Eligibility and disclosures under rights issue rationalized

– Qasim Saif, Executive



SEBI has on 23rd September 2020 released a press release[1] intimating about amendments to be made in SEBI ICDR Regulations, 2018 (“ICDR Regulations”/ “Regulations”) 2018. Further, on 28th September 2020, SEBI issued a notification bringing the SEBI (ICDR) (Fourth Amendment) Regulations, 2020[2] (“Amendment”). The Amendment is specifically focused for matters in relation to rights issue by listed entities. Several changes have been made which includes increasing the threshold for applicability, truncated disclosures in the letter of offer, removing the requirement for appointing a compliance officer, etc. At various places, the amendment is for the purpose of clarification or straightening of language of the Regulations.

Date of applicability

The Amendment notification states that the same shall come into force as on the date of their publication in the Official Gazette which is still awaited as on this date.

In this article we have discussed the major amendments along with the probable impact.

Areas for amendments

1.      Increase in issue size for checking applicability

Currently, the ICDR Regulations are applicable in case of a rights issue for a size exceeding INR 10 crores. Further, the draft letter of offer (“draft LOF”) in such cases is required to be filled with SEBI for its observations. In other cases, i.e. where the issue size is less than INR10 crores the letter of offer (“LOF”) is to be filled with SEBI for information and dissemination on the SEBI’s website in accordance with Regulation 3. As a matter of temporary relaxation, SEBI vide its Circular dated 21st April, 2020 (April Circular) increased the aforesaid threshold to INR 25 crore for issues opening on or before March, 2020.

By virtue of the Amendment, the limit of INR 10 crores under Regulation 3 has been increased to INR 50 crores. This would mean that while the general conditions and compliance will now be applicable to issue size of INR 50 crore or more, listed companies with a lower issue size will be required to file the LOF with SEBI for informative purpose.

As a result of the Amendment, while the applicability threshold has been increased, however, the companies with a lower issue size are still required to prepare the LOF in terms of the requirements of the ICDR Regulations and file the same with SEBI. Accordingly, while the change will surely be of relief to the entities which are now outside the applicability these Regulations, however, preparation of the LOF in terms of these Regulations will still be required.

Further to this, it should also be noted that practically filling of draft LOF for the purpose of obtaining observations from SEBI and then making prescribed changes generally takes several months. Accordingly, now since many entities will not be required to take the observations from SEBI, the same should help entities raise funds faster.

2.      Relaxation in eligibility to make right issue, for members of promoter group and promoter or director of company who are director in entities, which were earlier debarred by SEBI

Regulation 61 of ICDR Regulations state that an issuer shall not be eligible to make a rights issue of specified securities:

a) if the issuer, any of its promoters, promoter group or directors of the issuer are debarred from accessing the capital market by the Board;

b)if  any  of  the  promoters  or  directors  of  the  issuer  is  a  promoter  or  director  of  any  other company which is debarred from accessing the capital market  by the Board.

c) if any of its promoters or directors is a fugitive economic offender.

Further, explanation to the said Regulations state that “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  promoters  or directors  of  the  issuer  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.”

However, the language of the said explanation did not cover promoter group or other entities where the promoter or director of the issuer holds similar and which is debarred by SEBI. This lacuna in the language of the existing text gives an impression to result in a permanent restriction on right issue if the members of the promoter group were debarred or unless the concerned person vacated the post in the other entity which was debarred by SEBI from accessing the capital market.

The explanation shall now read as follows “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  persons  or  entities  mentioned therein  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.” After the amendment, all the mentioned persons or entities are now covered under the explanation and hence on completion of period of debarment, the issuer shall be eligible to undertake the right issue.

The above amendment is much needed clarification in the language rather than a relaxation

3.      Firm arrangement towards 75% of finance of capital expenditures only

Regulation 62 (1) (c) of ICDR Regulations require that issuer shall make  firm  arrangements  of  finance  through  verifiable  means  towards  seventy  five per cent of the stated means of finance for the specific project proposed to be funded from right issue,  excluding  the  amount  to  be  raised  through  the  proposed  rights  issue  or through existing identifiable internal accruals.

The Amendment introduces an explanation to the said clause stating “For the purpose of this regulation ‘finance for the specific project’ shall mean finance of capital expenditures only.”

The addition of explanation provides a clarity on calculation of amount that the company has to make firm arrangement for. The explanation also provides a simplification in compliance, as in most projects the capital expenditure are highly predictable unlike revenue expenditure that vary significantly and may not be estimated accurately.

4.      Removing the requirement to appoint a Compliance officer.

The Regulation 69 (8) of the ICDR Regulations require appointment of Compliance Officer by the issuer who  shall  be  responsible  for  monitoring  the compliance of the securities laws and for redressal of investors’ grievances. The said regulation has been omitted by the amendments.

Further the name of Part IV of Chapter III of ICDR Regulations has been suitably changed from “Appointment of Lead Managers, Other Intermediaries and Compliance Officer” to “Appointment of Lead Managers and Other Intermediaries”

Removing the requirement to appoint a compliance officer is a much needed amendment since the lead manager/ designated lead manager to the issue is any way required to ensure compliance with several applicable laws. Accordingly, it was a redundant practice to designate a compliance officer separately for a rights issue.

5.      Changes in Disclosure requirements

Regulation 70 of ICDR Regulations require that certain disclosure be made under LOF and Draft LOF. The SEBI has proposed that specified entities shall be required to make disclosures in format provided under Part A or Part-B of Schedule VI.

Disclosure requirements under Part B of Schedule VI have been rationalized to avoid duplication of information in LOF, especially the information which is already available in public domain and is disclosed by the companies in compliance with the disclosure requirements under SEBI listing regulations.

However, the Issuer not fulfilling the conditions above will be required to make disclosures in the format given in Part B-1 of Schedule VI, the disclosures in Part B-1 would be more detailed than that in Part B, however it shall be truncated as compared to Part A, that is applicable for IPO or FPO.

The Part-B of Schedule VI states that following entities shall be eligible to make disclosers under the given format –

1) Issuer has been filing periodic reports, statements and information in compliance with listing regulations for the last one year (instead of the last three years as required earlier) immediately preceding the date of filing Draft LOF or LOF as the case may be.

2) Statement above shall be available on website of Stock Exchanges.

3) the  issuer  has  investor  grievance-handling  mechanism  which  includes meeting of the Stakeholders’ Relationship Committee at frequent intervals, appropriate delegation of power by the board of directors of the issuer as regards  share  transfer  and  clearly  laid  down  systems  and  procedures  for timely and satisfactory redressed of investor grievances

The mentioned rationalization of disclosures would not only save the listed entities from duplication of task of providing same information that is already disclosed repeatedly but will also ease the accessing of reports by the stakeholders. The decluttering of the disclosures would be beneficial for all, Issuer, investor as well as regulators.

6.       Relaxation in Minimum 90% subscription criteria

Regulation 86(1) of ICDR Regulations require that the minimum subscription to be received in the right issue shall be at least ninety per cent of the offer through the offer document, the said limit was temporally relaxed to 75% by the April Circular.

The amendment proposes to remove mandatory requirement of minimum 90% subscription in case the issue is for the purpose of financing other than capital expenditure for a project, provided that the promoters undertake to subscribe fully to their portion of rights entitlement.

The said relaxation should help the issuers looking for financing their business by right issue, specifically for general financing needs of business. The condition that the promoters would be needed to subscribe their entitlements completely would help safeguard the interest of other subscribers.

7.      Application in plain paper to contain all the disclosures under the ICDR Regulations

Regulation 78 of ICDR Regulation allow shareholders to make application on plain paper in case he/she has not received application from for the right issue. SEBI has included a proviso to the regulation stating that “SCSBs shall accept such application forms only if all details required for making the application as per these regulations are specified in the plain paper application”.

On a general basis an application form contains following details to be entered by the shareholder-

– Name of Issuer

– Name and address of the Equity Shareholder including joint holders;

– Registered Folio Number/DP and Client ID no.;

– Number of Equity Shares held as on Record Date;

– Number of Rights Equity Shares entitled to;

– Number of Rights Equity Shares applied for;

– Number of additional Rights Equity Shares applied for, if any;

– Total number of Rights Equity Shares applied for;

– Total amount paid

– Particulars of cheque/demand draft;

– Savings/Current Account Number and name and address of the bank where the Equity Shareholder will be etc.

8.      FTRI in case of pending Show Cause Notice

Regulation 99 of the ICDR Regulations provide for eligibility criteria for Fast Track Rights Issue (FTRI). FTRI is a faster method of raising funds through right issue whereby the issuer is not required to file draft LOF to SEBI for observations, this makes the process of right issue comparatively faster, enabling issuer to get funds faster.

Clause (h) of the aforesaid regulation restricts the rights issue in case show cause notice have been issued or prosecution proceedings have been initiated by the  Board  and  pending  against  the  issuer  or  its  promoters  or  whole-time  directors.

The amendment provides that the above clause shall now exclude the cases where notice is issued in regards to proceedings for imposition of penalty. However it shall be necessary that disclosures along with potential adverse impact on the issuer are made in the letter of offer.

The said amendment would help compliant companies against whom SCN is issued for violations that are not of serious nature and require only imposition of penalty. As discussed FTRI facilitates faster and cheaper raising of finance by the company, the relaxation would promote the companies to undertake right issue for fund raising activities.


Rights issue has been constantly gaining popularity in India with corporate giants such as Reliance Industries, Shriram Transport Finance and Bajaj electrical have chosen the same as a way to raise funds during the pandemic. In order to promote the right issue as a way of raising funds and ease the funding for listed companies the SEBI has made the amendment.

The Amendments are in the directions to make the offer by way of rights issue easier and do away with disclosures or compliance requirements which were duplicated or redundant. Further, the relaxation in minimum subscription and eligibility criteria for FTRI should come to the rescue of the listed entities to raise funds in the times when most businesses are facing liquidity issues.

Our related write ups can be viewed here-



[1] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=6&ssid=23&smid=0

[2] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1601363043311.pdf

Contra trade restrictions on promoter group


Link to Informal Guidance by SEBI – https://www.sebi.gov.in/sebi_data/commondocs/sep-2020/SEBI%20let%20Raghav%20IG_p.pdf

SEBI automates continual disclosures under PIT regulations

Physical disclosures to continue till March 31, 2021

Updated as on September 23, 2020

– CS Harshil Matalia, Assistant Manager, Vinod Kothari and Company (harshil@vinodkothari.com)


SEBI in its Board meeting dated June 25, 2020, had discussed about necessary amendments[1] to be made in SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’). While the other amendments were implemented, the amendment relating to automating continual disclosures requirement under Regulation 7(2) of the PIT Regulations was pending to be implemented. SEBI vide gazette notification[2] dated July 17, 2020 notified amendments in PIT Regulations through SEBI PIT (Amendment) Regulations, 2020. As per these amendment regulations, Regulation 7(2)(c) was inserted granting enabling power to SEBI for prescribing manner of submitting System Driven Disclosures (SDD).

SEBI vide circular[3] dated September 09, 2020 (‘present Circular’) has issued the manner of providing SDD under Regulation 7(2). This article covers brief summary of the present Circular.


Earlier, in December 2015[4] SEBI had notified SDD in the first phase shall pertaining to acquisition/disposal of equity shares by promoters/promoter group based on specified thresholds under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST Regulations’) and PIT Regulations and pledge of equity shares by promoters/promoter group under the SAST Regulations. Thereafter in May 2018[5] next phase of SDD was implemented for disclosure under Reg 29 (1) and 29 (2) of SAST Regulations by non-promoters and continual disclosures under Reg. 7 (2) of PIT Regulations for directors and employees. Refer Figure 1: Flow of events in relation to SDD

With introduction of present Circular the aforesaid circulars dated December 01, 2015, December 21, 2016 and May 28, 2018 stands superseded with respect to implementation of SDDs under PIT Regulations. It continues to remain in force in relation to disclosures under SAST Regulations.

Figure 1: Flow of events in relation to SDD

Applicability of present Circular

SDD under PIT Regulations is applicable for continual disclosures relating to trading in equity shares and equity derivative instruments i.e. Futures and Options of the listed company (wherever applicable) by the entities by members of promoter group and designated persons in addition to the promoters and directors of the company (collectively referred as ‘Entities’). Therefore, at this stage, continual disclosure w.r.t. trading in listed debt instruments or listed preference shares are not system driven and requires disclosure in the manner provided in Reg. 7 (2) as discussed below.

System Driven Disclosure

As per Regulation 7(2) of PIT Regulations, every promoter, member of the promoter group, designated person and director of every company are required to disclose to the company, within two trading days, about the transaction related to the acquisition or disposal of securities if the value of such transaction, either individually or combined value of series of transactions exceed ten lakh rupees over any calendar quarter. Also, there is an onus on the company to intimate information about such transaction to the stock exchange on whose platform the securities of such company are listed, within two trading days of receipt of the disclosure or on becoming aware of such information.

Entities are required to comply with existing system for providing disclosure to the company under PIT Regulations as applicable to them till March 31, 2021. However, depositories and stock exchanges are required to adopt suitable arrangement for generating SDDs under PIT Regulations and such disclosures shall be disseminated on the website of respective stock exchanges w.e.f. October 01, 2020.

Process of Implementation

Pursuant to SEBI circular dated May 28, 2018, the listed entity was required to select one of the depositories as a ‘Designated Depository’ (DD)for the purpose of disclosure of data for that particular company.

Pursuant to the present Circular, the listed entity shall provide the information including PAN number of Entities to the DD in manner and format prescribed by the depositories within 10 days of this circular, i.e. upto September 19, 2020. SEBI has received certain representations from listed companies for extending the due date for sharing information to DD. In this regard, SEBI has informed the stock exchange about the extension of due date till September 30, 2020.[6]

However, in case of PAN exempted entities, the listed company shall provide demat account number of entities. The DD shall share such information with other depository.

In case of subsequent changes in the details of the Entities, the listed company shall update the DD, on the same day and the DD shall share such updated information to other depository on the same day on which information received from the listed company.

Based on information of PAN or demat account number, as the case may be, the depositories shall tag such demat accounts in their system at ISIN level. This would facilitate depositories to track trading activities of Entities and to monitor ceiling prescribed under Regulation 7(2) of PIT Regulations for the purpose of disclosure requirements.

The depositories shall provide the following data regarding tagged demat account to the stock exchanges on daily basis.

  • Details of transactions for pledge/revocation/invocation of shares and other encumbrances such as NDU etc. of the entities.
  • Details of off market transactions of the entities.
  • Details of transmission of shares of the entities.
  • Details of corporate actions such as ESOPs, Bonus, Rights, etc. of
  • the entities
  • Additionally, details of market transfers in case of PAN Exempt entities.

Based on the above data, stock exchange will identify transactions carried out in their trading system and such trading information shall be shared by stock exchange with other stock exchanges where the securities of the company are being listed. Every stock exchange shall consolidate such information of various trading activities and if the consolidated transaction value exceeds the ceiling prescribed under PIT Regulations then the Stock exchange shall disseminate information about these transactions on its websites.

Refer Figure 2: Flow of events for process implementation.

Figure 2: Flow of events for process implementation

Whether PAN/Demat Account number of immediate relatives shall also to be provided?

The primary intention of PIT Regulations is to prevent abuse by trading in securities of the company when in possession of unpublished price sensitive information (UPSI). Therefore, it is intended that disclosure requirement would be applicable not only to those persons who have executed any trade in securities while in possession of UPSI but also applies to immediate relative of person concerned or any other person for whom the person concerned takes any trading decisions.

As per para 14 of Schedule B of PIT Regulations, designated persons are required to disclose names and PAN details of immediate relatives along with persons to whom designated person shares material financial relationship. The said paragraph was inserted by SEBI (Prohibition of Insider Trading) (Amendment) Regulations[7], 2018, with effect from April 01, 2019.

Therefore, considering the intent of the law as a whole, the PAN details of immediate relatives of person concerned shall also to be provided to the designated depository even though it has not been specifically provided in the circular.

Procedure for submitting information to DD

In terms of SEBI circular dated May 18, 2018, the company may have already provided the information including PAN of the directors and employees (CEO and upto two levels below CEO) through NSDL’s issuer services portal under below mentioned categories/level.


Category level
1 Director

CEO with Directorship


CEO without Directorship


Employees upto two levels below CEO

For providing information including PAN of promoters, members of promoter group, and designated persons, additional categories/levels have been added:


Category level




Promoter Group


Other Designated Person

For providing the information as per aforesaid SEBI circular dated September 9, 2020, the company shall follow the below mentioned process:

For Listed companies who have designated NSDL and registered on NSDL issuer portal following steps may be followed:

  • Log-in to NSDL issuer services portal https://issuer.nsdl.com by using existing log-in credentials received from NSDL.
  • There are two options by which the company can provide information about Promoters, members of the promoter group, designated persons to NSDL on the issuer services portal:

Option 1 – Issuer can provide the aforesaid information by directly capturing data on the screen available under menu ‘Add Promoter / Designated Person Details’ under the tab ‘System Driven Disclosure’.

Option 2 – Alternatively, Issuers can upload the details through file upload facility available under the menu ‘Upload Promoter / Designated Person Details’ under the tab ‘System Driven Disclosure’. The format for upload is available in Annexure I and how to create/fill up the upload file is given in Annexure III. Also refer to Annexure II as a reference file i.e. example of data will look post creating in upload file.

  • Once the details of Promoters, members of the promoter group, designated persons and directors are provided on NSDL issuer services portal, the same can be viewed under the menu ‘ View/Delete  Promoter / Designated Person Details’.
  • NSDL will identify demat accounts in NSDL Depository System based on the PAN details of Promoters, members of the promoter group, designated persons and directors provided by Companies. The same can be viewed under the menu ‘View Demat Account Details’.

In case users have forgotten their password, they can reset their password by clicking on the ‘Forgot password’ link on the login page of Issuer portal. The user will need to follow to below mentioned steps:

  • Enter the User ID in the ‘Username’ field and click ‘Forgot password’ link;
  • User will be need to click on radio button for OTP;
  • User will be prompted to enter the mobile number registered with NSDL and click on ‘Send Code’;
  • On receipt of the OTP on the registered mobile number, user will need to enter the same in the said field and submit;
  • Once the OTP validation is done User will have the option to enter their new password and submit.

Whether PAN of the entire promoter group to be given to DD?

In order to enable the system to capture the trading activities of entire promoter group, the listed entity shall provide PAN/Demat account number, as the case may be, of all the members belonging to the promoter group irrespective of the fact that person belonging to promoter group is holding any shares or not.

Whether PAN details shall be provided separately for SAST disclosures?

Pursuant to SEBI circular[8] dated December 01, 2015, listed companies were required to provide information about promoters and promoter groups of companies to the depositories through the RTA for the purpose of disclosures under SEBI (SAST) Regulations, 2011. The intent was to build an accurate database of the existing holdings at ISIN level of all the promoters / promoter group. However, SEBI vide circular[9] dated September 23, 2020, informed that the same procedure is to be used for capturing PAN/Demat account details as mentioned in circular dated September 9, 2020 for SAST disclosures too. Therefore, erstwhile, where details of promoter or promoter group were required to be provided through the RTA, now the listed entity shall provide the same to the DD for all members of promoter group irrespective of their holdings. The idea behind the same is to align the practices of SDD for both PIT Regulations and SEBI (SAST) Regulations, 2011.


The automated process of generating disclosures under PIT Regulation will do away the instances of late filing of disclosures by the Entities or the listed company and will enable transparency in trading activities of Entities. SEBI may achieve its intention to create centralized database system by implementing such SDD process.

Our other writeups on the captioned subject:

  • SEBI prescribes norms for structured digital database, system driven disclosures & CoC violations – Click here
  • Presentation on recent amendments in PIT Regulations – Click here
  • YouTube video: Click here
  • Compliance by companies for system driven disclosures – Click here
  • System-driven Disclosures in Securities Market- Now extended to Non-Promoters – Click here

[1] https://www.sebi.gov.in/sebi_data/meetingfiles/jul-2020/1593688502334_1.pdf

[2] http://egazette.nic.in/WriteReadData/2020/220574.pdf

[3] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1599654391917.pdf#page=1&zoom=page-width,-16,559

[4] https://www.sebi.gov.in/sebi_data/attachdocs/1448970446882.pdf

[5] https://www.sebi.gov.in/legal/circulars/may-2018/system-driven-disclosures-in-securities-market_39066.html

[6] https://static.nseindia.com/s3fs-public/inline-files/NSE_Circular_18092020.pdf

[7] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/feb-2019/1550472422594.pdf#page=13&zoom=page-width,-15,76

[8] https://www.sebi.gov.in/legal/circulars/dec-2015/introduction-of-system-driven-disclosures-in-securities-market_31159.html

[9] https://www.sebi.gov.in/legal/circulars/sep-2020/system-driven-disclosures-sdd-under-sebi-sast-regulations-2011_47632.html

SEBI fixes the cut-off date for re-lodgement of physical transfers

– Time given till last day of FY 2020-2021

Pammy Jaiswal | Partner | Vinod Kothari and Company



Physical transfers of specified securities were prohibited w.e.f. 1st April, 2019 by virtue of amendment made in Reg. 40 vide SEBI LODR (Fourth Amendment) Regulations, 2018[1].Listed entitieswere not allowed to process the transfer request for equity shares where shareholders held the same in physical form with effect from 1st April, 2019.

In order to address the issue of transfer requests filed prior to April 1, 2019 but rejected due to deficiency in documents etc, SEBI issued a press release on 27th March, 2019[2] permitting the shareholders, who had already lodged their transfer request before 1st April, 2019 and where the request was returned/ rejected due to deficiency in paperwork, to re-lodge their transfer request with the listed companies.

However, there was no specific deadline provided for re-lodgement of such requests. SEBI vide its Circular[3] dated 7th September, 2020 has provided a cut-off date of 31st March, 2021 for re-lodging the transfer request rejected/ returned earlier.

Is the Circular applicable to all shareholders?

This Circular is only applicable in such cases where the transfer request for physical shares had been lodged prior to 1st April, 2019 and were rejected/ returned on grounds of deficiency in documents.

While the language of the Circular states – “Further, the shares that are re-lodged for transfer(including those request that are pending with the listed company / RTA, as on date), this cannot be interpreted to mean the inclusion of fresh transfer request post 1st April, 2019 since the same was prohibited by law itself.

Transfer to be effected in demat mode

Another important clarification that the Circular provides is that on effecting the transfer of such physical shares the transferee will be issued shares in demat mode only. This means that the transferee will have to have a demat account in order to give effect to the transfer, failing which the transfer will not be processed by the listed company.

Standard procedure for transfer of physical securities

For the purpose of processing the transfer request pursuant to the re-lodgement by the shareholders, the RTAs will be guided by the SEBI circular[4] dated 6th November, 2018 to follow the procedure provided therein. The said circular provides for the standard procedures including the document requirement for processing the transfer request of physical securities.

Enhanced due diligence for dematerialization of physical shares

For augmenting the integrity of the system in processing of dematerialization request in respect of physical shares, SEBI issued a circular on 5th November, 2019[5]. This requires the listed companies to share the static database (name of shareholders, folio numbers, certificate numbers, distinctive numbers and PAN etc.) of those shareholders who are holding physical shares.

The intent is to cross check the systems for validating dematerialization request of such shareholders.


By setting the deadline to re-lodge the transfer request, SEBI has put an end to allow the pending transfer request to be alive for an indefinite time period. In cases where the shareholder fails to re-lodge the transfer request on or before 31st March, 2021, such transfers will be deemed cancelled and will not be allowed to be transferred unless shares are dematerialised.





[5] https://www.sebi.gov.in/legal/circulars/nov-2019/enhanced-due-diligence-for-dematerialization-of-physical-securities_44863.html


Other reading materials on the similar topic:

  1. ‘No Physical, only Demat!’ can be viewed here
  2. ‘SEBI amends LODR mandating dematerialization’ can be viewed here
  3. ‘FAQs on Dematerialization of Shares’ can be viewed here
  4. Our other articles on various topics can be read at: http://vinodkothari.com/

Email id for further queries: corplaw@vinodkotahri.com

Our website: www.vinodkothari.com

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

SEBI Settlement Scheme 2020

-by smriti@vinodkothari.com

SEBI during FY 2018-19 conducted an investigation into the trading activities in illiquid stock options at BSE for a period of 1st April, 2014 to 30th September, 2015. As a result of the investigation, SEBI observed that there were large scale reversal trades executed in stock options by various entities.

Reversal trades refers to trading i.e. buying and selling of stocks from and to the same counterparty during a day which creates artificial trade units of stocks in the question. In such trades one party suffer losses and buy stock at higher rate and within seconds execute reversal trade and sell these stocks to the same counter party at a relatively lower rate thereby resulting to gains for other party. Supreme Court in the appeal no. 1969 dated 8th February, 2018 quoted:

Trading is always with the aim to make profits. But if one party consistently makes loss and that too in pre-planned and rapid reverse trades, it is not genuine, it is an unfair trade practice.”

Such kind of transactions executed by entities were considered non-genuine by SEBI as they were not executed with the basic trading rationale. These transactions were prohibited pursuant to the provisions of section 4(2) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’) which provides:

“(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: —

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;”

Pursuant to such restriction under the PFUTP Regulations, SEBI issued show cause notices to various entities (approximately 14000 entities) demanding justification for executing reversal trades at a loss. Entities who were involved in executing such trades were liable for penalty under section 15J of the SEBI Act.  Generally, SEBI has levied a fine of approximately Rs. 5 lakhs on entities i.e. the minimum under section 15J of SEBI Act, however, the parameter of determination of fine was subjective and hence even higher fine has been levied to some entities.

Rationale behind the scheme

SEBI was penalising entities for non-genuinely trading in illiquid stock options through price manipulation under the PFUTP Regulations and SEBI Act. However, tax evasion with respect to such trading activities were to be separately investigated and penalised by IT Authorities. Hence, most entities were contesting the SEBI order with higher authorities to avoid notice/regulatory action from the IT Authorities.

The Hon’ble SAT vide its order dated 14th October, 2019 in the matter of R S Ispat Ltd vs SEBI directed:

We are adjourning this matter today, so that SEBI may consider holding a Lok Adalat or adopting other alternative dispute resolution process with regard to the illiquid stock options”

Hence, to settle the proceedings initiated for such entities, SEBI introduced a scheme to settle the matter.


Regulation 26 of SEBI (Settlement Proceedings) Regulations, 2018, empowers SEBI to specify settlement schemes as and when desirable for defaults conducted by entities. SEBI for the purpose of reducing the administrative burden of pending proceedings relating to trading in illiquid stock options, issued a public notice on 27th July, 2020 for introduction of Settlement Scheme, 2020.

Pursuant to the scheme a one-time settlement opportunity is being provided to entities involved in dealing of illiquid stock options during the period from 1st April, 2014 to 30th September, 2015. The validity of the scheme is for a period ranging from 1st August, 2020 to 31st October, 2020.

Settlement mechanism

The scheme provides an indicative criteria for determining the settlement amount on the basis of:

  1. Artificial volume created
  2. Number of non-genuine trades
  3. Numbers of contracts resulting in creation of artificial trades

Further, uniform consolidated settlement factor of 0.55 shall be applied to calculate the net settlement amount payable by entities. For the purpose of determination, SEBI has introduced a separate web page where settlement amount for the purpose of such orders can be calculated. This can be accessed at Link

Process of determination of settlement amount
1. Company has to provide two information:

a)     Category of payment i.e. for order or settlement

b)    PAN details of the entity

2. The following details gets auto filed by providing PAN details:
i)                Name of the entity
ii)              Entity type
iii)            Number of contracts reversed
iv)             Number of non-genuine trades
v)              Artificial volume of trades
3. The settlement amount gets automatically calculated. The payment amount is segregated as follows:
a)     Settlement amount (as calculated using the 0.55 factor) b)    Registration fees

For bodies corporate: Rs. 25,000

For individuals: Rs. 15,000

5. Mandatory attachments:

1.     Income tax returns for last 3 years

2.     Copy of PAN card of the entity/individual

3.     Undertaking and waivers as required under the SEBI (Settlement Proceedings) Regulations, 2018

5. Payment process:

For the purpose of making payment under the settlement scheme, the entity has to withdraw any pending proceeding in the said matter. After withdrawal, entities can use this web page for payment of settlement amount.

The settlement amount is directly proportionate to the artificial volume of trades executed by the entities. We have obtained data of 15 entities on sample basis for analysis of settlement amount. The same is represented below:

Sl.No. No. of contracts reversed No. of non-genuine trades executed


Artificial volume of trades Settlement amount
1. 107 970 7,97,21,572 39,77,500
2. 85 750 2,76,68,000 35,12,500
3. 21 396 2,00,25,000 25,72,500
4. 83 492 2,75,50,000 33,57,500
5. 210 512 1,21,77,000 39,77,500
6. 165 612 2,55,25,750 39,77,500
7. 1672 4968 30,70,27,560 83,17,500
8. 191 526 2,91,34,000 39,77,500
9. 12 92 2,79,61,000 21,17,500
10. 252 666 7,17,69,750 42,87,500
11. 14 83 1,22,92,500 19,62,500
12. 682 1646 7,16,45,000 50,62,500
13. 9 194 81,29,000 21,07,500
14. 14 116 1,25,98,000 21,07,500
15. 61 332 3,37,92,000 30,47,500


Hence, basis the aforesaid table, we understand that higher the artificial trades executed, the higher will be the settlement amount. However, the point of focus here is where SEBI has levied fine of approximately Rs. 5 lakhs on entities, why will entities pay a higher settlement amount then the actual fine. Further, the whole intent of settling a proceeding is to settle it at a lower cost than actual fine. Here, the fine ranges around Rs. 5 lakhs, however, the settlement amount ranges from Rs. 20 lakhs and may go upto Rs, 83 lakhs or even higher.

Process of availing the settlement scheme

Whether settlement proceedings shall avoid scrutiny of IT department?

As regards penal provisions under IT provisions are concerned, the details of trading in illiquid stock options is linked to the PAN details of the entity. Further, the portal also requires to attach the ITR of last three years of the entity.

In this regard, whether the intent of the settlement proceeding is also to channelize information and link the proceedings with IT department, is still unknown. Further, the fate of intention of entities to delay/waive the IT proceedings by either challenging the SEBI order in higher court or settling the proceedings shall be seen only when IT departments start sending letters to such entities.

Generally, settlement refers to neither admitting nor denying any non-compliance. Therefore, entities opting for settlement scheme may have a better chance before the IT department. However, whether this can also safeguard entities them from being penalised by the IT authorities is uncertain.


The entities who opt for settlement scheme has to pay the settlement amount through the portal after withdrawing any pending proceedings. As regards, entities which do not opt for such schemes, the proceedings, as is, shall continue.


Our presentation can be viewed here: https://www.youtube.com/watch?v=CK6QOm4k8Rw 

SEBI clarifies trading in unrestricted securities and confidential nature of restricted list


Link to Informal Guidance – https://www.sebi.gov.in/sebi_data/commondocs/aug-2020/IG%20Let%20by%20SEBI%20KP_p.PDF