Securities
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This article is written by Komal Shah, Content Head, LawSikho.

“What’s a CCD?” the student asked a faculty in one of our online sessions.

His question instantly took me years back to a day I still vividly remember. We were sitting in a large third year commerce college class (yes, we did attend those classes) attending an auditing lecture by one of the professors who was a qualified chartered accountant. And he was mad at us. “T.Y. B.Com!”, he roared. “This is disgusting. Is there really no one in the class who can tell me what a GDR is?” He found it totally unacceptable that third year commerce students hadn’t read up enough to know and explain the mechanics of a Global Depository Receipt (GDR).

Even though he was addressing the class as a whole, I took his berating personally. How the hell was I not aware? Was I living in the current world? 

Some families have excess money. Some families have excess food. I grew up in a family that had excess reading stuff – we had at least twice the number of magazine and book series subscriptions than the average household in that city. These were either business or general knowledge or some fictional stuff like India Today, Safari, a Gujarati magazine called Chitralekha etc. Newspapers were additional. Despite these resources, I simply wasn’t ‘read up enough’ to be able to answer the professor on that day, which made it worse.

Teachers like these shape you. They will consistently set a bar for you far higher than you have placed for yourself and then make you go for it. They make you dissatisfied. They make you hungry. Hungry enough to consume every shred of knowledge you come across and go searching for more. Hungry enough to question and challenge what you know continuously. Hungry enough to go experimenting and try out new combinations rather than sitting and anticipating outcomes.

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Even till date I have this crazy curiosity and want to go exploring when my concepts are challenged. I recently had a conversation with a team member where he referred to non-convertible redeemable preference shares as ‘debt’ – never mind that it is recorded under the head ‘Share Capital’ in the balance sheet, he said. He basically challenged my fundas, which told me that ‘capital’ and ‘debt’ are never the same thing. Capital is ‘owned funds’ while debt is ‘loaned funds’. Further, Section 43 of the Companies Act, 2013 refers to preference shares as ‘preference share capital’. You are mandatorily required to create a capital redemption reserve if you want to redeem preference shares out of profits.

And yet, I saw the Zee Non-Convertible Preference Shares being traded on the debt segment in the BSE. Further, the recently issued FEMA (Debt Instruments) Regulations, 2019 treat the listed non-convertible, redeemable preference shares as debt instruments. But interestingly, listing of Non-Convertible Preference Shares is neither covered in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) nor is it covered in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. It has its own separate regulations called SEBI (Issue and listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013. Wow! Here’s where the same instrument is treated as capital by one law, debt by another and in the third case, the regulator has neither thought fit to bracket it as capital, nor as debt.

Interesting, isn’t it? I have been consistently intrigued by the world of securities. When someone referred to a Credit Default Swap (CDS) as a ‘weapon of mass destruction’, I wanted to know all about it. I got a chance to delve into this world in 2013 when the effects of the subprime lending crisis had fully crept over Dublin, where I was at that time. I did a course on the funds industry (Ireland is famous as a centre for fund administrators) and we had an excellent teacher. This guy dealt with hedge funds like he was telling some Hansel and Gretel story. I was hooked. I still remember waking up in the middle of the night thinking about a ‘contract for difference’.

If you sit down for a while and think how many varied areas the knowledge about securities and securities laws impacts, you’ll be stunned. Here are some:

Whenever you invest, you need to know about securities…..

Have you bothered to check out the portfolio of a mutual fund you invest in? They invest in – (you guessed it right) securities. Try www.mutualfundindia.com and you will get to see how much percentage of the fund resources are placed in which securities. The kind of securities it holds and the percentage of holding will determine the risk to which your money is subject.

Facing trouble with the registrar and share transfer agent for a company you invested in? Did your broker dupe you? Well, these are ‘intermediaries’ in a securities market. Knowing what legislation they are subject to will make you well aware of how to deal with them.  

Investors would need to be aware of what rights are attached to the type of securities they hold. What are the returns from these securities and how you can exit from the investment – unless you are aware about these, keep your money safe in your pocket.

You will be taxed according to the securities you invest in….

Interest is taxed in your hands. Dividend is taxed at the point of distribution i.e. in the hands of the company distributing the dividends. Your investments in equity shares will be valued in a certain way for tax purposes and your investment in preference shares will be valued in another way. The long term capital gains for securities are determined differently than other assets. The long term capital gains of listed and unlisted securities are also determined differently from each other. If your income tax return reflects investments, you gotta be well aware of how you are taxed for these. 

Wanting to make a quick buck from the stock market can get you fired from your job. And penalised.

You think you can predict how the shares of your employer company will move and make money out of it? Well, you can’t. There are securities laws broad enough to classify you as ‘insiders’. The company will definitely initiate proceedings against you and may even kick you out. If you had bet a high amount, you may even be penalised under the insider trading regulations if it seems your dealings affected the market price for others. In case you are working for intermediaries including investment banks, you may be prohibited from dealing in the securities of their clients as well. 

Wanna know what other areas the amazing world of securities impacts? If you feel ‘hungry’ and want to binge on the knowledge of securities, come and join us in this course and we promise to feed your curiosities and make you long for more.

For the ones who got curious about the terms and did not take the trouble to research, a CCD is a compulsorily convertible debenture – a debt instrument which is mandatorily to be converted into equity shares of a company by its terms. A Credit Default Swap (CDS) is a derivative contract where someone agrees to compensate you in case the company to whom you had lent money (in the form of a bond) defaults in its payment to you. You have to pay a premium to the compensator. A Contract for Difference (CFD) is a contract where you bet simply on the price movement of shares or derivatives and the difference between the opening and closing prices is then settled, without any securities actually changing hands. 

Here are some courses in which you can enroll today:

DIPLOMA

Diploma in Intellectual Property, Media and Entertainment Laws

Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution

Diploma in Cyber Law, Fintech Regulations and Technology Contracts

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Certificate Course in Labour, Employment and Industrial Laws for HR Managers

Certificate Course in Capital Markets, Securities Laws, Insider Trading and SEBI Litigation

Certificate Course in Media and Entertainment Law: Contracts, Licensing and Regulations

Certificate Course in Prevention of Sexual Harassment at the Workplace


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