Section 24 of Companies Act. Power of Securities and Exchange Board to regulate issue and transfer of securities. This provision empowers SEBI to regulate,“ Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.— 

(1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,—

 (a) in so far as they relate to —

 (i) issue and transfer of securities; and 

(ii) non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided under this Act, be administered by the Securities and Exchange Board by making regulations in this behalf; 

(b) in any other case, be administered by the Central Government. Explanation.—For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.

 (2) The Securities and Exchange Board shall, in respect of matters specified in subsection (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-section (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992”.

Let’s overview the provision of  Section 24 (2) of the Companies Act to empower SEBI including the below provisions

“Sub-section (1) of Section 458 of the Securities and Exchange Board of India Act, 1992 pertains to the power of the Securities and Exchange Board of India (SEBI) to make regulations. This section empowers SEBI to make regulations consistent with the provisions of the Act and the rules made thereunder to carry out the purposes of the Act. SEBI, as the regulatory body for the securities market in India, is granted authority through such sections to create and enforce regulations that govern the functioning of the securities market and protect the interests of investors”.

“Section 11 (1), (2a), (3), and (4): These subsections of Section 11 deal with the Powers and Functions of the Board – SEBI. Section 11 (1) empowers SEBI to regulate the securities market. Section 11 (2a) confers the power to call for information, undertake inspection, conduct inquiries, etc. Section 11 (3) grants SEBI the authority to conduct investigations and audit of any recognized stock exchange, clearing corporation, or any intermediary. Section 11 (4) outlines SEBI’s power to impose penalties”.

“Section 11A: This section pertains to the power of SEBI to regulate or prohibit insider trading in securities”.

“Section 11B: Section 11B deals with the power of SEBI to regulate substantial acquisition of shares and takeover of companies”.

“Section 11D: Section 11D relates to the power of SEBI to adjudicate”.

Regulation of Security Issues under section 24 of Companies Act :

Section 24 of 1(a) (i) of the Companies Act, empowers issuing and transfer of securities. Wherein, SEBI plays a pivotal role in upholding market credibility and transparency, it fosters confidence of the investors in the capital-raising of the companies through active issuance procedures and rigorous scrutiny of prospectuses.

SEBI has a process of issuing securities and approving prospectuses by ensuring accurate disclosure of Information in the interest of shareholders which follows as under:

• Identification of funding needs
• Decision on securities type
• Appointment of Intermediaries
• Due diligence
• Drafting of prospectus
• SEBI filing

Above mentioned process is followed by SEBI’s approval as under:

• Review and approval
• Ensuring compliance
• Preventing misleading information
• Investor protection
• Communication with companies
• Post issuance monitoring

Transfer of Securities:

Transfer of securities governed under Companies Act, 2013 and Security Exchange Board of India. SEBI (Listing obligations and Disclosure requirements) Regulation, 2015 also provides provisions related to transfer of securities within the security market in India as per below:

• Regulations specify procedural and disclosure requirements for securities transfer to ensure compliance and transparency.
• Strict adherence to laws and regulations is crucial for facilitating lawful and transparent securities transfers.

Recent Challenges in Security Transfer

A complexity arises in security transfers need to focus on giving 5 key pillars:

1. Regulatory Compliance by adherence to the Companies Act, 2013, and SEBI rules.
2. Technological Integration by ensuring data privacy and security.
3. Addressing challenges related to cross-border security transfers, while in compliance with International laws and regulations.
4. Ensuring transparency and accountability to uphold strong corporate governance.
5. Investors protection through effective Dispute Resolution Mechanism.

Investor Protection Measures under Section 24 of Companies Act

SEBI has instituted several investor protection measures in the simplification of share transfer and allotment procedures. A committee chaired by Shri R Chandrasekaran, Managing Director of Stock Holding Corporation of India Limited, has proposed streamlined procedures. The draft report is currently under review by market intermediaries, and upon feedback incorporation, it is expected to alleviate investor challenges linked to delays in share transfers and bad deliveries.

As part of these measures, stock exchanges are now mandated to assign a unique order code number for each transaction, enhancing traceability and transparency. Additionally, stock brokers are required to record and display the time when a client places an order, ensuring fair execution and preventing undue advantage-taking from intra-day price fluctuations.

To regulate sub-brokers, SEBI has taken significant steps, including efforts to revive the remisier institution, an agent of a broker registered with the stock exchange. Transfer deeds with rubber stamps not authorized by clearing members, SEBI-registered sub-brokers, or recognized remisiers are classified as bad delivery in stock exchanges.

Furthermore, brokers are prohibited from dealing with unregistered sub-brokers, and it is the broker’s responsibility to ensure their clients are not acting as sub-brokers unless registered with SEBI or recognized by the stock exchange as remisiers.

In terms of investor protection funds, SEBI has increased compensation amounts available against a single claim of an investor arising from default by a member broker, with varying limits depending on the size of the stock exchange, ranging from Rs.1 lakh for major stock exchanges to Rs.25,000 for smaller ones like Gauhati, Bhubaneshwar, Magadh, and Madhya Pradesh, and Rs.50,000 for others. These measures collectively fortify the regulatory framework, ensuring the integrity and security of investor transactions in the securities market.

Case Law

Section 24 of Companies Act 2013 deals with the appointment of directors and their terms, rights, and duties. Several precedents and case laws in India have addressed issues related to this section. Let’s discuss the case of Arun Kumar Agrawal vs Union of India & Ors, Justice Khehar emphasised the importance of the functions performed by SEBI in the exercise of its powers under Section 11. Observations had been made in this judgment that SEBI has discretionary powers vested under Section 11(1), emphasizing the unrestricted nature of the powers in fulfilling its functions related to investor and market regulation saying that, It is necessary to record that the aforesaid power to adopt “such measures as it thinks fit” to promote investors’ interest. It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open-ended terms having no prearranged limits. It also highlights that the power of SEBI under section 11(1) to adopt measures for promoting investor’s interests is not curtailed by any other provisions of the SEBI Act.

Conclusion

SEBI, under the authority granted by the Companies Act, has power to regulate the issue and transfer of securities in India. It plays a crucial role in maintaining market credibility and transparency, ensuring investor’s confidence through careful scrutiny of prospectuses and active issuance procedures. SEBI’s responsibilities include approving securities issues, ensuring compliance, preventing misleading information, and protecting investors. The transfer of securities is governed by the Companies Act, SEBI’s regulations provide procedural and disclosure requirements for transparent and lawful transfers. Recent challenges include regulatory compliance, technological integration, cross-border transfers, corporate governance, and Investor protection through effective dispute-resolution mechanisms. SEBI has implemented measures to enhance investor protection, including streamlined procedures, unique order code numbers, and increased compensation amounts for investor claims.

FAQs

Q1. Subsection 24(1)(a) grants SEBI the power to regulate the issuance and transfer of securities by listed companies and those intending to list. How is this power delineated between issuance and transfer in practice? Are there specific regulations or guidelines issued by SEBI in this regard?

Issuance: Controlled by Listing Obligations and Disclosure Requirements regulations, ensuring transparency, fair pricing, and investor protection during capital raising.

Transfer: Facilitated by SEBI Depositories, promoting efficient market movements through electronic transfers. SEBI can block suspicious transfers or prevent insider trading.

Distinct regulations like Listing Obligations and Disclosure Requirements and Insider Trading rules guide each function, upholding market integrity and investor interests.

Q2. Subsection 24(1)(b) leaves the regulatory power for other companies in the hands of the Central Government. Can you explain the rationale behind this distinction in regulatory oversight between listed/pre-listing companies and other companies?

The rationale behind the SEBI vs. Central Government oversight distinction  to resource allocation and regulatory focus:

Listed and pre-listing companies: These hold significant public interest due to investor exposure and larger capital movements. SEBI, with its dedicated focus on capital markets and expertise in regulating complex financial instruments, is well-equipped to handle their issuance and transfer complexities.

Central Government’s broader role:

Other companies: While important for the economy, their securities transactions typically involve fewer complexities and fewer public investors. The Central Government, overseeing a wider range of businesses, can efficiently handle their basic issuance and transfer requirements.

Q3. Can Company or other stakeholders can challenge SEBI’s exercise of it’s regulatory power of this provision?  What are mechanism to challenge it?

Company or other stakeholders can not directly challenge SEBI’s exercise of its regulatory power of this provision. It can be challenge if SEBI acts beyond its power or authority granted under section 24 and acted arbitrarily and unreasonably in exercising its power.

Mechanisms for Challenging SEBI’s Power:

1. Filing a writ petition in High Court.
2. Filing appeal to the Securities Appellate Tribunal (SAT) under SEBI Act.
3. Seeking Judicial Review against the decision of SAT in the Supreme Court.

Q4. How does the regulatory framework under Section 24 of Companies Act interact with other provisions of the Companies Act or other legal statutes governing securities transactions? Are there any potential conflicts or areas of overlap that require further clarification?

It Interplay with Companies Act, chapter XV and Chapter X as below.

Chapter XV, Issue of Capital and Debentures: Provides specific regulations for capital raising mechanisms, which SEBI further refines through LODR under Section 24. Overlap may require clear demarcation to avoid conflicting or redundant requirements.

Chapter X, Transfer of Shares: Sets out general principles for share transfers, while SEBI, under Section 24, focuses on dematerialization and electronic settlements through its Depositories. Harmonization could ensure seamless integration of physical and electronic transfer systems.

It Interaction with other statutes, SEBI Act, 1992, Securities Contract (Regulation) Act, 1956.

SEBI Act, 1992: Grants SEBI broader powers over market manipulation, insider trading, and investor protection. Overlaps with Section 24 of Companies Act need precise delineation to avoid conflicts and ensure coordinated enforcement.

Securities Contracts (Regulation) Act, 1956: Regulates intermediaries like stock exchanges and brokers. Harmonization with Section 24 of Companies Act is crucial to ensure smooth interactions in issuance, transfer, and market conduct.

Potential areas for clarification:

Scope of SEBI’s powers under Section 24 of Companies Act: Clarifying the extent of SEBI’s regulatory reach beyond pure issuance and transfer, for example, in mergers and acquisitions, could prevent ambiguities.

Dispute resolution mechanisms: Establishing clear channels for resolving conflicts between SEBI regulations under Section 24 and other provisions or statutes would streamline enforcement and reduce legal uncertainties.

Q5. Looking ahead, do you see any potential amendments or reforms to Section 24 or the broader regulatory framework for securities issuance and transfer that could be considered?

Potential amendments/reforms need to be on below-areas:

Granting SEBI clearer and more comprehensive powers over emerging technologies and alternative trading platforms.

Introducing specific regulations for complex financial instruments and derivatives, addressing potential risks while fostering innovation.

Harmonizing and streamlining regulations under Section 24 with other relevant provisions and statutes to eliminate overlaps and ambiguities.

Enhancing investor education and awareness programs to equip them with the knowledge to navigate the evolving market landscape.

Regularly reviewing and updating regulations to adapt to technological advancements and address emerging challenges.