This article throws light upon the eight important SEBI rules and regulations in regard to underwriters. The rules and regulations are: 1. Registration 2. Code of Conduct 3. Agreement with Clients 4. General Responsibilities of an Underwriter 5. Proper Books of Accounts and Records, etc. 6. Appointment of Compliance Officer 7. Board’s Right to Inspect 8. Liability in Case of Default.
SEBI Rules and Regulations, 1993:
- Code of Conduct
- Agreement with Clients
- General Responsibilities of an Underwriter
- Proper Books of Accounts and Records, etc.
- Appointment of Compliance Officer
- Board’s Right to Inspect
- Liability in Case of Default
Rule and Regulation # 1. Registration:
No person can act as underwriter unless he holds a certificate of registration granted by SEBI. However, every stock broker or merchant banker holding a valid certificate of registration from the SEBI shall be entitled to act as an underwriter without obtaining a separate certificate for underwriting activities.
For considering the grant of certificate of registration, the SEBI takes into account all matters which are relevant to or related to underwriting and in particular:
(i) The necessary infrastructure, like adequate office space, equipment’s and manpower to effectively discharge his activities;
(ii) Past experience in underwriting or employment of minimum two persons who had the experience in underwriting ; and
(iii) Capital adequacy requirement of not less than the net worth of rupees twenty lakhs.
Rule and Regulation # 2. Code of Conduct:
Every underwriter shall at all times abide by the following code of conduct issued by SEBI on 1.10.2003:
i. An underwriter shall make all efforts to protect the interests of its clients.
ii. An underwriter shall maintain high standards of integrity, dignity and fairness in the conduct of its business.
iii. An underwriter shall ensure that it and its personnel will act in an ethical manner in all its dealings with a body corporate making an issue of securities.
iv. An underwriter shall endeavour to ensure all professional dealings are affected in a prompt, efficient and effective manner.
v. An underwriter shall, at all times, render high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment.
vi. An underwriter shall not make any statement, either oral or written, which would misrepresent;
(a) The services that the underwriter is capable of performing for its client, or has rendered to any other issuer company;
(b) His underwriting commitment.
vii. An underwriter shall avoid conflict of interest and make adequate disclosure of his interest.
viii. An underwriter shall put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same in an equitable manner.
ix. An underwriter shall make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as underwriter which would impair its ability to render fair, objective and unbiased services.
x. An underwriter shall not divulge to other Issuer, Press or any party any confidential information about its Issuer Company, which has come to its knowledge and deal in securities of any Issuer Company without making disclosure to the Board as required under the regulations and also to the Board of Directors of the Issuer Company.
xi. An underwriter shall not discriminate amongst its clients, save and except on ethical and commercial considerations.
xii. An underwriter shall ensure that any change in registration status/any penal action taken by Board or any material change in financials which may adversely affect the interests of clients/ investors is promptly informed to the clients and any business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients/investors.
xiii. An underwriter shall maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations and circulars and guidelines issued by the Board. The underwriter shall also comply with the award of the Ombudsman passed under Securities and Exchange Board of India (Ombudsman) Regulations, 2003.
xiv. An underwriter shall ensure that the board is promptly informed about any action, legal proceedings, etc., initiated against it in respect of any material breach or non-compliance by it, of any law, rules, and regulations, directions of the Board or of any other regulatory body.
xv. An underwriter shall not make any untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the Board.
xvi. (a) An underwriter or any of his employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including its long or short position in the said security has been made, while rendering such advice.
(b) In case, an employee of an underwriter is rendering such advice, the underwriter shall ensure that he shall disclose his interest, the interest of his dependent family members and that of the employer including their long or short position in the said security, while rendering such advice.
xvii. An underwriter or any of its directors, partners or manager having the management of the whole or substantially the whole of affairs of the business, shall not either through its account or their respective accounts or through their associates or family members, relatives or friends indulge in any insider trading.
xviii. An underwriter shall not indulge in any unfair competition, which is likely to be harmful to the interest of other underwriters carrying on the business of underwriting or likely to place such other underwriters in a disadvantageous position in relation to the underwriter while competing for, or carrying out any assignment.
xix. An underwriter shall have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.
xx. An underwriter shall provide adequate freedom and powers to its” compliance officer for the effective discharge of his duties.
xxi. An underwriter shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of interests, disclosure of shareholdings and interests, etc.
xxii. An underwriter shall ensure that good corporate policies and corporate governance is in place.
xxiii. An underwriter shall ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience).
xxiv. An underwriter shall ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.
xxv. An underwriter shall be responsible for the acts or omissions of its employees and agents in respect to the conduct of its business.
xxvi. An underwriter shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis.
xxvii. An underwriter shall not be party to or instrumental for;
(a) Creation of false market;
(b) Price rigging or manipulation; or
(c) Passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary.”
Rule and Regulation # 3. Agreement with Clients:
Every underwriter shall enter into an agreement with each body corporate on whose behalf he is acting as underwriter.
The agreement, amongst other things, should provide for the following:
(i) The period for which the agreement shall be in force;
(ii) The amount of underwriting obligations;
(iii) The period within which the underwriter has to subscribe to the issue after being intimated by or on behalf of such body corporate;
(iv) The amount of commission or brokerage payable to the underwriter;
(v) Details of arrangement, if any, made by the underwriter for fulfilling the underwriting obligations.
Rule and Regulation # 4. General Responsibilities of an Underwriter:
(i) An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than the commission or brokerage payable under the agreement.
(ii) The total underwriting obligations under all underwriting agreements of an underwriter cannot exceed twenty times his net-worth.
(iii) Every underwriter, in the event of being called upon to subscribe for securities of a body corporate persuant to an underwriting agreement, has to subscribe to such securities within 45 days of the receipt of such intimation from such body corporate.
Rule and Regulation# 5. Proper Books of Accounts and Records, etc.:
Every underwriter shall keep and maintain the following books of accounts and documents:
(i) In relation to an underwriter being a body corporate:
A copy of the balance sheet and profit and loss account as specified in sections 211 and 212 of the Companies Act, 1956 and a copy of the auditor’s report referred to in section 227 of the Companies Act.
(ii) In relation to an underwriter not being a body corporate:
Records in respect of all sums of money received and expended by them and the matters in respect of which the receipt and expenditure take place; and their assets and liabilities.
Every underwriter shall, after the close of each financial year as soon as possible but not later than six months from the close of said period, furnish to the Board, if so required, copies of the balance sheet, profit and loss account, statement of capital adequacy requirement such other documents as may be required by the Board.
Rule and Regulation# 6. Appointment of Compliance Officer:
Every underwriter shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc. issued by the Board or the Central Government and for redressal of investor’s grievances (Inserted by SEBI) (Investment Advice by Intermediaries) (Amendment) Regulations, 2001, w.e.f. 29.5.2001).
Rule and Regulation # 7. Board’s Right to Inspect:
Where it appears to the Board so to do, it may appoint one or more persons as inspecting authority to undertake the inspection of the books of accounts, other records and documents of the underwriter to ensure that these are being maintained in the manner required. The Board may also appoint a qualified auditor to investigate into the books of account or the affairs of the underwriter.
Rule and Regulation # 8. Liability in Case of Default:
An underwriter or a stock broker or a merchant banker entitled to carry on business of underwriting, who fails to comply with any conditions subject to which certificate has been granted or who contravenes any of the provisions of the Act, rules or regulations shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry officer and Imposing Penalty) Regulations, 2002.