

Main Functions of NABARD:

1) Integrated Rural Development Programme

2) Development of Women and Children in Rural Areas

3) Training-cum-production Centre for Women

4) Self-Help Group

5) Refinance

6) Scheme of Monitoring Evaluation and Research Activities

7) Vikas Volunteer Vahini Programme

8) External Aid Project

9) Inspection and Supervision of Co-operative Banks and Regional Rural Banks:

10) Human Resource Development (HRD):

Role of NABARD:

NABARD is the apex institution in the country which looks after the development of the cottage industry, small industry and village industry and other rural industries.

i) Serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas.

ii) Takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

iii)Co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation.

Iv) Undertakes monitoring and evaluation of projects refinanced by it.

V) NABARD refinances the financial institutions which finances the rural sector.

vi) NABARD helps to develop the institutions which help the rural economy.

vii) NABARD also keeps a check on its client institutes.

viii) It regulates the institution which provides financial help to the rural economy.

ix) It provides training facilities to the institutions working the field of rural upliftment.

Credit Facilities Offered by NABARD:

Short-term/ Medium term/ Long-term refinance

Investment Credit (Medium and Long Term)

Rural Infrastructure Development Fund (RIDF

Refinance for Rural Housing Facilities Scheme

Micro Credit Innovation Scheme

The Department for Cooperative Revival and Reforms (DCRR)

Loans to State Governments

Kisan Credit Cards

A Research and Development Fund

Loans to State Governments

Swarojgar Credit Card Scheme: providing adequate and timely credit ie. Working capital or block capital or both to small artisans, handloom weavers, service sector, fishermen etc

Farmers' Club Programme

NABARD Consultancy Services (Nabcons)

Crafts Mart

Rural Innovation Fund (RIF)

Water Harvesting Scheme

Small Industries Development Bank of India (SIDBI):

Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of Indian Parliament, presently acts as the Principle Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and also co-ordinates the functions of the institutions engaged in similar activities. As on March 31, 2012, the Authorised Capital of SIDBI is ` 1000 crore and Paid Up Capital is ` 450 crore. Presently, the Bank provides refinance support through a network of eligible member lending institutions for onward lending to MSMEs and direct assistance is channelised through the Bank’s branch

offices. SIDBI also extends financial assistance in the form of loans, grants, equity and quasi-equity to Non Government Organisations / Micro Finance Institutions (MFIs) for on-lending to micro enterprises and economically weaker sections of the society, enabling them to take up income generating activities on a sustainable basis.

Objectives of Small Industries Development Bank of India:

i) Technological Up-gradation

ii)Market Expansion

iii) Employment Oriented Industries

iv) Co-ordination of Activities

2) Functions of Small Industries Development Bank of India (SIDBI):

i) Responsible Lending

ii) SIDBI has developed a Code of Conduct Assessment Tool:

ii) Refinance

iv) Risk Capital:

v) Discounting Bills :

vi) Assistance to NSIC :

vii) Co-promotes State Level Venture Funds :

viii) Setting Up of Incubation Centers :

ix) Financing Projects Relating to Transport Health :

Financial Assistance Scheme of SIDBI:

1) Loan assistance to the institutions providing market or marketing avenues to the

small entrepreneurs.

2) Loan to ancillary units and also for modernization and upgrading technology.

3) Loan to institutions providing primary services and infrastructure and developing the

growth centre's.

4) Loan assistance to NSIC.

5) Refinance for loan given by banks and concerned institutions for new projects, expansion and modernization of existing units, quality improvement and rehabilitation of the units.

4) Promotional Role of SIDBI :

SIDBI plays a key role in implementation of government policies and initiatives for the sector. It facilitates creation of an environment for self-sustaining and growing SSI units. Some of the institutions SIDBI that promoted include.

1) SIDBI retained its position in the top 30 Development Banks of the World in the latest ranking of The Banker, London (25th Rank).

2) The cumulative sanctions and disbursements of SIDBI since its inception stood at Rs. 75,255 Crore and Rs. 52,312 crore respectively during financial year 2002.

3) The aggregate sanctions of SIDBI during financial year 2002 amounted to Rs. 9.025 crore as against Rs. 10,821 crore in financial year 2001.

4) As regards financial performance, the profit before tax in financial year 2002 stood at Rs. 405 crore as against Rs. 477 crore in the previous year.

5) Disbursements were also lower at Rs. 5,919 crore as against Rs. 6,441 crore in previous year.

6) SIDBI has been permitted to raise finances upto Rs. 2,730 crore the year 2013 onward by the Reserve Bank of India.

National Housing Bank (NHB):

An Act of Parliament set up National Housing Bank (NHB), a wholly owned subsidiary of Reserve Bank of India (RBI), in 1987. NHB is an apex financial institution for housing. It commenced its operations in 9th July 1988. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith. NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators.

Functions of National Housing Bank:

Regulatory and Supervision

NHB regulates and supervises the activities of HFCs in accordance with the provisions of the NHB Act.

ii) Financing:

iii) Promotion and Development

Scheme of National Housing Bank

i) Energy Efficient Housing Scheme (EEHS)

ii) Rural Housing Fund (RHF):

The National Urban Housing and Habitat Policy 2007 released by the Government of India in December 2007 commend a multi pronged strategy for achieving the national goal of ‘Affordable Housing to All’.

iii) Refinance of Construction Finance for Affordable Housing:

Issues with the Regulatory Architecture

1) Emergence of Regulatory Arbitrage

2) Difficult to Create Financial Intermediaries

3) Conflict between Regulators

4) Problems of Coordination

5) Issue in Managing Systemic Risk

CHAPTER 2

Financial Regulatory Authorities in India

India’s financial sector is diversified and expanding rapidly. It comprises commercial banks, insurance companies, non-banking financial companies, cooperatives, pension’s funds, mutual funds and other smaller financial entities.

Different regulatory authorities carry out the regulation and supervision of the financial system in India.

The Reserve Bank of India (RBI) regulates and supervises the major part of the financial system.

The supervisory role of the RBI covers commercial banks, urban cooperative banks (UCBs), some financial institutions and non-banking finance companies (NBFCs).

Securities and Exchange Board of India (SEBI), Insurance Regulatory regulate the capital market, mutual funds, and other capital market intermediaries and Development Authority (IRDA) regulates the insurance sector; and the Pension Funds Regulatory and Development Authority (PFRDA) regulates the pension funds.

Functions of RBI:

As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks.

a) Traditional Functions of RBI: Issue of Currency Notes

Banker to other Banks

Banker to the Government

Exchange Rate Management

Credit Control Function

Supervisory Function

OTHER FUNCTIONS

Development of the Financial System

Development of Agriculture

Provision of Industrial Finance

Provisions of Training

Collection of Data

Publication of the Reports

Promotion of Banking Habits

Promotion of Export through Refinance

SUPERVISORY FUNCTIONS

Granting License to Banks

Implementation of the Deposit Insurance Scheme

Bank Inspection

Control over NBFIs

B) Credit Control Measures of Reserve Bank of India:

a) Meaning:

b) Methods of Credit Control:

1) Quantitative Methods :

Bank Rate Policy

Open Market Operations

Changes in Cash Reserve Ratios

i) Bank Rate Policy :NEEDS for successful implementation

Existence of Organized and Developed Monetary market

Existence of a Developed Bill Market

Re-encashment Requirement of Banks

Business Expectations

Interest Rates - Inflexibility of Bank Deposits

OMO LIMITATIONS

Absence of a Developed Market for Bonds

Credit Creation does not Change Proportionately to Cash Reserve Funds

Limited Transactions

Difficulties in Implementation

Stability of Government Bond Market

Assumption of Steady Circulation

Limitations of CRR

Large Scale Additional Reserve Funds

Determination of Banks’ Credit Policy

Demand for Credit Money

Limitations on Frequent Use

Discriminatory Effects

Uncertainty in the Banking Sector

More pressure on banks

Methods of credit control

Rationing of Credit

Moral Persuasion and Publicity

Credit Authorization Scheme

Direct Action

Margin Requirements

Consumer Credit Regulation

Control by Direction

Regulatory Measures taken by Reserve Bank of India to Facilitate Financial Inclusion:

Measures to Promote Financial Inclusion :

Reach:

i) Branch Expansion in Rural Areas:

ii) Agent Banking - Business Correspondent/ Business Facilitator Model:

iii) Combination of Branch and BC Structure to deliver Financial Inclusion:

2) Access:

Relaxed KYC Norms

Roadmap for Banking Services in Unbanked Villages

Products

Bouquet of Financial Services:

In order to ensure that all the financial needs of the customers are met, banks offer a minimum of four basic products, viz.

A savings cum overdraft account

A pure savings account, ideally a recurring or variable recurring deposit

A remittance product to facilitate EBT and other remittances, and

Entrepreneurial credit products like a General Purpose Credit Card (GCC) or a Kisan Credit Card (KCC)

4) Transactions

Direct Benefit Transfer

5) Recent Measures

i) Licensing of New Banks

ii) Basic Saving Bank Deposit (BSBD)

iii) Simplified Branch Authorization Policy

iv) Discussion Paper on Banking Structure in India – The Way Forward

B) Importance of Non Banking Financial Companies:

1) Greater Reach NBFC are Scattered all over Country

2)Flexibility in Tapping Resources

3) Retail Services to Small and Medium Business

4)Important Component of Financial Market

C) Regulatory Framework for NBFCs:

1) Registration

All NBFCs are required the certification of registration from the RBI for commencing their business. A penalty can be imposed if the NBFCs carry on their business without the certification of registration.

2)Net Owned Funds :

The NBFCs should have their net owned funds of minimum amount of Rs. 25 lacs to carry on the business. This limit can be raised up to Rs. 2 crore by the RBI.

3)Liquid Assets :

NBFCs have to maintain at least 15 per cent of the value of public deposits as investment in approved securities. This percentage can be raised to 25 per cent by the RBI. The penalty can be imposed if this percentage is not maintained.

4)Reserved Funds :

All NBFCs have to transfer 10 per cent of their profit to their reserve fund every year before declaration of any dividend.

5) Prudential Norms and Deployment of Funds :

The prudential norms in regard to classification of assets into standard, substandard, doubtful and loss assets are applicable to all NBFCs.

6) Power of Regulation/Prohibition :

The RBI can by general/special order regulate or prohibit the issue by any NBI the issue of any prospectus or advertisement soliciting deposits of money from the public.

7)Power to Collect Information from any NBI's :

The RBI can issue direction to NBIs to furnish information relating to/connected with deposits.

8)Power to Call for Information from FIS and Issue Directions:

To regulate the credit system, the RBI can ask for information from FIs relating to their business as well as directions for the conduct of their business.

9)Penalties :

If any prospectus/advertisement inviting deposit from the public, whoever willfully makes a false statement in any material particular knowing it to be false or willfully omits to make a material statement.

Functions of SEBI

a) Protective Functions:

i) It Checks Price Rigging

ii) It Prohibits Insider trading

iii) SEBI prohibits fraudulent and Unfair Trade Practices

iv) Educate Investors

v) Promotes Fair Practices

b) Developmental Functions:

Under developmental categories following functions are performed by SEBI:

SEBI promotes training of intermediaries of the securities market.

SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach.

c) Regulatory Functions:

• SEBI registers and regulates the working of mutual funds etc.

• SEBI regulates takeover of the companies.

• SEBI conducts inquiries and audit of stock exchanges.

• SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.

• These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive.

• SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.

SEBI Guidelines for Issue of Securities:

a) An unlisted issuer making a public issue i.e (making an IPO) is required to satisfy the following provisions:

b) Entry Norm I (commonly known as “Profitability Route”):

i) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years.

ii) Distributable profits in atleast three of the immediately preceding five years.

iii) Net worth of at least Rs. 1 crore in each of the preceding three full years.

iv) If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.

2) Entry Norm II (Commonly known as “QIB Route”):

i) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).

ii) The minimum post issue face value capital shall be Rs. 10 crores or there shall be a ‐compulsory market making for at least 2 years .‐

3) Entry Norm III (“commonly known as “Appraisal Route”):

i) The “project” is appraised and participated to the extent of 15% by Financial Institutions / Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).

ii) The minimum post issue face value capital shall be Rs. 10 crores or there shall be a ‐compulsory market making for at least 2 years. ‐

b) A listed issuer making a public issue (FPO) is required to satisfy the following requirements :

i) If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.

ii) The issue size does not exceed 5 times the pre issue net worth as per the audited balance ‐sheet of the last financial year.

c) Certain category of entities which are exempted from the a foresaid entry norms, are as under :

i) Private Sector Banks

ii) Public sector banks

iii) An infrastructure company whose project has been appraised by a Public Financial Institution or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions.

d) Inter Alia Comply :‐

An issuer making a public issue is required to inter alia comply with the following ‐provisions mentioned in the guidelines: Minimum Promoter’s contribution and lock in: In a ‐public issue by an unlisted issuer, the promoters shall contribute not less than 20% of the post issue capital which should be locked in for a period of 3 years.

. SEBI Guidelines for Book Building:

“Book Building” means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document; An issuer company proposing to issue capital through book building shall comply with the following:

1) The option of Book-Building is available to all body corporate which are otherwise eligible to make an issue of capital to the public.

2) The issuer company has an option of either reserving the securities for firm allotment or issuing the securities through book building process.

3) The issue of securities through book-building process will be separately identified as "placement portion category" in the prospectus.

4) The Companies are bound to adhere to the SEBI guidelines for book building offers in the following manner :

a) 75% Book Building Process:

Under this process 25% of the issue is to be sold at a fixed price and the balance of 75% through the Book Building process.

b) Offer to Public through Book Building :

The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner.

I. 100 percent of the net offer to the public through book building process.

Or

II. 75 percent of the net offer to the public through Book Building process and 25 percent of the net offer to the public at a price determined through book building process.

5) In case the "Book Building Option" is availed of underwriting may be undertaken to the extent of the net offer to the public.

6) The draft prospectus containing all the information except the information regarding the price at which the securities are offered shall be filed with SEBI as per the

existing guidelines.

7) One of the lead merchant bankers to the issue shall be nominated by the issuing company as a Book Runner whose name shall be mentioned in the draft prospectus submitted to SEBI.

8) The copy of the draft prospectus filed with the SEBI may be circulated by the Book Runner to the institutional buyers who are eligible for firm allotment as per the existing SEBI's Guidelines and to the eligible underwriters inviting offers for subscribing to the securities provided that the draft prospectus to be circulated shall indicate the price band within the securities offered for public subscription.

9) The Book Runner on receipt of offers shall maintain a record of the names and number of securities ordered and the price at which the institutional buyer or underwriter is willing to subscribe to securities under the placement portion.

10) The underwriters shall maintain a record of the orders received by them for subscribing the issue out of placement portion.

11) The underwriters shall aggregate the offers so received for subscribing to the issue and intimate to the "Book Runner" the aggregate amount of the orders received by him. The institutional investors shall also forward their orders to the Book Runner.

12) On receipt of above information the Book Runner and issuer Company shall determine the price at which the securities will be offered to the public. Provided that the issue price for the placement portion and offer to the public (IPO) shall be the same.

13) On determination of the price, the underwriter shall enter into an underwriting agreement with the issuer indicating the number of securities as well as the price at which the underwriter would subscribe to the securities.

14) The acknowledgement card will be issued by SEBI without mentioning the issue price or the price band. On receipt of the acknowledgement and determination of the issue price within two days, thereafter the prospectus will be filed with the Registrar of Companies.

15) The issuer company shall open two different accounts for collection of application money - one for the private placement portion and other for the public subscription.

16) One day prior to the opening of the issue to the public, the Book Runner shall collect from the institutional buyers and the underwriters the application forms along with the application money to the extent of the securities proposed to be allotted to them and subscribed by them.

17) Allotment for the private placement portion shall be made on the second day from the closure of the issue.

18) In case the Book Runner has exercised the option requiring the underwriter to the net offer to the public to pay in advance all money required to be paid by the underwriter in respect of their commitment by the 11th day of the closure of the issue of shares allotted as per the private placement category, shall be eligible to be listed. The Allotment of securities under the public category shall be made as per the existing statutory requirements.

19) The Book Runner and other intermediaries involved in the "Book Building Process" shall maintain records of the Book Building process. SEBI has the right to inspect such records.

20) In case of under subscription in the net offer to public spilled over to the extent of under- subscription shall be permitted from the placement portion to the net offer to the public portion subject to the condition that preference shall be given to the individual investors.

21) It shall be permissible for the issuer company to pay interest on the application money till the date of allotment or the deemed date of allotment provided that payment of interest is made uniformly to all the applicants.

Recent Changes in Book- Building Mechanism:

The Securities and Exchange Board of India on March 29, 2005 announced sweeping changes in the IPO norms. They are as follows:

1) Increased allocation for retail investors in book-built issue from 25 per cent to 35 percent and has also changed the definition of the retail category.

2) The market regulator has now permitted retail investors to apply for Rs. 1 lakh worth of shares in a book-built issue against Rs. 50,000 earlier. For this purpose, SEBI has redefined the

retail individual investor as one who applies or bids for securities of or for a value not exceeding Rs. 1 lakh.

3) It has reduced the non institutional category, popularly known as high net worth individuals (HNI), allocation from 25 per cent to 15 per cent.

4) Institutional investors include foreign financial institutions (FII) banks, mutual funds and Indian financial institutions like LIC or IDBI.

5) The changes have been made in the SEBI (DIP) Guidelines, 2000 on the basis of recommendations made by SEBI’s primary market advisory committee.

6) The new norms will be applicable to all public issues whose draft offers documents are filed with SEBI on or after April 4, 2005.

7) SEBI has decided to reduce the bidding period from the current 5 to 10 days(including holidays) to 3 to 7 working days.

8) It has also provided more flexibility for listed companies to disclose price band/floor price for public issues one day before bid opening.

9) SEBI has decided to give an option to listed issuers to either disclose price band in RHP/application form/abridged prospectus (current practice) or to disclose the price band/ floor price at least one day before bid opening.

10) It is proposed to amend the guidelines to improve contents and ensure uniformity in data display on the websites of the stock exchanges. The date will be made available for a further period of three days after the closure of the bids/issue.

D. SEBI Guidelines for OTCEI Issues :

1) Eligibility Norms:

a) Any company making an initial public offer of equity share or any other security convertible at a later date into equity shares and proposing to list them on the OTCEI, is exempted from the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines subject to its fulfilling the following besides the listing criteria laid down by the OTCEI:

i) it is sponsored by a member of the OTCEI and;

ii) Has appointed at least two market makers (one compulsory and one additional market maker).

b) Any offer for sale of equity share or any other security convertible at a later date into equity shares resulting out of a Bought out Deal (BOD) registered with the OTCEI is exempted from the eligibility norms specified in Clause 2.2 of Chapter II of these guidelines subject to the fulfillment of the listing criteria laid down by the OTCEI.

2) Pricing Norms:

Any offer for sale of equity share or any other security convertible at a later date into equity shares resulting out of a Bought out Deal (BOD) registered with OTCEI is exempted from

the pricing norms specified in Clause 3.2 of Chapter III of these guidelines subject to the following conditions:

a) The promoters after such issue shall retain at least 20% of the total issued capital with the lock-in of three years from the date of the allotment of securities in the proposed issue; and

b) At least two market makers (One Compulsory and one additional market maker) are appointed in accordance with the Market Making guidelines stipulated by the OTCEI.

3) Projections:

In case of securities proposed to be listed on OTCEI, for the purpose of Clause (6.12.1) of Chapter VI of these guidelines, projections based on the appraisal done by the sponsor who undertakes to do market making activity in the securities offered in the proposed issue can be included in the offer document subject to compliance with other conditions contained in the said clause.

E. Guidelines on Initial Public Offers through the Stock Exchange On-Line System (E-IPO):

1) Agreement with the Stock exchange.

2) Appointment of Brokers

3) Appointment of Registrar to the Issue

4) Listing

5) Responsibility of the Lead Manager

6) Mode of Operation:

a) The company shall, after filing the offer document with ROC and before opening of the issue, make an issue advertisement in one English and one Hindi daily with nationwide circulation, and one regional daily with wide circulation at the place where the registered office of the issuer company is situated.

b) The advertisement shall contain the salient features of the offer document as specified in Form 2A of the Companies (Central Government’s) General Rules and Forms, 1956.

c) During the period the issue is open to the public for subscription,

d) In case of issue of capital of Rs. 10 crores or above the Registrar to the Issue shall open centres for collection of direct applications at the four metropolitan centres situated at Delhi, Chennai, Calcutta and Mumbai.

e) The broker shall collect the client registration form duly filled up and signed from the applicants before placing the order in the system as per "Know your client rule" as specified by SEBI and as may be modified from time to time.

Insurance Regulatory and Development Authority(IRDA):

The Insurance Regulatory and Development Authority was established in the year 1999 by the Indian Government, for two significant reasons-to safeguard the interest of the policy holders and for the up gradation of the entire insurance sector right from the approach adopted by the existing insurance companies towards their shareholders to the eradication of the shortcomings of the industry. The organization was set up under the guidelines of the Insurance Regulatory and Development Authority Act, 1999.

Salient Features of the IRDA Act:

The following are salient features of the IRDA Act (1999):

1) Open to the Private Sector

2) Registered under the Companies Act, 1956

3) Indian Promoters can hold more than 26 % of Total Equity:

4)Higher Ceiling On Share Holding

5) Foreign Promoters unable to hold any Equity Beyond Ceiling

6) Act gives Statutory Status

7.Power to IRDA:

8) Eligibility to Appoint of COI :

9)Range of Paid-up equity :

10)Fixed Solvency Margin Solvency margin (excess of assets over liabilities) is fixed at not less than Rs.50 crore for life as well as general insurance; for reinsurance solvencymargin is stipulated at not less than Rs.100 crore in each case.

CHAPTER -3

Companies Act 1956

INTRODUCTION

The Act relate to companies conduct now in force in India is the Indian Companies Act of 1956 which came into force on 1st April, 1956.

• It extends to the whole of India and contains 658 Sections and 13 Schedules.

• The Companies Act, 1956, is based on the recommendation of the Bhabha Committee which submitted its report in 1952, recommending wholesale amendments in the Indian Companies Act, 1913.

• The Act aimed at discouraging the concentration of economic wealth in a few hands and securing its more equitable distribution.

• There are numerous provisions in the Companies Act, 1956 which affect, directly or indirectly, the financial statements.

• These provisions prescribe restrictions on some accounting numbers in the financial statements.

• For example, a company cannot pay to its managerial personnel any amount of remuneration. The Company Act, 1956, restricts such payments.

A) Objectives of Companies Act, 1956:

1) Management of the Companies 2) Control over Companies 3) Effective Control 4) Fair and True Disclosure 5)Proper Standard of Accounting and Auditing 6) Recognition of the Rights of Shareholders to receive reasonable information and facilities for exercising an intelligent judgment with reference to the management

7) Ceiling on the Share of Profits 8) Check on Transactions 9) Protection of Investor Interests

10) Enforcement of the Performance .

A) Private Company:

Private company means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,

1) restricts the rights to transfer its shares, if any;

2) limits the number of its members to fifty not including-

a) persons who are in the employment of the company,

b) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

3) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

4) prohibits any invitation or acceptance of deposits from persons other than its member, directors or their relatives;

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of these definitions, be treated as a single member;

B) Public Company :

Public company means a company which-

1) is not a private company;

2) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;

3) is a private company which is a subsidiary of a company which is not a private company.

A public company is one which is not a private company; in a public company the number of its members is unlimited. Any seven or more persons can form a public company. Generally the

shares of a public company are listed on the stock exchange and therefore the marketability of the shares is more. A public company should have a minimum paid-up capital of Rs. 5 lakh.

There are certain provisions under the Companies Act 1956 which are applicable only to a public company and not to a private company and by which a private company is benefited. However, if a private company defaults in complying with the aforesaid four restrictions then it shall cease to enjoy these exemptions and all these provisions shall apply as if it is a public company.

C) Other Considerations Regarding Public and Private Companies:

1) Every private company, existing on the commencement of the Companies (Amendment) Act, 2000, with a paid-up capital of less than one lakh rupees, shall, within a period of two years from such commencement, enhance its paid-capital to one lakh rupees.

2) Every private company, existing on the commencement of the Companies (Amendment) Act, 2000, with a paid-up capital of less than five lakh rupees, shall, within a period of two years from such commencement, enhance its paid-capital to five lakh rupees.

3) Where a private company or a public company fails to enhance its paid-up capital in the manner specified in sub-section (3) or sub-section (4), such company shall be deemed to be a defunct company within the meaning of section 560 and its name shall be struck off from the register by the Registrar.

4) A company registered under section 25 before or after the commencement of Companies (Amendment) Act, 2000 shall not be required to have minimum paid-up capital specified in this section.

A) Definition of Prospectus :

Prospectus has been defined by Section 2 (36) of the Companies Act. It says that “a prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate.”

The above definition clears that a prospectus is an invitation issued to the public to take shares or debentures of the company, or to deposit money with the company. In order to know the proper meaning of prospectus, it is necessary to go back to the incorporation of the company. Once the company is incorporated, it requires capital to run its business. The capital so required can either be collected from amongst friends and relatives, or subscribers in the case of a private limited company. In the case of a public limited company, at large, has to be invited to contribute to it.

B) Contents of Prospectus :

a) Part First of Schedule II:

Part First of Schedule II of the Act has provided that prospectus must include the following information:

1) General Information:

i) Name and address of registered office of the company

ii) Name /(s) of stock exchange /(s) where application for listing is made

iii) Declaration about refund of the issue if minimum subscription of 90% is not received within 90 days from closure of the issue

iv) Declaration about the issue of - allotment letters, refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate under Section 73.

v) Date of opening and earlier closing of the issue.

vi) Name and address of auditors & lead managers.

vii) Whether rating from CRISIL or any rating agency has been obtained for the proposed issue.,

viii)Name and addresses, of the underwriters and the amount underwritten by them.Contents of Prospectus :a) Part First of Schedule II: 5) Company Management and Project : History and main objects and present business of the company.Promoters and their background.Location of the projectCollaborations, if anyNature of product/(s), export possibilities,Future prospectusStock market data. For shares, debentures of the company including high and low price in each of the last three years and monthly high and low during the last six months, if applicable.Particulars about the companies under the same managementOutstanding litigations relating to financial matters or criminal proceedings against the company or directors, under schedule XIII.Management’s view points about risk factors.b) Part Second of Schedule II :This has provided that the prospectus must include the detailed information which is subdivided into following three parts :1) General Information : It shall include information on matters like :Consent of directors, auditors, solicitors, managers to the issue, Registrar to the issue, Bankers to the issue and experts.Change, if any, in directors and auditors during the last 3 years and reasons thereof.Procedure and time schedule for allotment and issue of certificates.Names and addresses of Company Secretary, Legal Advisor, Lead Managers, Co-managers, Auditors, Bankers to the issue and Brokers to the issue.2) Financial Information : It shall include the following :reports of the auditors of the company with respect to its profits and losses preceding 5 financial years and liabilities and the dividends paid during the five financial years immediately preceding the issue of prospectus.

report by the accountants on the profits or losses for the preceding 5 financial years and on the assets and liabilities on a date which must not be more than 120 days before the date of the issue of the prospectus.3) Statutory and other information : It includes -Minimum subscription.Expenses of the issue.Underwriting commission and brokage Previous public or rights issue giving particulars about date of allotment, refunds, premium / discount, etc.Issue of shares otherwise than for cash.Particulars about purchase of property, if anyRevaluation of assets, if anyMaterial contracts and time and place where such documents may be inspected.c) Part III of the Schedule : It gives explanations of certain terms and expressions used under Part - I and Part - II of the Schedule.) Statutory Requirements Relating to a Prospectus :Issue after Incorporation:

A prospectus is generally issued after incorporation of the company. However, Section 55 permits the issue of a prospectus in relation to an intended company.2) Dating of Prospectus:

According to Section 55 of the Companies Act, 1956, a prospectus issued by or on behalf of a company or in relation to an intended company shall be dated. The date which appears on the prospectus shall be taken as the date of publication of the prospectus unless the contrary is proved.3) Registration of Prospectus:

Section 60 of the Act lays down that a copy of the prospectus must be filed with the Registrar of Companies on or before the date of publication of the prospectus. Such copy must be signed by every person who is named in the prospectus as a director or a proposed director of the company or by his agent authorised in writing. 4) Issuance of prospectus within 90 days :

If a prospectus is issued subsequently after the expiry of 90 days, it shall be deemed to be a prospectus a copy of which has not been delivered to the Registrar. It means that the prospectus must be issued by newspaper advertisement or otherwise within 90 days of its registration. A) Meaning of Memorandum:The Memorandum of Association of a Company is a document which defines the construction and scope of the powers with which a company is established. The first and the important step in the formation of a company is to prepare the Memorandum of Association, the memorandum may be defined as company’s charter which contains the fundamental conditions upon which alone the company can be incorporated. It defines its constitution and the scope of the powers with which it has been established under this Act.B) Definitions : According to Section 2(28) of the Companies Act : “Memorandum means the Memorandum of Association of a company as originally framed or so altered from time to time in pursuance of any previous Companies Law, or of the Companies Act, 1956”Lord CairnsLord Cairns has said in the case of Ashbury Rly Carriage & Iron Co. Ltd. vs Riche as follows :“The Memorandum of Association of a company is its charter and defines the limitations of the power of a company established under the Act. It contains in it both that which is affirmative and that which is

negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation and it states negatively, if it is necessary so to state that noting shall be done beyond that ambit.”C) Clauses of Memorandum of Association :The Name Clause :

The ‘Name Clause’ contains the name of the company with ‘Limited’ as the last word in the name in case of the a public limited company and with ‘Private Limited’ as the last word of the name in the case of a Private Limited Company. The company is free to select any name but it is laid down under Section 20 (1) of the Act that no company can be registered with a name which in the opinion of the Central Government is undesirable. 2) The Registered Office Clause :

Under this clause the memorandum must specify the state in which the registered office of the company shall have a registered office from the day on which it begins to carry on business or within thirty days of incorporation, which is earlier. The exact place where the registered office is to be situated must be decided and the notice of the situation must be given to the Registrar who is to record the same.3) The objects clause :

It is the most important clause of the memorandum because it sets out the objects or vires of the company. A company is not legally entitled to do any business other than specified in its objects clause. 4) The Liability Clause :The fourth clause of the Memorandum must contain the nature of the liability that the members incur. The effect of this clause is that, in a company limited by shares, no member can be called upon to pay more than the amount that remains unpaid; and if his shares are already fully paid up, his liability is nil. 5) The Capital Clause :The last clause states the amount of the nominal capital of the company, and the number and value of the shares into which it is divided. This clause is for those companies, who have a share capital. The amount of the capital, the numbers of shares into which it is divided and the amount of each share should be clearly mentioned in the clause.6) Association clause :At the end of the Memorandum of every company there is a declaration of associations by subscribers. The subscribers declare, “we the several persons whose names, addresses and occupations are subscribed, are desirous of being formed into a company in pursuance of this Memorandum of Association, and respective be agree to take the number of shares in the capital of the company set opposite our respective names. D) Alteration of Memorandum of Association :Change of Name :

According to Section 21 of the Act, a company may change its name by passing a special resolution and with the approval of the Central Government signified in writing. But if a company’s name is wrongly registered by a name which, in the opinion of the Central Government is identical with the name of a company in existence, the name of such company may be changed by passing an ordinary resolution and with the previous approval of the Central Government in writing.2) Change of Registered Office :A company may, by a special resolution alter the provisions of its memorandum so as to change the place of its registered office from one place to another place as far as may be required to enable it -To carry on its business more economically or more efficiently;To attain its main purpose by new or improved means;To enlarge or change the local area of its operations.

To carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company?To restrict or abandon any of the objects specified in the Memorandum;3) Change of Objects Clause :Reading Section 13 and 16 of the Act together, it is clear that the objects clauses in the memorandum are treated as conditions of the memorandum and, therefore, can be altered only according to express provisions of statute which again are contained in Section 17 thereof. Section 17 allows alteration of objects within certain defined limits. 4) Change of Capital Clause :Alteration of share capital in the case of a limited Company:

A limited company having a share capital may, if so authorised by its article, alter the conditions of its memorandum so as to :

i) Increase the share capital by issuing new shares;ii) Consolidate and divide its share capital into shares of a larger amount than its existing

shares,iii) Convert its fully paid-up shares into stock and reconvert that stock into fully paid-up

shares of any denomination;b) Reorganisation of share capital :c) Reduction of share capital : 5) Alteration of Liability Clause :Ordinarily, the liability clause cannot be altered so as to make the liability of members unlimited. According to Section 38 of the Act, the liability of members cannot be increased without their consent in writing. A member cannot, by altering the memorandum or Articles, be made to take more shares or to pay more for the shares already taken unless he agrees to do so in writing either before or after the alteration. According to Section 323 of the Act, a limited company may, if so authorised by its articles by special resolution, alter its memorandum so as to render unlimited liability of the directors or of any director or of its managing agent, secretaries or manager. This alteration shall be valid only if the officer concerned has given his consent in writing.A) Meaning and Purpose of Articles:Articles of Association of the company contain rules, regulation and bye-laws for the general management of the company .It is compulsory to get the articles of associations registered along with the memorandum of association in case of private company. The articles of association constitute a contract between the company and its members and the members interest. The Articles are subordinate to the Memorandum of Association. Therefore, the Articles should not contain any regulation, which is contrary to provisions of the Memorandum or the Companies Act. The Articles are binding on the members in relation to the company as well as on the company in its relation to members. However, this does not constitute a contract between the company and a third person. The articles of private company having share capital must specify the following conditions:The right to transfer shares shall be restricted according to ArticlesThe maximum number of members shall be 50;The invitation to public to subscribe shares and debentures shall be prohibited.

In the case of a private company not having share capital the articles should contains provisions relating to matters specified in (b) and (c) above only.B) Points to be Consider while Drafting AOA :Following points should be kept in view while drafting the Articles of Association of a Private Company:A private company, which is not, a subsidiary of a public company can provide for disqualification of directors on any grounds in addition to those, specified Section 274(1).A private company cannot issue share warrants to the bearer.

A private company which is not a subsidiary of a public company may (notwithstanding the provision of Section 171) by its Articles provide:Its own regulation as regards the length of period of notice for calling meetingsWhat the notice should contain and to whom it should be given;Its own rules as to quorum chairman, proxies, method of voting on demand for poll, right to poll etc.4) For computer printed Articles of Association, refer to para 'format and printing' under heading Memorandum of Association.B) Points to be Consider while Drafting AOA :Following points should be kept in view while drafting the Articles of Association of a Private Company:A private company, which is not, a subsidiary of a public company can provide for disqualification of directors on any grounds in addition to those, specified Section 274(1).A private company cannot issue share warrants to the bearer.A private company which is not a subsidiary of a public company may (notwithstanding the provision of Section 171) by its Articles provide:Its own regulation as regards the length of period of notice for calling meetingsWhat the notice should contain and to whom it should be given;Its own rules as to quorum chairman, proxies, method of voting on demand for poll, right to poll etc.4) For computer printed Articles of Association, refer to para 'format and printing' under heading Memorandum of Association.C) Contents of Articles of Association:Articles of Association generally contains the provisions relating to :D) Alteration of Articles of Association:Section 31 of the Companies Act gives wide powers to the companies to alter their articles from time to time. A company can alter its Articles by passing a special resolution. Section 31 (1) states that an alteration which has the effect of converting a public company into private company shall have effect only if such a resolution has been approved by the Central Government. Limitations of Alteration: This fundamental right of a company is, however, subject to the following conditions or limitations :The alteration must not be in contravention, or inconsistent with the provisions of the Companies Act.The alteration must not be in contravention of Memorandum or in excess of the powers given by it or in conflict with the provisions thereof. It means that no alteration can be made in respect of any matter which has to be regulated by the Memorandum.The alteration must not be inconsistent with an order of the court. If any such alteration is so inconsistent with an order of the court, then under Section 404 of the Act, it cannot be adopted except with the leave of the court.A) Meaning and Nature of Share Capital:The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘Shares‘. According to section 2(46) of the Companies Act, 1956, a share is a share in the Share Capital of a company, and includes stock except where a distinction between stock share is expressed or implied. A ‘Share’ is not a sum of money but is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual ‘Convenants' entered by all the shareholders interest. B) Types of Share Capital :1) Equity Share Capital: Equity Share Capital shall be:(i) With voting rights(ii) With differential rights. The expression ‘Shares with differential voting rights' is defined as a share that is issued in accordance with the provisions of Section 86.

Equity shares carry voting rights on the ground meetings of the company and have the right to control the management of the company. They have right to share in the profits of the company in the form of distribution of dividend and bonus shares. In the event of winding up of the company, equity shares capital is repayable only after repayment of the claims of the creditors and preference share capital.2) Preference Share Capital: Preference share capital means that part of share capital which fulfils both the following requirements, namelyas respect dividend, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, andas respect capital, it carries or will carry on the winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the amounts, B) Types of Share Capital :Other Types of Share Capital:The various types of Share Capital of a Company are-Authorised Capital:

The capital mentioned in the capital clause of the Memorandum of Association as the capital with which the company is registered and is authorised to issue up to this limit is known as the Authorised, Nominal, and Registered Capital.Issued Capital:

It is that part of the registered capital, which is actually issued for subscription.Unissued Capital:

The portion of the Authorised Capital, which is not issued for subscription, is called Unissued Capital.Subscribed Capital:

That part of the issued Capital which is taken up by the public is called Subscribed Capital (This capital may be more, less or equal to issued capital)The various types of Share Capital of a Company are-Called-up Capital:

It is the pan of the subscribed capital with regard to which calls have been made.Uncalled-up Capital:

That part of the issued capital, which is not called up, is known as Uncalled-up Capital.Paid-up Capital

That part of the called up capital, which is paid by the subscribers to the issuing company, is known as Paid-up Capital.Reserve Capital:

Section 99 of the Indian Companies Act 1956 deals with the reserve capital of a limited company. The part of the uncalled capital which a limited company by special resolution has declared to be called up only in the event and for the purpose of winding-up of the company is known as Reserve Capital. Above Share Capital should be shown in the balance sheet as given ahead. C) Alteration of Capital (Section 94 the Companies Act, 1956):A limited company with a share capital can alter the capital clause of its memorandum of association in any of the following ways, provided authority to alter is given by the articles.it may increase its capital by issuing new shareconsolidated the whole or any part of its shares capital into shares of larger amountconvert shares into stock or vice versasub-divide the whole or any part of its share capital into shares of smaller amount

Cancel those shares which have not been taken up and reduce its capital accordingly.Provisions regarding confirmation, resolution and notices: Any of the above things can be done by the company by passing a resolution at general meeting, but do not require to be confirmed by the National Company Law Tribunal. Within thirty days of alteration notice must be given to the Registrar who will record the same and make necessary alteration in the company's memorandum and articles. Notice to the Registrar has similarly to be given when redeemable preference shares have been redeemed. Similar information is also required to be sent where the capital has been increased beyond the authorized limit, or where a company, being not limited by shares, has increased the number of its members.D) Reduction of the Share Capital: Section 100 of the Companies Act, provides that a company, limited by shares or guarantee and having share capital, if so authorised by the articles, may by special resolution and the confirmation of the Court, reduce its share capital in any way and in particular byextinguishing or reducing the liability of members in respect of the capital not paid up;writing off or cancelling any paid-up capital which is in excess of the needs of the company.paying off any paid-up share capital which is in excess of the needs of the company.Reduction of share capital may in reality take three forms, namely, (i) reducing the value of shares in order to absorb the accumulated losses suffered by the company without any payment to the shareholders; (ii) extinction of liability of capital not paid; and (iii) paying off any paid-up share capital. Only in the circumstances referred to in (ii) and (iii) is the interest of creditors really involved.A) Power of Company to Borrow:A company, like an individual, may have to borrow for the exigencies of its business. In practice, Articles of association of company give express power to a company for borrowing money by charging the assets of company as security to the lender. . The power of a company to borrow money is implied in the case of all trading companies. Non-trading companies, however, must be expressly authorized to borrow by their memorandum.Section 149(1) of the Companies Act provides that in case of a public company, borrowing powers are not exercisable until the company is entitled to commence business. In case of a private company, this is not the case. The power of the company to borrow is exercised by its directors, who cannot borrow more than the sum authorized. The powers to borrow money and to issue debentures can only be exercised by the Directors at a duly convened meeting. Pursuant to Section 292(1) (b) & (c) directors have to pass resolution at a duly convened Board Meeting to borrow moneys.Types of Borrowings :Long Terms Borrowings:

Funds borrowed for a period ranging for five years or more are termed as long-term borrowings. Along term borrowing is made for getting a new project financed or for making big capital investment etc. generally Long term borrowing is made against charge on fixed Assets of the company.Short Term Borrowings:

Funds needed to be borrowed for a short period say for a period up to one year or so are termed as short term borrowings. This is made to meet the working capital need of the company. Short term borrowing is generally made on hypothecation of stock and debtors.Medium Term Borrowings:

Where the funds to be borrowed are for a period ranging from two to five years, such borrowings are termed as medium term borrowings. The commercial banks normally finance purchase of land, machinery, vehicles etc.Secured/ Unsecured Borrowing:

A debt obligation is considered secured, if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company.

Long Terms Borrowings:Funds borrowed for a period ranging for five years or more are termed as long-term borrowings.

Along term borrowing is made for getting a new project financed or for making big capital investment etc. generally Long term borrowing is made against charge on fixed Assets of the company.Short Term Borrowings:

Funds needed to be borrowed for a short period say for a period up to one year or so are termed as short term borrowings. This is made to meet the working capital need of the company. Short term borrowing is generally made on hypothecation of stock and debtors.Medium Term Borrowings:

Where the funds to be borrowed are for a period ranging from two to five years, such borrowings are termed as medium term borrowings. The commercial banks normally finance purchase of land, machinery, vehicles etc.Secured/ Unsecured Borrowing:

A debt obligation is considered secured, if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company.5) Syndicated Borrowing :If a borrower requires a large or sophisticated borrowing facility this is commonly provided by a group of lenders known as a syndicate under a syndicated loan agreement. The borrower uses one agreement covering the whole group of banks and different types of facility rather than entering into a series of separate loans, each with different terms and conditions.6) Bilateral Borrowing: Refers to a borrowing made by a company from a particular bank financial institution. In this type of borrowing, there is a single contract between the company and the borrower.7) Private Borrowing : Private borrowing comprises bank-loan type obligations whereby the company takes loan from a bank financial Institution8) Public Borrowing : Public borrowing is a general definition covering all financial instruments that are freely tradable on a public exchange or over the counter, with few if any restrictions i.e. Debentures, Bonds etc.A) Preparation of Accounts :For preparation of annual accounts the maintenance of proper books of account is a must. Section 209 of the Companies Act, 1956 contains the provisions for maintenance of proper books of accounts.The requirement of maintenance of proper books of accounts has been further amplified through the provisions of Section 541 of the Companies Act. Though the provisions of this section relate to a situation involving winding up of a company, as a general rule, they are relevant.In terms of Section 541 (2) of the Companies Act, 1956, proper books of accounts shall be deemed to have been kept by a company ifsuch books exhibit and explain the transactions and financial position of the business of the company, including books containing detailed entries of daily cash receipts and payments; andwhere the business of the company has involved dealings in goods, statements of the annual stock takings (except in the case of goods sold by way of ordinary retail trade) of all goods sold and purchased, showing the goods and the buyers and the sellers thereof insufficient detail to enable those goods and those buyers and sellers to be identified have been maintained. B) Requirement of Keeping Books of Account:Section 209 of the Companies Act requires every company to keep at it registered office proper books of account with respect to the following transactions:all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure took place

all sales and purchases of goods by the companythe assets and liabilities of the company;in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or other items of cost as ma. be prescribed relating to certain class of companies as the Central Government may require.C) Place of Keeping Books of Account:Section 209 requires every company to keep the aforesaid books of account at its registered office. However, all or any of the books of accounts may be kept at such other place in India as the Board of directors may decide. When the Board so decides the company is required within seven days of such decision to file with the Registrar a notice in writing giving full address of that other place in e-Form No. 23 AA along with requisite filing fee.D) Preservation of Books of Account:Section 209(4 A) casts an obligation upon a company to preserve in good order the books of account together with the vouchers relevant to the entry in such books, relating to the period of at least 8 years immediately preceding the current year, or if the company has not been in existence for 8 years, then for the whole period of its existence. As per Section 2(8) of Act, book' includes a voucher also. Therefore, the related vouchers and documents for 8 years have also to be preserved. It has been clarified by the Department of Company Affairs in its Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil) for giving a proper and adequate meaning to the words, -proper books of account" in Section 209.E) Inspection of Books of Account:Director’s Right of Inspection:

Sub-section (4) of Section 209 provides that books of account and other books and papers should be available for inspection by any director on working days during business hours. -Book and Paper" and -Book or Paper" have been detined in Section 2(8) to include accounts, deeds, vouchers, writings and documents. Though generally the director should personally exercise this right of inspection, the right is not so restricted that it can only be exercised personally by the director. The right of inspection can however, be refused if it is found that the inspection is being sought to pass on the information to a rival business of the company.Inspection by the Registrar/Officers of SEBI:

Section 209 A empowers the Registrar and any other officer authorised by the Central Government to carry out inspection of books of account. The books of account can also be inspected by such officers of the SEBI as may be authorised by it, in respect of matters covered under sections referred to in Section 55 A i.e. Sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206 A and 207.3) Members' Right of Inspection of Accounting Records:Members of a company do not have a right of inspection of its accounting records Table A,Article 95(2) also provides that no members (not being a director) shall have any right of inspecting any account or book or document of the company except as conferred by law or authorised by the Board or the company in general meeting. Where books of account of the company are with the managing director in his ofticial capacity, the third parties in a suit, which is not against the company, cannot ask for the production of books of accounts. The right of inspection of documents and books of a company is not limited to the Board of Directors. In order to prove allegations made in a petition under Sections 397 and 398, the shareholders are also entitled to be allowed inspections of the books of account and other relevant papers of the company.4) Auditor’s Right of Inspection of Accounts: Section 227(1) empowers an auditor with the right of access at all times to the company‘s accounts, whether kept at the head office of the company or elsewhere.

F) Maintenance of Costing Records and Stock Records:Section 209(1) read with Section 541(2) provides for the maintenance of proper books of account and they obviously include the cost accounting records [Section 209(1)(d)] and stock records [Section 541(2)], apart from normal books of account. Section 209(1)(d) was included in the Act in 1965 to ensure that companies, engaged in production, processing, manufacturing or mining activities, if specifically required by the Central Government, maintain detailed cost records in the manner specified by the Central Government. Similarly, proper maintenance of stock records is also a necessity as in the absence of proper stock record the truth and fairness of the annual statement of accounts cannot be properly understood.G) Persons Responsible for Keeping the Books of Account: Sub-section (6) of Section 209 specifies the persons who have been made responsible for keeping the books of account and securing compliance by the company with the requirements of Section 209 of the Act, they are:managing director or manager and all officers and other employees of the company, andWhere the company has neither a managing director nor manager then every director of the company.A) Appointment of Auditor:Section 224 of the Companies Act provides for compulsory appointment of an auditor by every company whether public or private. It provides that every company shall, at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of next annual general meeting. The auditors are appointed at the annual general meeting by an ordinary resolution. However, special resolution may become necessary in certain situations as are specified under Section 224 A. First auditors are to be appointed by the Board of directors within one month of the date of registration of the company and auditor or auditors so appointed are to hold office until the conclusion of first annual general meeting.B) Resignation by an Auditor: The auditor may vacate his office by tendering a resignation. Where the auditor resigns his office, the vacancy arising therefore can be filled only by the company at a general meeting. The board has no power to fill casual vacancy caused by resignation. The auditor appointed to fill the casual vacancy caused by the resignation holds office until the conclusion of the next annual general meeting of the company. Besides the remaining auditor or auditors, if any, may act while any such casual vacancy continues.C) Removal of Auditors: The provision to Section 224(5), states that the first auditor appointed by the Board of directors may be removed at a general meeting, by the company and other appointed in his place. Section 224(7) states that except as provided in the proviso to Sub-section (5) any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf.At the expiry of his term, the company may in general meeting appoint another person in his place; but a special notice of any such resolution will be necessary. A copy of the resolution is required to be sent immediately to the auditor as he has the right to make a representation. A copy of his representation, if any, and if so desired by the auditor, should be sent to every member to whom notice of the meeting has been sent, and if this is not practicable the representation should be read out at the meeting [Section 225(3)]. But the representation need not be sent to the members or read out at the meeting if, on the application of the company or of any aggrieved person, the Company Law Board is satisfied that the right of representation is being abused to secure needless publicity for defamatory matter. The Company Law Board may also direct that the company‘s costs on such application to be paid by the auditor notwithstanding that he is not a party to the application. D) Status of the Auditor:

An agent of the members :An auditor is an agent of the shareholders. He is expected to safeguard their interests. The

auditors may be agents of the shareholders, so far as relates to the audit of the accounts. For the purposes of the audit, the auditors will bind the shareholders.“

An auditor is specifically mentioned as an agent of the company for the purposes of Section 240 dealing with the production of documents and the giving of evidence on investigation and as an agent of the company he may be examined on oath by an inspector. However, his signature in the statutory report or the balance sheet will not amount to an acknowledgement on behalf of the company of a debt referred to in that report.2) As an Officer of the Company:

An auditor is not an officer of the company within the meaning of Section 2(30) of the Companies Act, 1956. An auditor was held to be an officer of the Company.

It seems impossible to deny that for some purpose, and to some extent, an auditor is an officer of the company. He is appointed by the company and his position is described in the section as that of an officer of the company. He is not a servant of the directors. On the contrary, he is appointed by the company to check the directors and for some purposes and to some extent, it seems to me quite impossible to say that he is not an officer of the company." E) Liabilities of an Auditor:Apart from liability under the common law, the statutory liabilities of an auditor could be either Civil or Criminal.Civil Liability:

An auditor may be held liable to the company for negligence where loss is caused to the company due to the failure of the auditors to perform his duties with reasonable care and skill. He is also liable for (i) breach of trust regarding any money or property of the company or (ii) breach of duty.2) Criminal Liability:

An auditor is responsible for the destruction, mutilation, alteration, falsification or fraudulent concealment of any books, papers or documents belonging to the company with an intent to defraud or deceive; and also where he makes intentionally any false statement in any report or document prepared by him.

Criminal liability of an auditor may extend to imprisonment for a period of seven years and/or fine at the discretion of the court.F) Right and Powers of Auditors:The various rights and powers enjoyed by the auditors under the Companies Act, 1956 are as follows:Right to access to books, accounts and vouchers:

The auditor of a company shall have right of access, at all times, to the books, accounts and vouchers of the company, whether kept at the head office of the company or elsewhere [Section 227(1)]. The auditor shall also have access to books of account containing cost data which, under Section 209(1)(d), the Central Government requires from certain classes of companies to include in its accounts, in respect of utilisation of material, labour or other terms or costs. The term ;vouchers‘ includes, in addition to vouchers of sales, purchases, receipts and payments, all documents, correspondence, agreements, etc. which may in any way serve to vouch for the accuracy of the books and accounts.2) Right to obtain information and explanations:

The auditor shall be entitled to require from the officers of the company such information and explanation as he thinks necessary for the performance of his duties as auditor [Section 227(1)]. The Articles of a company cannot preclude the auditor team from availing himself of all information which is material to enable him to make his report and from fulfilling his statutory duties to the shareholders 3) Right to sign the audit report:

Only the person appointed as auditor of the company, or where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor‘s report, or sign or authenticate any other document of the company required by the law to be signed or authenticated by the auditor (Section 229).4) Right to receive notice of and attend General Meeting: The auditors have the right to attend any general meeting and to receive any notice and other B communications relating thereto which members are entitled to receive and to be heard at any general meeting on any part of the business which concerns them as auditors [Section 231].5) Right to visit branch once and right of access to books: Where the accounts of any branch office are audited by a person other than the company‘sauditor, the company‘s auditor-shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor: anshall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office.G) Duties of an Auditor : The duties of an auditor are many and varied. He must examine the original books of account, kept by the company to discover any inaccuracies or omissions therein, to examine the company‘s balance sheet and protit and loss account, and report on the original books of account and the annual accounts to the members. Section 227(1A) requires an auditor to inquire:whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members;where the transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;where the company is not an investment or a banking company, whether so much of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;whether loans and advances made by the company have been shown as deposits;whether personal expenses have been charged to revenue accounts;whether cash has actually been received in respect of any shares shown in the books to have been allotted for cash; and if no cash has actually been so received, whether the position as stated in the books is correct, regular and is not misleading.A) Meaning : The persons through whom a company acts are called directors. Though a company is a legal person in the eyes of law it is an artificial person having neither mind nor a body of its own. It is invisible, intangible and existing only in the contemplation of law. A company cannot act in its person, for it has no person. This makes it necessary that the company’s business should be done through human agents. Directors are such person who acts for a company. The Directors are appointed to conduct the business of the company.Directors are the select body of persons on who lies the responsibility of the management of the company as well as the business by the company. They are the persons in whom the power is vested to make contract and the duty to take care of the property. B) Definition : Section 2 (13) of the Companies Act, 1956 defines director as “any person occupying the position of a director, by whatever name called.”Director is one of a body of persons appointed for managing the affairs of a company or corporation. The body of persons collectively is referred as Board or Board of Directors. They are the persons in

whom vests the management of the business of the company, the power to make contracts and to take care of the property of the company. C) Types of Directors :Director:

Section 2(13) of Companies Act 1956, defines the term director “includes any person occupying the position of director, by whatever name called”. It means any person can be appointed a director. This is also called as a Normal Director. He is only a director and does not take part in the day to day business of the company. He can attend meeting of the Board and Company Committees. For that purpose he has paid a sitting fees. No other benefits and remuneration shall be given to this type of directors. They are normal director and known for their name only.2) Sitting directors :

These are the directors which attend every meeting of the Board of Directors and Committees. As like a director, he is required to attend each and every meeting of the Board. For that purpose, he has been given a sitting fee. The companies Act makes provision for sitting fees. Current sitting fees rate is Rs. 5000 per year.3) Whole Time Director :

Whole Time Director is “a director employed to denote whole of his time and attention in carrying on of the affairs of the Company”. Such a whole Time Director may be an ordinary director of one or more companies. However, he cannot be simultaneously an employee in any other business or company more than one person can be appointed as a whole Time Directors.4) Managing Director / Executive Director :Section 2(26) of the Companies Act defines a Managing Director “means a director, who by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of Directors, or by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercised by him and includes a director occupying the position of a managing director, by whatever name called.5) Manager :Section 2(24) defines a manager as “an individual who, subject to the superintendence control, and directors of the Board of Directors, has the management of the whole or substantially the whole of the affairs of a company and includes a director or any other person occupying the position of a manager by whatever name called, and whether under a contract of service or not.”It is thus clear from the above definition that a manager and the managing director have almost identical functions and only an individual can be appointed as a manager.D) Legal Position of Directors :Directors as Agents :

The true position of directors seems to be that of agents for the company with powers and duties of carrying on the whole of its business subject to the restrictions imposed by the articles and the statutory provisions.2) Directors as Trustees :

The directors have also been designated as trustees for the company. They are persons elected to manage the affairs of the company for the benefit of the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. 3) Directors as Managing Partners :

Directors are certainly not agents for the shareholders but have been described as managing partners appointed to fill that post by mutual agreement between all the shareholders.E) Qualifications for Directors :There need not be any qualification for a director but the articles generally provide that no person shall act as a director unless he holds certain number of shares i.e. has a personal stake in the concern.

Section 270 and 272 state that it shall be the duty of every director who is required by the articles to hold a specified number of shares. Such shares are called qualification shares. If he is not qualified by qualification share, he must obtain the required number of shares within two months of his appointment as a director. After the expiry of the said period of two months, any person acting as a director of the company when he does not hold the qualification share, shall be punishable with fine which may extend Rs. 50 for every day during which he acts as a director. These provisions shall not apply to a private company unless it is a subsidiary of a public company.F) Appointment of Directors :Appointment of First Directors: (Section 254) :

Section 254 of the Companies Act deals with the appointment of first directors, it lays down that subscribers of the memorandum who are individuals are deemed to be directors of the company until the directors are duly appointed. Generally, the first directors are appointed by name in the Articles or in the manner provided therein. If they do not name, all the subscribers become directors. The very fact of incorporation makes them the first directors of the company. These directors hold office up to the date the directors are duly appointed in the first annual general meeting of the company. The subsequent directors must be appointed in accordance with the provisions of Section 255 of the Act.2) Appointment at General Meeting: (Section 255) :

According to Section 255 of the Act, directors must be appointed by the company in its general meeting. Unless the articles provide for retirement of all directors at every general meeting not less than two-thirds of the total number of directors of a public company or of private company which is a subsidiary of a public company shall be persons who are liable to rotation. In other words, only one-third of the total number of directors can be non-rotational directors.3) Appointment of Directors by the Board: The Board of directors are empowered to appoint a director:as an additional director; orto fill a casual vacancy; oras an alternate director.4) Appointment of Directors by Third Parties: A third party may be empowered by the articles to appoint directors. e.g. A vendor of a business to the company can appoint directors. Similarly, a Banking company or a financial institution which has advanced loans to the company may appoint their nominees on the Board. But it is to be noticed that it is doubtful whether the court will force to the company to accept a nominee of the third party.5) Appointment of Directors by the Central Government (Section 408): The Central Government may appoint not more than two persons to hold office as directors of the company. Such persons must be the members of the company. Such appointment shall be for a period not exceeding three years on any one occasion.6) Appointment by Company Law Board (Section 402): The Company Law Board has the power to appoint directors for prevention of oppression and mismanagement.G) Removal of Directors :Removal by Shareholders (Section 284) :

According to Section 284 of the Act, a company may by ordinary resolution remove any director (other than a director appointed by the Central Government in pursuance of Section 408) at any time before the expiration of his period of office.”

But in the case of a private company, a director holding office for life on the first April, 1952, cannot be so removed, whether or not he is subject to retirement under an age-limit by virtue of the Articles or otherwise.2) Removal by the Central Government: (Section 388 - B to 388 - E) :

Chapter IV - A, containing Section 388 A to 388-E, deals with the power of the Central Government relating to the removal of a director of a company. The managerial personnel may be removed from the office on the recommendation of a High Court by the Central Government.3) Raemoval by Company Law Board (Section 402) :

If an application is filed before the Company Law Board alleging oppression or mismanagement, and if the Board finds that a relief ought to be granted it may order for termination or setting aside of an agreement with a director or managing director or other managerial personnel. H) Resignation by a Director :Usually Articles of Association shall lay down procedure regarding resignation of Director. A Director can leave (vacate) his office by tendering resignation. Articles of Association shall state the minimum number of days in advance that director shall send notice of his resignation. It may be provided in the Articles of Association that such resignation may be accepted in the general meeting i.e. meeting of shareholder. In the absence of such provision resignation shall be accepted in the Board Meeting and shall be effective from the date on which it is submitted to the company.Duties of Directors :A) Statutory Duties : These include the duties and obligations imposed by the Companies Act. They are as follows :To file returns of allotments:

It is the duty of the directors to file return of the allotment stating the specified particulars within a period of 30 days. This is provided by Section 75 of the Companies Act. If they fail to do so directors may be held liable as officer in default and may be punished with a fine up to Rs. 5000 per day till the default continues.2) Not to issue irredeemable preference shares redeemable after 10 years:

Section 80, as amended by the Act of 1988, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 10 years. Directors making any such issue may be held liable and may be subject to fine upto Rs. 10,000/-3) To disclose interest: (Section 299-300) :

A director who is interested in a transaction of the company is required to disclose his interest to the board. The disclosure must be made at the first meeting of the board held after he has become so interested. If he is a member of a company or of a firm with which the company has to deal he may give a general notice to the board of his interest in that concern. Such notice must be renewed after every year.4) To disclose receipt from transfer of property: (Section 319) :

It is the duty of every director to disclose any money received by him from the transfer of property of the company. Such receipt must be disclosed to the members of the company and approved by the company in general meeting. Otherwise, the amount shall be held by the directors in trust for the company.To disclose receipt of compensation from transferee of shares - (Section 320) :

Section 320 provides that if the loss of office results from the transfer of all or any of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place. 6) Duty to attend Board Meetings:

The directors are to perform their duties at periodical board meetings. Although a director is not expected to attend all the meetings of the board he is not bound to attend all the boards. Section 283 (g) states that the office of a director will be vacated if he absent himself from three consecutive meetings of the board, or from all meetings of the board for a consecutive period of three months, whichever is longer without obtaining leave of absence from the Board. Thus, it is the duty of the directors to attend Board Meetings.

Duty to convene general meetings: It is the duty of the directors to convene different meetings of a company.

Duty to prepare Reports: Directors have to prepare the report of the progress of the company and to present the annual

general meeting before the shareholders of the company. Such report must be accompanied by the balance sheet and profit and loss account.Duty to make declaration of solvency:

It is the duty of every director to make a declaration of solvency in the case of members’ voluntary winding up. Duties of Directors :General Duties: General duties of directors are as follows:Duty of care:

A director has to perform his functions with reasonable care. He has to attend, to do his work with due diligence and caution. The duty of care is uniform for all directors whether the position granted to a director is that of an executive or non-executive director. Thus, directors are duty bound to carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persons of their knowledge and status.Duty not to delegate:

Director occupies legal position of an agent of a company so he being a delegate cannot further delegate. It means that he should not delegate his functions except to the extent authorised by the Act or the constitution of the company. Thus, he must perform his functions personally.Duty of good faith:

The directors must act with honesty. Greatest good faith is expected in the discharge of their duties. A director shall not exploit to his own use the corporate opportunities. The fiduciary duties of directors are owed to the company and not to the individual shareholders. A director shall not make any secret profits.Powers of Directors :General Powers:

Section 291 of the Act provides for general powers of the board of directors as follows:The board of directors of a company shall be entitled to exercise all such powers, and to do all

such acts and things, as the company is authorised to do. However, the board shall not exercise any power or do any act or thing which is by the MoA or AoA to be exercised by the company in the general meeting of the shareholders. It is interesting to note that if any regulation is made in the general meeting; such regulation shall not invalidate the valid action taken by the board prior to such regulation.2) Powers exercised only at the board meeting:Filling casual vacancy.Appoint additional directors.Appoint alternate directors.Recommend rate of dividends. 3) Special Powers: Section 292 of the Act provides that the board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the board:a) The power to make calls on shareholders in respect of money unpaid on their shares.

aa) The power to authorise the buy-back.b) The power to issue debentures.c) The power to borrow moneys otherwise than on debentures.d) The power to invest the funds of the company.e) The power to make loans.Managing DirectorA) Meaning : A managing director means a director who is entrusted with substantial powers of management. Which would not otherwise be exercisable by him? The term includes a director occupying the position of a managing director, by whatever name called. B) Definition : According to Section 2(26) of the companies Act, "managing director is a director who, by virtue of an agreement with the company or of a resolution passed by the company in general a meeting or by its Board of directors or by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called.“The definition makes it clear that a managing director must be a director enjoying substantial powers of management and such powers may be conferred upon him by agreement or memorandum or articles or Board resolution or General Meeting resolution. The power to do administrative acts of routine nature like power to affix the company seal or to draw and endorse cheques or to sign any share certificate etc. shall not be deemed to be included within substantial powers of management. Such routine nature acts are usually done by directors but they are not called as managing directors.Appointment : According to Section 269 of the Act, in the case of a public company the appointment or reappointment of a person as a managing or whole-time director has to be approved by the Central Government. Under the provisions of sub sections (3) to (5) of Section 269 added by the Companies (Amendment) Act, 1974, guidelines have been detailed for the grant or refusal of such approval. In accordance with these provisions the Central Government shall not accord its approval unless it is satisfied that –it is in the interests of the company to have a managing or whole-time director;the proposed managing or whole-time director of the company is in its opinion, a fit and proper person to be appointed as and that the appointment of such person as a managing or whole-time director is not against the public interest, and the terms and conditions of appointment of the proposed managing or whole-time director of the company are fair and reasonable while according its approval. The Central Government may reduce the period for which the person be appointed by the company where the appointment of a person as a managing or whole-time director is not approved by the Central Government. The person so appointed shall vacate his office as such managing or whole-time director on the date on which the decision of the Central Government is communicated to the company.E) Term of Office / Tenure of Appointment :Section 317 of the Act deals with the provisions regarding the term of office of managing director. According to this section, the term of office of a managing director cannot exceed 5 years at a time. Reappointment is possible but it may be made within the last two years of his present term only. It can be made on the basis of 5 years tenure on each occasion.It is important to note that the person ceases to be managing director with his ceasure of directorship on account of his retirement by rotation at the Annual General Meeting. But, if such a person is re-elected as director at the Annual General Meeting and thereby he continues as a director of the

company, he shall continue as a managing director also for the period for which he is so elected by the Annual General Meeting.F) Remuneration of managing Directors : A managing director may be remunerated either by way of a monthly payment or as a specified percentage of the net profits of the company or partly by one way and partly by the other. However, such remuneration should not exceed 5 per cent of the net profits without the sanction of the Central Government. Where there are more than one managing directors, the remuneration payable to all of them must not exceed 10 per cent of the net profits without sanction of the Central Government.Winding up :Meaning of Winding up :

Winding up is a process to bring about the dissolution or end of the company. All assets of the company are collected and realised. The amount so recovered is used for the payment of all debts and obligations of the company. If there be any surplus amount, it is duly returned to its members. In this way the affairs of the company are wound up and its life as a legal entity is terminated. Thus, the process of winding up involves the realisation of the assets, payment of the liabilities and distribution of surplus, if any, amongst the members of the company. B) Definition : Gower :

“Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.” Modes of Winding Up :Winding up by the Court : 1) Grounds of Winding: The grounds of winding up are as follows:Special Resolution : (Section 433 (a)):

A company may be wound up by the court if the company has by special resolution, resolved that the company may be wound up by the court.

The shareholders have full freedom to decide any course of action against the company when the shareholders are satisfied that, it is in the interest of creditors, shareholders and other outsiders to wound up company, the shareholders may pass a special resolution in their meeting. Special Resolution must be passed by the majority of 75% of the attending and voting members.b) Default in Holding Statutory Meeting : (Section 433 (b) ):

Every company limited by shares shall, within a period of not less than one month or more than six months from the date of commencement of business hold a general meeting. If the company fails to call a meeting or fails to deliver statutory report to the Registrar within a specified time the court may order for the winding up of the company. The court may direct to hold a statutory meeting instead of winding up order.Winding up by the Court : 1) Grounds of Winding: c) Failure to commence business within a period of one year : [Section 433 (c)]If a company does not commence its business within a year from its incorporation, or suspends its business for a whole year, it may be ordered to be wound up. Here again, the court is given discretionary power. If the court is satisfied that the company was prevented from starting its business and the company has intention to start business within a reasonable time, the court may not exercise its power.

d) Reduction of Membership below Statutory Limit : [Section 433 (d)]In case of public company the minimum numbers are seven and in case of private company the minimum number is two. If membership is reduced below seven or below two as the case may be, the company may be wound up under this situation. A company where there are no sufficient members cannot carry on its business. If it is carried on, the members shall be liable for all contracts and agreements.1) Grounds of Winding: e) Inability to pay debts : [Section 433 (e)]A company can be wound up if it is unable to pay its debts. According to Section 434, the company is unable to pay its debts in the following circumstances :A creditor has served a demand for more than Rs. 500/- at the registered office of the company and the company fails to pay or secure or compound the sum to the satisfaction of the creditors within three weeks. The court has issued an execution order in favour of the creditor and the company has not paid in whole or part.If the court is satisfied that the company is unable to pay debts the court shall take into account the contingent and prospective liabilities of the company.f) Just and Equitable Grounds : [Section 433 (f)]When the court is of the opinion that it is just and equitable that the company should be wound up, the court orders for winding up. This is residuary power which should be exercised only in the interest of company, its employees, shareholders, creditors and the general public interest. This is a last resort when all other remedies have failed.2) Some reasons where courts have ordered winding up under this clause are as follows When substratum of the company has disappeared i.e. if original objects become impossible to attain.The company is doing illegal businessIf the company is bubble i.e. it does not have any real businessThe majority shareholders oppress the minority shareholders and the oppression must be of a serious character.The company is suffering huge losses and there is no possibility to recover these losses.There is a deadlock in management due to serious differences among groups.

The company may be wound up by the court on these various causes or grounds. The court has discretionary power under this Section. Even though there are above situations, the court may not order to wound up the company. 3) Procedure of Compulsory Winding Up : Commencement of winding up by court :

The winding up of a company shall be deemed to have commenced when the resolution has been passed by the company. In any other case the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for winding up.b) Power of Court to stay or restrain proceedings against Company :

At any time after the presentation of a winding up petition and before a winding up order has been made, the company or any creditor or contributory, may apply to the court and the court may stay or restrain the proceedings on such terms as it thinks fit.c) Statement of affairs to be made to official liquidator :

Where a compulsory winding up order has been made by the court, the statement of affairs of the company must be made to the official liquidator. Voluntary Winding Up :Grounds for Voluntary Winding Up :

According to Section 484, a company may be wound up voluntarily under any of the following two circumstances

1) By passing an ordinary resolution: A company may resolve by an ordinary resolution to be wound up voluntarily –

When the period fixed for the duration of the company as mentioned in its articles, has expired, orWhen the event on the happening of which, the articles provide that the company is to be dissolved, has occurred;

2) By passing a special resolution: A company may, at any time, without assigning any reasons, resolve by a special resolution to be

wound up voluntarily.The resolution (whether ordinary or special) when passed, must be advertised within 14 days of

the passing of the resolution in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company (Section 485.)b) Circumstances in which a company may be wound up voluntarily :Commencement of Voluntary Winding up :

A Voluntary Winding up shall be deemed to commence from the date of the passing of the resolution to that effect.No business to be carried on :

From the commencement of voluntary winding-up, company stops carrying on its business, except so far as may be required for the beneficial winding up of the company.Assets transferred to Official Liquidator

The possession of the assets of the company is transferred to official liquidator for realisation and distribution among the creditors.Notice of Discharge of Services :

A resolution for voluntary winding up is a sufficient notice of discharge to the employees of the company. However, if business is continued by the official liquidator for the beneficial winding up of the company or when company is liquidates with a view of reconstruction, employees are not discharged.Powers of Board of Directors

On the appointment of the official liquidator powers of Boards of Directors, Managing directors / Manager shall come to an end.c) Types of Voluntary Winding Up :Members’ Voluntary Winding Up :

When company is solvent but members decide to wind up the company voluntarily i.e. without any external reason/cause, it is called as ‘Members’ Voluntary Winding Up’.

A members’ voluntary winding up is possible only when the company is solvent and is able to pay its liabilities in full.2) Creditors’ Voluntary Winding Up :

When a ‘declaration of solvency’ by directors is not made and delivered to the Registrar, in a voluntary winding up, it is a case of creditors’ voluntary winding up. This mode of winding up is restored to by insolvent companies. Where the company is unable to pay its liabilities in full and still wants to undergo voluntary winding up, it should naturally be controlled and supervised by the creditors, so that their interests can be duly protected. It is for this reason, that creditors have the dominating control over the proceedings under this mode of winding up.

Sections 500 and 509 contain provisions regarding the procedure of “Creditors Voluntary Winding up”.Winding Up subject to supervision of Court : (Section 522) :Advantages of Winding Up subject to supervision of court :

The advantages of the winding up order subject to supervision of the court may be summarised as under :The order operates as a bar to commencement and continuance of any proceedings against the company without the leave of the Court.The Court may appoint an additional liquidator under Section 524.In respect of calls and their enforcement and exercise of the powers of the court, the order confers full authority on the court to act as if it were an order for compulsory winding up by the court. (Section 523).Where a winding up order subject to supervision of the court can be passed :

In order that a court may make an order winding up the company subject to supervision of the court it is essential to prove that there is validly passed resolution of the company for voluntary winding up. c) Who can apply for supervision order :A supervision order can be made either on the application of a creditor, contributory or the liquidator. It is also open to the company to apply for a supervision order.d) Grounds on which the order can be made : A winding up order subject to supervision of the Court can be passed on the ground of :The partiality of the liquidator,Non-observance rules in liquidation, ohis negligence oDilatoriness in realising the assets.CHAPTER 4Regulatory Framework of International Funds 4.1 Regulatory Framework for Raising Funds through GDRs and ADRs4.2 External Commercial Borrowing4.3 Foreign Direct Investment (FDI)4.4 Foreign Institutional Investments (FII)4.5 Foreign Exchange Management Act (FEMA)4.6Forward Contract (Regulation) Act 1952 The trend towards the internationalization of financial markets has gained impetus during the last decades, driven mainly by the sophistication in IT and capital market participants, greater co-operation between financial regulators, the lowering of capital barriers across national boundaries and the liberalization of capital markets in emerging economies.

Many companies have been looking beyond their domestic financial markets, in an effort to enhance their global presence. They have intended to raise capital beyond the borders of their home market with the aim of expanding their offerings and shareholder bases.

At the same time, investors around the world have been also looking beyond their national borders to take advantage of new opportunities for raising the risk-adjusted return on funds through geographic diversification of their portfolios.Regulatory Framework for Raising Funds through GDRs and ADRsThe past few decades have witnessed the increased internationalization of various firms through cross- listings on international exchanges. This has been facilitated by market liberalisation, which has led to greater integration of global securities markets. Cross-border listing has become one of the avenues for the integration of global securities markets. There are two forms of cross-border listing, namely, direct listing and indirect listing.

Direct listing implies that the firm concerned offers ordinary shares to the public. Indirect listing on

exchanges is through Depository Receipts (DRs). Depository receipts are a negotiable certificate issued by a bank in a domestic country that represents ownership of shares in companies of other countries. Cross listing, particularly through DRs such as American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs), is a popular way of internationalization among firms from emerging economies. A) Meaning : An American Depositary Receipt (or ADR) represents ownership in the shares of a non-U.S. company that trades in U. S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U. S. investors to buy shares in foreign companies without the hazards or inconveniences of cross - border and cross - currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US - based companies.

B) Significant Features:

1) Transfer & Redemption: ADRs can be transferred and redeemed as well.

2) Taxation: Income by way of dividend on shares issued under ADRs shall be taxed @ 10%. On account of any capital gains arising on the transfer of the aforesaid shares to the non-resident investor, the same shall be liable to be taxed @ income-tax under the provisions of the Income-tax Act.3) Fungibility: ADRs have two- way fungibility; generally meaning that investors, either foreign institutional or domestic, in any company, which has issued ADRs can freely convert the ADRs into underlying domestic shares. Furthermore, they can also reconvert the domestic shares into ADRs, depending upon the market movements for the stock.

4) Repatriation: The authorized dealers have been delegated with the authority to remit the received for purchase of shares or on account of cancellation of trade, under Two-way fungibility of ADRs.

5) Retention of Proceeds: The Indian companies issuing shares to overseas depository for issuing ADRs are allowed to invest funds abroad for a temporary period pending repatriation to India. In furtherance, the companies may also retain abroad funds raised through ADRs, for any period to meet their future forex (foreign exchange market) requirements. They (the companies) just need to report the details of such funds raised and retained abroad within 30 days from the date of closure of the issue to the Reserve Bank of India (RBI).6) Voting Rights: Many deliberations have been made on the voting rights of the ADR holders. Initially, the ADR holders were not entitled to voting rights. Although, the situation improved when, in 2009, they were made entitled to vote on the underlying shares. However, this was subject to the clauses in the 'terms of issue' or agreements between the holders of these instruments and the issuers. This practically negated the possibility of exercising the voting rights.This is why SEBI recently recommended for a change in current rules to allow ADR holders to exercise their voting rights, raising the possibility of increased shareholder activism in future.7) Receipt of Disinvestment Proceeds: As a further measure to liberalize and encourage the Indian companies to resort to the issue of

ADRs, the resident shareholders, who offer their shares for conversion to ADRs, will receive the sale proceeds in foreign currency, subject to the conversion to such ADRs should have the approval of Foreign Investment Promotion Board (hereinafter "FIPB").C) Types of ADRs:1) Unsponsored: Unsponsored ADRs are issued without any formal agreement between the issuing company and the depository, although the issuing company must consent to the creation of the ADR facility. With unsponsored ADRs, certain costs, including those associated with disbursement of dividends, are borne by the investor. 2) Sponsored: Sponsored ADRs are created by a single depository which is appointed by the issuing company under rules provided in a deposit agreement. There are two broad types of sponsored ADRs - those that are restricted with respect to the type of buyer which is allowed, and are therefore privately placed; and those that are unrestricted with respect to buyer and are publicly placed and traded. 3) Unrestricted ADRs (URADRs) : Unrestricted ADRs are issued to and traded by the general investing public in United States capital markets. There are three classes of URADR, each increasingly demanding in terms of reporting requirements to the Securities and Exchange Commission, but also increasingly attractive in terms of degree of visibility provided.D) ADRs’ Special Risks :1) Currency Risk : If the value of the US dollar rises against the value of the company’s home currency, a good deal of the company’s intrinsic profits might be wiped out in translation.

2) Political Risk : ADR status does not insulate a company’s stock from the inherent risk of its home country’s political stability. Revolution, nationalisation, currency collapse or other potential disasters may be greater risk factors in other parts of the world than in the US, and those risks will be clearly translated through any ADR that originates in an affected nation.

3) Inflation Risk : Countries around the globe may be more, or less, prone to inflation than the US economy is at any given time. Those with higher inflation rates may find it more difficult to post profits to an US owner, regardless of the company’s underlying health.E) Advantages :

Owning ADRs has some advantages compared to owning foreign shares directly :

1) Trading Settlement in U. S. Dollar : When you buy and sell ADRs you are trading in the U. S. market. Your trade will clear and settle in U. S. dollars.

2) Conversion of Payments in U. S. Dollar : The depositary bank will convert any dividends or other cash payments into U. S. dollars before sending them to you.

3) Arrangement for Vote :The depositary bank may arrange to vote your shares for you as you instruct.

F) Disadvantages :On the other hand, there are some disadvantages :

1) Time Consuming : It may take a long time for you to receive information from the company because it must pass through an extra pair of hands. You may receive information about shareholder meetings only a few days before the meeting, well past the time when you could vote your shares.

2) Fees and Expenses : Depositary banks charge fees for their services and will deduct these fees from the dividends and other distributions on your shares. The depositary bank also will incur expenses, such as for converting foreign currency into U. S. dollars, and usually will pass those expenses.A) Meaning : The GDR is a dollar denominated instrument traded on a stock exchange in Europe or in America or both. It is an instrument made in the form of ‘Receipts’. It is based on underlying equity shares of the issuer company. The graduate globalisation of the markets realised the wants of the issuers of international securities to reduce their cost of raising funds and maintaining them minimised.4) Lock-in-Period: Lock–in-period is 45 days, i.e. 45 days after the allotment, the GDR holder can get it converted into shares.

5) Marketing: Marketing of GDRs issue is done by the underwriters by organizing the road shows which are presentations made to potential investors. 6) No Voting Rights: The GDR does not entitle the holder to any voting rights, so there is no fear of loss of management control.

B) Important Features of GDRs: 1) Collection in Foreign Currency: The issuer enjoys the benefit of collection of issue proceeds in foreign currency and may utilize the same for meeting the foreign exchange requirements. 2) No Exchange Risk: If the GDR holder surrenders the GDRs for conversion into shares and request for the sale of such shares, the Domestic Custodian Bank sells the shares. The Domestic Custodian Bank converts the net sales proceeds into foreign exchange at the market rate. Hence, no foreign exchange risk for issuing company. 3) Listing: Most of the GDRs of the Indian companies are listed at LUXEMBOURG.4) Lock-in-Period: Lock–in-period is 45 days, i.e. 45 days after the allotment, the GDR holder can get it converted into shares.

5) Marketing: Marketing of GDRs issue is done by the underwriters by organizing the road shows which are presentations made to potential investors.

6) No Voting Rights: The GDR does not entitle the holder to any voting rights, so there is no fear of loss of management control.C) Advantages of Global Depository Receipts (GDRs) :

1) Right of Holder : A GDR is denominated in dollars or in some other freely convertible foreign currency. It gives its holder the right to get equity shares of the issuer company against the GDR as per the terms of the offer.2) Collections in Foreign Currency : The issuer companies can raise capital with much ease in foreign exchange on the large scale. Thus, they are able to utilise the foreign currency for meeting foreign exchange component of project cost, repayment of foreign currency loans, meeting overseas commitments and for similar other purposes.3) Less Exchange Risks : The main advantage to the issuer is that it reduces exchange risks. The issuer done not assume any exchange risk, though he does enjoy the benefit of foreign exchange collected by way of issue proceeds. 4) Option to Hold Equity Shares :A GDR also gives a holder an option to convert the same into underlying shares and holds equity shares of the company instead of GDRs.5) Listing : GDRs are listed in Luxembourg. But they are traded at two places besides the place of listing. These two places are the UTC market in London and on the private placement basis in the U.S.

6) No Lock-in-Period : The investor is still given the option, after the lock-in-period, to send the GDR back to India. The depository instructs the custodian to undertake the job of cancelling the GDR.

7) Marketing : Marketing of GDR issues is done by the underwriters by organising road shows. Such shows are presentations made to potential investors. The investor response is obtained by an equity called the ‘Book Runner’.

8) Voting Rights : The fear of losing control over the company to foreign shareholders also does not arise in the GDR issue. Because a GDR does not entitle the holder to any voting rights.

Global public issues and private placements of depository receipts, bonds and convertibles by Indian corporate's are governed by the provisions of the Companies Act, FEMA and the guidelines issued by the Ministry of Finance, GOI in particular apart from the applicable provisions of the SCRA and other laws. These are broadly listed below:Regulatory Framework1)The issue shall be in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme 1993 as amended from time to time. Such issues also need to conform to the FDI policy of the government. 2) The issue should comply with the provisions of the Companies Act, SEBI guidelines, SCRA and the listing agreement insofar as it relates to the underlying issue of shares or convertible instruments.

However, as per the guidelines, companies will not be permitted to issue warrants as part of their overseas capital issues. 3) The company satisfies other conditions prescribed in Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. The above provisions are discussed in detail in the following paragraphs.A) Important GOI Guidelines on Issues of Depository Receipts and FCCBs: The government guidelines on issue of GDRs and FCCBs through euro issues and private placements as well as public issues of ADRs/ADS in American capital market are covered under the Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and notifications issued pursuant to the scheme. These guidelines have gone through several amendments over the years offering better flexibility to issuer companies. Under these provisions, it is possible for an Indian issuer to issue FCCBs and GDRs against equity shares. A GDR has been defined to mean ‘any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the overseas depositary bank outside India and issued to non-resident investors against the issue of ordinary shares or FCCBs of issuing company'. Therefore, any type of depository receipts including ADRs and ADSs come under the above

definition. B) The other provisions of the GOI scheme mentioned above are as follows:1) For Listed Companies: a) Eligibility of issuer: An Indian Company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign Currency Convertible Bonds (FCCBs s) and (ii) Ordinary Shares through Global Depositary Receipts. b) Pricing: The pricing of ADR/GDR/FCCBs issues should be made at a price not less than the higher of the following two averages: The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.2) For Unlisted Companies: Unlisted companies, which have not yet accessed the ADR/GDR/FCCBs route for raising capital in the international market would require prior or simultaneous listing in the domestic market, while seeking to issue (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts. The Government that unlisted companies, which have already issued ADRs / GDRs/FCCBs in the international market, would now require to list in the domestic market on making profit beginning financial year 2005-06 or within three years of such issue of ADRs / GDRs/FCCBs, whichever is earlier has clarified it.3) Other Common Conditions:

a) The FCCBs shall be denominated in any freely convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian rupees.When an issuing company issues ordinary shares or convertible bonds, it shall deliver the ordinary

shares or bonds to a domestic custodian bank that will, in terms of agreement, instruct the overseas depositary bank to issue depository receipts .

b) A GDR may be issued in the negotiable form and may be listed on any international stock exchanges for trading outside India or OTC exchanges or through book entry transfer systems prevalent abroad .

C) The provisions of any law relating to issue of capital by an Indian company shall apply in relation to the issue of FCCBs or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.d) The provisions of any law relating to issue of capital by an Indian company shall apply in relation to the issue of FCCBs or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.

e) A GDR may be issued for one or more underlying shares or bonds held with the domestic custodian bank. The FCCBs and GDRs may be denominated in any freely convertible foreign currency. The ordinary shares underlying the GDRs and the shares issued upon conversion of the FCCBs will be denominated only in Indian currency.

f) The following areas of the issue will be decided by the issuing company in consultation with the Lead Manager to the issue, namely: 1. Methodology of the issue—through public or private placement 2. Number of Global Depository Receipts to be issued 3. Issue price 4. Rate of interest payable on FCCBsg) There would be no lock—in—period for the GDRs/ADRs issued under the GOI scheme.h) Dividend distributions on the depository receipts shall be sent to the overseas depository bank, which shall distribute them to the non-resident investors proportionate to their holdings of depository receipts evidencing the relevant shares. i) For the purpose of conversion of FCCBs, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the BSE or the NSE on the date of conversion of FCCBs into shares.j) As far as taxation of FCCBs is concerned, interest payments on the bonds, until the conversion option is exercised, shall be subject to deduction of tax at source at the applicable rates.k) All transactions of trading of the ADRs/GDRs outside India, among non-resident investors, shall be free from any liability to income tax in India on capital gains there from.l) If any capital gains arise on the transfer of the underlying shares in India to the non-resident investor, he or she will be liable to income tax under the provisions of the Income Tax Act. m) During the period of fiduciary ownership of shares in the hands of the overseas depositary bank, the provisions of avoidance of double taxation agreement entered into by the GOI with the country of residence of the overseas depositary bank will be applicable in the matter of taxation of income from dividends from underlying shares and interest in FCCBs.n) During the period, if any, when the redeemed underlying shares are held by the non-resident investor on transfer from fiduciary ownership of the overseas depositary bank, before they are sold to resident purchasers, the avoidance of double taxation agreement entered into by the GOI with the country of residence of the non-resident investor will be applicable in the matter of taxation of income from the dividends from the said underlying shares, or interest on FCCBs, or any capital gain arising out of

transfer of underlying shares. O) The holding of the depositary receipts in the hands of non- resident investors and the holding of the underlying shares by the overseas depositary bank in a fiduciary capacity and the transfer of the depository receipts between non-resident investors and the overseas depository bank shall be exempt from wealth tax.C) RBI Guidelines on ADR/GDR/FCCB Issues: Issue of ADRs/GDRs is presently under the automatic route without prior approvals from the GOI or the RBI as already mentioned. To give effect to these provisions initiated by the GOI, the RBI issued necessary amendments to the Foreign Exchange Management Regulations 2000.

a) FCCBs have to conform to the overall FDI caps under FEMA.

b) Public issues of FCCBs shall be made only through reputed investment bankers in international capital markets. In the case of private placements, the placement shall be with banks, multilateral or foreign financial institutions, foreign collaborators, foreign equity holders having a minimum holding of 5% of the paid up capital of the issuing company.

c) The maturity of the FCCB if not converted before such time shall be a minimum of 5 years.

d) Issue of FCCBs with attached equity warrants shall not be permitted under the automatic route.e) The ‘all-in’ cost of the FCCBs shall be 100 basis points less than those prescribed for ECBs. The all-in cost shall include coupon rate, redemption premium, default payments, commitment fee, front-end fee etc but shall not include issue-related expenses such as legal fee, lead manager’s fee and out of pocket expenses.

f) FCCB proceeds can be used for purposes for which ‘external commercial borrowing’ can be used but not in investments in stock market and real estate activities. As in the case of ADRs/ GDRs, the proceeds have to be repatriated into India within one month unless exempted by the RBI from time to time or pursuant to a specific approval sought by the issuer.

g) The issue related expenses should not exceed 2% of the issue size in the case of a private placement and 4% in the case of a public issue.

h) Reporting requirements to RBI have to be complied within 30 days from the completion of the issue.EXTERNAL COMMERCIAL BORROWINGS The government announces the policy of ECB for the country as a part of prudent debt management. ECBs occupy an important position as a source of funds for Corporate. a To keep borrowing maturities long,

b) To keep borrowing costs low,

c) To encourage infrastructure, and to increase export sector financing. The ECBs route is beneficial to the Indian corporate on account of following:

d) It provides the foreign currency funds which may not be available India.

e) The cost of funds at times works out to be cheaper as compared to the cost of rupee funds. .

A) Meaning : The foreign currency borrowings raised by the Indian corporate from outside India are called "External Commercial Borrowings"(ECBs). Generally, the external commercial borrowings (ECB) refer to borrowings by the business community from foreign sources. ECB are defined to include commercial bank loans, buyers credit, suppliers credit, securitized instruments such as floating rate notes and fixed rate bonds etc. B) Elements of Commercial Borrowings:1) Loan from Foreign Banks: Many a time, Government of India has raised loans from the foreign banks such as U.S. Exim Bank, Japanese Exim Bank, ECGC (Export Credit Guarantee Corporation) of U.K. etc.2) Deposits of NRIs: Another Important source of commercial borrowings in India is the inflow of Non-Resident Indian (NRI) deposits. Non-resident deposits have been considered a major component of country‘s foreign capital inflows during the past decade.

C) Usage of ECBs:

1) ECB can be utilised for Foreign Exchange Costs of Capital Goods and Services:ECBs are to be utilised for foreign exchange costs of capital goods and services (on FOB and CIF basis). Proceeds should be utilized at the earliest and corporate should comply with RBl's guidelines on parking ECBs outside till actual imports.

2) ECB can be utilised for Projects Related to Rupee Expenditure:ECB proceeds may also be utilised for project - related rupee expenditure, as outlined above. Proceeds must be brought into the country immediately. However, under no circumstances, ECB proceeds will be utilized for: a) investment in the stock market b) speculation in real estate

3) ECB may be raised to acquire ships/vessels :ECB may be raised to acquire ships/vessels from Indian shipyards D) Terms and Conditions: Apart from the maturity and end - user requirements, the financial terms and conditions of each ECB proposal are required to be reasonable and market - related. 1) Security: The choice of security to be provided to the Lenders suppliers will also be left to the borrowers. However, where the security is in the form of a guarantee from an Indian financial institution or from an Indian scheduled commercial bank, counter - guarantee or confirmation of the guarantee by a foreign bank foreign institution will not be permitted. 2) Average Dues :

The minimum average maturity period prescribed is as follows : i) Loan amount not exceeding USD 20 million - 3 years. ii) Loan amount exceeding USD 20 Million. a) 100% Eou unit - 3 years. b) Others - 5 years. Bonds and FRNs can be raised in tranches of different maturities as long as the average

maturity of the different tranches within the same overall approval satisfies the maturity criteria.

3) Foreign Exchange Earners : There is permission granted to raise ECB to corporates who have foreign exchange earnings up to thrice the average amount of annual exports during the previous three years subject to a maximum of USD 100 million without end use restrictions.

4) Infrastructure Projects : There will be permission for holding companies/promoters to raise ECB up to the mark of USD 50 million to provide funds (equity investment) in a subsidiary/joint venture company implementing infrastructure projects.

The sectors who qualify for infrastructure sectors :a) Powerb) Telecommunicationc) Railwaysd) Roads including bridgese) Portsf) Industrial parksg) Urban infrastructure - water supply, sanitation and sewage projects.

5) End Use Requirements : There is no rule set on end use of funds except that they cannot be used for investment in stock market or in real estate. during the past decade. 6) Exemption from Withholding Tax: All interest payments and fees etc. related to external commercial borrowings would be eligible for withholding tax exemption under Section 10(15) (iv) (b) to (g) of the Income Tax Act. 1961. 7) Approval under Foreign Exchange Regulation: After receiving the approval from the ECB Division, Department of Economic Affairs, Ministry of Finance, the applicant is required to obtain approval from the Reserve Bank of India and to submit an executed copy of the loan agreement to this department for taking the same on record, before obtaining clearance from the RBI for drawing the loan. 8) Short - Term Loan from RBI: While external commercial borrowing for minimum maturity of three years and above will be sanctioned by the Department of Economic Affairs, Ministry of Finance, approvals for short term foreign currency loans with a maturity of less than three years will be sanctioned by the RBI, according to the RBI guidelines. 9) Validity of Approval: Approvals are valid for an initial period of three months, i.e. the executed copy of the loan agreement is required to be submitted within this period.

10) Long Term Borrowers : ECB of eight years and above of average maturity will be outside the border set by ECB, though the ministry of finance approval would continue to be necessary. Corporate may raise through Bond Issues/ FRN/ Syndicated loans etc. these borrowings as the maturity and interest spread are work out as per the guidelines.

11) Expense of Borrowing :The all in ceiling for normal, infrastructure and long term ECBs are 300, 400 and 500 basis points over six month Libor, for the respective currency in which the loan is being raised or set benchmark as the situation may be.2) Terms and Conditions: a) The financial terms and conditions of each ECB proposal are required to be reasonable and market related apart from the maturity and end-user requirements.

b) The option selection of the sourcing of ECB, currency of the loan and the interest rate basis i.e. fixed or floating will be left to the borrowers.

c) For public sector units, the loan agreement should not contain the covenant that the government will continue to hold at least 51% of equity.

13) Prepayment of ECB : a) Prepayment procedure is undertaken if government permits, within the permitted period, of all ECBs with residual maturity up to 1 year.

b) Prepayment upto 10% of outstanding ECB to be permitted once till the expiry of the loan, subject to the company complying with the ECB approval terms.

C) The approval of prepayment for ECBs other than Bonds/Debentures/FRNs is till 15 days or till the period up to next interest payment date, whichever is later.

14) ECB Plans for New Projects : a) All infrastructure and greenfield projects will have a chance to enjoy ECB to the level of 35% of the total project expenses.

b) ECB limits for telecom projects are more flexible at 50% of the project cost.

c) Greater flexibility may also be permitted in case of power projects and other infrastructure projects based on merits.

d) 100% EOUs will be permitted to have foreign currency exposure upto 60% of the project expense.

15) Refinancing the Present Foreign Currency Loan : a) Refinance the outstanding amounts under existing loans by raising fresh loans at lower expense may also be allowed on a case to case basis, subject to the condition that the outstanding maturity of the original loan is maintained.

b) Rolling over of ECB will not be allowed.

E) Key Issues with ECB Policy:1) Domestic loan refinancing by ECBs is not available to companies in sectors such as retail, construction, services etc.

a) Similar policy available for companies developing sea ports, airports, roads, bridges and power b) These sectors require cheap source of funding to remain competitive in global markets

2) Use of ECBs for on-lending is not allowed

a) Inability of wholly owned subsidiaries(WOSs) and Special Purpose Vehicles (SPVs) to raise cost effective debt due to lack of strong balance sheet. b) SPVs and WOSs prevalent in infrastructure sector which are capital intensive 3) Absence of full capital account convertibility and thus a cap on rupee expenditure of ECBs.

India's foreign trade policy has been formulated with a view to invite and encourages Foreign Direct Investment in India (FDI). Indian economy has been consistently showing its commitment in walking the path of liberalization since it opened its doors to the world in 1991. FDI4.3.1 Meaning : Foreign direct investment is the flow of lending to our industries. Such investment is in the form of equities or lending. Foreign direct investment leads to the control of foreign investors in the management of the concerned organisation in which investment is done. The foreign investment may not only be in the form of net flow of foreign capital but there may be flow of new technology also. It helps the economic development of the country. Many multi-national companies of various developed countries have started their offices in India. The Government of India is encouraging foreign direct investment for the continuous flow of capital in India. It is a cheaper source of foreign exchange than borrowings.

4.3.2. Needs of Foreign Direct Investment : The inflow of foreign capital serves various purposes. They are as follows:

1) To Supplement to the Domestic Savings : The rate of saving in an under-developed country is too small to generate self sustaining rate of economic development. 2) Exchange of Technical Know-how : An under-developed country is deficient not only in capital but also in skills and in trained technical manpower. External assistance by bringing in technical experts and technical know-how can bridge the gap between the need for and supply of technical knowledge as well as of trained personnel to carry through the programmes of industrialisation.

3) To Benefit from Experience of Developed Countries : External assistance has a vital role in supplying under-developed countries the fruits of years of scientific and industrial research accomplished by the older industrialised countries. 4) To Off-set the Gap in Balance of Payment : External aid makes it possible to run a deficit in the balance of payments, caused due to the import of capital goods and other equipment required for strengthening the industrial structure.5) To Increase the Pace of Development : External assistance enables to plan for quicker development without the inherent inflationary pressure of the development outlay. It is anti-inflationary in character.

4.3.3 Regulations on FDI : The new Industrial Policy was introduced by the government in the year 1991 to attract foreign investments in larger volumes. The rules and procedures are simple.

1) Automatic FDI Approval : Foreign investment approvals are upto 51% of equity in specified list of 34 high priority industries were made automatic. They were to be registered with the Reserve Bank of India.

2) Constitution of FIPB (Foreign Investment Promotion Board) : Investment above 51% of equity was also permitted on the basis of case by case approvals given by specially constituted Foreign Investment Promotion Board (FIPB) charged with expediting processing of government approvals.

3) Simplification of Procedure for Indians as to go Abroad : The procedure for Indian companies to invest abroad and develop global linkages in this way also streamlined and made easier. 4) FEMA : The Foreign Exchange Regulation Act (FERA) was amended to remove a number of constraints earlier applicable to firms with foreign equity operating in India. It also makes it easier for Indian business to operate abroad. New Foreign Exchange Management Act introduced signing of material.

5) Signing of Multilateral Investment Guarantee Agency (MIGA) Convention : India signed the Multilateral Investment Guarantee Agency (MIGA) Convention and became a member of MIGA along with many other developing countries interested in promoting foreign investment.

4.3.4 FDI in India: India has been a major recipient of FDI Inflows in the majority of sectors. There has been an unnerving upsurge in the economic developments of the country.

1) July, 1991, India opened doors to private sector and liberalized it economy.

2) Experience of South – East Asian countries by liberalizing their economies in 1980s became stars of the economic growth and development in 1990s

3) There is a considerable change in the attitude of both developing and developed countries towards FDI. They both considered FDI as most suitable form of external finance.

4) Increase in competition for FDI inflows particularly among developing nations.

A) Current Features Related to FDI: FDI cap in telecom raised to 100% from 74%; up to 49% through automatic route and beyond via FIPB

1) No change in 49% FDI limit in civil aviation.

2) FDI cap in defence production to stay at 26%, higher investment may be 1considered in state-of-the-art technology production by CCS.

3) 100% FDI allowed in single brand retail; 49% through automatic, 49-100% through FIPB

4) FDI limit in insurance sector raised to 49% from present 26%, subject to Parliament approval.

5) FDI up to 49% in petroleum refining allowed under automatic route, from earlier approval route.

B) Procedure for Receiving Foreign Direct Investment in an Indian Company : An Indian company may receive Foreign Direct Investment under the two routes as given under:

1) Automatic Route : FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

2) Government Route : FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

C) Scope of FDI in India : India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India, has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies. Some of the major economic sectors where India can attract investment are as follows:-

1) Telecommunications2) Apparels3) Information Technology4) Pharmacy5) Auto parts6) Jewelry7) Chemicals

D) The sectors where FDI is NOT allowed in India : FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:1) Atomic Energy2) Lottery Business3) Gambling and Betting4) Business of Chit Fund5) Nidhi Company6) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry,

Pisci-culture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations). Housing and Real Estate business (except development of townships, construction of residen-tial/commercial premises, roads or bridges to the extent specified in notification).Trading in Transferable Development Rights (TDRs).Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

FII

A) Definition:

By SEBI:

"Means an institution established or incorporated outside India which proposes to make investment in India in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor.“

B) Regulation of FIIs:

The regulations for foreign investment in India have been framed by the Reserve Bank of India in terms of Sections 6 and 47 of the Foreign Exchange Management Act, 1999 and notified vide Notification No. FEMA 20/ 2000-RB dated 3rd May 2000 viz. Foreign Exchange Management (Transfer or issue of Security by a person Resident outside India) Regulations 2000, as amended from time to time. In line with the said regulations, since 2003, the Securities and Exchange Board of India (SEBI) has been registering FIIs and monitoring investments made by them through the portfolio investment route under the SEBI (FII) regulations 1995. SEBI acts as the nodal point in the registration of FIIs.

A) Eligibility to get Registered as FIIs:

Following foreign entities / funds are eligible to get registered as FII:

1) Pension Funds

2) Mutual Funds

3) Investment Trusts

4) Banks

5) Insurance Companies / Reinsurance Company

6) Foreign Central Banks

7) Foreign Governmental Agencies

8) Sovereign Wealth Funds

9) International/ Multilateral organization/ agency

10) University Funds (Serving public interests)

11) Endowments (Serving public interests)

12) Foundations (Serving public interests)

13) Charitable Trusts / Charitable Societies (Serving public interests)

Types of Investment by FIIs :

A foreign Institutional Investor may invest only in the following:-

1) securities in the primary and secondary markets including shares, debentures and warrants of companies unlisted, listed or to be listed on a recognised stock exchange in India;

2) units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognised stock exchange or not

3) units of scheme floated by a collective investment scheme

4) dated Government Securities

5) derivatives traded on a recognised stock exchange

6) commercial paper

7) Security receipts

8) Indian Depository Receipt

FIIs are allowed to trade in all exchange traded derivative contracts subject to the position limits as prescribed by SEBI from time to time. Clearing Corporation monitors the open positions of the FII/ sub-accounts of the FII for each underlying security and index, against the position limits, at the end of each trading day.

The foreign exchange management act (FEMA), , which came in to effect from January 1, 2000(replacing the foreign exchange regulations act (FERA), 1973), extends to the whole of India and Also applies to all branches, offices, and agencies outside India, owned or controlled by a person resident in India. Foreign exchange management act is very helpful law for development of foreign exchange market in India.

After this foreign exchange regulation act (FERA) 1973 was closed. FEMA was most suitable for India corporate sector instead of FERA because almost all strict regulations of FERA were removed in FEMA. In India, Extensive economic reforms were undertaken in the early 1990s and this led to the deregulation and liberalization of the country's economy.

Therefore, Foreign Exchange Management Act (FEMA) was formulated in order to be compatible with the policies of pro- liberalization of the Indian government.

OBJECTIVES

1) To Facilitate External Trade and Payments:

he objectives of FEMA are to facilitate external trade and payments; and to promote the orderly Development and maintenance of foreign exchange market.

2) To Reduce the Restriction on Foreign Exchange:

Another objective of apply FEMA is to reduce the restriction on foreign exchange .

3) To Increase the Flow of Foreign Exchange :

One of the objectives is to increase the flow of foreign exchange in India.

4) To Encourage Maintenance and Development of the Foreign Exchange Market:

Another significant objective and goal of the Foreign Exchange Management Act (FEMA) is to encourage the orderly maintenance and development of the foreign exchange market in India.

5) To Unite and Revise all the Laws that Relate to Foreign Exchange :

Among the various objectives of the Foreign Exchange Management Act (FEMA), an important one is to unite and revise all the laws that relate to foreign exchange.

6) To Regulate Purchase of Immovable Property :

Another significant objective of FEMA is to regulate purchase of immovable property in India by non-residents, and outside India by Indian residents.

objectives

1) Empowers Central Government to Impose Restrictions:

The FEMA empowers the Central Government to impose restrictions on dealings in foreign exchange and foreign security and payments to and receipts, from any person outside India.

2) Restrictions on Persons Residing in India :

The Act imposes restrictions on persons residing in India on acquiring, holding or owning foreign exchange, foreign security and immovable property abroad and on transfer of foreign exchange or security abroad.

3) Dealings through Authorised Persons:

The FEMA lays down that all dealings in foreign exchange or foreign security and all payments from outside the country to India shall be made only through authorised persons, except with the general or special permission of the Reserve Bank.

4) Dealings through Current Account Transactions :

The FEMA permits dealings in foreign exchange through authorised persons for current account transactions.

5) Any Person may Sell or Draw Foreign Exchange :

Any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction permitted by the Reserve Bank.

6) Permits to Hold, Own, Transfer or Invest in Foreign Currency:

The FEMA permits a person residing in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India.

7) Reserve Bank is Empowered by this Act :

The Reserve Bank is empowered by this Act to prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person residing outside India, for carrying on any activity relating to such branch, office or other place of business.

8) Act Requires the Exporters to Furnish :

The Act requires the exporters to furnish to the Reserve Bank or to such other authority certain details regarding the exports.

9) Ensuring Export Value of the Goods :

For the purpose of ensuring that export value of the goods is received without any delay, the Reserve Bank may direct any exporter to comply with such requirements as it deems fit.

10) Take Steps to Realize and Repatriate :

Where any amount of foreign exchange is due or has accrued to any person, he shall take all reasonable steps to realize and repatriate it to India within the time and in the manner prescribed by the RBI.

Earlier, under FERA, there was no restriction placed on foreign citizens who were residents of India for acquiring immovable property outside India.

1) Now FEMA prohibits a resident to acquire, own, possess, hold or transfer any immovable property situated outside India. This restriction applies irrespective of whether the resident is an Indian citizen or foreign citizen.

2) Resident Indians can buy immovable property outside India subject to some conditions.

3) In accordance Transfer of Immovable Property outside India) Regulations, 2000, have been formulated with FEMA, the Foreign Exchange Management (Acquisition and.

The FC(R) Act provides for the regulation of commodity futures markets in India and the establishment of the Forward Markets Commission (FMC).

This act provides regulation of for certain matters relating to forward contracts, the prohibition of options in goods and for matters connected therewith.

The FC(R) Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. It permitted only the government recognised association’s exchanges to organise forward trading in regulated commodities.

The Act prohibited options trading in goods along with cash settlements of forward trades, rendering a crushing blow to the commodity derivatives market.

OBJECTIVES

) To Ensure Efficient Futures Trading :

The main objective of FC(R) Act is to ensure that the futures trading in the commodities is conducted in a way so as to meet the twin economic functions of price discovery and risk management in an efficient and transparent way.

2) To Ensure Smooth and Orderly Development of Commodity:

To ensure smooth and orderly development of the commodity futures markets to enable it to perform the economic functions of the Price discovery and price risk management efficiently, through effective Regulation of the market.

3) To Provide Benefit to the Participants:

The commodity exchanges in the country come up as professional organizations so as to effectively meet the aspirations of various intermediaries in the commodities market including the farmers. The basket of commodities in which futures trading is permitted should progressively grow so that the participants of these commodity markets can also benefit from the futures market.

Forward Markets Commission (FMC)

A) Introduction to Forward Markets Commission:

The Forward Markets Commission (FMC) is a statutory body set up under the Forward Contracts (Regulation) Act, 1952. It functions under the administrative control of the Department of Economic Affairs, Ministry of Finance since September 2013. Before this, FMC used to function under Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, Govt. of India. Vide Gazette Notification S.O. No. 2694 dated 6 September 2013 the work related to Forward Markets Commission, Futures trading and The Forward Contracts (Regulation) Act of 1952 were shifted to Department of Economic Affairs (DEA) from Department of Consumer Affairs (DCA).)

B) Purpose:

Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect & promote interest of consumers /non-members.

C) Functions of the Forward Markets Commission as defined in the FC(R) Act, 1952 are as follows:

1) To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.

2) To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.

3) To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;

4) To made recommendations generally with a view to improving the organization and working of forward markets;

5) To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.

6) To perform such other duties and exercise such other powers as may be assigned to the Commission by or under this Act, or as may be prescribed.

D) Powers of the Commission as indicated in Section 4 A of the F.C.(R) Act, 1952:

1) Summoning and enforcing the attendance of any person and examining him on oath;

2) requiring the discovery and production of any document;

3) receiving evidence on affidavits;

4) requisitioning any public record or copy thereof from any office;

5) Any other matters which may be prescribed.

The powers of approving memorandum and articles of association and Bye-laws; powers to direct to make or to make articles (Rules) or Byelaws; powers to suspend governing body of recognized association, and, powers to suspend business of recognized association

E) Regulatory Measures prescribed by Forward Markets Commission:

Forward Markets Commission provides regulatory oversight in order to ensure financial integrity , market integrity and to protect & promote interest of customers /non-members. The Forward Markets Commission prescribes following regulatory measures:

1) Limit on net open position as on the close of an individual operator and at Member level to prevent excessive speculation

2) Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices.

3) Imposition of margins to prevent defaults by Members/clients

4) Physical delivery of contracts and penalty for default/delivery obligations

5) Dialy mark to matketing of the contracts

F) Legal and Regulatory Provisions for Customer Protection:

The F.C(R) Act provides that client’s position cannot be appropriated by the member of the Exchange, except a written consent is taken within three days’ time. Forward Markets Commission is persuading increasing number of Exchanges to switch over to electronic trading, clearing and settlement, which is more customer-friendly.

Commission has also prescribed simultaneous reporting system for the Exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like, trading ahead of clients, etc.

The Commission has also mandated all the Exchanges following open outcry system to display at a prominent place in Exchange premises, the name, address, telephone number of the officer of the Commission who can be contacted for any grievance. The website of the Commission also has a provision for the customers to make complaint, send comments and suggestions to the Commission.

Regulation of commodity markets

The emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes.

A) Three Tiers of Regulations of FC(R) Act 1952:

1) Forward/ Futures Trading System:

It organizes forward trading in regulated commodities can prepare its own rules (articles of association) and byelaws and regulate trading on a day−to−day basis.

2) FMC:

Forward Markets Commission approves those rules and Byelaws and provides regulatory oversight.

3) Central Government :

Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution − is the ultimate regulatory authority.

Principles for the Regulation of Commodity Derivatives Markets:

) Design of Physical Commodity Derivatives Contracts : Design of Physical Commodity Derivatives Contracts - focused on establishing design concepts for futures contracts;2) Surveillance of Commodity Derivatives Markets: Surveillance of Commodity Derivatives Markets - including the basic framework for surveillance, powers needed to access information for both on-exchange, OTC, and cash market transactions, emphasises the importance of monitoring large positions;3) Disorderly Markets : Disorderly Markets sets out the powers needed by market authorities to intervene in the markets to address disorderly conditions; 4) Enforcement and Information Sharing:Enforcement and Information Sharing addresses the basic framework for a successful enforcement program, including required powers; and5) Enhancing Price Discovery and Transparency: This principle figure out how to improve this to the public and regulators through the publication of open interest according to certain categories of traders.

C) Benefits of Derivatives Instrument:

1) Price Risk Management:

The derivative instrument is the best way to hedge risk that arises from its underlying.

2) Price Discovery:

The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets.

3) Asset Class:

Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporate and financial institutions but also for retail investors like high networth individuals.

4) High Financial Leverage:

Futures offer a great opportunity to invest even with a small sum of money.

5) Transparency:

Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally.

6) Predictable Pricing:

Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time.

Commodity Derivative Brokers:

1) Hedgers:

Many participants in the commodity futures market are hedgers. They use the futures market to reduce a particular risk that they face.

2) Speculators :

If hedgers are the people who wish to avoid price risk, speculators are those who are willing to take such risk.

3) Arbitragers :

Arbitrageurs are another important group of participants in futures markets. They take advantage of price differential of two markets. An arbitrageur is a trader who attempts to make profits by locking in a riskless trading by simultaneously entering into transactions in two or more markets.