MF0017 – MERCHANT BANKING AND FINANCIAL SERVICES

 

 

Q.1 What do you understand by insider trading. What are the SEBI rules and regulations to prevent insider trading. [10]

Answer :  An insider is a person who is connected with a company and who is expected to have access to unpublished sensitive information with respect to securities of the company. A person who has access to unpublished information which deals in securities and is involved in violations of the provisions will be guilty of insider trading. Insiders have access to confidential information of a company due to the position occupied by them in the company. They are in a position to manipulate the share prices to their own advantage and make huge profits. These actions cause major fluctuations in the prices of the securities. Considering the fact that the actions of insiders cause devastating effects on the functioning of stock exchange, SEBI has issued regulations to control such practices. Another problem that the stock market faces is unofficial trading in shares before listing of new companies. The company is not guilty of insider trading if the acquisition of shares was as per SEBI Substantial Acquisition of Shares and Takeover Regulations. If SEBI suspects that any person has violated the regulations of prohibition of insider trading, it can initiate an inquiry. For the prevention of insider trading, SEBI has introduced a policy on disclosure and internal procedure. According to this policy:

• All listed companies and organisations associated with the securities markets have to frame a code of conduct for internal procedure as per the specified model.

• Any person holding more than five per cent shares in any listed company has to disclose the number of shares held by him to the company, within 54 working days.

• Every listed company must disclose the information received about the initial and continual disclosures within five days to all the respective stock exchanges.

Any person other than a company violating the disclosure provisions would be liable for action under the SEBI Act. SEBI has prescribed a model code of conduct for prevention of insider trading for listed companies. According to this model, the listed company appoints a compliance officer who reports to the managing director and is responsible for setting the policies and procedures, monitoring adherence to the rules for the preservation of ‘price sensitive information’, pre-clearance of designated employees’ trade, monitoring of trades and implementation of the code of conduct. Preservation of price sensitive information is done by the employees and directors. They have to maintain confidentiality of all price sensitive information. The information must not be passed to any person directly or indirectly.

Merchant bankers are administered by the SEBI (Merchant Bankers) Rules and Regulations, 1992. According to the rules and regulations, a merchant banker is a person who is engaged in the business of issue management either by buying, subscribing to securities as manager, consulting or rendering corporate advisory service in relation to issue management. The regulatory framework is designed to ensure that the merchant bankers have sufficient competence and follow diligence in their work so that the issuers comply with the statutory requirements concerning the issue. SEBI has emphasised on ensuring that all merchant bankers fulfil the eligibility criteria. As stated earlier, all merchant bankers must have a valid registration certificate. Merchant bankers must follow the general obligations, responsibility, code of conduct prescribed under the SEBI regulations. Under the regulations, the merchant bankers must submit periodical returns and other additional information to SEBI regularly. SEBI has the authority to conduct inspection of the accounts, records and documents of the merchant banker at any time if necessary.

 

 

 

 

 

Q.1 What are the provisions for prevention of fraudulent and unfair trade practices by SEBI regulations. [10]

Answer : Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 authorises SEBI to investigate into cases of market fraudulent and unfair trade practices. The regulations prohibit market manipulation, misleading statements to increase sale or purchase of securities, unfair trade practices relating to securities. The SEBI can conduct investigation by an investigating officer regarding conduct and affairs of any person dealing, buying, and selling securities. The investigating officer prepares a report based on this information. The SEBI can take action for cancellation or suspension of registration of an intermediary based on this report. Fraud is any act, expression or concealment committed by a person or his agent while dealing with securities in order to prompt the deal in securities. The regulations prohibit the dealing in securities in fraudulent method, it prohibits market manipulation, misleading statements that promote sale of securities and unfair trade practice related to securities. Any dealing in securities shall be considered to be fraudulent or an unfair trade practice if it involves fraud. The following are considered as fraudulent or an unfair trade practice if it:

• Indulges in an act which creates misleading or false impression of trading in securities market.

• Advances or agrees to advance any money to any person to induce other person to buy any security in any issue with an intention of securing the minimum subscription to such issue.

• Pays, offers, or agrees to pay directly or indirectly to any person, any money for inducing such person for dealing in any security with the object of depression or causing fluctuation in the price of such security.

• Acts to manipulate the price of security.

• Publishes reports, dealing in securities which are not true.

• Sells and deals with stolen security whether in physical or dematerialised form.

• Advertises misleading or containing information in a distorted manner which can influence the decision of the investors.

• Spread false or misleading news which induces sale or purchase of securities.

For restricting unethical trading practices, SEBI propagated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market).

 

 

 

 

 

Q.4 A company wishes to take machinery on lease. Study the lease options available to the company. [10]

 

 

 

Q.5 Give examples of various venture capital funds that are present and examples of some business ventures that have been successful with venture capital financing. [10]

 

 

 

 

 

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