Project on

THE SECURITIES AND EXCHANGE

BOARD OF INDIA ACT, 1992

Submitted by
MR. SAMEER L. KUMBHAR
MMM Ist Year
Roll No - 28
A report submitted to the University of Mumbai in partial
fulfillment of the requirement for the award of MMM for
the year 2010 - 11

Under the guidance of

Prof. Dhongade

METs Institute of Management

Bandra Reclamation
Bandra West
2010 - 2011

CERTIFICATE
1
 This is to certify that project titled, “THE SECURITIES
AND EXCHANGE BOARD OF INDIA ACT, 1992”, Is based on
original study conducted by, SAMEER L KUMBHAR Roll No 28

Under the guidance and this had not formed basis for
the award or any other degree of this Institute or University

Place: Mumbai

Date: 31st Oct 2010 Prof Dhongde

METs Institute of Management

Bandra Reclamation
Bandra (West)

The Securities & Exchange Board of India Act, 1992

2
 INDEX
Sr no. Contents Page no.
1 INTRODUCTION 5

3
 2 6
DEFINATION
3 7
CHAPTER I - PRIMINARY
CHAPTER II - ESTABLISHMENT OF
4 8-9
THE SECURITIES AND EXCHANGE
BOARD OF INDIA

CHAPTER III - TRANSFER OF

5 ASSETS, LIABILITIES, ETC., OF THE 10
EXISTING
SECURITIES AND EXCHANGE
BOARD TO THE BOARD
6 CHAPTER IV – POWERS AND 11
FUNCTIONS OF THE BOARD

CHAPTER V – REGISTRATION 12
7 CERTIFICATE

CHAPTER VA - PROHIBITION OF
MANIPULATIVE AND DECEPTIVE
8 DEVICES, INSIDERTRADING AND 13
SUBSTANTIAL ACQUISITON OF
SECURITIES OR
CONTROL

9 CHAPTER VI 14
FINANCE, ACCOUNTS AND AUDIT

10 CHAPTER VIA – PENALTIES AND 15 - 17

ADJUDICATION

CHAPTER VIB – ESTABLISHMENT,

11 JURISDICTION, AUTHORITY AND 18
PROCEDURE OF
APPELLATE TRIBUNAL
12 CHAPTER VII – MISCELLANEOUS 19 - 20

13 21 - 26
CASE STUDY ON SEBI ACT 1992

14 27
Bibliography

Introduction
The Bombay Stock Exchange (BSE) is known as the oldest exchange in Asia. It traces its
history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai’s
Town Hall. The location of these meetings changed many times, as the number of brokers
constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an

4
official organization known as ‘The Native Share & Stock Brokers Association’. In 1956, the BSE
became the first stock exchange to be recognized by the Indian Government under the Securities
Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means
to measure overall performance of the exchange. In 2000 the BSE used this index to open its
derivatives market, trading Sensex futures contracts. The development of Sensex options along
with equity derivatives followed in 2001 and 2002, expanding the BSE’s trading platform.

Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an
electronic trading system in 1995. It took the exchange only fifty days to make this transition.

Capital market reforms in India and the launch of the Securities and Exchange Board of
India (SEBI) accelerated the integration of the second Indian stock exchange called the National
Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become the largest
stock exchange in India.

DEFINATION
THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
[4th April, 1992.]

An Act to provide for the establishment of a Board to protect the interests of investors in
securities and to promote the development of, and to regulate, the securities market and for

5
matters connected therewith or incidental thereto. Be it enacted by Parliament in the Forty-third
Year of the Republic of India as follows
 CHAPTER I (Preliminary)
 CHAPTER II (Establishment Of The Securities And Exchange Board Of India)
 CHAPTER III (Transfer Of Assets, Liabilities, etc., Of The Existing Securities
And Exchange Board to the Board)
 CHAPTER IV (Powers And Functions Of The Board)
 CHAPTER V (Registration Certificate)

 CHAPTER VA (Prohibition Of Manipulative And Deceptive Devices, Insider

Trading and Substantial Acquisition Of Securities Or Control)
 CHAPTER VI (Finance, Accounts And Audit)
 CHAPTER VIA (Penalties and Adjudication)
 CHAPTER VIB (Establishment, Jurisdiction, Authority and Procedure of
Appellate Tribunal)
 CHAPTER VII (Miscellaneous)

CHAPTER I - PRIMINARY

Short title, extent & commencement.

1. (1) This Act may be called the Securities and Exchange Board of India Act, 1992.
(2) It extends to the whole of India.
(3) It shall be deemed to have come into force on the 30th day of January, 1992.
Definitions.
2. (1) In this Act, unless the context otherwise requires, -
6
 (a) "Board" means the Securities and Exchange Board of India
Established under section 3;
(b) "Chairman" means the Chairman of the Board;
(c) "existing Securities and Exchange Board" means the Securities and
Exchange Board of India constituted under the Resolution of the Government of
India in the Department of Economic Affairs No.1 (44)SE/86, dated the 12th day
of April, 1988;
(d) "Fund" means the Fund constituted under Section 14;
(e) "member" means a member of the Board and includes the Chairman;
(f) "notification" means a notification published in the Official Gazette;
(g) "prescribed" means prescribed by rules made under this Act;
(h) "regulations" means the regulations made by the Board under this
Act;
(i) "securities" has the meaning assigned to it in section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956).
3[(2) Words and expressions used and not defined in this Act, but defined
in the Securities Contracts (Regulation) Act, 1956(42 of 1956), 4[or the
1 Inserted by the Securities Laws (Amendment) Act, 31 of 1999, S. 11 (w.e.f. 22-2-2000).
2 Inserted by the SEBI (Amendment) Act, 2002, S. 2 (w.e.f. 29-10-2002).
Depositories Act, 1996], shall have the meanings respectively assigned to them
in that Act.]

CHAPTER II - ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA

Establishment and incorporation of Board.

(1) With effect from such date as the Central Government may, by notification,
appoint, there shall be established, for the purposes of this Act, a Board by the name of
The Securities and Exchange Board of India.
(2) The Board shall be a body corporate by the name aforesaid, having perpetual
Succession and a common seal, with power subject to the provisions of this Act, to
acquire, hold and dispose of property, both movable and immovable, and to contract,
7
and shall, by the said name, sue or be sued.
(3) The head office of the Board shall be at Bombay.
(4) The Board may establish offices at other places in India.
Management of the Board.
4. (1) The Board shall consist of the following members, namely:-
(a) a Chairman;
(b) two members from amongst the officials of the 5[Ministry] of the
Central Government dealing with Finance 6[and administration of the Companies
Act, 1956(1 of 1956)];
(c) one member from amongst the officials of 7[the Reserve Bank];
8[(d) five other members of whom at least three shall be the whole-time
members,]to be appointed by the central Government.
(2) The general superintendence, direction and management of the affairs of the Board
shall vest in a Board of members, which may exercise all powers and do all acts and
things which may be exercised or done by the Board.
(3) Save as otherwise determined by regulations; the Chairman shall also have powers
of general superintendence and direction of the affairs of the Board and may also
exercise all powers and do all acts and things which may be exercised or done by that
Board.
(4) The Chairman and members referred to in clauses (a) and (d) of sub-section (1)
shall be appointed by the Central Government and the members referred to in clauses (b)
and (c) of that sub-section shall be nominated by the Central Government and the
9[Reserve Bank] respectively.
(5) The Chairman and the other members referred to in clauses (a) and (d) of subsection
(1) shall be persons of ability, integrity and standing who have shown capacity in
dealing with problems relating to securities market or have special knowledge or
experience of law, finance, economics, accountancy, administration or in any other
discipline which, in the opinion of the Central Government, shall be useful to the Board.

It is in this background, the SEBI Board had decided to constitute an Expert Group to
identify the deficiencies / inconsistencies in the existing provisions of the SEBI Act and also to
suggest new provisions that can be incorporated in the SEBI Act to make it more effective and

8
investor friendly, taking into account recommendations of the JPC as also recommendations of
other expert groups constituted by SEBI from time to time in this regard.

The SEBI Board in its meeting held on August 5, 2004 constituted the Expert Group with the
following members:

1. Mr. Justice M. H. Kania, ( Former Chief Justice of India) Chairman

2. Mr. Justice A. N. Mody ( Retd.)
3. Mr. Justice S. M. Jhunjhunwala (Retd.)
4. Ms. P. M. Umerji, Principal Secretary (Retd.) (Legislation),Govt. of Maharashtra
5. Shri. Jitesh Khosla*, Joint Secretary, Representative of the Department of Company
Affairs(Govt. of India)
6. Shri. Prashant Saran , Chief General Manager, Representative of the Reserve Bank of
India
7. Ms Parimala Rao, Principal, Govt. Law College, Mumbai
8. Shri. PGR Prasad, Managing Director,SBI Funds Management Pvt. Ltd., Representative of
the Association of Mutual Funds of India(AMFI)
9. Shri. N. K. Jain**, Secretary and Chief Executive Officer, the Institute of Company
Secretaries of India (ICSI), Representative of ICSI
10. Shri. Sushil Jiwrajka, Chairman,Western Regional Council , Federation of Indian Chambers
and Commerce of Industry(FICCI) Representative of FICCI
11. Shri. K.R. Chandratre, Practicing Company Secretary & Ex-President Institute of Company
Secretaries of India

CHAPTER III - TRANSFER OF ASSETS, LIABILITIES, ETC., OF THE EXISTING

SECURITIES AND EXCHANGE BOARD TO THE BOARD

(1) On and from the date of establishment of the Board,-

(a) any reference to the existing Securities and Exchange Board in any law other
than this Act or in any contract or other instrument shall be deemed as a reference to
the Board;
(b) all properties and assets, movable and immovable, of, or belonging to, the
existing Securities and Exchange Board, shall vest in the Board;
(c) all rights and liabilities of the existing Securities and Exchange Board shall be
9
transferred to, and be the rights and liabilities of, the Board;
(d) without prejudice to the provisions of clause (c), all debts, obligations and
liabilities incurred, all contracts entered into and all matters and things engaged to be
done by, with or for the existing Securities and Exchange Board immediately before
that date, for or in connection with the purpose of the said existing Board shall be
deemed to have been incurred, entered into or engaged to be done by, with for, the
Board;
(e) all sums of money due to the existing Securities and Exchange Board
immediately before that date shall be deemed to be due to the Board;
(f) all suits and other legal proceedings instituted or which could have been
instituted by or against the existing Securities and Exchange Board immediately before
that date may be continued or may be instituted by or against the Board; and
(g) every employee holding any office under the existing Securities and
Exchange Board immediately before that date shall hold his office in the Board by the
same tenure and upon the same terms and conditions of service as respects
remuneration, leave, provident fund, retirement and other terminal benefits as he
would have held such office if the Board had not been established and shall continue
to do as so an employee of the Board or until the expiry of the period of six months
from that date if such employee opts not to be the employee of the Board within such
period.

CHAPTER IV - POWERS AND FUNCTIONS OF THE BOARD

Functions Of The Board

• The Board is responsible for the securing the interests of investors in securities and to
facilitate the growth of and to monitor the securities market in an appropriate manner.
• To monitor and control the performance of stock exchange and derivative markets.
• Listing and monitoring the functioning of stock brokers, sub brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and others associated with securities
markets by any means.

10
• Monitoring and Controlling the functioning of venture capital funds and mutual funds.
• Forbid unjust and dishonest trade practices in the security markets and forbid insider
trading in the security market.
• Undertake periodic audits of stock exchanges, mutual funds, individuals and self regulatory
organizations associated with the security market.

CHAPTER V - REGISTRATION CERTIFICATE

No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and
such other intermediary who may be associated with securities market shall buy, sell or deal in
securities except under, and in accordance with, the conditions of a certificate of registration
obtained from the Board in accordance with the regulations made under this Act.

Provided that a person buying or selling securities or otherwise dealing with the securities market
as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and
such other intermediary who may be associated with securities market immediately before the
establishment of the Board for which no registration certificate was necessary prior to such
establishment, may continue to do so for a period of three months from such establishment or, if
he has made an application for such registration within the said period of three months, till the
disposal of such application.
11
Provided further that any certificate of registration, obtained immediately before the
commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been
obtained from the Board in accordance with the regulations providing for such registration.

1A) No depository, participant, custodian of securities, foreign institutional investor, credit

rating agency, or any other intermediary associated with the securities market as the Board may
by notification in this behalf specify, shall buy or sell or deal in securities except under and in
accordance with the conditions of a certificate of registration obtained from the Board in
accordance with the regulations made under this Act.
Provided that a person buying or selling securities or otherwise dealing with the securities market
as a depository, [participant] custodian of securities, foreign institutional investor or credit rating
agency immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for
which no certificate of registration was required prior to such commencement, may continue to buy
or sell securities or otherwise deal with the securities market until such time regulations are made
under clause (d) of sub-section (2) of section 30.
(1B) No person shall sponsor or cause to be sponsored or carry on or caused to be carried
on any venture capital funds or collective investment scheme including mutual funds, unless he
obtains a certificate of registration from the Board in accordance with the regulations. Provided
that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any
venture capital funds or collective investment scheme operating in the securities market
immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which
no certificate of registration was required prior to such commencement may continue to operate till
such time regulations are made under clause (d) of sub-section (2) of section 30."

CHAPTER VA - PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES,

INSIDERTRADING AND SUBSTANTIAL ACQUISITON OF SECURITIES OR CONTROL

No person shall directly or indirectly –

(a) use or employ, in connection with the issue, purchase or sale of any securities listed
or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or
contrivance in contravention of the provisions of this Act or the
rules or the regulations made there under;
(b) employ any device, scheme or artifice to defraud in connection with issue ordealing
in securities which are listed or proposed to be listed on a recognized stock
exchange;32 Chapter VA inserted by the SEBI (Amendment) Act, 2002, S. 7(w.e.f. 29-10-2002).
(c) engage in any act, practice, course of business which operates or would
operate as fraud or deceit upon any person, in connection with the issue, dealing in
securities which are listed or proposed to be listed on a recognized stock exchange, in
12
contravention of the provisions of this Act or the rules or the regulations made
there under;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or
communicate such material or non-public information to any other person, in a manner
which is in contravention of the provisions of this Act or the rules or the regulations
made there under;
(f) acquire control of any company or securities more than the percentage of
equity share capital of a company whose securities are listed or proposed to be listed ona
recognised stock exchange in contravention of the regulations made under this Act

CHAPTER VI
FINANCE, ACCOUNTS AND AUDIT

The Central Government may, after due appropriation made by Parliament by law in
this behalf, make to the Board grants of such sums of money as that Government may
think fit for being utilised for the purposes of this Act.
Fund.
(1) There shall be constituted a Fund to be called the Securities and Exchange Board
of India General Fund and there shall be credited thereto-
(a) all grants, fees and charges received by the Board under this Act;
(b) all sums received by the Board from such other sources as may be decided
upon by the Central Government.
(2) The Fund shall be applied for meeting -
(a) the salaries, allowances and other remuneration of members, officers and

13
other employees of the Board;
(b) the expenses of the Board in the discharge of its functions under section 11;
(c) the expenses on objects and for purposes authorized by this Act.
Accounts and Audit.
(1) The Board shall maintain proper accounts and other relevant records and prepare
an annual statement of accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and Auditor- General of India.
(2) The accounts of the Board shall be audited by the Comptroller and Auditor-
General of India at such intervals as may be specified by him and any expenditure
incurred in connection with such audit shall be payable by the Board to the Comptroller
and Auditor-General of India.
(3) The Comptroller and Auditor-General of India and any other person
appointed by him in connection with the audit of the accounts of the Board shall have
the same rights and privileges and authority in connection with such audit as the
Comptroller and Auditor-General generally has in connection with the audit of the
Government accounts and, in particular, shall have the right to demand the production of
books, accounts, connected vouchers and other documents and papers and to inspect any
of the offices of the Board.
CHAPTER VIA - PENALTIES AND ADJUDICATION

Sr.No Offence Penalty

(a) Failure to furnish any document, return or report
Penalty of Rs1 Lakh for each day
to the board.
15 A (b) Failure to file any document, return or report to for which the offence continues or

the board Rs 1 crore whichever is less

(c) Failure to maintain books of accounts or records.

Penalty of Rs1 Lakh for
Failure by an intermediary to enter into an
each day during which
agreement with his clients as required under this Act
15 B such failure continues or Rs
or any rules or regulations made there under,
1 crore whichever is less

14
 Failure by any listed company or any person
Penalty of Rs1 Lakh for each day
who is registered as an intermediary, redress the
during which such failure
15 C grievances of investor’s inspite of being asked by
continues or Rs 1 crore whichever
the board.
is less

Penalty of Rs1 Lakh for

Failure to obtain a certificate of registration from each day during which the
15 D the board for sponsoring or carrying on any sponsors or carries on any
(a) collective investment scheme, including mutual such collective investment
Funds scheme including mutual
funds or Rs 1 crore which
ever is less
A person registered with the board as a collective
investment scheme, including mutual funds, for
sponsoring or carrying on any investment
scheme:

(a) fails to comply with the terms and conditions of

certificate of registration.
(b) Fails to make an application for listing of its Penalty of Rs1 Lakh for
schemes as provided for in the regulations each day during which
15D
governing such listing such failure continues or
(b) © Fails to dispatch unit certificates of any scheme in Rs 1 crore which ever is
the manner provided in the regulation governing less
such dispatch.
(d) Fails to refund the application moneys paid by
the investors within the period specified in the
regulations.

(e) fails to invest money collected by such collective

investment schemes in the manner or within the
period specified in the regulations.

15(E) Any asset management company of a mutual fund Penalty of Rs1 Lakh for each day
registered under this Act fails to comply with any of during which such failure

15
 the regulations providing for restrictions on the
activities of the asset management companies.
If any person, who is registered as a stock broker
under this Act.
(a) Fails to issue contract notes in the form and
manner specified by the stock exchange of which
such broker is a member.
(b) Fails to deliver any security or fails to make
payment of the amount due to the investor in the
15F manner or within the period specified in the
regulations.
continues or Rs 1 crore whichever
is less
A penalty not exceeding Five times
the amount for which the contract
note was required to be issued by
that broker;
penalty of Rs 1 lakh for each day
during which such failure
continues or Rs 1 crore whichever
is less.

( c) Charges an amount of brokerage which is in A penalty of Rs 1 lakh or Five

excess of the brokerage specified in the regulations. times the amount of brokerage
charged in excess of the specified
brokerage whichever is higher.

If any insider who:

i) either on his own behalf or on behalf of anyu other
person, deals in securities of a body corporate listed
on any stock exchange on the basis of any
unpublished price sensitive information; or
(ii) communicates any unpublished price sanative
Penalty of Rs 25 crore or 3 times
information to any person, with or without his
15G the amount of profits made out of
request for such information except as required in
insider trading whichever is higher.
the ordinary course of business or under any law: or

(iii) Counsels, or procures for any other person to

deal in any other person to deal in any securities of
any body corporate on the basis of unpublished
price sensitive information.

16
 Failure by any person, who is required under this Act
or any rules or regulations made thereunder, fails to
Penalty of Rs 25 crores or 3 times
-
(i) Disclose the aggregate of his shareholding in the the amount of profits made out of
15H
body corporate before he acquires any shares of such failure, whichever is higher.

that body corporate; or

(ii) Make a public announcement to acquire shares
at a minimum price
Penalty of Rs 25 crores or 3 times
If any person indulges in fraudulent and unfair trade the amount of profits made out of
15HA
practices relating to securities such practices, whichever is
higher.

CHAPTER VIB - ESTABLISHMENT, JURISDICTION, AUTHORITY AND PROCEDURE OF

APPELLATE TRIBUNAL

.Establishment of Securities Appellate Tribunals.-

(1) The Central Governmentshall, by notification, establish one or more Appellate Tribunals to be
known as theSecurities Appellate Tribunal to exercise the jurisdiction, powers and authority
conferredon such Tribunal by or under this Act 56[or any other law for the time being in force ]
(2) The Central Government shall also specify in the notification referred to in
sub-section (1) the matters and places in relation to which the Securities Appellate
Tribunal may exercise jurisdiction.
.Composition of Securities Appellate Tribunal. A Securities Appellate
Tribunal shall consist of a Presiding Officer and two other Members, to be appointed, by
notification, by the Central Government:
Provided that the Securities Appellate Tribunal, consisting of one person only,
established before the commencement of the Securities and Exchange Board of India
(Amendment) Act, 2002, shall continue to exercise the jurisdiction, powers and
authority conferred on it by or under this Act or any other law for the time being in force
till two other Members are appointed under this section.
.Tenure of office of Presiding Officer and other Members of Securities
Appellate Tribunal. The Presiding Officer and every other Member of a Securities
Appellate Tribunal shall hold office for a term of five years from the date on which he
17
enters upon his office and shall be eligible for re-appointment:
Provided that no person shall hold office as the Presiding Officer of the
Securities Appellate Tribunal after he has attained the age of sixty-eight years:
Provided further that no person shall hold office as Member of the Securities
Appellate Tribunal after he has attained the age of sixty-two years.]
Salary and allowances and other terms and conditions of service of Presiding
Officers.- The salary and allowances payable to and the other terms and conditions of
service (including pension, gratuity and other retirement benefits) of the 59[Presiding
Officer and any other Member of a Securities Appellate Tribunal] shall be such as may
be prescribed:

CHAPTER VII - MISCELLANEOUS

Power of Central Government to issue directions.

16.(1) Without prejudice to the foregoing provisions of 74[this Act or the Depositories
Act, 1996], the Board shall, in exercise of its powers or the performance of its functions
under this Act, be bound by such directions on questions of policy as the Central
Government may give in writing to it from time to time:
Provided that the Board shall, as far as practicable, be given an opportunity to
express its views before any direction is given under this sub-section.
(2) The decision of the Central Government whether a question is one of policy or not
shall be final.
Power of Central Government to supersede the Board.
17. (1) If at any time the Central Government is of opinion-
(a) that on account of grave emergency, the Board is unable to discharge
the functions and duties imposed on it by or under the provisions of this Act; or
(b) that the Board has persistently made default in complying with any
direction issued by the Central Government under this Act or in the discharge of
the functions and duties imposed on it by or under the provisions of this Act and
as a result of such default the financial position of the Board or the
administration of the Board has deteriorated; or
(c) that circumstances exist which render it necessary in the public

18
interest so to do,
the Central Government may, by notification, supersede the Board for such period, not
exceeding six months, as may be specified in the notification.
(2) Upon the publication of a notification under sub-section (1) superseding the Board,-
74 Substituted by Act 22 of 1996, S. 30(w.e.f. 20-9-1995), for “this Act”
(a) all the members shall, as from the date of supersession, vacate their
offices as such;
(b) all the powers, functions and duties which may, by or under the
provisions of this Act, be exercised or discharged by or on behalf of the Board,
shall until the Board is reconstituted under sub-section (3), be exercised and
discharged by such person or persons as the Central Government may direct;
and
(c) all property owned or controlled by the Board shall, until the Board is
reconstituted under sub-section (3), vest in the Central Government.
(3) On the expiration of the period of supersession specified in the notification issued
under sub-section (1), the Central Government may reconstitute the Board by a fresh
appointment and in such case any person or persons who vacated their offices under
clause (a) of sub-section (2), shall not be deemed disqualified for appointment:
Provided that the Central Government may, at any time, before the expiration of
the period of supersession, take action under this sub-section.
(4) The Central Government shall cause a notification issued under sub-section (1) and
a full report of any action taken under this section and the circumstances leading to such
action to be laid before each House of Parliament at the earliest.
Returns and

19
 CASE STUDY ON SEBI ACT 1992

Harshad Mehta: India's best-known scamster.

Harshad Mehta was an Indian stockbroker caught in a scandal beginning in 1992. He died
of a massive heart attack in 2001, while the legal issues were still being litigated.
Early life
Harshad Shantilal Mehta was born in a Gujarati jain family of modest means. His father was
a small businessman. His mother's name was Rasilaben Mehta. His early childhood was spent in
the industrial city of Bombay. Due to indifferent health of Harshad?s father in the humid environs of
Bombay, the family shifted their residence in the mid-1960s to Raipur, then in Madhya Pradesh

20
and currently the capital of Chhattisgarh state.
An Amul advertisement of 1999 during the controversy over MUL saying it as "The Big
Bhool" (Bhool in Hindi means Blunder)
He studied at the Holy Cross High School, located at Byron Bazaar. After completing his
secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai
College for a Bachelors degree in Commerce.
After completing his graduation, Harshad Mehta started his working life as an employee of the
New India Assurance Company. During this period his family relocated to Bombay and his brother
Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. His youngest
brother Hitesh is a practicing surgeon at the B.Y.L.Nair Hospital in Bombay. After his graduation
Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a
small flat in Ghatkopar for living.
In the late seventies every evening Harshad and Ashwin started to analyze tips generated from
respective offices and from cyclostyled investment letters, which had made their appearance
during that time.
In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated
to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.
In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a
while he was unable to sustain his overbought positions and decided to pay his dues by selling his
house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to
his brokers and offered the papers of the house as guarantee. The brokers Shah and Sheth were
moved by his gesture and gave him sufficient time to overcome his position.
After he came out of this big struggle for survival he became stronger and his brother quit
his job to team with Harshad to start their venture GrowMore Research and Asset Management
Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for
the same with financial assistance from Shah and Sheth, who were Harshad's previous broker
mentors.
He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading
floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as
well as scrip-specific activities. By the end of eighties the media started projecting him as "Stock
Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt
proud of this accomplishments and showed off his success to journalists through his mansion

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"Madhuli", which included a billiards room, mini theatre and nine hole golf course. His brand new
Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the
nondescript broker to super star of financial world.
During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of
funds and finances as well as personal wealth.
The fall
In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all
along considered as the architect of the bull run was blamed for the crash. It transpired that he had
manipulated the Indian banking systems to siphon off the funds from the banking system, and
used the liquidity to build large positions in a select group of stocks. When the scam broke out, he
was called upon by the banks and the financial institutions to return the funds, which in turn set
into motion a chain reaction, necessitating liquidating and exiting from the positions which he had
built in various stocks. The panic reaction ensued, and the stock market reacted and crashed
within days. He was arrested on June 5, 1992 for his role in the scam.
His favorite stocks included
1) ACC
2) Apollo Tyres
3) Reliance
4) Tata Iron and Steel Co. (TISCO)
5) BPL
6) Sterilize
7) Videocon.
The extent
The Harshad Mehta induced security scam, as the media sometimes termed it, adversely
affected at least 10 major commercial banks of India, a number of foreign banks operating in India,
and the National Housing Bank, a subsidiary of the Reserve Bank of India, which is the central
bank of India.
As an aftermath of the shockwaves which engulfed the Indian financial sector, a number of people
holding key positions in the India's financial sector were adversely affected, which included arrest
and sacking of K. M. Margabandhu, then CMD of the UCO Bank; removal from office of V.
Mahadevan, one of the Managing Directors of India’s largest bank, the State Bank of India.
The end

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The Central Bureau of Investigation which is India’s premier investigative agency, was entrusted
with the task of deciphering the modus operandi and the ramifications of the scam. Harshad Mehta
was arrested and investigations continued for a decade. During his judicial custody, while he was
in Thane Prison, Mumbai, he complained of chest pain, and was moved to a hospital, where he
died on 31st December 2001.
His death remains a mystery. Some believe that he was murdered ruthlessly by an underworld
nexus (spanning several South Asian countries including Pakistan). Rumour has it that they
suspected that part of the huge wealth that Harshad Mehta commanded at the height of the 1992
scam was still in safe hiding and thought that the only way to extract their share of the 'loot' was to
pressurize Harshad's family by threatening his very existence. In this context, it might be
noteworthy that a certain criminal allegedly connected with this nexus had inexplicably
surrendered just days after Harshad was moved to Thane Jail and landed up in imprisonment in
the same jail, in the cell next to Harshad Mehta's.
Mumbai: Just as the year 2001 was coming to an end, Harshad Shantilal Mehta, boss of
Growmore Research and Asset Management, died of a massive heart attack in a jail in Thane.
And thus came to an end the life of a man who is probably the most famous character ever to have
emerged from the Indian stock market. In the book, The Great Indian Scam: Story of the missing
Rs 4,000 crore, Samir K Barua and Jayanth R Varma explain how Harshad Mehta pulled off one of
the most audacious scams in the history of the Indian stock market.
Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early
childhood was spent in Mumbai where his father was a small-time businessman. Later, the family
moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier place on
account of his indifferent health. But Raipur could not hold back Mehta for long and he was back in
the city after completing his schooling, much against his father’s wishes.
Mehta first started working as a dispatch clerk in the New India Assurance Company. Over
the years, he got interested in the stock markets and along with brother Ashwin, who by then had
left his job with the Industrial Credit and Investment Corporation of India, started investing heavily
in the stock market.
As they learnt the ropes of the trade, they went from boom to bust a couple of times and survived.
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did
very well for himself. At his peak, he lived almost like a movie star in a 15,000 square feet house,
which had a swimming pool as well as a golf patch. He also had a taste for flashy cars, which

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ultimately led to his downfall.
? Newsmakers of the week:
The year was 1990. Years had gone by and the driving ambitions of a young man in the
faceless crowd had been realized. Harsh ad Mehta was making waves in the stock market. He had
been buying shares heavily since the beginning of 1990. The shares which attracted attention
were those of Associated Cement Company (ACC), write the authors. The price of ACC was bid
up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation.
The theory basically argues that old companies should be valued on the basis of the amount of
money which would be required to create another such company.
Through the second half of 1991, Mehta was the darling of the business media and earned
the sobriquet of the? Big Bull? who was said to have started the bull run. But, where was Mehta
getting his endless supply of money from? Nobody had a clue.
On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious
ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his
buying.
The authors explain: The crucial mechanism through which the scam was effected was the ready
forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one
bank to another. Crudely put, the bank lends against government securities just as a pawnbroker
lends against jewelleryThe borrowing bank actually sells the securities to the lending bank and
buys them back at the end of the period of the loan, typically at a slightly higher price.?
It was this ready forward deal that Harshad Mehta and his cronies used with great success to
channel money from the banking system.
A typical ready forward deal involved two banks brought together by a broker in lieu of a
commission. The broker handles neither the cash nor the securities, though that wasn? T the case
in the lead-up to the scam.
In this settlement process, deliveries of securities and payments were made through the
broker. That is, the seller handed over the securities to the broker, who passed them to the buyer,
while the buyer gave the cheque to the broker, who then made the payment to the seller.
In this settlement process, the buyer and the seller might not even know whom they had
traded with, either being know only to the broker.?
This the brokers could manage primarily because by now they had become market makers and
had started trading on their account. To keep up a semblance of legality, they pretended to be

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undertaking the transactions on behalf of a bank.
Another instrument used in a big way was the bank receipt (BR). In a ready forward deal,
securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of
securities, gave the buyer of the securities a BR.
As the authors write, a BR ?confirms the sale of securities. It acts as a receipt for the money
received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to
the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.?

Having figured this out, Metha needed banks, which could issue fake BRs, or BRs not
backed by any government securities. ?Two small and little known banks - the Bank of Karad
(BOK) and the Metorpolitan Co-operative Bank (MCB) - came in handy for this purpose. These
banks were willing to issue BRs as and when required, for a fee,? the authors point out.
Once these fake BRs were issued, they were passed on to other banks and the banks in
turn gave money to Mehta, obviously assuming that they were lending against government
securities when this was not really the case. This money was used to drive up the prices of stocks
in the stock market. When time came to return the money, the shares were sold for a profit and the
BR was retired. The money due to the bank was returned.
The game went on as long as the stock prices kept going up, and no one had a clue about Mehta?
s modus operandi. Once the scam was exposed, though, a lot of banks were left holding BRs
which did not have any value - the banking system had been swindled of a whopping Rs 4,000
crore.
Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a
weekly newspaper column. This time around, he was in cahoots with owners of a few companies
and recommended only those shares. This game, too, did not last long.
Interestingly, however, by the time he died, Mehta had been convicted in only one of the many
cases filed against him.

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 BIBLIOGRAPHY

1) http://www.sebi.gov.in
2) The Institute of Chart ants Accounts of India resource file
3) Sebi Act, 1992, Scra, 1956 With Rules by Bharat\'s
4) Manual Of SEBI Act, Rules, Regulations, Guidelines, Circulars, Etc. (With Free Download) in 2
Volumes by Bharat\'S
5) Corporate Laws With Allied Acts/Rules, Sebi (Icdr) Regulations, 2009
6) Book called Scam From Harshad Mehta To Ketan Parekh by Debashis Basu Sucheta
7) Book called Great Indian Scam: Story of the Missing Rs 4,000 crore by Barua, S K
8) Frontline News papers , Times of India, The Hindu
9) Magazines, India Today, Business World.

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