Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
Table of Recommendations 13.7 Issuance of securities
With respect to issuance of securities the Commission recommends:
1. Mandating the Government to publish a list of financial instruments which will be governed under securities
law;
2. That once an instrument is included in the list of securities, the trading of such instruments should be carried
out under general principles of organised financial trading;
3. Stipulating registration of the securities irrespective of the nature of the entity issuing them with specific
requirements;
4. Creating statutory basis for disclosure obligations on the issuer (which must be done through regulations),
instead of being completely reliant on the listing agreement;
5. Giving the regulator jurisdiction over issuers of securities when they approach a certain size or number of
purchasers;
6. Creating exemptions from registration requirement of issues which are below a certain size;
7. Empowering the regulator to regulate minimum corporate governance standards for issuers irrespective of
their legal structure; and
8. Empowering the regulator to frame regulations requiring disclosure of any change in ownership of the issuer
entity (take over) and give investors a reasonable exit option is such event.
ment, which is in turn reliant on the disclosures made by the entity as well as the transparency
of its governance processes.
The law must ensure that whenever any entity is raising capital from a fairly large pool
of investors, it is properly managed and monitored. If such an entity is not managed and
monitored, unscrupulous persons may use such entities to commit fraud. This, in turn,
may detrimentally affect investor confidence and the smooth functioning of markets.
Accordingly, the Commission recommends that issuance of ‘security’ by any person
must comply with certain registration requirements unless exempted by law. However,
the Commission understands that such a broad definition may impose a prohibitive
compliance cost on issuers. High compliance costs may limit the growth of small entrepreneurs.
As such, broad exemptions need to be granted from the registration requirement
for a limited number of issues to a limited number of people.
Presently, various continuous obligations and corporate governance norms are embedded
in the Companies Act, 1956. These naturally apply only to companies issuing ‘securities’.
Various obligations applicable to issuers, such as corporate governance norms,
arise from the listing agreement. The Commission is of the view that since ‘securities’
may be issued by entities other than companies, the disclosure and governance norms
of the issuer should be independent of the legal structure of the issuer. The Commission
believes that obligations imposed on issuers of securities must be codified in statute and
elaborated by subordinate legislation or regulations.
13.6.2. Trading of securities
The Commission noted that while each type of securities may have specific legal issues
related to creation, the organised trading of securities faces similar concerns about integrity.
The Commission recommends that the law takes a unified approach to regulate
the trading of securities. This would include exchanges, brokers, clearing houses and
payment systems. This would require a generalised definition of securities. The Commission
found that there is no fixed definition of securities. Therefore it recommends that
the Central Government should create a list of securities based on the understanding of
the financial sector.
Table 13.7 gives a detailed summary of the specific recommendations of the Commission
pertaining to disclosure and governance obligations to be applied to issuers of
securities.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 127