Birbal’s Update
December 2019
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Key Updates

Recent Judgements

1. SC Clarifies SEBI Jurisdiction on Accounting Firms – Securities and Exchange Board of India through Manager vs. Price Waterhouse and Co. & Ors. [Civil Appeal 8567-8570/2019]

A notice was issued by the Hon’ble Supreme Court on the appeal filed by Securities Exchange Board of India (SEBI) quashing the orders of SEBI in which, a two-year ban was inflicted on Price Waterhouse (PW) for its alleged involvement in the Satyam Scam. The Hon’ble Supreme Court had stayed the part of SEBI’s decision holding that SEBI did not have the jurisdiction to bar auditing houses from auditing the books of listed Companies. The ban inflicted by SEBI was under Sections 11 and 11 B of the SEBI Act which barred PW from issuing any certificate of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI, either directly or indirectly, for a period of two years. Even though SEBI was of the opinion that there wasn’t enough evidence that the partners of the auditing firm were directly involved in the Scam, however they did believe that there was a ‘professional lapse’ on the part of the firm.As far as the jurisdictional scope of SEBI was concerned regarding taking actions against the auditors, it was held by SAT in para 78 of the judgment that –


“… the powers conferred on SEBI under Section 11 and 11B is to protect the interests of investors in securities and to promote the development and to regulate the securities market. Therefore, the measure to be adopted by SEBI is remedial and not punitive… Thus, the role of debarment is beyond the scope and powers under Section 11 and 11B of the SEBI Act. Direction under Section 11 and 11B  of the SEBI Act can be issued to a person associated with the securities market. Such directions can only be remedial”


SAT’s decision had created some ambiguity with regard to the powers of SEBI to take steps against auditing firms found to have indulged in fraudulent trade practices. However, the decision of the Supreme Court bench comprising of Justice Indira Banerjee and Justice Arun Mishra has restored clarity of the authority of SEBI by staying the operative part of the SAT’s order until the next date of hearing being 15.01.2020.

2. ‘Material’ information to be disclosed in Initial Public Offer - Electrosteel Steels Ltd. vs.

Securities and Exchange Board of India [Misc. Application No. 381 of 2016 And Appeal No. 223 of 2016]

An adjudication was passed on 8th December 2016 in the proceedings before the Adjudicating Officer SEBI under order no. AK/AO – 8-12/2-16, which imposed a penalty due to non- disclosure of the previous rejection of the Forest Advisory Committee (“FAC”) of Ministry of Forest and Environment (MoEF) in the IPO. The penalty imposed was:

  • Rs.1,00,00,000/- (Rupees One Crore only) prescribed under Section 15HB of the SEBI Act i.e. on the issuer company M/s Electrosteel Steels Limited (ESL) and BRLMs viz. SBI Capital Markets Ltd., Axis Capital Ltd. and Edelweiss Financial Services Ltd.( hereinafter referred to as “Merchant Bankers”) in the matter of initial public offering(IPO) of M/s. Electrosteel Steels Limited for the violation of Regulation 57(1), Regulation 57(2)(a)(ii) ,ICDR Regulations, 2009 and Regulation 13 of the Merchant Bankers Regulations, 1992.

BRLMs were made jointly and severally liable to pay the imposed penalty.

  • Rs.50,00,000/- under Section 23A(a) and Rs.50,00,000/- under Section 23E of the Securities Contract (Regulation) Act, 1956 was imposed on M/s. Electrosteel Castings Limited (ECL) for the violation of Clause 36 of the Listing Agreement read with Section 21 of Securities Contract (Regulation) Act, 1956.

The BRLMs, ESL and ECL were required to pay the mentioned amount within 45 days of receipt of this order.

It is against this order that the affected parties filed an appeal before the SAT in the matter – Electro-steel Steels Ltd. vs. SEBI. SAT concurred with the strict approach adopted by SEBI’s adjudicating officer. SAT opined that the maximum punishment is not imposable just on the ground of non-disclosure of rejection of mining project application. The continued efforts of appellants in pursuing further for the reconsideration and detailed disclosure of the risks with possibilities of not getting the final approval etc. must be considered.
The tribunal reduced the amount of penalty of Rs.1 crore to 50 Lakhs each imposed on ESL (under Section 15HB) and the three Merchant Bankers. ECL(appellant) contended that Section 23E of SCRA,1956 is applicable only to persons managing CIS or mutual funds but this contention was rejected by the Tribunal. Therefore, the penalty cannot be termed as excessive or harsh and the appeal was dismissed.
SAT concluded that the rejection by the FAC was a material information, and failure to disclose the same has violated the relevant SEBI regulations. SAT stuck to a strict interpretation of the “materiality” requirement which leaves no discretion on the parties to determine the relevancy of information for investors. The tribunal focused on the requirement of greater disclosure and suggests that it is unwilling to condone violations even when they may not have in fact caused any loss to investors.



The Securities and Exchange Board of India has published a circular dated 29.11.2019 wherein the following norms were prescribed for Debt Exchange Traded Funds (ETFs)/ Index Funds to be adopted –


1. Asset Management Companies have to adopt the following norms-

    a) The constituents of the index shall be aggregated at issuer level.

    b) The index shall have a minimum of8 issuers.

    c) No single issuer shall have more than 15% weight in the index

    d) The rating of the constituents of the index shall be investment grade.

    e) The constituents of the index shall be investment grade.

2. Debt ETFs/Index Funds should be as per the following points –

  • Debt ETFs/Index Funds shall replicate the index completely.
  • In case the condition laid above in para 2(a) is not feasible due to non-availability of issuances of the issuer forming part of index, the Debt TFs/Index Funds shall be allowed to invest in other issuances issued by the same issuer having deviation of +/- 10% from the weighted average duration of issuances forming part of the index, subject to single issuer limit. Further, the duration of Debt ETF/ Index Fund shall not deviate +/-5% from the duration of the index.
  • c) In case of non-feasibility of the conditions laid down in para 2(a) and (b), the Debt TFs/Index Funds shall be allowed to invest in issuances of other issure(s) within the index having duration, yield and credit rating in line with that of the non- available issuances of the issuer(s) forming part of the index, subject to single issuer limits. The duration of Debt ETF/ Index Fund shall not deviate +/-5% from the duration of the index.
  • d) In case of non-feasibility of conditions laid down in para 2(a), para 2(b) and para 2(c), the Debt ETFs/Index Funds shall be allowed to invest in issuances of issuer(s) not forming part of the index with duration, yield and credit rating in line with that of the non-available issuances of issuer(s) forming part of the index. Such investment in issuances of issuer(s) not forming part of the index shall be maximum of 20% of the aggregate portfolio of the Debt ETF/Index Fund.
  • e) Any circumstances of deviation from para 2(d) shall be recorded.

3. In circumstances where credit rating of an issuance falls below the investment grade or rating which has been mandated in the index methodology, rebalancing by Debt ETFs/ Index Funds shall be done within a period of 5 working days.

4. A Debt ETF/Index Fund that seeks to imitate a particular Index shall ensure that such index complies with the mentioned norms.

The abovementioned norms shall be applicable to all Debt ETF/Index Fund tracking debt indices and the issuers shall ensure compliance of the norms. Moreover, it shall be applicable to all existing Debt ETF/Index Funds in the market, all the Debt ETF/Index Fund where SEBI has issued final observations on the Scheme Information Document, but have not been launched yet but shall not be applicable to Debt ETF/Index Funds tracking debt indices having constituents as Government Securities, Treasury Bills and Tri-party Repo (TREPS) only.

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